Catalyst Venture Partners

The past month has indicate that a feeding frenzy may be about to begin. Facebook (founded 2004) bought Instagram (2009) for $1 billion. Earlier, Zynga (2007) acquired OMGPop(2006) for $200 million . The feeding frenzy is a result of collective paranoia and greed. Facebook and Zynga recognise that just as they came from no where to being giants of the web so other companies can achieve the same. The strategy appears to be as soon as another company raises its head above the parapet and gain some traction acquire it. The fear stems from a strong belief that unless you are on the curve you will lose the edge and the head space of the target audience who value the new and the different ahead of the traditional values of brand, reliability etc. Innovation is all and Facebook and Zynga know that large companies are always behind the curve. There is a view that Facebook is old school , Zynga not yet but both have the same challenge of remaining on the edge.

There is much discussion at the moment about the Banks not willing to lend to SME’s. Government has proposed to help SME’s by subsidising loans to the tune of £20 billion. This will reduce the interest rate on loans made by participating banks by 1%. Is this likely to stimulate the SME economy?

The answer I am afraid is not by much. Our worms eye view at Catalyst is that the problem is not the cost of debt but the absence of debt. There is in effect a binary problem. If your project leaps the banks hurdles then you get the finance if it fails then you don’t. The problem is the that the bar has got higher and higher – what was sensible and fundable in 2005 now fails absolutely – not because the outcomes are different but because of a climate of fear .

I am not arguing for a return to the wild and woolly days merely that the cost of debt needs to reflect the risk of the project. Banks used to pride themselves that they understood risk  and could price it.  There even used to be what was called mezzanine debt which ranked below senior debt but above equity.

This finance would have interest rates of 15% with an equity kicker. Risk is not binary – often projects do not fail in an absolute sense: the investors may have to wait for a long time to get their money back; debt may have to be rescheduled. Debt providers need to re-learn how to price risk and be more creative with financial instruments.

There has been much discussion on the News and in the Press on how to fuel growth in the UK. Most commentators agree that SME’s will be a major source of future growth . So  it seems reasonable to ask what is holding back SME’s from growing and diversifying?

Our experience at Catalyst suggests that while many factors affect SME growth and company foundation the major source of constraint is finance. This is both cash flow finance and investment finance.  Until this constraint is tackled then removing regulation, providing tax incentives, and creating enterprise zones is merely papering over the cracks.

We at Catalyst have launched two “credit crunch” products: the first through our partner company – Catalyst IFG helps ease companies cash flow constraints. The second our Bond aims to provide investment funding on reasonable terms.