Creating Risk Capital. Ian Whalley

      

      Publishing details

      HARRIMAN HOUSE LTD

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      Petersfield

      Hampshire

      GU32 2EW

      GREAT BRITAIN

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      Email: [email protected]

      Website: www.harriman-house.com

      First published in Great Britain in 2011

      Copyright © Harriman House Ltd

      The right of Ian Whalley to be identified as the Author has been asserted in accordance with the Copyright, Design and Patents Act 1988.

      ISBN: 978-0-85719-154-0

      British Library Cataloguing in Publication Data

      A CIP catalogue record for this book can be obtained from the British Library.

      All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior written consent of the Publisher.

      No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by any employer(s) of the Author.

      Acknowledgments

      This book is based on observations of individual projects, mainly while I worked at the merchant bank Morgan Grenfell and at the National Research Development Corporation. Over several years, I had the benefit of day-to-day contact with many colleagues, entrepreneurs and experts from various walks of life: industry and commerce, academia, the professions and the financial world, so it is impossible to mention them all, greatly indebted as I am to them.

      A number of people have generously provided valuable support and much stimulating comment on the manuscript at various stages, including Nick Antill, Rodney Brack CBE, Mike Butcher, Ian Coult, Alan Curtis, Andrew Duncan, Patrick Gilpin, Sue Konzelmann, Pete Parsons, Alan Plummer, Richard Redfern, John Roach, Robert Scallon, Richard Sharman, Martin Shaw, Neil Short and Michael Wilkinson. I am grateful to them all.

      Most enterprises start small, so I particularly appreciate the help of John Moxon, a founder-director of Beeson Gregory who has had substantial experience of raising capital for small and medium-size enterprises.

      I would also like to thank Craig Pearce and his colleagues at Harriman House for their positive and professional approach and their contribution to improving the final product.

      I am truly grateful to my family for all their help and support in this project.

      The opinions expressed and conclusions drawn in this book are entirely mine, and are not necessarily shared either by the organisations or the individuals mentioned above. Likewise, the responsibility for any errors or omissions is mine and mine alone.

Preface

      What this book covers

      The aim of this book is to make the case for a fresh, straightforward approach to raising risk capital for enterprise in order to create wealth. It makes this case by looking at our rich inheritance of private enterprises and supporting capital and credit systems in the major market economies, examining situations where conventional approaches may cause problems, and seeking solutions through a system called royalty funding.

      Risk capital matters: it is the financial bedrock of all active enterprise. Without it, no enterprises can start up or function, whether sole traders, partnerships, private or listed companies, not-for-profit organisations, co-operatives, mutual societies or even public sector undertakings.

      Likewise, our enterprises themselves matter, since they are essential to our social and economic wellbeing: collectively through their activities and the wealth they generate, they underpin our health, education, defence, employment, environment, entertainment, public order and much else besides. Consequently, the ownership and control of enterprise matter, since they ultimately determine its direction and behaviour: if one changes, so may the other.

      The context of this book is the private sector enterprise, of all shapes and sizes, which supplies goods and services of one type or another. Public sector enterprise, however substantial it may be, lies outside its scope. Nor does the book discuss grand historic or military endeavours such as the voyages of Columbus or that Great Enterprise of 1588, the Spanish Armada. ^[1]

      Endnote

      1 From the title of the book edited by Stephen Usherwood, The Great Enterprise: The History of the Spanish Armada (The Folio Society, 1978). [return to text]

      Who this book is for

      This book is written for all those with an interest in building successful enterprises, who are prepared to work and invest in them, and who want to create wealth for present and future generations. They include users of capital, like entrepreneurs, owners and managers; providers of capital, such as investors and lenders; stakeholders, like customers, employees, suppliers and the local community; professional advisers like lawyers, accountants and property experts; and in society generally, citizens, educators and students. This is, accordingly, a book for industry and enterprise as much as for finance and the City of London, for Main Street USA as well as Wall Street.

      The book is not, however, intended as a practical guide, for reference or otherwise – those wishing to apply the royalty funding approach outlined here should seek suitable advice on such matters as law, taxation and property. Nor is this an academic work: rather than extending the frontiers of knowledge, it draws much from the research of others.

      While the primary focus of the book is on Britain, there is considerable reference to other countries and their systems. The problems the book describes are also relevant in other major market economies such as those in the USA and Europe, in developing countries, and in countries in transition to market economies. Consequently the approach to solving these problems should in principle be as valid there as it is in Britain, subject to local laws and conventions.

      How this book is organised

      This book is divided into three principal parts.

      Part I looks at the rich inheritance of enterprises in the major market economies and at their origins. It describes the various ways in which enterprises are organised and the diverse forms of ownership, control and governance. It then looks at the capital and credit systems, including the provision of risk capital, which support enterprise. Finally it brings enterprise and finance together at their natural meeting point: the capital structure.

      Against this background, Part II looks at some of the problems which arise, and at any gaps or flaws in these systems, most of which are well-known and much debated.

      Part III seeks grass-roots solutions to the problems covered in Part II and introduces a fresh approach to risk capital and ownership: royalty funding. It describes the various building blocks of royalty funding, integrates them into a system and shows how a royalty fund would operate. It then looks at applications and at the wider potential of the approach.

      Terminology

      The book aims to adopt a lighter touch than that of a typical textbook or academic work. It also seeks to avoid jargon and mystique for, as Walter Bagehot expressed in Lombard Street, his classic account of the Victorian City, a writer on money must