A recipe for more start-ups
Article Date: Jul 01 2004How do we create more new businesses? I’ve got some suggestions – but they won’t make me popular.
Gordon Brown says that Britain needs more start-ups. He has recently been writing articles and giving speeches saying what he intends to do to improve the rate of UK business creation to bring it up to the level of the US.
Brown is claiming that ‘our new set of enterprise reforms will help more people to start up and grow their own businesses.’ The Chancellor contends that he has cut audit, tax and VAT requirements on small firms, provided incentives for investment in research and development, created a new National Council for Graduate Entrepreneurs and is setting up a new Enterprise Capital fund to finance small firms.
Wow!
Government help is no help
But now I am going to completely blow any last chance I might ever have had of a mention in the Queen’s honours list. Does he really think that this makes a blind bit of difference to anyone who might be thinking of starting up a business? It sounds great politically, but practically it is bunkum!
So what is needed to create the extra 1.8 million businesses that Brown claims we would have if we matched the US rate of business creation?
Curb the Inland Revenue
First on my agenda would be to stop the Inland Revenue using every opportunity possible to deem that people are employed rather than self-employed. The purpose is to bring the maximum number of people within the PAYE and Employer’s NI tax grouping.
This sort of official pursuit is damaging because being self-employed is effectively creating a small business and fostering exactly the type of entrepreneurial culture Brown talks about.
More flexible offices
Next on my list of reforms is property. When I started my own business, getting an office was the single most difficult area for me. Either I had to commit to an extended lease (seven years upwards in many cases) plus provide personal guarantees or I had to rely on friends to give me a desk somewhere.
Admittedly, serviced offices are available but these are very expensive. A hot potato this, but why can’t we have maximum three-year leases that apply in other countries, such as France?
Getting loans should be easier
Let’s come to banks. In the past I have believed that they were a major stumbling block in the cause of enterprise. Today they have become much more small company friendly, providing a range of professional and advisory services for start-up companies.
I would, however, like to see an extension of the Government loan guarantee scheme that allows companies less than two years old to borrow up to £100,000, backed by a Government guarantee of 75 per cent of the loan. However, if you own a house, you fail the wealth test for the loan guarantee scheme. So, in most cases you end up using your home to secure your loan – hardly the best way to encourage businessmen to take risks.
But Brown’s tax breaks help
But in case you thought I had given up all hope of my call to the Palace, let me praise where praise is due. Gordon Brown has done a number of very positive things for enterprise.
The generous tax breaks he has made available for private individuals to invest in unquoted companies has led to a proliferation of ‘business angels’.
Astonishingly, Labour has also helped the London Stock Exchange, as there is no doubt that the runaway success of AIM has been massively boosted by the innovative tax breaks it enjoys.
But I still have the nagging feeling that this is not what really makes people take the risk to start their own business. Helpful, yes, but the real key? Possibly no.
So what does?
No other avenues open up
When people come into our offices at Elderstreet, I often ask them what made them start their own business. I would say that 70 per cent were forced to by circumstances outside their control, such as redundancy.
In my case I was fired and finding a job in 1990 was not easy, so I started my own thing, until I got a proper job (or so I thought) – but I liked being my own boss and the rest is history.
So perhaps it is a massive irony. Gordon Brown’s proud boast is that Britain was a ‘stop/go, boom/bust economy for 50 years with economic instability causing havoc with homeowners and businesses and now [it is] one of the most stable economies’. But perhaps this may be the reason why we have fewer start-ups than during the last recession.
Mass lay-offs and technological change
Interestingly, it is often said that what led to the enterprise culture of Silicon Valley was the mass lay-offs in the US defence sector, the result of the peace dividend at the end of the Cold War with Russia. Combine this with US labour laws that allow a high degree of flexibility and you have a rich environment for new start-ups.
In the UK technology sector a similar thing happened in the early 1980s when IBM and ICL were both laying off large numbers of employees. These same people became the IT entrepreneurs that rose to the fore some ten years later in the 1990s. They were also helped by changes in technology, notably the arrival of the low-cost PC, which in itself created a whole new sector of the software industry.
The most recent example of new technology being the driving force for the new business start-ups was the internet.
The perfect recipe
So there you have it. To create our new wave of business start-ups, all we need is a short sharp recession with lots of job losses, combined with some form of major technological change and mix that with Government policies that provide significant tax advantages for entrepreneurs and investors to start up their own business. Not quite what Gordon Brown had in mind but that’s politics for you!
Michael Jackson is chairman of Elderstreet Investments, the leading technology venture capitalist which he founded in 1990. He is also chairman of Sage, the FTSE-100 accounting software group which he has been closely involved with for the last 20 years, since its unquoted days. Michael is an entrepreneur and legendary investor in his own right.
