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19 October 2013

Entrepreneurship (2)

Tag(s): Business, Politics & Economics
In last week’s blog I covered the subject of entrepreneurship which seemed to me the principal theme of the recent Institute of Directors’ Convention which I attended as a guest of the late Laurie Young who died later that night. The business speakers were all stars in their own right and collectively gave a stimulating and upbeat presentation of what it takes to be an entrepreneur. But what is the reality when we look at the UK as a whole? To help me answer that question I’m going to draw on conclusions made by the Economist Intelligence Unit. I am a member of its Opinion Leaders’ Panel and received a report commissioned by Lloyds TSB Private Banking earlier this year. The EIU surveyed 300 British entrepreneurs to explore their motivations, challenges and attitudes to social responsibility. They also conducted in-depth interviews with some entrepreneurs and other experts[i].

In summary entrepreneurs are seen as a key driver of the UK’s economic recovery and new businesses are on the increase. As of this week over 415,000 new businesses have registered this year with Companies House. There will be countless more who have started a business activity as a sole trader and not needed to register. Beyond their economic significance as employers and taxpayers these creators of wealth also make other positive contributions to society. Yet in the UK there prevails an ambivalent attitude to people who become affluent through success in business.

The key findings of the research include:
  • Determination and independence drive entrepreneurs rather than a desire to become wealthy. 55% of respondents said their key motivation for starting a business was the wish to be their own boss. Nearly 40% thought work satisfaction was the main driver. And of those who succeed the vast majority attribute their success to determination.
  • Entrepreneurs believe they make a positive contribution to society. 70% of the respondents see the role of entrepreneurs as beneficial for society at large. The number who contribute hours of personal or business time to charitable work has risen from 32% in 2008 to 40% today, while nearly all said they give money to charity.
  • Tax and a sluggish economy are the biggest challenges for wealth creators. 49% identify government policy and tax as the number one constraint when creating personal wealth from their businesses and almost as many view the overall economic situation as the principal limitation.
  • More governmental support is needed for wealth creators. 85% believe that the government could do a lot more to encourage and support potential entrepreneurs. About half acknowledge that the government recognises their contribution to society but not many think they are given the practical help they need to provide further social impact.
Let me look at some of these findings in more detail.

According to the Department for Business, Innovation and Skills (BIS) there has been continuing steady growth in the number of small and medium-sized enterprises in the UK. There were a record 4.8 million SMEs at the start of 2012 up from 4.5 million the previous year and by nearly 40% since 2000 when comparable data were first compiled. Such businesses are responsible for 60% of jobs in the private sector and nearly 50% of private-sector revenue. However, if these statistics are based on records at Companies House then they probably understate the total hugely. When I first began a portfolio career I set up my own company and registered it at Companies House. But after a year or so I found the costs of running what was effectively a sole trader’s operation outweighed any advantages and I closed the company while continuing to take the odd piece of consulting work outside my retained positions on various boards. I report my income normally and pay all due taxes but I no longer have those costs. Meanwhile my wife has run her own business for several years and is not registered at Companies House. (She is an Art Conservator and Restorer. See her website at ) I further conjecture that one of the reasons for this explosion of small businesses is the massive dislocation in the economy over the past five years first by the disastrous management of the economy by Gordon Brown and  then by the banking crisis. In some parts of the country the state has become the dominant employer. As those jobs decrease people looking for work very often have only one choice- don’t look for a job, create one.

The main reasons why entrepreneurs start businesses are not so much the idea of becoming wealthy, only 14% cite financial security in retirement as one of their motivations, but more the ability to be their own boss. Most find that they have to reinvest profits in the business at least in the early years. But this is not the biggest challenge they face. For most it’s tax that is the biggest headache. Not just the amount they have to pay but in larger firms the need to employ people just to make sure they comply with tax legislation. This is expensive and the penalties for late returns are sizeable.

The government insists that it is determined to reduce the amount of red tape and claims that it has reduced the costs to business by £1 billion through reductions in regulation. It’s so-called ‘one in, two out’ rule, it claims, will double that. But that does not square with the view of campaign group Business for Britain which has identified 3,589 new regulations issued by the European Union since the British General Election in 2010. It estimates that it would take 92 days to read the 13,321,530 words in these new laws if you allow a reading time of 300 words per minute for eight hours per day. In other words a business man would have to spend about a month per year just reading this stuff never mind finding out what it meant for his business. Sir James Dyson has lodged a legal challenge to one such regulation which will force him to label his vacuum cleaners stating they are less efficient than in fact they are, but no SME has his resources. So big is this problem that as many respondents identified pressure to meet government regulations as the most significant disadvantage of being a successful entrepreneur as did the risk of losing large sums of money.

As for demographics in this survey 74% are aged between 50 and 70 suggesting that many come late to entrepreneurial activity after being employed in someone else’s business. As the baby boomer generation comes up for retirement they may take retirement early, or be retired early, and then start up their own business. Two thirds are based in London and the South suggesting that in the rest of the country there might be less access to start up resources, poorer infrastructure, a less-dynamic business environment and less-prosperous local markets.

Government initiatives to support SMEs include:
  • Business in You, launched in January 2012, is designed to inspire would-be entrepreneurs and highlight the range of support available ( )
  • The mentoring portal, provides a single access point to bring together mentoring organisations and those looking for guidance. Services may be free or paid-for. There are now 27,000 mentors across the UK listed on the portal.
  • SMEs with potential for rapid growth can apply to for additional help from a qualified coach.
  • Young people aged 18-30 can now apply for a start-up loan; an additional £3m has been added to the fund, taking the total available to £110m ( )
  • There are also several finance schemes in place, including the Enterprise Finance Guarantee scheme for businesses without the collateral or track record to access bank lending; Enterprise Capital Funds, in the shape of venture capital for new businesses with high growth potential; the Business Finance Partnership, which provides alternative sources of lending; and the Funding for Lending scheme which is encouraging banks to lend more freely.
No doubt this is all very worthy but to me it does not add up to very much. The state can also be considered as an entrepreneur and if well done can have massive influence. Albert N. Link and Jamie R. Link in their book Government as Entrepreneur[ii] show that a Government can act as an entrepreneur when its involvement in market activities is both innovative and characterized by entrepreneurial risk. They examine a specific subset of U.S. government policy actions particularly through defence and space spending. The book is probably the first systematic treatment of U.S. innovation policies to promote the formation of strategic research partnerships. You can trace the development of firms like Intel and Google back to actions by the U.S. government working with academia particularly Stanford University.

[i] Wealth Creators: Assessing the Impact of UK Entrepreneurs on Society Economist Intelligence Unit 2013
[ii] Government as Entrepreneur Albert N Link and Jamie R. Link  OUP 2009
Copyright David C Pearson 2013 All rights reserved

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