Whatever happened to the Business Expansion Scheme? The scheme itself, which allowed investors to offset their contribution against income tax, is dead and gone. But so, alas, are many of the small companies into which investors sunk their funds.
One professional participant in the BES bonanza-that-wasn't believes that the death-rate of genuine traders, providing products and/or services, was alarmingly high: nine out of ten. Charles Fry of Johnson Fry, the leading player in this game, reckons that the fall-out was far less: about half.
That's hardly encouraging, either. Johnson Fry's own experience, though, was 40%: and Fry points out that this compares perfectly well with the normal experience of venture capital. Out of ten ventures, four or five 'fail very quickly': two to three become 'walking wounded': but one or two do 'frightfully well.'
For companies that raised their BES funds just before the 1990 recession struck, that description applies to sheer survival. The amount of money they could raise (with the upper limit progressively scaled down by the Government to £500,000) wasn't nearly enough to shelter them from the recessionary blasts - and very few were able to persuade the shareholders to provide more.
There wasn't any hope of getting institutions to put their money alongside that of the suffering shareholders. The consequent failures make a general point about any business venture. As Fry says, 'it never goes according to plan.' If you haven't lined up second-round finance at the beginning, the money won't be there when it's urgently needed - which will probably happen.
Not that the BES firms which dodged recession did wonders. Johnson Fry's own first five offerings were two wine companies, which respectively paid investors 82p and 124p in the £ (to which 40p tax relief can be added): and three property firms. One paid out £2.40, another £1.20, and a third could have yielded £2.50 - if you got out in time.
The company went public - and went bust, a victim of the recession. Small firms in their early days are especially vulnerable to deterioration in the economy or the market. As Fry notes, that vulnerability is by no means confined to BES companies. Nor are other weaknesses that laid some of the latter low: such as under-capitalisation.
He recalls a six-shop chain which, to make economic sense, 'needed to have twelve.' It couldn't raise any more money, and went the way of all flesh. In other cases, people who coped perfectly well with two pubs, say, were completely thrown when confronted with six and the need for 'totally different skills.'
Northern pub group Café Inns did develop the necessary arts and crafts, and has joined the first of the few in the Alternative Investment Market. As an investment, the company has not been a 'huge success', says Fry. However, another BES graduate, Britannia Marine, has entered the main market - and investors who got in at the bottom have trebled their money from this supplier of offshore support vessels for North Sea oil rigs.
By and large, though, the record shows that investors in start-ups and like ventures have to be mentally prepared for failure. That isn't always the case with entrepreneurs, says Fry, which is another reason why they fail. They miss their targets and, instead of buckling down to the task of renewing and redirecting their efforts, 'throw their hands in the air' and are totally unable to cope.
'That's when we send in our own people to clear up the mess' - if it can be cleared up, that is. Sometimes entrepreneurs who seemed to be 'perfectly sensible people turn out to be complete idiots.' Others succumb to the personal problems and strains that often accompany the entrepreneurial life - 'all human life is there.'
Yet all BES businesses had passed fairly stern professional vetting before being allowed to solicit funds from the public. Too few regarded the enforced improvements in their financial housekeeping as a foundation on which to build better procedures and better management. The mistake is to regard fund-raising as an end in itself. It's how wisely and well you use your money that makes the literally vital difference..
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