David Adams 7 Dec 2016

Entrepreneurship: going it alone

David Adams explores the factors that help to create the best possible environment to nurture entrepreneurship

Caption: There is concern that Brexit may undermine the prospects of early stage business in the UK.

We know entrepreneurship plays a vital role in driving any successful economy. But what is the best way to encourage and nurture it? The Global Entrepreneurship and Development Institute (GEDI) defines 14 Pillars of Entrepreneurship: qualities that create the best possible environment for entrepreneurs. It quantifies a country’s performance in 14 variables related to these pillars and weights those scores for social and economic infrastructures in each country to create its Global Entrepreneurship Index. The top 10 countries in the 2016 Index were the US, Canada, Australia, Denmark, Sweden, Taiwan, Iceland, Switzerland, the UK and France.

The score on the 2016 Index for the US, 86.2, is an all-time record. The UK, by contrast, fell from fourth in the table in 2015 to ninth in 2016, its score declining from 72.7 to 67.7.

One problem the UK, and other countries, face is that entrepreneurs tend to be based in one part of the country. London is a great place to be an entrepreneur, with plentiful access to finance, expertise, talent and international transport links. Other entrepreneurial hotspots around the UK can’t match London. There is also now concern that Brexit may undermine the prospects of early stage business in the UK.

It is also true that although many start-up companies are created in the UK each year, many fail and few grow into large businesses. “The UK has a comparatively high number of start-ups, but also a high number of failures and a relatively low number of scale-ups,” says Stephen Ibbotson, director, commercial and business, ICAEW. “We’re good at starting, but we’re also good at failing and not very good at scaling up.”

There has been public criticism of the sale of some successful UK businesses that had been able to grow, notably in the summer of 2016, when former government minister Lord Myners described the sale of the UK software company ARM to Japanese company Softbank as an example of the UK “selling out our winners”.

A number of organisations are trying to address this issue. They include the ScaleUp Institute, a not-for-profit organisation that seeks “to make the UK the best place in the world to scale up a business”. It seeks to promote recommendations made in its ScaleUp Report, published in 2014. These include a call for better support for businesses that have the potential to scale up, from government and other sources of support such as local enterprise partnerships; educational improvements to boost skills and encourage entrepreneurship; and assistance for companies seeking to recruit skilled staff from abroad.

UK governments have supported entrepreneurship in various ways, beginning in the mid-1990s with the establishment of the Enterprise Investment Scheme (EIS), a tax relief system for investment in small businesses. The UK government now runs a complex infrastructure to help entrepreneurship, including further tax incentives for investors, alongside a range of support services and grant and loan finance schemes. But there are also funding sources that have EU backing. Emma Jones, founder of small business network Enterprise Nation, believes the government needs to do more to reassure businesses that these schemes, or equivalents, will be retained after the UK leaves the EU.

Enterprise Nation and ICAEW are also both members of the Small Business Taskforce in the UK. The Taskforce is calling for assurances on the residential status of EU citizens from outside the UK working in the country, continued support for small businesses in the tax system, more encouragement of international trade and a louder voice for small businesses in general in developing post-Brexit trading relationships with other countries.

Meanwhile, entrepreneurs enjoy greater support from the private sector than has sometimes been the case. Many are now able to seek investment through online crowdfunding platforms as well as more mainstream finance providers.

Entrepreneurs also need support and advice. “Surround yourself with people who are smarter than you,” says Stuart Lacey, CEO and founder at Trunomi, a fintech company specialising in customer data with offices in Bermuda, Silicon Valley and London. He acknowledges the value of working with the brightest young minds, but emphasises the value of working with experienced people, such as those with a very good understanding of sector-specific regulation, for example.

Some funders can help entrepreneurs find potential advisers and other useful contacts. Climate-KIC, a Europe-wide public private innovation partnership, offers funding and support to businesses and other organisations working on initiatives that could help mitigate climate change.

One UK entrepreneur who has worked with Climate-KIC is Kate Hofman, co-founder of GrowUp, an urban farm company, which produces a year-round harvest of vegetables, herbs and fresh fish in a new type of farm using hydroponics and aquaculture technology, based in a 6,000 sq ft warehouse in east London.

“Climate-KIC was important in giving us seed funding and it’s brought us into a community of entrepreneurs, start-ups and other organisations who could be partners, suppliers and customers,” says Hofman. GrowUp now employs 10 people, sells produce to local restaurants and retailers, and is planning further urban farms.

Joanna Santinon, lead partner for the Entrepreneur of the Year programme at EY, points to
support companies such as Virgin, Telefonica and Unilever offer entrepreneurs through direct funding, and various accelerator and sandbox programmes.

Neeta Patel, CEO at the New Entrepreneurs Foundation, a not-for-profit organisation that runs support programmes for young people running or seeking to start new businesses, wonders if government could also get directly involved in supporting accelerator or sandbox programmes. She envisages networks backed by public and private money: “a coalition of entrepreneur skills development”.

Entrepreneurs and organisations that represent them have other requests to put to government. But the right regulatory environment offers entrepreneurs security. “You need to be in a jurisdiction that has strong patent and copyright laws if you are developing IP,” notes Lacey.

Professor Andrew Godley, director of the Henley Centre for Entrepreneurship at Henley Business School, at the University of Reading, thinks the UK government is still failing to offer adequate support to businesses that show the potential to grow. In Canada, a more generous R&D tax credit system is offered to businesses ready to scale up. “Those companies could have access to millions of Canadian dollars’ worth of funding,” he says. “Here we say ‘have a look at this website’.”

Does the UK government have the right priorities to help entrepreneurs? Darren Fell, a serial entrepreneur and the founder and CEO of online accountancy service Crunch, thinks it may be making a mistake in prioritising the scale-up agenda, trying to encourage businesses to emulate fast-growing US technology firms.

There are many other types of entrepreneur, including those who have created businesses with every intention of selling at some point, providing returns to investors; but also social entrepreneurs or business owners like Hofman who use entrepreneurship “to help achieve social and environmental goals”, and “lifestyle entrepreneurs”, who may not actually want their business to grow any larger.

Innovative business

Any entrepreneur seeking to grow an innovative business, whatever their long-term goal, is likely to need to employ people with specific skills. “It’s not just technical skills, it’s about understanding how innovation works, how to spot opportunities, or create new markets,” says Patel. “The ScaleUp Report said that there aren’t enough people who have those skills here. I do wonder if this is holding us back.”

Even if the necessary finance, government and private sector support and talent pool are all present, might there still be something missing?

Javier Camara, an entrepreneur from Spain and co-founder of beBee, a social network for business people that connects individuals through their interests, not their jobs, sees a cultural difference between the US and other countries. “It is difficult to be an entrepreneur in Spain and in much of Europe, outside the UK or Germany,” he says. “The Americans see mistakes as the first step to success. Sometimes being bankrupt is the first step to success – but if you are bankrupt in Europe no one will give you money.”

There is also one final element that can make all the difference in helping entrepreneurs turn great ideas into commercial reality: support from accountants. ICAEW members currently advise about
two million businesses, most of which are SMEs. The Institute also runs a free business advice service for start-ups, offering consultations with member firms.

Some entrepreneurs employ accountants inside the business too: GrowUp’s Hofman points to the invaluable contribution made to her business’s success by its financial controller, as well as support
and advice offered externally by accountants Perlin Franco.

But GrowUp and many other early stage businesses also use cloud-based accountancy software and services. The growing popularity of technologies like Sage Live, Xero, or services like Crunch is changing the role accountants play in helping many entrepreneurs, says Jones. “Now that there are really amazing accountancy software packages and online services, that role is more about adding value in business knowledge, and in connecting clients to each other,” she explains.

Accountancy firms of all sizes are rising to that challenge. Larger firms help entrepreneurs through initiatives such as EY’s Entrepreneur of the Year programme. This offers nominees and winners publicity and networking opportunities as part of a global programme that identifies 5,000 promising entrepreneurs worldwide every year.

Any country able to offer all of these sources of support will see entrepreneurship flourish. But should there be concern if many entrepreneurs tend not to scale their businesses up, but sell them instead? “Is it necessarily a bad thing, if in the process they create jobs, pay taxes and build the economy?” asks Patel. She and many others point to the contributions that serial entrepreneurs make in many different industries, as investors, mentors and simply as sources of inspiration.

Perhaps there are as many versions of successful entrepreneurship as there are new business ideas. There are always practical barriers that may hold firms back, but the only real limits to entrepreneurship are the limits of imagination and innovation.

Any country where policymakers, investors, other businesses and service providers are prepared to help entrepreneurs turn ideas into businesses will enjoy tangible economic benefits as a result, however long those individual businesses last.