How government can unlock funding for UK entrepreneurs

Unlocking Growth, a new report from The Entrepreneurs Network and The Enterprise Trust, highlights a range of policies to ensure more entrepreneurs can access the finance they need.

• The funding picture for SMEs is mixed: while access to traditional bank loans has been limited since the global financial crisis, we’ve seen a dramatic increase in equity investment – up from £1.6bn in 2011 to £12bn in 2019.

• SMEs have benefitted from the rise of alternative finance. Over £2bn is lent through P2P lenders and close to 400 equity crowdfunding deals take place in the UK each year.

• However, many entrepreneurs fail to access the finance they need. The best available data suggests almost one in ten (9.1%) of SMEs are discouraged from seeking external finance.

• This causes an estimated £1.5bn in lost investment by SMEs (£11,439 per discouraged business). As a result, fewer jobs are created and businesses can fail unnecessarily.

Policy recommendations include:

• Reforms to make it easier for pension funds to invest in venture capital to enable more of the UK to benefit from equity investment.

• Better mentoring for Start Up Loans to address why too few seek external finance again once their loan has been repaid.

• Streamlining the process to access tax-relief on investments in early-stage firms to avoid unnecessary cashflow crunches.

Although the financing options and tax incentives open to UK SMEs are improving year-on-year, almost one in ten small businesses are still not seeking the external capital that would allow them to grow, a new report reveals.

Unlocking Growth: How to Expand Access to Capital, a joint report from The Entrepreneurs Network and The Enterprise Trust, evaluates the funding options open to SMEs – from Start-Up Loans and grants to equity crowdfunding and peer-to-peer lending. The report identifies policy changes that will ensure businesses can access the finance they need to grow.

While traditional lending is down, according to the British Business Bank, the bank is still the first port-of-call for SMEs seeking finance.  It’s only once entrepreneurs have been turned down by the bank that they investigate other types of lending, including equity investment. These alternative forms of finance are effectively filling the gap. 

According to Beauhurst, the demand for equity investment via venture capitalists has exploded.  In 2011 the figure stood at £1.6bn; last year it reached £12bn. 

Despite this, figures suggest 9.3 per cent of all SMEs fall into the category of so-called ‘discouraged borrowers’, businesses with a real need for finance, who fail to apply due to fear of rejection, a belief that raising capital would be too expensive, or concerns the process would be too difficult or time-consuming. 

This leads to an estimated £1.5bn SME investment shortfall, or £11,439 for each discouraged firm.

It also leads to fewer jobs and weaker economic growth through a lack of investment in workforce skills, investment in new technology, and investment in international expansion.

Joy Foster, founder of TechPixies, a digital training firm for returning women, raised £150,000 through EIS and SEIS, but admits she almost didn’t and considered walking away because she was daunted by the amount she needed to raise with ‘no guarantee’ she could pay it back.. 

Similarly Francis Toye, founder of justice software firm Unilink describes not knowing how to grasp opportunity until he joined the Goldman Sachs 10,000 Small Businesses programme and raised £1m through Funding Circle and then another £7m through defined payment terms.

This report makes the case for key policy changes that would unlock new funding opportunities for entrepreneurs including increasing VC capital flow by reforming the way defined contribution pension funds invest or fast-tracking EIS and SEIS applications.

Increasing mentoring to Start Up Loan recipients, who tend to be among those described as ‘discouraged borrowers,’ could also help deliver growth.

Richard Harpin, founder of the UK’s leading home repairs and improvements business HomeServe and new ‘think and do tank’ The Enterprise Trust, said: 

“All evidence points to the fact that businesses that take on investment at key moments in their growth trajectory do dramatically better than those that don’t.

“These founders go on to create jobs, generate taxes and contribute to UK economic growth.

“Yet, navigating the funding sphere has often become so difficult that it has left nearly 10% of founders discouraged from raising the finance they need to survive and thrive.

“It’s clear that finance is out there, with a dramatic uptake in Start Up Loans, equity finance and crowdfunding.  However, it is also clear that this capital is not always getting to where it needs to be. We need to change that.”

Sam Dumitriu, Research Director of The Entrepreneurs Network and author of Unlocking Growth: How to Expand Access to Capital

“By helping small businesses manage cashflow, invest in better equipment, and expand into new markets, access to the right type of finance can be transformational.

“The meteoric rise of alternative finance and VC should be celebrated, but still too many businesses fail to access the finance they need to grow. 

“Reforms to reduce wait-times for early-stage investment tax reliefs and allow pension funds to invest more in venture capital will allow more businesses across the UK realise their growth ambitions.”

Full Policy recommendations:

• Experiment with lottery-style funding to channel more grant-funding to start-ups. New Zealand’s Health Research Council uses this approach to allocate funding to proposals that are “transformative, innovative, exploratory or unconventional, and have potential for major impact” and it works well.

• Simplify and modernise Research & Development Tax Credits by providing better feedback for applications and expanding the score of activities that qualify as R&D. It could be improved on three fronts: feedback, speed, and scope. Solving these problems would enable more start-ups to benefit from the relief and reduce the risk of theirs turning to specialist tax credit advisers who can take up to 25% of the relief claimed.Make data sharing obligatory for incubators and accelerators receiving public funding. This will allow us to identify the most successful programmes, and better understand why they work. It will also allow us to identify the schemes best at expanding access to entrepreneurship among disadvantaged or under-represented groups.

• Improve the mentoring offer for Start Up Loans by providing additional advice when businesses finish paying their loans. The programme’s evaluation found high numbers of discouraged borrowers among participants.

• Streamline the advanced assurance process for EIS and SEIS to unlock more investment in high-growth start-ups so businesses using the pre-approved documentation could be fast-tracked and delivery more efficient.

• Unlock additional investment into venture capital from defined-contribution pensions by reforming the fee cap and clarifying rules on the valuation of illiquid assets. In the US, VCs invested more than 10 times as much as UK VCs in 2017. This is partly explained by the impact of pension fund investment in venture capital. In the US, VCs are overwhelmingly (98%) funded by institutions such as pension funds, insurance companies, and endowments. Pension funds play a much larger role in the US. They contribute 65% of the capital in the US VC market and 18% in Europe, but just 12% in the UK.

• Provide more long-term patient capital through the British Business Bank. The government should encourage the British Business Bank to investigate if funds can be better directed towards solving market-failures. For instance, there may be a case for prioritising investments in regions under-served by venture capital or tying funding from the BPC to support for start-up community building, such as training for emerging fund managers.

Reaching out

Fewer than one in five equity investments made in 2018 went to startups with at least one female founder. As a result, women are under-represented in high-growth entrepreneurship. The equity funding gap has myriad causes, from a lack of role models and mentoring to biases in the investment industry. As VC investors often rely on referrals and face-to-face introductions, access to networking opportunities could be a powerful tool for closing the gap.

However, a new study from Sabrina Howell and Ramana Nanda finds simply expanding networking opportunities by exposing female entrepreneurs to more VCs isn’t sufficient to solve the problem.

To test the idea, they looked at Harvard Business School’s (HBS) New Venture Competition (NVC).

“In the first round of the NVC, each team is assigned to one of about 15 panels, each composed of about six judges. Having delivered a pitch to the judges and answered their questions, the participants are in a position to reach out to the judges after the competition, leveraging the connection to secure financing for their ventures. The competition does not, however, explicitly encourage such follow-up. The core dataset for our analysis consists of comprehensive team and judging information for HBS NVCs held between 2000 and 2015, comprising 964 participants. 

Our research design exploits random variations in the number of VC judges across panels, which arises from the way judges are allocated to panels in the NVC. Specifically, assignment is random conditional on sector, which is to some degree taken into account.”

If exposure to venture capital was enough to close the gap, then we’d expect the students exposed to more VC judges to be more likely to get equity funding. But Howell and Nanda found that exposure to VCs only boosted VC-backed entrepreneurship among male students.

Why does exposure to VCs help men, but not women? Men were twice as likely as women to “proactively reach out to VC investors” after the competition. Interestingly, the researchers find VCs are no more likely to respond to male entrepreneurs reaching out to them. Similarly, VCs reached out to men and women at the same rate. They also find little evidence of explicit bias from VCs.

“We do not find obvious evidence of explicit bias by male VCs against female participants in our sample. In addition to VCs responding to outreach equally by participant gender, we show that the private scores of VC judges are in fact slightly lower for male-led ventures than for women-led ventures. Also, while there are too few female VC judges to establish precise effects by a judge’s gender, we do not find evidence that female VC judges are differentially beneficial for female participants. Still, less observable discrimination may be at play, and the lack of outreach by women could reflect expectations of bias or harassment.”

Two key things need to happen to narrow the gap. First, female founders should be encouraged to reach out more. To that end, mentoring and networking may help build confidence. Second, organisations like accelerators should take a more hands-on approach to facilitating networking opportunities. It’s not enough to simply expect people to send emails after events. Closing the gap will require more than exposure alone.

Bank On It

Yesterday, the British Business Bank released its latest Small Business Finance Markets Report – a comprehensive assessment of finance markets for smaller businesses.

The report finds evidence that the current period of uncertainty is pushing small businesses to use external finance to put in place contingency plans, or reduce finance requirements as they delay longer-term investment and expansion decisions.

Although 56% of SMEs don’t expect the UK leaving the EU will impact the growth of their business, the number expecting it to have a negative impact has risen to 29% from 22% in 2017. Just 5% expect their business to grow more because of it.

And just 36% of smaller businesses now use external finance compared to 44% in 2012, with over 7 in 10 firms saying they would rather forgo growth than take on external finance. However, equity finance, asset finance and marketplace lending have grown by 4%, 3% and 18% respectively, and awareness of alternatives to traditional finance has continued to grow, with 52% of small businesses aware of peer-to-peer lending, 70% aware of crowdfunding platforms and 69% aware of Venture Capital (up from 47%, 60% and 62% respectively in the previous year).

For those still looking to learn more about finance options, our friends at Intelligent Partnership have just released a NIFTY guide which might be useful.

You’ve got mail
The Daily Mail has got in touch as they’re looking for case studies to coincide with the Budget. They are particularly keen to speak with entrepreneurs who could be affected if Entrepreneurs’ Relief was to be cut. You would need to be willing to chat to them and be photographed. Just let me know if you’re game, and I’ll connect you to the journalist.

Expanding horizons
The government is creating a Regulatory Horizons Council – a new expert committee that will advise the government on emerging technologies and the regulatory reform needed to support their introduction. 

They are looking for experts in health and life sciences; digital, data and cyber; engineering and energy; innovative business models; and citizens and the environment. It’s 1-2 days per month (£380 per day) and the application deadline is 23rd March. 

I think it’s vital that these sorts of roles are filled by our very best and brightest talent, which is why they should probably pay a bit more. But hopefully civic duty is enough to attract the right people. Please share widely. Find out more.

Officers and a Gentle Plan

The All-Party Parliamentary Group for Entrepreneurship is back! 

We are relaunching the APPG in the House of Lords on Tuesday morning with Andrew Griffith MP, the Prime Minister's Chief Business Adviser. You might still be able to get a ticket if you’re quick.

Lord Leigh of Hurley, who is a successful entrepreneur in his own right having co-founded Cavendish Corporate Finance, and Bim Afolami MP, touted by the BBC as a rising star, have joined as Officers. We also have loads of new MPs and Peers as Members.

We are the Secretariat of the APPG, which means it’s our job to help ensure Parliament and the Lords are kept updated about what entrepreneurs need to thrive. To this end, we will be hosting a series of roundtables on all matters related to entrepreneurship – all of which will be written up into snappy briefing papers to inform policymakers. We will build sponsored roundtables around core activity based on the brilliant research of the Enterprise Research Centre (ERC). Get in touch if you want to get involved.

We don't want to hog the APPG. It should be for everyone supporting entrepreneurs. That's why the APPG will launch the research of other organisations' doing interesting work on entrepreneurship. First up, the APPG is co-hosting an event with Lord Howard Flight and the Enterprise Investment Scheme Association (EISA) on this vital tax break for entrepreneurs. Drop Mark Brownridge an email to enquire about a place. And watch this space for a paper launch with Tech Nation.

You can read the minutes from the APPG AGM minutes here.

Factory tax
This week, our Research Director Sam Dumtiru had a report out on full expensing – making the case for abolishing the so-called 'Factory Tax'.

We are currently ranked 33rd in the OECD on the Tax Foundation’s Capital Cost Recovery index, discouraging entrepreneurs investing in capital. This is hitting manufacturers in the Midlands and North particularly hard (hence calling it the 'factory tax'). 

For over two decades, the UK has had the lowest level of private investment in fixed capital as a share of GDP in the G7. This can be turned around by letting businesses fully deduct the costs of investments in equipment by accounting for inflation and a real return on capital.

Allowing businesses to immediately write-off capital expenditures would boost investment by 8.1% and labour productivity by 3.54% (£2,214 per worker).

In the Telegraph (Paywall), Ryan Bourne backs Sam's plan, and The Times (Paywall) is convinced, concluding that the new Chancellor, “Mr Sunak will come across worse ideas.”
 
In a spin
Our friends at Beauhurst have revealed that investment into university spinouts declined in 2019 (£1.24 billion), compared to 2018 (£1.38 billion).

The drop-off – which isn’t reflected in overall equity investment activity – has been particularly acute for foreign investors. “The UK’s spinouts secured fewer deals with international investors in 2019 compared to the previous two years, and the value of the deals they were involved also declined. Most foreign-backed deals were backed by US funds, but even these investors halved their deal activity compared to last year.:

Hopefully it's a blip, not a trend.

Startup Manifesto: Protect encryption from politicised attacks

Policy 21: Protect encryption from politicised attacks

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

As every technologist knows, policymakers have a tendency to judge the web by the worst abuses of it, and try to legislate it accordingly. That’s certainly the case with encryption, which is routinely singled out as the cause of everything from child abuse to terrorism. In recent months, DNS over HTTPS encryption has come in for particular criticism by MPs who believe that it will undermine the CSE filters provided by the Internet Watch Foundation. This has led to some of them setting up a zero-sum argument: the UK can have child protection or data protection, but not both. In light of the blanket surveillance of everyday internet use called for in the Online Harms framework as well as the Age Appropriate Design Code, that zero-sum argument could become a very dangerous one.

We want policymakers to look at the wider picture with cooler heads. DNS over HTTPS encryption fills in the gaps which leave all web users at risk. It adds a layer of encryption to one of the last remaining fundamental technologies of the web, strengthens protections for users at risk of government censorship, and can help provide user anonymity for vulnerable people who need to stay safe online. It also makes the web a safer place to do business. Despite all that, the UK government is the only government seeking to reverse this technical direction of travel on ideological grounds, risking a British internet which works to its own set of technical standards.

DNS over HTTPS is not a risk to children or the CSE monitoring frameworks which protect them. The solution to those issues lies elsewhere. Encryption must remain end-to-end, and encrypted DNS technologies should not be the subject of legal blocks or filters.

It's also critical that policymakers don't insist that platforms and providers provide "backdoors" for law enforcement to bypass encryption. A backdoor to one phone is a backdoor to all.

Startup Manifesto: Work with startups to shape tech regulation that promotes competition, not stifles it

Policy 20: Work with startups to shape tech regulation that promotes competition, not stifles it

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Further regulation of internet platforms now seems inevitable. But as the Government themselves have admitted, there isn’t a one-size-fits-all framework for tackling the challenges that have risen along with tech platforms (though that doesn’t stop them seeking one…).

One thing is clear: there is a real risk of poorly designed regulation hitting startups harder than the tech giants that the government is aiming at. Where European watchdogs thought that regulation would balance the market, it has actually tilted it further towards the tech giants. Investors agree: 86 per cent of UK investors surveyed worry that policies aimed at tech giants could hit startups harder than their intended targets.

Startups have already struggled under the weight of legislation such as the EU’s General Data Protection Regulation, and are likely to see it again with the recently passed Copyright Directive. The UK’s dozens of committee reports, draft frameworks, working groups, and proposed legislation muddy the waters even further. So whether it’s the domestic Online Harms framework’s proposals on subjective harms, the Digital Charter’s multiple areas of focus, or the EU’s review of intermediary liability provisions in the forthcoming Digital Services Act, the next government needs to be mindful of the impact that sweeping regulation can have on startups. 

That’s also why it’s so important for the next government to take heed of the Furman Review’s findings into digital competition on regulation - and that it doesn’t just cherry-pick the bits it likes. Professor Furman and the panel warned that regulations could “cut across each other if taken forward in isolation”, and that government “should ensure that pro-competition aims and functions are aligned with others, and that the regulatory landscape for digital businesses is kept simple”.

Now the tide of public perception is turning against the tech giants, they are building a regulatory moat to protect their interests - because they are large and profitable enough to do so. The next government should not inadvertently help them by drafting punitive regulation which can only miss its target.

Startup Manifesto: Redraft the Age Appropriate Design Code to be more pragmatic

Policy 19: Redraft the Age Appropriate Design Code to be more pragmatic

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Next year the Information Commissioner’s Office plans to introduce its Age Appropriate Design Code, a series of design standards which aim to make the internet a safer place for children. As it’s been drafted, though, the Code won’t quite achieve that - but it will make the UK an impossible place for startups and scaleups to do business. The draft Code’s provisions would require startups to impose mandatory age verification on all sites, regardless of whether their services even target children, and to collect and safeguard all that user data; create up to six different versions of their services for six age bands from infancy to adulthood; and create parental monitoring systems to let children know they’re under surveillance. That’s just the start of a list of sixteen requirements which will put startups in the business of corporate co-parenting first, and their actual business models second. 

The costs for coming into compliance with the age appropriate design code’s requirements, which will include everything from contracting with age verification providers to beta testing privacy policies on preschoolers, will fall entirely on startups to bear themselves, on top of the costs they are already incurring ahead of leaving the European Union. In fact, the compliance burdens are so overwhelming that many non-UK businesses will either leave the UK market or block UK customers altogether.

While we all have a role to play in making the internet a safer place for children and young people, we know that the draft Code isn’t the right way to do it. Startups and scaleups which don’t even target kids will be forced into an absolutely impossible regulatory burden which, appallingly, will define their noncompliance as child exploitation. It’s in everyone’s interest - both startups and kids - to send the Code back to the drawing board.

Startup Manifesto: Revolutionise the way government collects, stores and shares data

Policy 18: Revolutionise the way government collects, stores and shares data

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

At the extreme, governments’ failure to properly collect, store and share data can destroy individuals’ lives – just ask British citizens caught up in the Windrush scandal. But on a sustained basis, business owners are stymied in their interactions with government, monopolising time that could otherwise be spent focused on running their business.

At present, there is a lack of standards across government leading to inconsistent ways of recording the same data. The National Audit Office has found that more than 20 ways of identifying individuals and businesses across 10 departments and agencies, with no standard format for recording data such as name, address and date of birth.

Tinkering may help, but the next government could and should be more ambitious. Estonia’s X-Road is the model we should shamelessly imitate. The keystone of Estonian digital society since 2001, is “allows the nation’s various public and private sector e-service information systems to link up and function in harmony.” It is estimated that the general savings is around 12 million hours every year. 

Since 2016, X-Road has been available as open source under an MIT License. In fact, the UK was considering using it back in 2013. Finland, Iceland and the Faroe Islands have already adopted the platform. With it’s e-residency card, Estonia even allows entrepreneurs outside the country to start and run a company – which embarrassingly the Mayor of London’s entrepreneurs of the year 2017, Ellenor McIntosh and Alborz Bozorgi, founders of eco-friendly wet wipe brand Twipes, did to avoid Brexit complications.

Estonia’s experiment was a gamble. It could have failed – but it didn’t. We aren’t asking for the next government to take a leap in the dark; they just need to copy what already works elsewhere so Britain’s businesses – and perhaps even those located overseas – can flourish.

Startup Manifesto: Use the Open Banking approach to open everything

Policy 17: Use the Open Banking approach to open everything

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Open Banking allows consumers and small businesses to share their banking data via a secure API with approved third parties, and to allow those third parties to make payments on their behalf. Its objective is to “unbundle” banking services from the traditional current account so that bank customers can access third party services, like accounting and payments software, without the need to move accounts.

The Open Banking principle could be applied to other products as well. The FCA is currently considering whether to extend Open Banking-style APIs to other financial products like savings accounts, mortgages and insurance, and BEIS is considering a wider application of data sharing through secure APIs to markets like energy and telecoms as well.

This “Open Everything” approach will have increasing returns as more kinds of data are made available. Many businesses spend lots of time and money managing everyday expenses like energy and telecoms, or end up spending too much because they get stuck on expensive deals. Data sharing would allow them to delegate the task of shopping around to a trusted intermediary. 

It would also unlock valuable data to innovators, with the owners of that data remaining in control of how it can be used and by whom. In energy, for example, data sharing would make demand-side response viable, so that businesses that could help people draw electricity at times of lowest demand, for example by providing home batteries that can charge in the middle of the night, to save huge amounts of money and allow us to move to renewables that might otherwise be unviable because of intermittency.

Office Politics

Sajid Javid will go down as only the second Chancellor to never deliver a Budget.

Javid was forced to resign after Number 10 asked him to replace all of his advisers. I went into Number 11 a couple of times to meet those advisers and they seemed perfectly pleasant to me. I guess it’s easy to get mixed up with office politics in political office.

The new Chancellor Rishi Sunak is well regarded (even by Javid), and makes all the right noises on his website: “I co-founded a large investment firm, working with companies from Silicon Valley to Bangalore. Then I used that experience to help small and entrepreneurial British companies grow successfully. From working in my mum’s tiny chemist shop to my experience building large businesses, I have seen first-hand how politicians should support free enterprise and innovation to ensure our future prosperity.”

Perhaps his father-in-law can offer some advice. He is Infosys founder N. R. Narayana Murthy.

Among other relevant changes for entrepreneurs, the Department for Business, Energy & Industrial Strategy will be led by Alok Sharma MP, with Kwasi Kwarteng MP and Nadhim Zahawi MP staying on in the department. We have private dinners for entrepreneurs in the works with both Kwasi and Nadhim. Drop me a message if you’re interested in finding out more about how you can attend these.

Paper profit
We are starting to distinguish fact from friction(less) trade.

The Government plans to introduce full import controls for goods moving into and out of the EU after the transition period ends on 31 December 2020. All goods entering the UK from the EU will be subject to the same checks and controls as goods coming from the rest of the world – whether or not we reach a trade deal.

You might need an EORI number, or to hire someone to deal with customs. HMRC has extended the deadline for businesses to apply for customs support funding to 31 January 2021. There is still at least £7.5m available.

If you’re looking to export more, the Department for International Trade has just launched a digital tool to help you navigate the rules and restrictions, tax and duty rates, and the necessary exporting documents.

Go west
NatWest has asked us to let you know about their fully-funded Pre-Accelerator, Accelerator, and Fintech Accelerator programmes.

The Pre-Accelerator is for start-ups. The Accelerator is for businesses who are ready to scale their business. While the Fintech Accelerator is sector specific and is run out of its hubs in Bristol, Edinburgh, London and Manchester. The deadlines are fast approaching. Find out more here.

On the case
As my colleague Annabel Denham argued in The Telegraph last year, rail tickets and fares are too inflexible and ill suited to the way an increasing number of us work.

We think The Rail Delivery Group has some good ideas for better ways of regulating the sector, and they are looking for a business person who can speak about this issue.

Perhaps you can’t travel at the time you want because the fares are too high, or you have to book on a specific train to save money but then end up waiting around after a meeting. Or maybe you’ve decided to drive because the train is too busy. Or perhaps you’ve declined a meeting altogether because of the lack of flexibility.

They are looking for people to get in touch as soon as possible, so if it’s an issue you’re passionate about, drop them an email today.

Startup Manifesto: Promote innovation in regulated sectors by creating a cross-sector regulatory sandbox

Policy 16: Promote innovation in regulated sectors by creating a cross-sector regulatory sandbox

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Regulatory sandboxes allow new firms to operate outside some existing regulations, many of which are constructed with large incumbents in mind. The success of the UK’s fintech sandbox shows how effective they can be. 

An “n+1 sandbox” could replicate this function across other sectors, issuing five-year provisional licenses to innovative companies with business models that conflict with existing regulations, which could then operate outside those regulations. The companies would be required to take out liability insurance, or in some cases the regulator itself may offer it (at a price) if the private sector would not insure an innovative business.

This approach exists in healthcare already, where treatments may be used in certain circumstances even before they have won full regulatory approval, as well as in fintech to some extent. 

This would have two objectives. The first would be to make it easier for innovative companies to come to market, and test out their propositions without having to worry about regulations which may unintentionally have prevented them from operating. The second would be to highlight regulations that are causing problems and holding back innovation, allowing other regulators to see the costs of their actions that would otherwise be invisible.

Good news – and bad – for women on boards

Regardless of the issue in question, public discourse usually follows a similar pattern. 

Take female representation in business. The status quo is challenged (“why don’t we see more women in senior level roles?”) and momentum gathers for tackling it (“we need more women on boards!”). But then a backlash ensues (“don’t we believe in a meritocracy?”). 

What happens from there can depend on the subject matter. Laurence Fox’s Question Time spectacle suggested “anti-woke” celebrities are threatening the liberal consensus. As one author observed in the Guardian last week, “progressives need to wise up to the fact that they are losing the argument and decide what to do in response”. 

In the case of women in the workplace, Amber Rudd wrote an insightful editorial in The Sunday Times that neatly summarised where we are now. 

It’s all very well, the former Cabinet minister wrote, to suggest that we want the best person for the job regardless of gender, race or ethnicity. But if the best candidate is repeatedly a man, “it has to be challenged. It can’t be a coincidence every time.”

Rudd pivots the debate towards the benefits of diversity. It fosters a “broader mix of experience and priorities, leading to better outcomes.” And in politics, “no one is going to fight for women like a woman”. Hear hear. Rudd writes in the context of the forthcoming reshuffle and the rumours that half of the women in Cabinet may lose their jobs.

But with the news last week that one in three board positions at the UK’s biggest companies is now held by a woman, Rudd’s comments could equally be applied to business. The Hampton-Alexander Review found that 349 women currently sit on the boards at FTSE 100 firms. 

Not only will increased representation help tackle unconscious bias and gender stereotypes around what a leader should look like, but if Rudd is right, these women will commit to boosting other women in business. This desire to pay it forward is apparent in the Female Founders Forum, where members give up precious time to champion, advise and even mentor fledgling female entrepreneurs.

Business Secretary Andrea Leadsom was right to point out that businesses had achieved this target voluntarily and without the need for legislation or fines. Perhaps the spotlight on diversity alone has changed the behaviour of big firms. Countless studies have found that it fosters innovation, creativity and empathy in ways that homogeneous environments seldom do. 

Both Rudd and Leadsom have been criticised in a vitriolic, asinine article that insolently dismisses the role diversity can play in avoiding groupthink, ignores the importance of role models, and paternalistically seeks to tell women what they want – especially when they become mothers.

We need reasoned debate, because all is not rosy. There remains a lack of women in senior and executive roles: they make up just 15% of finance directors, for example. 33% isn’t 50%. But rather than cry foul over discrimination, or shrug nonchalantly (or write deplorable blogs) when there is still a way to go before we achieve gender equality in the leadership of British firms, we should strive for balanced discourse that at once accepts progress made, and work yet to do.

Read more about the Hampton-Alexander Review here. And our views on Women in Leadership here and here.

Startup Manifesto: Secure a Data Adequacy agreement as soon as possible

Policy 15: Secure a Data Adequacy agreement as soon as possible

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Data is the lifeblood of the UK’s startups, and that lifeblood must flow freely. After the UK leaves the European Union, we will become a third country to Europe’s data protection framework. This means that while UK businesses will still be able to send data to Europe as before, information flowing from Europe to the UK will require a lot more work.

Without a data protection adequacy agreement, meaning EU recognition of the UK’s domestic privacy framework as one which protects European data to European standards, startups will need contract-based legal structures to cover their data flows. While these contractual structures are easy for large tech companies, they can consume a startup’s time and funding.

The process of evaluating the UK as an adequate third country cannot begin until the UK has left the European Union - you cannot, after all, evaluate a third country which is not a third country yet - and would take no less than a year to adjudicate. Nor is an agreement guaranteed by any means. A range of issues, including the UK’s domestic surveillance programmes, stand in the way of the UK being deemed adequate.

It will be absolutely critical for government to ensure that an adequacy agreement can be achieved, as quickly as possible, to keep the UK’s startups afloat. This will mean remaining within the spirit and letter of the European data protection framework, supporting startups to devise contractual protections at the speed of business, and resolving domestic issues which could block an adequacy recognition.

Startup Manifesto: Devise a coherent regional startup strategy

Policy 14: Devise a coherent regional startup strategy

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

There has been a growing disconnect between central government and regional tech ecosystems. The needs and requirements of startups in the UK’s wider regions are very different to those situated in London and the South East. Yet there has been a tendency to force top-down reinvented initiatives upon regions which can be detrimental to the local ecosystem. 

The investment landscape across the UK is not uniform and private investment varies from region to region. This is because emerging and innovative funds lack a network of peers and mentors outside London, which increases the perceived risk of investment.  Unlike London and the South East, startups in the wider regions rely heavily on public-backed investment funds. Although some tech clusters have sought to move to a privately financed model because public funds have not proved agile enough, this disengagement from public funding risks leaving large parts of the sector underserved.

To mitigate this risk, we must start to build a nationwide network of peers and mentors outside London for emerging and innovative VC funds to tap into. The British Business Bank’s UK Finance Hub should partner with Capital Enterprise to create a network that could highlight both best practices, and also practices that could be risky for emerging funds in the long run. This would instil confidence in regional investments, enabling emerging funds to unleash capital outside London.

But investment alone brings less benefits than when it is combined with business support initiatives, especially in newer, more emergent ecosystems. It is widely felt that Local Enterprise Partnerships (LEPs) across the country do not understand, and are not always responsive enough, to the needs of the tech sector. Future investment schemes should consider ways to ensure that investment and support are intrinsically linked.

Similarly the digital skills shortage is felt very acutely in the wider regions and it cannot be resolved with a ‘one size fits all’ approach. Intervention has to be targeted, and funded, to deliver for individual regions. The issue needs to be overcome by understanding what is happening at a grassroots level in terms of skills.

The next government must devise a coherent regional startup strategy that is led by a grassroots up approach, developing more networks and infrastructure to share best practice between tech clusters, to bridge the disconnect. This will ensure policy initiatives are targeted rather than mere reinventions from other geographical areas.

Nothing Ventured

Octopus has released its latest High-Growth Small Business (HGSB) Report. At The Entrepreneurs Network we're partial towards HGSBs. After all, these 77,646 businesses (at the last count), making up 2.9% of UK businesses, are vital to the UK’s prosperity.

HGSBs are companies with an annual average growth of more than 20% over a three-year period and an annual turnover of between £1 million and £20 million. They contribute £113 billion in gross value added (GVA) to the UK economy, employ 1.9 million workers, and account for 84% of net employment growth.  Find out more.

Nothing gained
This week I wrote for City AM about pensions reform. Over the years, politicians have talked a lot about Britain as a property-owning, share-owning democracy. Now it’s time to take that aspiration seriously. 

We are struggling on the property-owning front, but auto-enrollment has been a success in getting people to save. However, due to a 0.75% cap on annual charges, pension funds aren’t investing in venture capital. We lag behind the rest of the world: public pension funds contribute just 12% in the UK, in contrast to 18% in Europe, and 65% in the US.

It’s the law of unintended consequences that a seemingly sensible, minor regulation on fund charges is having such a significant impact. It’s not just investors who could benefit from a pension industry more open to venture capital: British businesses up and down the country would gain from this fresh source of capital. Read the whole article here.

Rational expectations
The Department for Business, Energy and Industrial Strategy has asked us to direct you towards an online survey. Filling it in will generate a list of things you need to do between now and the end of the year. I've tested out the survey and it seems to be rationally designed. If you have any feedback, let me know and I will pass it on to the Department. Fill in the survey here.

London calling
Calling London's most ambitious tech businesses! Today is the last day to apply for the Spring Cohort of the London & Partners Business Growth Programme.

You'll have to be running a London based technology company with three or more full-time employees and a minimum viable product. The programme is particularly focused on helping connect you to corporates. Register your interest here.

Read the whole thing here (includes news, views, and events), and sign up here.

Startup Manifesto: Improve access to Innovate UK grants

Policy 13: Improve access to Innovate UK grants

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

The cost of making UK research funding more professionalised in the past three decades has been to make it more bureaucratic and managerial as well. 

This has meant that many innovative firms prefer not to bother with grants from Innovate UK, for example, because of the time and cost of applying and the amount of reporting necessary. The cumulative cost to all the applicants for any particular grant could be a sizeable per cent of the actual grant award: for example, 8 applicants spending 2.5% each on the application would be 25%.  

Apart from the bureaucracy involved, it is not clear that research grants are very well targeted. Inevitably, many good projects will fail the approvals process, and application reviewers end up separating not just good from bad, but good from good, a more difficult and probably less valuable task. 

There could also be clearer focus on Innovate UK’s reason for existing – the market failures, like uncaptured spillovers or collective action problems, that means that private investment may underfund innovation from society’s point of view.

To simplify and better-target grant funding, the next government should pilot a lottery-based funding system, where grant applications are reviewed to pass a certain threshold and those that do are entered into a funding lottery. The assessment could include whether there is a “market failure” case for support where for-profit VCs have decided not to, so that government funding has a clear purpose grounded in the economic case for supporting innovation.

Startup Manifesto: Reform R&D Tax Credits so that they are fit for a modern digital economy

Policy 12: Reform R&D Tax Credits so that they are fit for a modern digital economy

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

When it comes to R&D spend the UK is lagging behind its peers. According to the latest spending data, we only rank 11th in the EU and 19th in the OECD. Although the government has set a target of achieving 2.4 per cent of GDP for R&D investment by 2027, if R&D investment continues at the current rate of growth the UK would not reach this target until 2053... 26 years too late. If we are to meet the 2.4 percent of GDP target we must increase the amount of R&D work carried out by startups.

The UK’s tech sector is growing over one-and-a-half times faster than the rest of the economy, yet tech startups are currently being denied the right to R&D Tax Credit rebates for a range of technologies that are vital to their innovations. 

Take data for example, the lifeblood of any tech startup. Since it isn’t classed as a ‘consumable’ in the R&D process, the cost of data sets can’t be claimed under R&D tax credits. Yet it’s integral to R&D projects of many tech startups, including AI and machine learning. 

Another issue of major hindrance to tech startups and scaleups concerns cloud services. Startups rely exclusively on cloud providers to work with large datasets, train new algorithms and deploy sensors at scale when developing their products. However, more often than not, these costs are not accepted in tax credit applications. It is vital that startups have access to the computing power they need to build world-beating products and services.

Similarly, over 80% of startups undertake significant amounts of user interface (UI) and user experience (UX) research which they considered a vital part of their R&D processes. At the moment, startups are unable to claim fully for the costs they incur building innovative solutions to the front end of their product. Tech firms won’t market a product unless it’s been tested properly with users; they need a clear understanding from HMRC that UI/UX work is critical R&D work, and should be included in the credit.

We know that R&D is going to be critical for the future of the UK economy. We know that startups with limited capital need to invest early to be able to build world-beating products. And we know that the system needs to be updated. The next government must look at modernising this great scheme so that it is fit for the digital age.

Startup Manifesto: Unleash pension fund capital by adjusting the pension charge cap

Policy 10: Unleash pension fund capital by adjusting the pension charge cap

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

For many entrepreneurs, seeking investment from abroad is not a strategic decision — it happens simply because the funds they need to fuel growth are not available in this country. Venture capitalists (VCs) completed £63.7bn of deals in the US but just £5.8bn in the UK in 2017. While the steady flow of investment from overseas can be seen as a vote of confidence in the UK, it does mean that the fruits of the rapid growth delivered by our own startups will be enjoyed offshore.

The government has spent several years examining how to release some of the cash held in Defined Contribution (DC) schemes for investment in fast-growing startups. The next government must follow through on this work as this progressive approach will help the UK to mirror the large amounts of growth capital available in the US and China. In the US, for example, 98% of venture capital funding comes from institutions such as pension funds and insurance companies. This figure stands at just 55% in the UK.

With assets in UK DC schemes expected to exceed £1 trillion by 2029, diverting just 5% of that to venture capital firms would equate to a £50bn funding boost for startups. The British Business Bank has already undertaken a study which found that a 5% portfolio allocation in startup investments appropriately balances against the risks of investing in illiquid assets - thus protecting retirement savings. 

Unfortunately DC funds are currently unable to invest in startups, through VCs, because of a statutory 0.75 per cent cap on annual fees. VC fees are significantly higher than passive asset classes with lower returns (equities) due to the costs of managing an unlisted portfolio of companies, which translates into a performance fee. 

By adjusting the annual fee cap, to account for performance fees, the next government can unleash this growth capital - hugely benefitting savers at the same time. Research has shown that retirement savings for an average 22-year old could be increased by as much as 7-12 per cent, and the average 45-year old could see an increase of 6-7 per cent. This would ensure that a wider group of people reap the rewards from some of the UK’s fastest growing businesses, rather than the profits remaining concentrated in an ever-smaller group of wealthy investors and institutions.

Startup Manifesto: Encourage the British Business Bank to provide more risk capital

Policy 11: Encourage the British Business Bank to provide more risk capital

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

The government helps startups to grow and scale by providing them with patient capital through the British Business Bank (BBB). This is structurally achieved through two “fund of funds” schemes - British Patient Capital (BPC) and Enterprise Capital Funds (ECF) - which deploy capital to various venture capitalists (VCs) depending on their fund size. In theory this structure should spread capital across a broad range of investors and, therefore, a wide range of innovative companies.

Although the barriers to entry are meant to be lower for VCs applying for ECF access, in practice there is little difference in the functionality of the ECF to BPC. The BPC focuses exclusively on well-established VC managers who have already been successful in raising capital without public help. Whereas the ECF currently writes marginally smaller cheques into marginally less established VC managers operating slightly smaller funds. Since both primarily support funds larger than £30m, neither are helping to nurture new emerging managers or investment diversification. 

For the ECF to fulfill its strategic objectives, it must be reformed to become more ambitious in its policy goals, improving diversity and its added value to the VC ecosystem. To do so there needs to be more of a focus on backing genuine emerging fund managers. The BBB should nurture smaller funds of £5m+ through the ECF, with more established fund managers providing mentoring and training programmes for newer fund managers in exchange for their BPC support. These measures would help diversify the VC ecosystem, which would in turn improve the investment pool for startups. 

In order for the BBB to provide effective long-term patient capital, it is also vital that it is given the latitude to be genuinely risk taking. This will require the BBB remaining fairly independent from central government to ensure that long-term investment horizons are not subject to political whim and that success is not deemed by an artificial required rate of return. This will help to ensure that the BBB can become a world class state-backed funding vehicle. 

Startup Manifesto: Reform EIS and SEIS advanced assurance

Policy 9: Reform advance assurance for EIS and SEIS to unlock more investment in high-growth startups

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are targeted tax reliefs designed to promote investment into innovative startups and scale-ups. They offer substantial tax relief and de-risk investments in early stage businesses who often face considerable difficulty in raising funds. In the 2017/2018 tax year, 3,920 startups raised £1.9bn in investment under EIS, alongside 2,320 startups raising £182m under SEIS. Most business angels (58%) say they would not have invested at all, if the reliefs were not available.

In recognition of their vital role in the UK’s entrepreneurial ecosystem, the next government should commit to maintaining and improving the schemes. In particular, the government should seek to streamline the application process for advance assurance from HMRC, which investors typically insist upon before agreeing to invest. Although the government set a target of 15 working days to approve each application, the waits can often last more than three times longer. Startups often need to access capital quickly and 6 to 8 week waits can place otherwise viable businesses under significant pressure. 

There are a number of measures the government could take to substantially shorten wait-times. For instance, they could work with investor organisations to develop standardised EIS/SEIS pre-approved Shareholders’ Agreements and Articles of Association to reduce the amount of time inspectors must spend on each application. Companies using standardised documents could qualify for a fast-tracked decision. They could also create greater certainty, with regards to wait times, by allowing applicants to track their application status online. 

The advance assurance process is necessary under the status quo as there is no mechanism to make corrections post-investment if they fall foul of HMRC’s interpretation. If there were provisions to make such corrections, it could be possible for lower-risk applications (for instance, those using pre-approved standard documents, within the 7 year limit, and not in certain sectors) to be outsourced to accredited independent advisers.

HMRC should also remove the requirement that investors should be identified in applications for advanced assurance, in order to prevent ‘speculative applications’. While this restriction was a well-intentioned measure designed to reduce the backlog for the advance assurance process, it has created an unwelcome ‘chicken and egg’ situation, where startups need advance assurance to attract investors, but can’t get advance assurance without an investor.