Stakeholder Capitalism or Venture Socialism? Either way, 'the Times they are A Changin'.

By David Bailey on Jan 17, 09 10:44 PM in Enterprise

(Blogged by David Bailey and John Clancy)

Apparently we are all now to own a portfolio of shares in small businesses...has the Government been reading the Post Blog?

The package of measures announced by Lord Mandelson earlier this week to get credit and investment into small and medium sized enterprises (SMEs) included an initial £75million which will involve the taxpayer (you and I) owning a new portfolio of shares through a debt for equity swap. Not in the banks or some big strategic industry, but perhaps in some businesses not very far from your front door. As you pass to your local business park or high street in your car or bus, you might in future keep an eye on your latest local investments.

Well, it may be hard to believe, but we will soon all own equity shares in viable small businesses who apply to the government to invest in them long term. This will enable a new culture of investment rather than lending; and it's an investment which the taxpayer can potentially make money on long term, too.

Anyone who has read this blog over the last year will know that we have been calling for this again and again. It needs to be a first step in both ensuring that good, viable businesses don't go under for the want of a long term vision by their banks during the credit crunch (now entering its critical second stage) and in establishing a new pattern of direct investment for the long-term in small and medium sized businesses: the sector, afterall, in which most employees in the country work.

Clearly someone up there in Westminster has been reading the Post blog and listening to our entreaties (well we can dream anyway)! We hope that the £75 million pledged is just a start. It should be regarded as perfectly normal for the state, and we would argue local city and metropolitan councils, or even regional development banks a la Germany's KfW, actually to own shares in our local businesses for the long game.

Public ownership as seen in the past was caught up in images of owning 'the commanding heights of the economy' and wholesale nationalisation of industrial sectors. In fact, public ownership can also involve much more in the way of what we might call 'micro-public ownership'. This is partial ownership with the intention of both investing in SMEs as an end in itself to develop diverse and mature local economies and also to make a return for the taxpayer on those investments.

The government is now stepping in at national level effectively to take on the role of a state-owned Venture Capitalist. A venture capitalist invests for sometimes a decade or more as a shareholder in a company, because long-term patient finance can involve much greater returns, and builds strong, mature investee businesses. Often after the initial investment has been paid back over time the real returns come rolling in to the venture capitalist.

Gordon, the 'venture socialist' is not involved in bailing out here, he is involved in jumping in and staying put.

What Venture Capitalists do not do, then, is simply 'lend'. Rather, it involves commitment and patience and nurturing and a belief that, in the jargon, 'Lemons Ripen Before Peaches' (see our earlier blog here). Initial short-term success and gains often disappears in business. Good, solid, reliable and truly successful business require more often than not a much more long-term game.

Obviously we do not see this venture by the government as being a short-term measure, simply part of the response to the recession. It should be the start of a real sea-change in how the public engages with businesses for the economic benefit of all.

'Keep out' signs should and can no longer be placed at the doors of private enterprise. Indeed the 'Please Come In' (or 'please help') signs have been evident all too clearly these last few months.

Moreover, this approach just happens to be particularly beneficial at the point of an economic cycle involving a serious recession. It means that viable companies can seek out solid serious investment, not lending or quixotic bank overdrafts to enable survival.

Now the government has set out its stall as being part of the investment culture, we would argue that it is an obvious next step to localise this. We need to allow either the current model to be decentralised to allow investment decisions to be made at a more local level, or that future investment on this model should be based in cities and regions.

Just as you and I will own a stake in SMEs through the government's present national plan, so you could own a local stake in local SMEs as a citizen of Birmingham (on possibilities for Brummie Bonds see here).

All in all what we are seeing is the state taking both a huge stake in the main banking system and also looking for direct ways to take equity stakes - albeit on a small scale for now - in SMEs. This represents a fundamental shift in government thinking. As Bob Dylan once noted... the Times they are A-Changin'.

Footnote: Our original 1997 piece advocating this approach can be found here.

David Bailey is Director of the Birmingham Business School and John Clancy is a former Birmingham City Councilllor, venture capital solicitor and runs two SMEs including MediaFuturesAlert.com