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:

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 www.restorationoilandgild.co.uk ) 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:

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.

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