As Enterprise Week, a week of events for budding entrepreneurs, gets underway, Simon Barnes from Tanaka Business School says Britons are less risk averse.

Government seeks to foster youthful enterprise
By Jonathan Guthrie and Jonathan Moules
Published: November 13 2005 20:02 | Last updated: November 13 2005 20:02

James Murray-Wells, a 22-year-old internet entrepreneur, is due to share a stage with ministers today at a government-­sponsored “summit” marking the start of its Enterprise Week. He would appear the ideal fresh-faced candidate for politicians to pat on the head at the best publicised of more than 1,000 events loosely connected by the passion of Gordon Brown, the chancellor, for promoting entrepreneurship to the young.

Mr Murray-Wells started his business, selling spectacles online, from his sitting room: “It seemed like an easy thing to try when you were young and on a budget,” he says. He is raising finance with the aim of making his company, Glasses Direct, “as big as possible as quickly as possible”.

Yet Mr Murray-Wells is also a natural maverick, as entrepreneurs often are. He is threatening the cosy business model of traditional opticians, which subsidise eye tests and claw back the costs, along with heavy property overheads, by selling spectacles dearly. He encourages customers to get a subsidised prescription on the high street – then order glasses cheaply from his website.

The government’s endorsement of him reflects its enthusiasm for selected elements of Thatcherism, to which the expansion of “enterprise culture” was central. To economists, he personifies the entrepreneur as a creative destroyer, seizing assets from staid businesses and making more efficient use of them himself. Thus the chancellor approves of him. According to studies that have influenced the Treasury, half the productivity gains in a given industry can come from entrants pushing out established rivals. Enterprise is one lever the government hopes will help it raise stubbornly low levels of productivity.

Enterprise began gaining momentum as a Treasury-led campaign only in Labour’s second term. The first Enterprise Week was held only a year ago. But as it was predated by some years by economic policies intended to encourage such a culture, how well has Labour done in stimulating enterprise?

For a start, the Global Entrepreneurship Monitor, a survey by Babson College of the US and the London Business School, provides little evidence of progress. In 2000, 6.9 per cent of Britons surveyed were involved in a start-up or planned to be. That eased to 6.3 per cent last year. Mr Brown’s aim of matching the US figure of 11.3 per cent remains unfulfilled. The UK occupied a mid-table position last year among the Group of Seven top industrial nations, followed by Germany and Japan but with France closing the gap.

Other statistics are more encouraging, however. According to the Department of Trade and Industry, there were 3.7m businesses with 250 or fewer staff in the UK at the start of 1997. Today there are 4.3m. Many are self-employed people in low-income jobs such as hairdressing, so, to exclude them from the count, take value added tax registrations. They reveal that there were 1.8m VAT-registered businesses at the start of 2005, compared with 1.6m just before Labour’s 1997 election victory.

The number of businesses registering or deregistering for VAT reached a high of 360,000 in 2004 – a vigorous “churn” that suggests new entrants have been enjoying increasing success in replacing established businesses.

Critics of the government concede that it has presided over a period when conditions for starting a business have been about as positive as they are likely to get. Thanks to initially cautious budgeting, an independent Bank of England and such inheritances from Tory rule as a more flexible workforce, growth has been steady and inflation and interest rates low. John Caudwell, the Phones 4U entrepreneur who last week put businesses valued at over £1bn up for sale, says: “On the whole, the environment has been stable and good. The government has done a reasonable job of managing the economy.”

Business groups say the government has proved less friendly in its propensity for creating barriers to entry. Lucy Findlay, head of enterprise at the Confederation of British Industry, says that for would-be entrepreneurs, “the disincentive of red tape far outweighs the incentives provided through government support schemes.”

Nanna Hybschmann Lay, who has run her furniture and giftware businesses, called Ananas and Dansk, for 21 years, is selling off her stock and preparing to close, saying she is exhausted by red tape and employee rights. “It has definitely got worse in recent years,” she says. “All the employers I know are dead scared of anything coming up in an employment tribunal.”

Many entrepreneurs point to obstacles created by a relationship between big business and government that they regard as incestuous. Clearance by the Office of Fair Trading for Tesco to buy into convenience stores in 2002 is seen as an example, exposing small retailers to an extra level of low-cost competition. Watchdogs have meanwhile made little headway in persuading banks to give small businesses a better deal or big customers to pay them on time.

Labour has bought itself some popularity. One of the best-regarded schemes has been the Small Firms Loan Guarantee Scheme, inherited from the Tories, under which banks advance funds to companies that lack collateral, in return for a government guarantee. Cobra Beer, the brewer set up by law graduate Karan Bilimoria, is among businesses to have benefited. Plans are afoot to expand a scheme that dishes out tax credits for research and development costs, initially offered to small businesses alone but now available to all companies. That scheme has provided £1.3bn of credits since 2000. By reimbursing lossmaking smaller companies in hard cash, it has impressed business as a token of the government’s determination to push up corporate spending on research and development.

Other props to small business have received mixed reviews. Reforms have so far failed to improve the image of Business Link, a national chain of advisers providing subsidised guidance to small entrepreneurs. One customer, who runs a Birmingham recruitment agency, mocks these well-meaning public servants as “retired bank managers reminiscing about their glory days”.

Private equity specialists, such as Jon Moulton of Alchemy Partners, have been bemused by the Treasury’s detection of a “market failure” in the limited supply of equity finance for start-ups. Mr Moulton, a seasoned investor in early stage businesses, instead sees a failure by the UK to produce enough sound investment opportunities. Undeterred, the government is financing venture capital funds with more than £1bn of taxpayers’ cash.

Although most start-ups take wing on personal savings and bank loans, those that do require risk capital include a group in which the government is intensely interested: businesses that must invest heavily to commercialise a technological breakthrough. These have a chance of generating the big returns that the Treasury hopes will come as a payback for funding science research in universities.

Sir Geoffrey Owen of the London School of Economics (and a former editor of the Financial Times) is disappointed that the UK has yet to produce a technology “gorilla” to rival Microsoft or Google. “British high-tech companies have generally failed to make it on the world stage,” he says, while praising Arm, the chip designer, and Cambridge Silicon Radio, the wireless technology specialist.

Tim Cook, managing director of Isis Innovation, which helps Oxford University academics commercialise their research, says British innovators tend to “grow their businesses to a saleable size, then sell them” – which is what he himself did as a founder of Oxford Asymmetry, a pharmaceuticals company. “But does that matter?” he asks. Ground-breaking research continues generating returns within a large acquirer, he argues, even if that value has become less visible.

Government promotion of enterprise matches incentives such as subsidised finance with persuasion in the forms of education (see below) and marketing, of which Enterprise Week is an example. However, the aim of this week’s events, to encourage young people to set up businesses, has detractors. Some bankers say the best entrepreneurs are old enough to have accumulated the assets needed to improve their chances of survival – money, contacts and commercial experience. Sally Preston, a government adviser and founder of Babylicious, a maker of frozen baby food, says the initiative hypes entrepreneurship without explaining the sacrifices it can exact. Enterprise promotions should carry a wealth warning, she adds.

The government rationale in targeting young people is that they are more open to influence and have less to lose. That makes sense to Martin Halstead, who at 19 has raised £500,000 and set up an airline, called AlphaOne, to serve the Isle of Man. He says: “I do not have property or a family, so I am not in a comfort zone. Even if this [venture] fails, I would still only be in my early twenties.”

Simon Barnes of Imperial College’s Tanaka Business School believes Britons are becoming less risk-averse. He says: “The culture has changed at the grassroots. Young people are genuinely interested in starting businesses and working for themselves.” The stigma of failure has been reduced by reforms to bankruptcy laws and by the dotcom shake-out, through which “people realised businesses can fail simply because they are operating at the edge of what we understand”.

Yet can the government ever cajole Britons into adopting the can-do American attitude towards start-ups that the chancellor so much admires? That mindset reflects the fear of destitution as well as the ambition to become a billionaire, says David Storey of Warwick University. Labour’s progressive strengthening of the welfare state and of workers’ rights inevitably weakens that stimulus to business formation.

A slowing economy and the threat of higher corporate taxes are additional disincentives. So Enterprise Week might come as the attractions of starting a business wane. Ministers and public servants could be excused for looking defensive if Mr Murray-Wells, in his role as the voice of youth, today expands on his belief that “if the government really wants enterprise to flourish, it needs to stand back and let us get on with it”. Officials say that stimulating enterprise is a “slow burn” for the government. Just as well.