The art of starting a business

It is probably as easy to found a business here as in any developed country
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The Independent Culture
SUDDENLY THE Government has discovered entrepreneurs. In the words of Tony Blair this week: "I want this government to be the champion of entrepreneurs. We need more of you. We need government policy to reflect this. We need society as a whole to applaud you."

And so on. Mr Blair railed particularly against anti-business snobbery from both the left and right, with the left thinking of entrepreneurs as anti-social and the old right-wing elite thinking business beneath them.

As Mr Blair delivered his peroration, alongside him sat Reuben Singh - who epitomised the heroic spirit that Mr Blair would like to see replicated across the land. Reuben Singh is aged 22 and has already founded several businesses and enjoys wealth of at least pounds 45m.

It is fascinating to see how the Government is seeking to position itself and it will be even more fascinating to see whether it does start to deliver policies friendly to small businesses - or whether Mr Blair is, so to speak, all mouth and no trousers.

Meanwhile, though, how is the state of entrepreneurship in Britain? Well, it is not at all bad, though it is very uneven. The crude figures for the numbers of business start-ups here run at about half that of the US, but they are double that of most Continental countries. So on that measure, as so often, we sit half way between America and Europe.

If you look at a rather different measure - the funds going into venture capital - then at first sight we look rather good, for as a percentage of GDP our venture capital industry is three times that of continental Europe and larger even than the US. But that flatters us, for most of the money is going into management buy-outs rather than start-ups. We have had some remarkable start-ups here - you are reading one, for this newspaper was funded by start-up capital 13 years ago - but the total remains small.

What about the climate for entrepreneurship, particular things like regulation, taxation and the like? Talk to people running new or small businesses and they usually complain of excessive regulation, either directly from the Government or imposed on behalf of the European Union. This government has certainly increased the admin burden on small firms, making a bit of a mockery of Mr Blair's fine words, but looking around the world it is probably as easy to found a business here as in any developed country.

It so happens that I have had a worm's-eye view of entrepreneurship, having helped a former colleague found an electronics publishing and research company, Net Profit Publications. We started three years ago and now employ, directly or indirectly, the equivalent of nearly a dozen people. We have had our nail-biting moments, but now, unlike most Internet start-ups, we are in profit. Looking ahead, things appear very exciting. How did we find the whole process?

The actual mechanics were remarkably easy. We had a good firm of accountants who handled the registration and so on. At a personal level the bank has been fine too, though at a corporate one it has been very disappointing. It would not, for example, give us even a modest overdraft without our actually paying in the money ourselves into a different account as a guarantee. We were a bit underwhelmed by that, and I subsequently found our experience is not uncommon.

Regulation, legislation, taxation, accounts? Maybe surprisingly, we do not seem to feel that this has been excessive. There are unproductive costs that we have to carry, but contrary to what many entrepreneurs say, I don't think we found these unacceptable.

Raising money? Well, to start with we used our own. Originally we had big backer but it pulled out. We swallowed hard and realised that if we put in a bit more cash and used my colleague's spare bedroom as an office we could own the whole business ourselves rather than having to share ownership with someone else. When, after a year, we did need to raise more capital, it came from friends and relations. One friend came in, then another, then another. They now own a third of the business, wonderfully supportive shareholders.

So raising the money was not really a problem. But here I think we were unusually lucky, partly because we had some cash ourselves without having to mortgage our houses and partly because we knew other people who were looking around for entrepreneurs to back. If it had all gone terribly wrong we would, I suppose, have licked our wounds and earned the money back. You can do that on a 40 per cent top tax rate, but it would have been impossible on a 60 per cent rate. As for our friends, they would have had the wry consolation of seeing us lose even more than they did. As it has turned out, it looks as though we will all be fine.

But here this worm's eye view becomes misleading. Obviously we were lucky to be in the right corner of the commercial forest, the information business. But we were also lucky in our contacts. There is clearly an enormous pool of money around, looking for ventures to back, but linking that money to the projects is a haphazard process, relying on personal relationships and family ties. If you have those relationships, fine; if not, getting the money is likely to be a struggle.

The cost structure of the financial services industry - the offices, the telecommunications, the salaries it pays its people - are all so enormous that it becomes very hard to make money out of backing entrepreneurs wanting, say, pounds 100,000. By the time you have evaluated the projects that are brought to you and eliminated all the ones that you won't think will work, you have piled up so much cost that you cannot hope to get back enough from the few winners you think you will be able to pick.

One way round this problem is the development of "business angels", business people who are prepared to back entrepreneurs rather in the way theatre angels back West End productions. You pitch in the money pretty blind and hope that every now and again you will make the bell ring. They do exist now, but matching money to ideas is still a primitive exercise.

The interesting question here is whether the Internet can step into this gap. It has in the US. The trouble is that backing unknown businesses is always going to be a gamble and while we do as a nation love a flutter, I'm not sure we are ready yet as a society to sanction more gambling of this sort.

It is profoundly undemocratic that only those with good contacts or family money can raise the funds to back their ideas, but the alternative is to create a sort of casino where would-be backers choose entrepreneurs on little more than the spin of the wheel. Some people who could not afford it would get hurt.

There is a further difficulty that we have yet to encounter. It is the exit strategy. The normal way for entrepreneurs in the US to realise their gains is to sell part of their business to the public: to float, but go on running it. Here the normal way is to sell to a bigger business, retire to the country - and then see the buyer muck things up.

There is a cultural problem here, but it is not the one referred to by Mr Blair - that both left and right sneer at people who make money. It is that once someone has made say pounds 5m-pounds 10m, they tend to pack it in. By contrast, in the US they want to go on and turn it into a billion or more. You could say that we are more balanced in our outlook on life, in that we believe that there are more things to the world than more money than you could possibly spend. But it does mean that we are not creating the Microsofts and the Oracles of tomorrow, and the jobs that go with them.

So give a round of applause, as our Prime Minister urges, to the people starting up businesses in Britain. But save a bigger cheer for those who turn small businesses into big ones - and maybe the loudest for 22-year- olds who have big businesses at that age and who will create even larger ones.

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