Why we need more entrepreneurs
Sunday 23 August 1998
Inevitably this leads to a series of questions which attempt to uncover the causes of a lack of enterprise; most of these focus on the availability of capital. I must confess that I have no precise idea where the UK ranks in a world league of entrepreneurial activity, but I am a believer in the notion that entrepreneurs are critically important to the economic well-being of the UK, and in this sense you can never have too many.
Further, I believe that any debate which focuses on one factor alone - such as capital, regulation or tax - will be arid and ultimately unproductive.
Is there a shortage of entrepreneurs in the UK? International comparisons suggest that on most measures (job creation, adoption of new technology, patent registration, new company formations) the US probably leads the world. It is, however, more difficult to compose an accurate international league table to benchmark the UK against its peers.
To be frank, I think we should be less concerned with bench-marking and give more regard to running an ever more entrepreneurial economy.
Here I should confess to a vested interest; the key success factor of any venture capital fund is a manager's ability to put his fund's capital to work alongside great entrepreneurs. In essence, the more outstanding businessmen/women I can back, the better my returns, and the happier my clients (corporate pension plans) will be, and hence the greater the amount of funding they will allocate to venture capital.
Putting aside this rather parochial view, entrepreneurship does matter. As our environment is subject to a constant stream of externally and internally generated shocks or movements, our society must be able to adapt itself quickly, or else we simply become victims of events.
Entrepreneurs are the first people to read the straws in the wind, to identify new patterns of demand, and to identify new methods of making or delivering goods and services. Their activity is both the product of change and a driver of change. For example, in response to the spiralling costs of healthcare, several entrepreneurial-minded managers and companies have introduced novel methods of drug design, managing the R&D process (Clinical Research Organisations), and delivering healthcare (e.g. home i.v. therapy).
Entrepreneurs have a wonderful record of achievement. The great enterprises of today are almost, without exception, built on the foundations created from the vision, talent and drive of entrepreneurs. For example, the great retailers such as Walmart and Marks & Spencer, the major oil companies such as BP, and the leading consumer electronics business, Sony, are all founded by entrepreneurs of vision and energy.
A similar entrepreneurial thread weaves its way through the application of technology. For example, the widespread use of low-cost computing comes to us courtesy of Intel, Microsoft, ARM and Psion, all of which are the recent creation of a handful of pioneers.
The thread does not end here. Consider the part played by charitable foundations, endowed by entrepreneurs in providing money to finance original research, to promote the arts and to deal with social problems. Examples that spring to mind include The Wellcome Trust, The Gatsby Foundation, The Rockfeller Foundation and the Howard Hughes Foundation. This thread of enterprise has in act been woven into a thick and comforting blanket.
So where might we find areas for improvement? I would suggest that we look at our people, our culture, the opportunities available to us and the supply of capital. They are all inter-related and should be considered as a whole.
Most new wealth and employment-creating enterprise over the next decade will depend on people with a deep understanding of science and technology, and a talent for applying it to meet the current and future needs of the market. Do we place sufficient weight on mathematics and science in educational policies and budgets?
Unfortunately our current shortage of people with a science-based education together with entrepreneurial attributes is likely to get worse as our population ages and the workforce shrinks.
This leads me to our business and social culture where I suggest we have much to learn. Entrepreneurs are highly driven and focused people, sometimes to the point of obsession. They reduce issues to first principles and apply high levels of intelligence, energy and willpower to getting things done. They are restless and see change as an opportunity. They are calculated risk-takers and are highly competitive. Their motor is a serious appetite for financial reward and acclaim, which they richly deserve.
Our consensual culture, which is suspicious or at times hostile to success, likes to preserve the status quo; it is comfortable with drift and seems to downplay the importance and value of competition. It is not conducive to entrepreneurship and compares unfavourably with the culture and environment of America.
Next time you hear expressions like "too clever by half', "fat cat", "our children are too young to compete", "he is a workaholic", ask yourself what do they mean and what do they say about the speaker?
Opportunities to do things differently and to make change happen are the essence of enterprise. When Direct Line, the insurer, removed a layer of the distribution chain and offered keen prices, a new business was born. Our markets are open to change if they make economic sense.
Barriers to change and the creation of opportunity tend to be regulatory. Here, fortunately, we are free of interference from Westminster and our economy appears to be producing a never-ending stream of opportunities to exploit. Beware the creation of new regulatory barriers, normally installed to protect an existing vested interest.
If I have one question, it is whether we are sufficiently international in our thinking?
I have deliberately left the question of capital to the end. Theory and practice tell us that capital will be allocated to the area that produces the highest returns. Entrepreneurs compete for funds. Other things being equal they will obtain backing if they can persuade people that they have ability to produce superior returns. What, then, are the barriers to efficient allocation of funds? I would point to three areas:
Firstly, there is perception amongst businessmen and women that investment in unquoted companies, including venture capital, is excessively risky and unrewarding. This perception exists in spite of the fact an investment in 3i, for example - a fair proxy for the venture capital market - has compared favourably with an investment in the All-Share Index.
Secondly, regulations governing the valuation of unquoted securities held by insurance companies and those which define qualifying assets for the purposes of determining the solvency ratios of pension funds, make unquoted investments less attractive than their risk-adjusted return characteristics would otherwise suggest. Accordingly, allocations to unquoted equity in the UK by pension funds are less than one-fifth the level allocated by the Americans.
Thirdly, the incidence of capital gains tax at 40 per cent discourages individuals from:
(a) realising existing gains in mature companies, and
(b) investing the proceeds in a new, higher risk venture.
In America money from friends and family is still a major source of seed- corn and early-stage funding. When American CGT rates were cut from 35 per cent to 20 per cent, commitments to venture capital partnerships rose to $3.5 billion over the period 1980-82 as compared with only $75 million in 1974-75.
If the UK is to prosper, we will need to produce or attract an expanding population of entrepreneurs and entrepreneurially-minded managers and corporations. The policies we vote for ought to be logically consistent and should ideally form part of an integrated whole, dealing with the education of future entrepreneurs, our attitudes, barriers to change and the supply of funds.
The competition never sleeps - and neither should we.
Ian Armitage is managing director, private equity division at Mercury Asset Management.
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