Venture Capital. Funding for fresh ideas is on the rise. In U.K., Thatcher sparks innovation
Britain, too, is experiencing a boom in venture capital -- a reflection of changes Prime Minister Margaret Thatcher's policies have generated. ``According to the Thatcher view of the world, being entrepreneurial is good,'' says Kingsley Manning, managing director of Greyfriars Ltd., a venture-capital consulting company. ``This has had an impact on the institutions and the climate has changed -- she believes in investing.''
As in the United States, venture-capital companies in Britain invest in risky, start-up companies -- usually involved in high technology.
Thompson Clive & Partners Ltd., a British venture-capital firm founded in 1979, is an example of the kind of gung-ho organization Mrs. Thatcher hopes her policies will create. Headed by Colin Clive, an enthusiastic Briton with degrees from the Massachusetts Institute of Technology and Harvard, the group has assets of 22 million (about $24 million) spread among 25 companies, most of them dealing in high-tech. Of these, it has helped to bring three to the stock market and hopes to bring two more soon.
Thompson Clive's biggest success has been the July 1983 flotation of DPCE Holdings PLC, a computer services company serving British Airways, the Dutch national airline KLM, and other large retail institutions. The Thompson Clive group acquired its initial 30 percent stake of 72,000 in 1981. It later sold about 12 percent of the company, making an estimated 3 million profit. Today, its remaining 18 percent holding is worth about 9 million, and DPCE's market capitalization is 53 million ($58 million). British cultural, economic changes
The success of the Thompson Clive group illustrates the dramatic growth in venture-capital companies in the United Kingdom recently. By the end of last year there were an estimated 95 venture-capital organizations, compared with barely 20 in 1980, according to Venture Economics Ltd., a U.K. research and information services company. Those completely independent firms have raised an estimated 500 million since 1979, and the figure would be even larger if it included funds raised by wholly owned subsidiaries, or divisions, of larger financial groups.
Several things have contributed to the boom in venture capitalism, but the most important has been the change in the government's attitude toward business since Thatcher came to power. This shift has revolutionized economic activity in a way British society had not experienced in years.
``This cultural change is significant,'' says Greyfriars' Mr. Manning. ``A few years ago people were embarrassed to claim they wanted to be rich. Now, people are less embarrassed about making money.''
``It's not what Thatcher has done,'' he continues, ``but the style she has brought about. The parallel is with President Reagan.''
Transforming attitudes has not been an easy process, however. ``It's the American dream to grow up, own a business, and make a million,'' Mr. Clive observes. ``The English just don't have the venture-capital community do that.''
But Thatcher is trying to alter this perception and make the dream come true for Britain.
``I came to office with one deliberate intent -- to change Britain from a dependent to a self-reliant society -- from a give-it-to-me to a do-it-yourself nation,'' the prime minister told a group of small-business people last year. ``This means creating a new culture -- an enterprise culture which accords a new status to the entrepreneur and offers him the rewards to match.''
But Thatcher is combating an antipathy toward industry and entrepreneurs dating from Victorian times.
``The gentry and aristocracy were hostile to industrialism right from the start,'' notes Krishan Kumar, a Kent University sociologist. Parents, aspiring to an aristocratic way of life, sent their children to private schools, and then, when possible, to Oxford or Cambridge. There, they acquired aristocratic values and an aversion to entrepreneurship and moneymaking.
``Land was the only important form of wealth,'' Professor Kumar observes, ``and making money was regarded as vulgar.'' Going into manufacturing or industry was seen as especially ``ungentlemanly.''
``Even today, the best brains have been attracted away from industry,'' he says, noting that graduating students from the top universities still tend to go into the professions, join the British Broadcasting Corporation or the civil service, become financiers, or stay in academia. Incentives pave the way
``It's still too early to tell whether the sheer power of anti-industrialism will win out or whether it's too late'' to make changes in the economy that many believe should have taken place two decades ago, Kumar says.
Even so, he notes that Mrs. Thatcher ``has made the most systematic effort since World War II to persuade the public that industry is an exciting and interesting place.''
Among the changes she has brought about to encourage investment and small businesses has been a general easing of tax rates, with the highest individual income tax rate reduced from 83 to 60 percent.
The government has also changed the tax treatment of stock options. Gains made on these options are now subject to a lower 30 percent capital-gains tax rather than income tax, as was previously levied. In addition, the tax is paid when the shares are sold instead of when the option is exercised.
In addition to these tax breaks, in 1983 the government launched its Business Expansion Scheme, offering substantial tax relief to individuals who invest in new, unquoted U.K. trading companies. This has spawned a whole new breed of venture-capital funds, and although these funds raised only 42 million ($46 milion) in 1983-84, they do represent a new pool of risk capital in Great Britain.
``The BES is not a major factor in the development of new business,'' says Susan Lloyd, managing director of Venture Economics, ``but it is a psychological factor that has raised the profile of the venture-capital industry.''
Along with this ``psychological'' boost, the establishment of the Unlisted Securities Market, a market for small, aggressive young companies that cannot meet the costs and tougher reporting requirements of the main London Stock Exchange, has enabled fledgling companies to show their success at an earlier stage. The US role model
During the course of this transformation in Britain, the US venture-capital industry has been an important role model. Many British venture-capital companies have strong ties with the US. Some venture capitalists, like Mr. Clive, have worked there or are in companies closely associated with an American counterpart.
``A lot of the original inspiration came from the US,'' said Rhys Williams, managing director of the London-based Alan Patricof Associates Ltd., affiliated with the New York firm of the same name, ``and we are emulating it.''
The U.K. venture-capital industry has also benefited from the spinoff of the technological revolution that began in California's Silicon Valley.
``Rapid changes in technology and in the application of technology to traditional business have meant opportunities for financiers in electronics, information technology, and computers,'' notes David Prosser, managing director of CIN Industrial Investments, a National Coal Board subsidiary which manages the unquoted investments of the board's pension funds.
Britain's venture-capital industry is still in its early stages and differs significantly from the highly developed American version. It is structured in a much less uniform way, with venture-capital groups divided into two categories of roughly equal number. These are independent companies, which raise money for venture-capital funds from a variety of sources, and firms that are wholly owned subsidiaries of larger financial concerns. In the US, the most common organizational unit is the private limited partnership.
In addition, most U.K. venture capitalists have tended to take a passive, uninvolved approach with their investments. But this attitude is changing as British venture capitalists increasingly adopt the ``hands on'' American method of active participation in the management decisions of new companies.
Another significant difference is to be found in the kind of people who become venture capitalists. In the US, they have been drawn from those who were previously successful entrepreneurs in high managerial positions, notes Michael Walton, managing director of the London-based Electra Risk Capital.
By contrast, the United Kingdom, with its historical disdain for industrialists, lacks a similar pool of entrepreneurs, and many who become venture capitalists were formerly accountants or finance managers.
``Venture capitalism does not get the spinoff from industry'' that it does in the US, Colin Clive agrees. ``In the U.K., you are pleased to find a good product and a good market. The chances of a manager knowing about management are small.''
Still, he is optimistic the industry will succeed here. British technology is good, he asserts, and, quoting another industrialist, he contends that when the better technology-marketing management teams set up their own businesses, ``that's when England is going to take off.''