Cool Intentions

The evidence is mounting that the pandemic has spurred more people in the UK to want to become an entrepreneur, with the latest Global Entrepreneurship Monitor (GEM) report finding that the crisis has played a significant role in getting more people to think about starting a business.

The GEM report is probably the best resource for comparing entrepreneurship between countries. This year it reports that: “The United Kingdom was one of the few European economies to increase its entrepreneurial intentions rate, which is adults expecting to create a new business in the next three years, up from 7.6% in 2019 to 8.2% in 2020. Of those adults intending to start a new business, 80% indicated that this decision was influenced by the pandemic to some extent.” This represents the highest figure among European countries, and the same rate as the United States, which "suggests a level of adaptability to the pandemic that is rare among peer economies,” write the authors. When it comes to measures of entrepreneurial intentions, being more similar to the US and less like Europe is generally a good thing.

The pandemic has dented ambitions though. Only 1.3% of UK adults plan to hire six or more employees over the next five years, compared to 2.6% in 2019. And 4.2% plan on hiring no employees at all.

The report offers more notes of optimism, however, with the UK improving on a number of metrics between 2019 and 2020. Experts found improvements in: access to entrepreneurial finance; research and development transfers; commercial and professional infrastructure; government policy; and government entrepreneurship programs. And while the Government’s response to pandemic was only ranked 20th among GEM economies, on the entrepreneurial response to the pandemic the UK came fifth.

While the pandemic isn’t quite over, entrepreneurs and those supporting them should take a moment to pat themselves on the back. Then we must strive to support this new cohort of wannabe entrepreneurs realise their entrepreneurial intentions.

Really really want
We spend a lot of time talking to politicians and civil servants about policies to support entrepreneurship. We also spend a lot of time chatting to people like us who lobby the government on behalf of businesses of all sizes. In normal times we even have a group that meets for a drink to discuss this stuff after work. Alongside the research, consultation responses and media work, I think it’s fair to say we have a decent impact on entrepreneurship policy in the UK.

As the team has grown, and we’ve increased the number of Advisers, we’ve expanded our expertise. Collectively we know a lot about a decent number of things – or at least know an expert or entrepreneur who does. But there are still gaps in our knowledge.

I want us to get better at crowdsourcing your ideas, to take them to government. One way I’ll try to do that is asking for more policy ideas in this newsletter. To that end, on Wednesday we have a webinar with Paul Scully, the Small Business Minister. While there will be opportunities to ask questions on the day via Slido, it would also be great to get your questions in advance.

I can’t promise to ask them all, but I will read every suggestion and I’ll forward them onto our research team, which will help inform our work. The minister will be joined by Chris Hulatt, co-founder of Octopus, and both will be talking about ‘how to build a nation of entrepreneurs’. So what do you want the government to do differently?

Nothing Ventured

Getting more UK pension funds to invest in venture capital has proven far from straightforward, with both sides having noble, but different goals.

On one side, the pension fund industry wants to keep the cost of pension funds down. That is why we have a 0.75% fee cap (in practice averages are 0.46%). On the other side, the venture capital industry looks to the US, where pension funds contribute almost two-thirds of the capital in the much larger VC market (it’s just 12% in the UK), supporting the growth of the world’s most innovative companies. Sadly, the VC model two and twenty fee structure doesn't fit with the cap.

As Sam Dumitriu writes on our blog, the Government is looking to loosen the 0.75% ceiling on annual management fees for workers auto-enrolled into workplace pensions. It is something we have both argued for before. For example, in City AM I called for the cap to be scrapped: “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 would 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.”

That said, I suggest reading the Pensions and Lifetime Savings Association’s submission to the Chancellor’s consultation on why they worry about getting rid of the cap.

In reality, compromise is probably the only way forward. Nest, who manages autoenrollment pensions, intends to allocate 5% of its funds to private equity. However, Mark Fawcett, Nest’s chief investment officer, believes that private equity will accept a deal where they pay lower fees in return for a large guaranteed stream of capital, saying “we won’t pay two and 20.”

Let’s hope for the sake of entrepreneurs that the two industries can meet somewhere in the middle. As Sam argues: “Soon, there will be £1tn worth of assets under management in defined contribution (DC) pensions. If just 3% of that was allocated to venture capital then that would be £30bn. This would have a transformative impact on the UK’s startup ecosystem.”

Sharing’s caring
We’re going to launch a new theme as part of the APPG for Entrepreneurship on ‘The Sharing Economy’.

We’re aiming to host the first roundtable next month, so please get in touch if you’re an entrepreneur, politician, academic, policy wonk etc with an interest in this policy area. As with all our APPG themes, this will include a virtual roundtable, call for evidence, briefing paper, then roundtable launch.

Next month we’ll be hosting the AGM. It will be a chance for interested MPs and Peers to become Officers of the group. Any MPs or Peers who want to get involved should get in touch with Katrina to find out more. Also, feel free to pass this on to any MPs and Peers you think should get involved.

Spooking you
The National Cyber Security Centre (NCSC) has asked us to share their resources with you. The NCSC is a government organisation that provides advice and support for the public and private sector in how to avoid computer security threats. It was set up in 2016 with the aim of making the UK the safest place to live and work online.

Cyber security is a policy area we’ve yet to really get our teeth into, but I remember coming away from one our Mishcon de Reya Leap breakfasts a few years ago in shock at the scope of the threat. It was led by one of the founders of Darktrace, whose successful IPO today is perhaps also testament to the challenge all entrepreneurs face.

Government is well aware of the threat (hence the NCSC) – new cyber security laws, for example, will ban insecure default passwords.

The NCSC has some great resources. For starters, check out their Cyber Essentials, create a Cyber Action Plan and sign up for their newsletter.

Sign up to future newsletters here.

Education Entrepreneurship Monthly – April 2021

Higher education. An open letter from Universities UK and others at the beginning of the month prompted the government to confirm 17th May as the date students could return to campus (i.e. not until the beginning of the next stage of lockdown easing). This came after the sector had already expressed considerable frustration about a lack of necessary support 

Many want to know why this is the case, when nurseries, schools and FE have all already returned to face-to-face teaching? And why was this decision taken despite the mounting survey evidence of the negative impacts of the off-campus/remote experience for learning, social life, wellness and readiness for graduate employment?

Students, it appears, have largely given up hope of getting any more face-to-face teaching this academic year according to the fourth and latest HEPI and YouthSight survey of how students are coping with pandemic conditions.

In March, the ONS Student Insight Survey had already indicated that as many as two-thirds of students may have experienced a decline in their mental health this academic year as social distancing, isolation measures and shut-outs have continued to plague a return to anything like normal campus life. 

Taking stock. In FE, a report from the Association of Colleges (AoC), based on a survey of 80 college responses, was published. All respondents suggested negative impacts for learning, while 75% indicated that their 16–18-year-olds were between one and four months behind compared with a normal academic year. Drawing on the survey’s findings, the Association called for a £1.5bn package of support to fund up to an extra year of study for those due to leave this year, and funded extra hours and support for those already in or about to join. 

To put this in perspective, the government’s current spending plans for catch-up across the board–from early years, through schools and up–hover at around £1.7bn - while the true need, according to the Education Policy Institute (EPI), is likely to be more in region of £10-£15bn. The level of shortfall means many of those young people who need catch-up/remedial provision the most will miss out, if not on access to support, then on quality. For private and third sector providers and responding entrepreneurs, the future is B2C.

Youth job market. The full impact of coronavirus and lockdown on young people has been masked by still-rising participation rates. This is a trend that the general decrease in youth employment opportunities during the pandemic will only have added to. The Institute for Employment Studies (IES) reports that the numbers of young people on payroll have fallen by 12.0% since the start of the crisis a year ago, while the fall for all other age groups has been just 1.4%. Its report also highlights that the numbers point to significant increases in long-term youth unemployment (defined as those unemployed for more than six months), which is now at its highest level in five years.

The government’s response has focused first on the introduction of incentives (enumerated in the last issue) to help stimulate demand for apprenticeships and traineeships, and second, post-18, on the Lifetime Skills Guarantee, which got underway this month. From next year, free access will be given to some 400 qualifications and skills bootcamps for eligible adults without a Level 3, funded through the National Skills Fund. 

News and Views

UK-based Guide Education raises £6 million for tech-based approach to teacher training (Finsmes)

UK Edtech Mindstone ‘compound learning’ tool achieves $2.2 million raise with Moonfire Ventures (Tech.eu)

La Salle Education, an online learning and assessment platform, completes £1m funding round for new Digital Tutor product (Ed Tranham)

Graduway named EdTech Company of the Year 2020 by CIOReview (Cision PR Newswire)

Angel investment in Scotland back to end-2019 level (DailyBusiness)

Will Zoom Apps be the next hot start-up platform? (TechCrunch)

The Creator Economy Boom: What it is, what’s driving it, and where it’s going? (Ollie Forsyth, Global Community Manager, Antler)

How are VCs handling diligence in a world where deals open and close in days, not months? (TechCrunch)

Fundraising: How long does it take to raise capital for a start-up? (BNN Times)

Startup 101: Knowing When You’re Ready For Venture Capital (Forbes)

Which founder would you rather be? (David Franel, Partner, Founder Collective)

Should workplace pensions fund entrepreneurs?

In the US, pension funds contribute almost two-thirds (65%) of the capital in the VC market. By contrast, they provide just 12% of the funding in the UK VC market. Soon, there will be £1tn worth of assets under management in defined contribution (DC) pensions, if just 3% of that was allocated to venture capital then that would be £30bn. This would have a transformative impact on the UK’s startup ecosystem.

It is understandable then that the Government is, and has been for a while, keen to understand why British pension funds invest less in venture capital than their US counterparts and to change it. 

One key barrier is the 0.75% cap on fees for workplace pensions. In my report Unlocking Growth, I noted that this poses problems for the traditional VC model.

“Venture Capital funds typically charge a 2% management fee and take a 20% share of the uplift when the fund closes. Unlike traditional investments in stock markets, VCs invest smaller amounts and take a hands-on approach.”

A higher cap would help solve this problem. Alternatively, regulators could treat carry (the 20%) differently to other performance changes.

At the Budget, Rishi Sunak announced a consultation on changes to the cap on pension charges. While it seem highly unlikely that the cap will be raised altogether (the DWP ruled this out in January) a range of options are on the table according to the FTAdviser:

“One such measure would allow schemes to “smooth the incurrence” of performance fees, which are often payable on illiquid investments, over five years. 

The use of a “rolling average” would allow schemes to exceed the 0.75 per cent charge cap occasionally through good performance without being penalised.”

For instance, a VC fund that saw three or four of its investments exit through lucrative IPOs in a single year might see fees spike and exceed the cap. A rolling average would make this less likely. However, it still might be insufficient as the FT notes: 

“But this might not solve the issue of performance fees for private equity, which tend to be lumpy and concentrated in the years when portfolio company investments are harvested.”

However, not everyone is in favour of a greater share of pension investment going to private equity. The Pensions and Life Savings Association downplayed the idea, arguing that a 5% allocation to VC would effectively double the costs of a typical pension portfolio.

It’s right to try to limit pension fees and protect savers, but having some exposure to VC is in the interests of most savers.

An Oliver Wyman analysis commissioned by the British Business Bank found “the asset class has delivered an average return net of fees of 7% points a year higher than that seen in public equity markets.” There’s also a diversification argument. VC exposes people to sectors that are underrepresented in public markets. As the investments have only a weak correlation to listed equities, it has the benefit of reducing volatility.

That’s why it was welcome to read that Nest, who manage autoenrollment pensions, intends to allocate 5% of its funds to private equity. They believe that private equity will accept a deal where they pay lower fees in return for a large guaranteed stream of capital.

The challenge, as noted in the British Business Bank report, will be creating new vehicles that spread risks across multiple funds. But the prize for savers and the UK economy as a whole from a step-change in VC investment is too large to pass up.

Female Founders Forum webinar - Trade: Accessing New Markets

How can female entrepreneurs break into international markets? Last Wednesday,the Female Founders Forum hosted a webinar on exporting. We had a very informative discussion, led by a panel of experts including Juliet Rogan, head of high growth and entrepreneurs at Barclays, and two entrepreneurs, Cécile Reinaud and Virginie Charles-Dear, the founders of Séraphine and toucanBox.

They had some helpful advice for the guests who tuned in. Here are their top tips.

Go for low hanging fruit

You should identify the markets which are going to be the easiest to enter. Séraphine makes maternity clothing, and founder Cécile Reinaud told us that they first targeted countries where the maternity fashion market was underdeveloped. She thinks you should only export to places where you know that you have some kind of competitive advantage over existing players. The costs for a foreign business will be higher so it would be difficult for a “me too” product to succeed.

Look at the regulation

toucanBox ships toys, which are tightly regulated. Their founder Virginie Charles-Dear explained that  you have a product which is highly regulated, it helps to export to places with similar rules so that each additional market does not add too many onerous approvals or slight adjustments to the product.

Network with entrepreneurs who are doing the same thing

Cécile said she gained the confidence to enter new markets by talking to other entrepreneurs who had gone before her. She found that they could tell her what the specific hurdles for that country and that sector were. She has also received advice about which software to use and where to find a good tax adviser, which proved very helpful.

Ask for help from professionals

Juliet Rogan advised female founders to actively seek advice. Female founders are more likely to seek advice from people within their network, whereas male entrepreneurs are more likely to ask for advice from professionals. Women should continue to seek out networks of other entrepreneurs, but it is worth female entrepreneurs making an extra effort to find professionals too; like lawyers, accountants, or even specialist trade advisers.

Reach out to UK Trade and Investment for support

The Gov.uk website offers a lot of resources to British entrepreneurs who are interested in exporting. Beyond information about how exporting to different countries works, they will also offer some grants to entrepreneurs. Cécile says they helped her to export to Japan and the UAE, and gave her grants to travel to the countries first.

Know and understand the market

Understanding consumers in new markets is vital. In the early days for toucanBox, Virginie stood outside schools and asked parents and pupils to test out her products. She believes that when you export you should make sure to hire people who know the local market because you can learn a lot of unexpected things.

Make a financial plan

Cécile cautions that there are some markets which are difficult to break into. She said that marketing costs in the US are very high, and that in her sector, maternity fashion, there was already a very competitive market. She said they only launched Séraphine in the US when they were financially secure enough to sustain a loss making business for several years.

Do not wait for everything to be ready

Virginie says that you should be wary of over-preparing. There is no point in waiting for the perfect moment to export because it doesn’t exist.

It was a fruitful conversation with a lot of actionable advice. If you would like to be invited to future Female Founders Forum events please sign up on our website.

David and Goliath

Lobbying is a dirty word. The unfolding story of former Prime Minister David Cameron’s Greensill shenanigans will serve to further muddy the practice.

But lobbying, in the broadest sense of the word, is a necessary part of a representative democracy. Politicians can’t know all of the ways that the laws of the land are impacting the country, so it’s an important part of civil society that individuals and groups are able to petition the government when things need changing. Banning lobbying isn’t really an option.

Lobbying is particularly important for the most innovative entrepreneurs, as there are plenty of regulations that aren’t fit for purpose or else become out of date when new technology is created. In an excellent article for Sifted (which inspired me to write about this topic), friend of the network Nicholas Colin mentions the 1835 Highways Act, which effectively prohibits anyone in the UK from riding an electric scooter on the road. Every entrepreneur, in every sector, has their own examples of changes that would support their business.

However – and it’s a big “however” – not all lobbying is good. Beyond the flagrantly bad examples of businesses trying to circumvent what should be open tenders, sometimes business leaders will call for more regulation of their sector as a strategy to stifle smaller competitors and increase the barriers to entry to deter new entrants.

Sector-specific lobby groups might be pushing for what’s best for their sector – say, manufacturing or tech – but their desired policies can come at the expense of other sectors and ultimately make taxpayers and consumers worse off.

Even sector agnostic business groups aren’t always acting in the public interest, as their job is to represent their members, not necessarily the best ideas. Lobbying for the special treatment or exemption for certain types or sizes of business often distorts the market and perverts competition-friendly incentives, once again making consumers worse off.

So while lobbying is necessary, it’s lopsided. And despite what you hear, the main issue isn’t between small and big businesses, but between large established cohorts and newer challengers. While large and small businesses have well established and effective lobby groups, innovative startups and scaleups still don’t get the same level of support. Their voice is important because their businesses have the greatest potential to scale and create wealth and jobs. And as they are trying to disrupt incumbent industries, they are also often the businesses pushing up hardest against existing regulations backed by organised lobbies.

While there is a strong case to be made for more business-friendly policies across the board, startups and scaleups need particular attention. As a think tank, we and other organisations have a role to play in this (I’ll share more details about how we will do this at an event with UKBAA next week), but politicians can help by working harder to seek out these innovative businesses, which still lack the institutions and resources to get their voices heard in parliament.

Dynamic systems
On the blog, Sam Dumitriu asks the question: Is declining business dynamism to blame for our productivity woes? Business dynamism relates to measures of birth, growth and decline of businesses and drawing on a recent presentation from Professor Mark Hart from the Enterprise Research Centre, Sam makes the case for why we should pay more attention to it.

I highly recommend reading it in full. And if you like the idea and would like to get involved in supporting a paper on this topic, please feel free to get in touch.

GB News
Rhys Gunter, a Senior Producer at GB News, has reached out to see if any entrepreneurs are open to being guests on the TV channel when it launches later in the year. If you would be keen to be added to their database to talk about business, startups, tech, tax, education – whatever your passions are. Just drop an email to Rhys with a little about you, your business and what you would like to talk about (include your phone number).

Sign up for the Friday Newsletter here.

Open for Business

The next few months promise to be an exciting time for businesses. Today, with lockdown easing, town centres are full of people hoping to revisit their old haunts. Queues have appeared up and down the country outside shops, hairdressers and beauty salons have run out of appointments, and if you haven't already booked you're going to struggle to find a spare table in a pub tonight. After a few months of being kept away, it seems that shoppers are keen to spend again. The past few weeks have seen a surge in hiring, as businesses (accurately) predicted this bounce back in demand.

Frances Bishop is the founder of a children's clothing shop, The Pud Store. Because of the pandemic, she had to restructure aspects of her business, and started trading online but she says that now things are open again, her customers are excited to “get back to some sort of normality – just to come and see the clothes."

As we identified in our Resilience and Recovery report, female-founded firms across the UK have been most impacted by lockdown. However, with retail and hospitality being disproportionately female-led sectors, and the UK's vaccine programme continuing to storm ahead, reopening presents significant opportunities for female entrepreneurs. We expect that they will be more than able to rise to the challenge.

Webinars & Programmes
Join us for our webinar on Wednesday.

Speakers: Juliet Rogan, Head of High Growth and Entrepreneurs at Barclays; Cécile Reinaud, Founder of Seraphine; and Virginie Charles-Dear, Founder of ToucanBox
Join us for our webinar on Wednesday
Free
10am to 11.30am
14 April 2021

Female Founders Forum – Trade: Accessing New  Markets
 

Juliet Rogan is Head of the High Growth & Entrepreneurs team at Barclays. She leads a national team of High Growth Relationship Directors focused on supporting companies to scale up.

Cecile Reinaud is the founder of Seraphine, an international maternity and fashion label. She grew Seraphine from nothing to a £50m company which she sold in 2020. She supports the Cherie Blair Foundation for Women and wants to use her experience to help many other women found and scale their businesses.

Virginie Charles-Dear is the founder of ToucanBox. It provides a subscription service which delivers a monthly package of activities for children and toddlers. They ship over 150 000 boxes every month, to people in the UK, Europe, and the US.

Female Founder Highlights
Here’s a quick round-up of the news:

• Announced on International Women’s Day, the government is giving £50,000 grants to 40 female innovators. The grants have been given to women who have started businesses with extra social benefits. Recipient companies include an app to help victims of domestic abuse access emergency services and an ocean plastic recycling company.

• Congratulations are due to another Female Founders Forum member Tugce Bulut. She, and the rest of her team at StreetBees have raised another £5m.

• Further congratulations are in order for Faye Holland, another member of the Female Founders Forum whose company cofinitive has been named the best PR and Communications agency in East Anglia.

• Huckletree runs regular "VC office hours" for female founders. Last year an entrepreneur raised £400K from one of these meetings, so it is well worth your while. This quarter they are partnering with SeedCamp. You can apply for a 30 minute slot here. 

Government Support

• HMRC has launched a series of live webinars covering customs arrangements on shipping goods between the EU and the United Kingdom. If you’re still getting to grips with the new arrangements you can sign up to a webinar here.

• Even though the end of the pandemic is in sight, you may still be eligible for business support from the government. Here is a quick test to find out what financial support you can receive.

• If you are going to be reopening physical locations soon, here is some advice on how to make your workplace more COVID-secure. The information is broken down for different businesses, with advice tailored to labs, retail, and even other people’s homes.

• The government has updated their new post-Brexit visa system and our adviser Zenia Chopra details how the different types of visa work.

• One of the most exciting announcements in the budget was the super-deduction, which will allow businesses to deduct 130% of investments from their taxable income. Our Research Director has written about all of the changes to corporation tax in a policy update here, and also about the super deduction in more detail here.

• Help to Grow is a new scheme from the government for SMEs, which, as the name suggests, is aimed at helping businesses grow. There are two streams, one for improving management and one for improving digital tools. The management programme is a 12-week programme delivered by business schools, which at a 90% subsidy, only costs £750. The digital programme delivers free software advice to participating businesses, as well as vouchers for technology which can help boost your business’s productivity. You can learn more about them here.

Barclays Support and Opportunities

Barclays Women in Business Hub
Barclays is dedicated to levelling the playing field for female-led businesses so that more female founders start up and run businesses across the UK. We are a founding signatory of the HM Treasury Investing in Women Code, a commitment from the financial services industry which was launched in 2019 to improve female entrepreneurs’ access to tools, resources and finance. You can read more about Barclays’ three-year commitments to provide ongoing and meaningful support for female entrepreneurs plus helpful tools, guides, checklists and the wider support that is available for female-led businesses on the Barclays Women in Business hub here.

Barclays Money Management Hub
With many customers facing turbulent times, and so many coming to the end of loan repayment holidays, Barclays has created a dedicated Money Management Hub to help businesses keep their finances healthy. It’s continually evolving with lots of useful tips to help businesses budget and plan cashflow, as well as articles and guidance to help consider challenges businesses may be facing. 

Barclays Marketplace
If you need to find new partners to help your business with payment services, pensions, insurance and funding for growth, visit Barclays Marketplace whose featured partners have a track record of delivering quality services in their field.

Eagle Labs Virtual Events
Barclays’ programme of virtual events covers a range of topics from cashflow management to building resilience to help entrepreneurs and start-ups navigate these uncertain times. Forthcoming events include a session on thinking differently about social media marketing and an event to demystify AI, machine learning, and machine intelligence. All events are free to attend and open to anyone. For more information visit the Eagle Lab event page.

Barclays COVID-19 Support Hub
The Barclays COVID-19 Support Hub provides the latest information, tools, and guidance to support businesses throughout the COVID-19 pandemic. This hub includes information about Barclays’ products, webinars, Facebook Live events, and more information on how to access government schemes.

Is declining dynamism to blame for our productivity woes?

Over the past decade, we have seen a historic slowdown in productivity growth. While there is some cause for optimism based on the rapid adoption of tech during the pandemic, boosting productivity should still be the top priority for any government. After all, more than anything else, it is what determines wages and living standards.

Over the past five years, policymakers have tended to focus on the UK’s long tail of underperforming SMEs as the main route to improving productivity. It’s not a bad idea per se, if we could close the productivity gap between our top performing firms and the rest then it’d boost UK GDP by £270bn and bring us closer to German and American levels of productivity. This is why a range of policies, including the recently announced Help to Grow scheme for SMEs, are focused on supporting more SMEs to adopt best practices in digital adoption and management. 

Yet, while our long tail may help to explain why we are less productive than Germany or the US, it doesn’t explain why productivity growth has slowed down across the West or why the slowdown has been sharpest in the UK.

At a recent meeting of the APPG for Entrepreneurship, Prof Mark Hart from the Enterprise Research Centre challenged the long tail narrative. He pointed out that since the financial crisis it’s been the long tail that’s added the most productivity growth, while the most successful firms have seen labour productivity fall or stagnate.

Part of the explanation is that the top 25% of the productivity distribution were more resilient and as a result were able to retain staff even when turnover was falling. The result was a fall in real wages and productivity. He made the provocative point that an exit of some of the UK’s most productive businesses might actually create the space for worse performers to improve their productivity.

There’s precedent for this. Creative destruction is a key driver of productivity. As economist Magnus Henrekson writes:

“Economic growth is not primarily about firms growing by a similar percentage or productivity rising in existing jobs because of technological change and more capital per worker. Rather, it comes mainly from churning (firm and job turnover) and restructuring— mostly shifts in production from less to more successful firms within narrowly defined industries, rather than from declining to growing sectors.”

Higher rates of job reallocation – that is the sum of employment changes from businesses starting up, closing down, expanding or contracting – are associated with higher rates of economic growth. The same is true for rates of worker reallocation, people moving from job to job. In other words, business dynamism is what drives growth.

A decline in job and worker reallocation may explain why productivity has stagnated in recent years. At the APPG meeting, Prof Mark Hart noted that the UK has not seen a US-style decline in job reallocation. Job reallocation rates in the UK have been essentially flat, though consistently lower than US rates.

It may be difficult then to blame job reallocation rates for the UK’s decline. However, there is still some evidence that business dynamism has got worse in the UK. Research from Nesta found that the allocative efficiency of the UK economy fell significantly between 1998 and 2007. In other words, we became worse at allocating resources i.e. workers and capital to our best businesses. The Nesta paper concluded: 

“If Britain’s productive resources were as efficiently allocated at the end of the period as they had been at the beginning, productivity would have been 7.6 percentage points higher among firms of this size. This is equivalent to around £79 billion of lost GDP.”

It is possible that job reallocation might have concealed the decline in dynamism. There might be a case for focusing on worker reallocation, people moving from job-to-job instead. A recent paper from Census Bureau economist Henry Hyatt highlights a worrying trend. Job-to-job flows in the US have fallen dramatically since 2000. This is interesting because while job reallocation fell consistently between 1980 and present, the decline only became linked to a fall in productivity post-2000. 

There are a few reasons to look at job-to-job moves specifically. Workers typically move to jobs that pay better and last longer. It is part of an efficiency-enhancing process where productive employers expand and unproductive employers cut jobs.

While the job reallocation rate has remained roughly stable in the UK, job-to-job flows do appear to have fallen.

Data from the Labour Force Survey shows that seasonally-adjusted job-to-job flows have not reached their pre-Financial Crisis level.

The above data only goes back to 2004. Earlier, slightly different data, cited by the Bank of England shows the decline began in 2001. Interestingly, this data seems to mirror the decline in allocative efficiency that the Nesta paper points to.

In Hyatt’s paper, he points to a range of explanations for the US decline, including:

• An ageing workforce: older workers move from job-to-job less.

• A decline in startup rates: startups have more job turnover.

• Increasing concentration: large firms have less job turnover.

• Higher levels of education: educated workers are less likely to change jobs.

His data suggests the first two factors are the most significant (explaining 9-21% and 8% of the decline respectively). But it’s clearly not the full story.

One factor he doesn’t mention is the high cost of housing in our most productive places. Could a decline in geographic mobility, documented in the UK by the Resolution Foundation and in the US by the Mercatus Center, be to blame?

The Resolution Foundation notes that although the population has grown by 11% since the millennium, the number of workers moving across the UK to new jobs has stayed the same. This is a 25% drop (0.8% to 0.6%) in the share of the population moving. Their data also reveals that the decline has been starkest among young graduates:

“whereas graduates under the age of 35 were almost 5.7 times more likely to move region and employer than non-graduates in the 1990s they are now just 3 times as likely.”

This decline in geographic labour mobility may have an outsized effect on productivity compared to other job to job flows. 

“People who change job consistently benefit from pay rises 5.5 times as large as people who remain in the same job, and those that move region and employer see typical pay rises 6 times as large.”

The issue could be that moving to a high productivity region such as London may improve your pay, but in real terms you could be worse off. This point is starkly made in a recent Economist article on what the author describes as Barratt Britain.

“In Cramlington, Richard, who works in sales, earns around £28,000 a year and his partner, a part-time administrative assistant, earns £12,000. That is enough for a four-bed house and two cars. “If I’d moved to London and got a graduate job, I’d probably be renting a shitty flat and I doubt I’d have two kids,” he says.

In other words, higher productivity work and high wages no longer always translates to higher living standards.

The Duke

One of Prince Philip’s greatest achievements and legacies will be The Duke of Edinburgh's Award.

At the request of Kurt Hahn, his educational mentor, HRH The Duke of Edinburgh first considered the idea of a national programme to support young people’s development in the autumn of 1954.

According to the DofE website: “His Royal Highness wanted to bridge the gap between leaving formal education at 15 and entering into National Service at 18, so that young men made the best use of their free time, found interests and acquired self-confidence and a sense of purpose that would support them into their future and help them to become well-rounded citizens.”

More than 4 million teenagers have participated in the scheme and over 140 countries and territories now offer DofE programmes. Just in the UK, last year 295,490 young people started a programme and a record 159,051 Awards were achieved.

While it’s very broad, the DofE Award is the sort of upstream intervention that we think will raise the confidence of young people so later in life they will have the confidence and broad skills to consider entrepreneurship. It’s a long-term investment, but one worth making.

My colleague Sam Dumitriu covers some of the more enterprise focused upstream interventions in the latest APPG for Entrepreneurs digest, which points people in the direction of the work of The Prince’s Trust’s Enterprise Challenge, which was founded by Prince Charles, and our friends at Ultra Education. Sam also cites some other great international examples in his report on Educating Future Founders, such as Teach a Man to Fish’s School Enterprise Challenge, ABE’s KidsMBA, and VIVITA. 

(As an aside, when writing his history of the RSA, our Head of Innovation Research interviewed Prince Philip. Here’s Anton’s great Twitter thread on what he learned about Prince Philip’s commitment to environmentalism and the convening power he was able to wield.)

Calling all Female Founders
The Female Founders Forum is back. Well, it never really went away, but we have now cemented our plans for the next 12 months. 

In partnership with Barclays, it’s going to be bigger and better than ever, and it kicks off on Wednesday for the first of four webinars. This one is focused on helping support your exporting ambitions and includes Cecile Reinaud, the founder of Seraphine, who recently sold her fashion label for £50m, and Virginie Charles-Dear, founder of ToucanBox, which ships over 150,000 packages of activities for children and toddlers every month to the UK, Europe, and the US. RSVP here.

Later in the year, we will host regional roundtables across the country, and we will release our annual data-backed policy report (check out previous reports here).

It would be great to see you on Wednesday (literally, I hope, as there will be time afterwards for virtual networking), and please forward this onto any female founders who you think would be interested in getting involved in our work. You can sign up to our quarterly Female Founder Forum focused newsletter here.

At Fives and Fours

The think tank Autonomy predicts that more than one million companies in Britain could move to a four-day working week after the pandemic.

Certainly, the pandemic has revealed all sorts of new ways of working that will remain in place when things go back to 'normal'. For example, Dr Matt Clancy argued, in a report for us on The Case for Remote Work, that even when it’s safe for us to all return to the office, a lot more work will be undertaken remotely than before the pandemic. There are policy implications for this. And not Deutsche Bank Research’s ludicrous suggestion of a 5% tax on those who work from home – but things like supporting better digital infrastructure.

Similarly, many of us are desperate to get off back-to-back video calls, but the idea that things will just snap back to pre-pandemic meetings is fanciful.

The same may be the case for more flexible working weeks. Employers and employees may have discovered by being forced to reduce days because of the economic hit of the pandemic that both have a preference for working less in future.

However, the thing about Autonomy is they aren’t just spotting a trend and then asking the government to think about the policy implications. They’re campaigning for a universal four-day working week – both directly and through the 4 Day Week Campaign.

We should always be wary when an organisation suggests a single policy change has the potential to solve all society's ills – even when it’s something you agree with (in fact, especially so). The 4 Day Week Campaign is a bit like that – promising all manner of benefits for our economy, society and environment. It even promises to help restore our democracy.

There is some evidence that 4-day work weeks can make some of us more productive, but the weight of evidence is far from overwhelming – and importantly isn’t satisfactorily broken down across industries and age groups.

A universal policy of a reduced working week runs against the rise and rise of entrepreneurship. Entrepreneurs and their founding teams readily spend closer to 7 days a week than 4 days a week when building their businesses. Of course, as they grow most of the workforce will expect less intense working practices, but without that initial intense push the company may not have grown or survived, to afford it. (Missing the initial start-up intensity as the company matures is one reason why founders leave successful companies to start again.)

But I don’t think this debate should really rest on economics. It’s really about choice. Many of us – particularly entrepreneurs – like what we do and while it’s sometimes hard it’s not without reward. Many employees like their work too and enjoy spending time with their colleagues, which may explain why John Maynard Keynes’s prediction of a 15 hour work week proved incorrect.

If the pandemic breaks down the expectation that people work 5-day work weeks when both employer and employee want to work fewer hours, that’s great. But the “universal approach” would take away our autonomy.

Oh when the saints
I may be a little biased, but our research is getting better and better each year. We can’t do it without the support from our sponsors, and our growing group of paid Advisers, who freed us to be able to write the recent AI report and our previous Copyright paper.

As well as corporate sponsors, a couple of entrepreneurs have also funded research that they’re passionate about. In recognition of this, we’ve created a new category of Patron to go alongside our Advisers and Supporters.

Our first Patrons are Chris Hulatt, Co-Founder, Octopus Group for support of our Future Founders report, which uncovered the views of the next generation towards entrepreneurship, and Sukhpal Singh Ahluwalia, Founder and Chairman of Dominvs Group, for his support of our influential Job Creators report, which set out the contribution of immigrant founders.

If you have a particular passion for an area of policy that you would like to support, just drop me an email.

Introducing Aria
Earlier this year, the Government announced the launch of a new research agency to support high risk, high reward science: the Advanced Research & Invention Agency (ARIA). Today, we announce Aria – a low risk, high skilled member of The Entrepreneurs Network’s growing team.

Aria Babu is a Senior Researcher and the Head of the Female Founders Forum, having written the Resilience & Recovery report before formally joining us. She has written a short introductory blog here and please feel free to drop her an email to say hello.

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Aria Babu joins The Entrepreneurs Network

I’m new at The Entrepreneur’s Network and thought I would introduce myself.

I’ve been around for a while. I’ve done some freelance work for The Entrepreneur Network and the Female Founders Forum. I wrote the Resilience and Recovery report in October, and I have also written a couple of newsletters and blogs.

I’ve had a reasonably varied career up to this point. My first full time role after university was at The Small Business Charter. The Small Business Charter works with business schools to encourage them to support small businesses, both providing support to already existing SMEs in their area and by encouraging their students to start their own businesses. While I was there I helped on a bid for BEIS funding for an SME leadership training programme, which was successful and is now a fully funded scheme with 20 participating business schools. The scheme includes peer-mentoring, which we included, partly because the evidence in The Entrepreneur Network’s report Management Matters.

After that I joined the consultancy Public First. On the policy side, I worked on tech policy, R&D, and pharmaceuticals. On the campaigns side we did projects based on public opinion and through that I have somehow ended up on the front page of The Times. (See if you can spot me.)

I have also worked at a European Space Agency funded start-up, making the world a better place by using satellites to monitor biodiversity.

If you recognise me for anything, it is probably because during the first lockdown I made a political compass quiz which went viral on British Politics Twitter and was mentioned in UnHerd and on the New Statesman podcast.

I’m hoping this eclectic background brings a lot to The Entrepreneur Network. It’s a small and agile team so I think the fact that I’ve done a little of everything is going to be very helpful.

I will be running the Female Founders Forum, and doing some combination of comms, policy, and operations. My main areas of interest are tech, feminism, and housing. My hobbies outside of work are incredibly lame. I’m learning to code, play every Taylor Swift song on the piano, and I run a weekly rationalist book club.

If after reading that last sentence, you still want to talk to me, shoot me an email at aria@tenentrepreneurs.org.

Education Entrepreneurship Monthly – March 2021

Welcome to the March issue of Education Entrepreneurship Monthly from The Entrepreneurs Network – our monthly update covering news, views, research and events of interest to entrepreneurs in education. You can read past updates here.

Human capital. This month’s budget made it clear that the Chancellor is convinced that human capital is integral to economic growth. He announced a new scheme, Help to Grow, to encourage small businesses to adopt management best practices and take fuller advantage of productivity-enhancing software.

Under the scheme, business schools will deliver a ‘what-you-need-to-know’ curriculum and practical peer mentoring programmes. Businesses will also be able to benefit from free advice on efficiency-improving software. Unfortunately, the voucher discounts, just as entry to the mentoring programmes, are closed off to businesses with fewer than 5 employees.

As The Entrepreneurs Network’s Sam Dumitriu noted in his response to the Budget announcement:  “Management practices explain almost a third of the differences in productivity between and within countries. And pre-pandemic data suggests that if the UK’s 1.1m micro businesses doubled their uptake of key digital technologies, it would lead to a £4,050 average productivity for the millions of workers they employ.”

If you’re interested and want to take part, you can read a recent Policy Update which breaks down the specifics of the scheme for entrepreneurs.

In a Budget boost for Higher Education student recruitment, employers, and start-ups, the promised detail of a new Graduate Visa has also been published. From July, graduates with the visa will be able stay in the UK for two years after graduation. Employment of graduate talent right out of university will become much easier, with less need to worry about visas, which is a vital step towards unlocking an important talent pool from which to resource our economy.

The government’s initiatives in Further Education and Skills were met positively. The Chancellor confirmed additional funding for “high quality” work placements and traineeships for 16- to 24-year-olds; a doubling of cash incentives for employers to hire new apprentices; and a new fund for “portable apprenticeships” to better prepare those destined for portfolio careers and project-working. All measures that will be positive for college recruitment and revenue.

Schools. In the midst of a general disgruntlement among teachers about the pressures of Covid-related safety compliance and learning catch-up, many school leaders voiced disappointment that there would be no extra funding for schools beyond existing planned budget increases and catch-up schemes already announced by the government. 

Nevertheless, a budget total of £705m, with a focus on the disadvantaged, £200m for secondary schools to run summer school activities, and roughly the same more for the National Tutoring Programme, is not nothing, and the questions quickly turned to focus on how the money should be spent and intervention design. The latter was argued to be particularly important by the Education Endowment Foundation (EEF) in regard to the value or otherwise of summer schools, which if well-balanced and put together can bring gains for some pupils (up to two months’ progress in some cases).

To maximise the impact, Head of Policy Jonathan Key argued, programmes should utilise trained teachers for small group tuition (potentially adding the equivalent of a further two months’ of progress in the summer school context).

Feedback. According to the EEF Toolkit, ensuring pupils receive high-quality feedback by comparison can be transformative (+8 months). There is broad consensus that well-thought out and explained homework activities, which enable specific and timely feedback, are important, but how this relates to other aspects of good teaching and learning is less clear. It’s an area that teachers know is in need of improvement. An indicator of this was given this month in a TeacherTapp survey of over 8,600 responses. The question focused on the new technology applications they’d used over the past year, and the results reveal a strong inclination to make changes to the way they approach homework and feedback.

Exams and assessment. Finally, even as the new Education Recovery Tsar, Kevan Collins was highlighting the need for renewed effort in the area of formative assessment, and for restoring faith in assessment more generally, a great confusion was erupting over arrangements for this summer’s 14-19 exams. While the government confirmed that teachers will have lead responsibility for determining grades, based only on what students have been taught, and drawing on a range of evidence that includes mocks, coursework and optional exam board set questions, educationists largely concurred that we are walking into a minefield. Multiple checks will be built into the system, including peer checking in schools, sign-offs and exam board moderation support.

While Ofqual published teacher guidance and information for exam centres on how teacher-assessed grades should be determined and submitted, one HMC head nailed the problem with the whole approach: what if students from different schools/exam centres start comparing their experiences and questioning whether allowing these diverse approaches is fair? “Plans will be thrown into chaos if pupils are permitted to challenge not only the decisions themselves but also the basis on which they have been made,” he said. Meanwhile, a poll conducted by The Student Room Group found students not far behind: 52% thought that exam grades this year would not be fair to them. 
 

News and Views

What did the 2021 Budget mean for the UK tech sector and COVID-19? Executives, entrepreneurs and investors give their views. BusinessCloud.

A year into the pandemic: Reflections on how education systems responded & where we are heading. Brighteye Ventures.

To raise funds or not to raise funds? Vadim Rogovskiy, serial tech entrepreneur and investor. TNW.

The 5 main reasons VCs reject start-ups. RLC Ventures.

UK tech investment hits record levels as TechNation’s annual report voices concerns about the sector’s increasing reliance on foreign investment at later stages. Relocate Global.

Europe suffers from lack of late-stage investors. Over 80% of later stage tech venture capital in Britain comes from overseas investors. It’s a Europe-wide problem. Suranga Chandratillake of Balderton Capital in Growth Business.

vc:20 – The Twenty Minute VC, with Harry Stebbings. Inside the world of Venture Capital, Start-up Funding and The Pitch. Harry Stebbings.

How to become an entrepreneur. The John F. Kennedy University's Institute of Entrepreneurial Leadership re-envisions its traditional class as a free, open-source, interactive online learning experience with CurrikiStudio. Details here.

Greed is Groundless

The Prime Minister caused a kerfuffle this week by saying on a call with MPs that the reason we have successful vaccines is because of capitalism and greed. He quickly withdrew the remarks after the call.

Oliver Stone and Stanley Weiser are partly to blame for this trope. According to Gordon Gekko in Wall Street: “The point is, ladies and gentlemen, that greed, for lack of a better word, is good.”

Gekko was wrong. We do have a better word: self-interest.

Dr Eamonn Butler explains the distinction well: “Greed is acting on one’s own interests, accumulating things regardless of one’s needs, without a care for the interests of others, and with contempt for social conventions, even laws. Self-interest, by contrast, is a natural human characteristic, without which none of us would survive. It prompts us to act in ways that fulfil our needs; but more often than not, that rational, long-term self-interest requires us to collaborate with and help others.”

Enlightened self-interest can also encompass the desire we have to make others happy and do good, or you can define that separately as altruism or charity if you prefer. But the point is that in market-based economies governed by the rule of law, our commercial interests are directed towards the public good.

As Johnson’s comments were made in relation to vaccines, let’s just consider Dr Ugur Sahin and Dr Özlem Türeci, the couple who founded BioNTech. In a New York Times article Dr Sahin is quoted as saying: “It felt not like an opportunity, but a duty to do it, because I realised we could be among the first coming up with a vaccine,” and “trust and personal relationship is so important in such business, because everything is going so fast.”

What is true of pharma entrepreneurs is true for all. Sure, we are all to a greater or lesser extent greedy, but it doesn’t do much to explain how the vaccines got made, nor the motivations of entrepreneurs in general. Profit and loss is just a useful way of getting more of what we want and to this end an argument can be made – and Tom Chivers does exactly this for Unherd – that pharma should have been able to make more profit.

Out of the crooked timber of humanity, entrepreneurship can make the world a better place for everyone.

METR reading
The Tax Foundation has produced a report on the marginal effective tax rates (METR) of the recent Budget. It’s analysis chimes with our immediate response.

On the positive side, it concludes that the 130% super-deduction will encourage additional investment in plant and equipment; however, its expiration alongside the planned hike in corporation tax in 2023 will cause the METR on plant and equipment to increase in the long run.

The pending tax hike will also reduce the incentive to invest in other assets such as IP and structures, and firms will have an incentive to delay IP investment because the effective tax burden will be higher in 2021 and 2022 than in 2023. The report argues that if the Government had provided full expensing with an increased corporate tax rate, investment would have been increased in both the short run and the long run.

All is not lost. The Chancellor has time to announce that full expensing – that is a 100% deduction – will come in 2023, and he could always pull back on the 25% hike if the public finances look better.

Brains trained
There’s a new edition of the Brain Business Jobs Index, which looks at the number of highly knowledge-intensive enterprises across 31 countries and 284 regions. We launched a previous version of this paper a few years ago.

The United Kingdom has two of the top 10 European knowledge regions: Berkshire, Buckinghamshire and Oxfordshire, and London. These are lauded for having a higher concentration of knowledge-intensive occupations as a share of the working-age population.

Between 2012 and 2019 the United Kingdom added 600,300 so-called brain business jobs. However, in 2020 we lost 30,200, with the concentration of the population employed in knowledge-intensive occupations decreasing slightly from 8.2 percent in 2019 to 8.1 in 2020.

The report argues that there is a link between business brain jobs and low unemployment – with the Slovakian capital region of Bratislava, the region with the highest concentration of brain business jobs, having an unemployment rate of just 2.4%.

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Make it Till You Fake it

The future is now. Artificial intelligence is no longer just about beating humans at chess and Go, it’s revolutionising whole industries and will ultimately revolutionise them all. If anything, the transformative power of this already lauded technology is still being underhyped.

That’s why we launched a report yesterday on how to make the UK the best place in the world for AI innovation. In his pithy briefing paper, former Head of Regulation at the Office for AI Séb Krier sets out eight recommendations for achieving this goal:

– Create a pool of cloud compute credits for the UK R&D ecosystem.
– Upgrade public data infrastructure and open up datasets.
– Explore innovation-friendly regulatory markets.
– Work closely with the EU to review and improve GDPR.
– Lower barriers to immigration and actively attract foreign talent through targeted scholarships.
– Shun protectionism and proactively lead global AI governance efforts.
– Foster public trust in the public sector’s use of AI by giving the CDEI greater independence and allowing it to audit public sector algorithms.
– Ensure the UK’s intellectual property regime is fit for AI by creating an exemption for for-profit data and text mining.

We are well poised to build on our strong foundations. As our Research Director Sam Dumitriu discusses in an article for politics.co.uk, in a year when scientists produced the first mRNA vaccines to help defeat a pandemic, it may be that DeepMind’s use of AI to solve the protein folding problem is 2020’s greatest discovery. And while DeepMind was sold to Google, as I argue for Forbes we will necessarily need to ally with the US on a technology that comes with such profound geopolitical and perhaps even existential threats.

The UK has been a driving force in the development of AI as Séb explains in this article for CapX, and back in 2018 we were one of the world’s first countries to announce policies to strengthen the sector through our AI Sector Deal. However, on the policy front things have stalled since then. Until last week, that is, when, partly in response to the AI Council’s AI Roadmap, the Government announced its intention to publish a National AI Strategy later this year.

Our paper aims to feed into that strategy, but prior to that we want it to start a discussion around our recommendations and whether we need anything else. Watch this space for a virtual roundtable – or register your early interest.

And this is just the first technology/sector/industry specific briefing paper. Our next will be on drones. If there is another technology/sector/industry that you think is ripe for policy recommendations just let me know which and why (it doesn’t need to be tech focused).

Nation building
According to the annual Tech Nation report, tech investment in the UK reached $15bn in 2020. Only the US and China get more and last year we pulled further away from Germany and France. The UK tech startup and scaleup ecosystem is valued at $585bn, which is 120% more than in 2017, and more than double the next most valuable ecosystem, Germany, at $291bn. The UK is also more attractive to international investors than ever, with 63% of investment into UK tech coming from overseas last year – up from 50% in 2016.

London is fourth for tech VC investment globally behind San Francisco, Beijing and New York at $10.6bn, with the percentage of total UK VC investment made in London increasing from 73% to 88% between 2018 and 2021. 

Despite this very good news, some will be concerned about the regional breakdown and others may be worried that more cash is coming from abroad for national security reasons. However, I think if there is a concern, it is around the drop off in funding going to tech startups. 

The report draws attention to the fact that investment in seed stage companies is decreasing as a proportion of overall tech VC investment (14% to 6% over 5 years) – and along these lines, John Spindler of Capital Enterprise draws attention to Beauhurst research in a LinkedIn post which shows that the number of successful first-time deals is now below 2012 levels. 

As John suggests: “It might be cyclical, it might mean the incentives to invest in first round raises (the most risky) needs refreshing or it might be that the amount of investment going into scale ups and their ability to suck up talent and attention is having an impact.” This is something we will be keeping an eye on.

Gig a lot
Internet speed used to be a significant concern for business owners, but over the years it went down their list of gripes. The pandemic has changed that, as many employees are expected to continue to work from home even after the pandemic. Faster broadband has once again risen up the agenda.

Today the Government has launched a £5bn ‘Project Gigabit’, with an extra £210m worth of vouchers to help those with slow speeds and £110m to connect up to 7,000 rural GP surgeries, libraries and schools. There is also a call for evidence on using satellite and 5G technology to connect very hard to reach areas, which reportedly could involve Starlink, Elon Musk’s network of satellites.

Vouchers will be worth up to £1,500 for homes and £3,500 for businesses to help to cover the costs of installing gigabit broadband. The voucher will launch on Thursday 8th April 2021 and you’ll be able to check your eligibility here.

This is an extract from our Friday Newsletter. Sign up to future newsletters here.

On Top of Your Voice

This week we’ve put out a couple of Policy Updates on how the Budget announcements will impact entrepreneurs. So far we have looked at the Help to Grow Scheme and the Corporation Tax announcements. Next week we let you know about reforms to the via system and key consultations announced in the Budget. We’ll share more details in our Policy Update newsletter (sign up here), but I just wanted to alert you to three consultations that have piqued our interest and may be of interest to you. After all, we exist to ensure entrepreneurs have a greater voice in policy making.

In the last couple of years we’ve argued that the scope of the R&D Tax Credit should be expanded to cover data and cloud computing (Dom Hallas from Coadec explains why in our joint Startup Manifesto). Rather surprisingly, former Prime Minister Theresa May bemoaned in Parliament this week that there have already been a number of reviews but little in the way of action. I hope and expect this will be one last push. The Government is keen to hear from firms that undertake R&D, or might consider doing so in future. You can read the full consultation here.

There’s also a Call for Evidence into the Enterprise Management Incentive, which we’re a big supporter of. But we think it needs to be more generous as other countries have copied – and improved upon – our scheme. A consultation was also announced to look at how the UK can get more pension fund investment into VCs, which is something I’ve written about before and features heavily in our Unlocking Growth Report with the Enterprise Trust.

Let Sam Dumitriu know if you are planning to respond to any of these consultations (or any others). We will be doing so and it might be more efficient for us to coordinate things, or run a virtual roundtable if we get enough interest in any of them. We recently did this with the help of our Research Adviser Dr Chris Haley and our Advisers Giovanna Forte and Mark Neild on the Green Paper on transforming public procurement, which worked really well.

If you want to see the government’s open consultations, you can do so at Gov.uk here. It’s a little unwieldy, so it might be easier just to sign up to our ad hoc Policy Updates.

It's life, Jim
The Department for Digital, Culture, Media and Sport (DCMS) has outlined its 10 Tech Priorities. Number 6 on the list is “unleashing the transformational power of tech and AI”.

It reads: “Artificial intelligence has the potential to fundamentally transform our lives. The UK already has a strategic advantage in this new frontier, and our upcoming National Artificial Intelligence Strategy, which we will publish later this year, will help us build on our world-class research and innovation base. We will also work to solidify our global leadership in the development of quantum computing and other transformative tech.”

Next week we will release a briefing paper written by Séb Krier, former Head of Regulation at the Office for AI, on how we make sure the UK continues to punch above its weight when it comes to AI. I’ll write about it here next week, but as with previous reports, just let me know if you want me to send you a copy on the morning of its release.

You may also want to check out Stanford’s comprehensive and fascinating AI index, and if you have an ongoing interest in AI and aren’t already signed up for it, you should check out Matt Clifford’s Thoughts In Between newsletter, which is great at unpicking the policy challenges around AI – and much else besides.

Works in progress
For the intellectually curious, I would wholeheartedly recommend checking out the Works in Progress Oxford Union conference tomorrow.

The first is a conversation between the CEO of the Royal Statistical Society (and our Research Adviser) Stian Westlake and Dr Rachel Laudan – author of the award-winning book: Cuisine and Empire: Cooking in World History. There is also a conversation between the economist Dr Tyler Cowen and Patrick Collison, the founder CEO of Stripe, as well as between the cognitive psychologist, linguist, and popular science author Dr Steven Pinker and the psychologist Dr Stuart Ritchie. Find out more here.

The Budget

The Budget could be sliced and diced in a hundred different ways. You’ll be pleased to know I won’t do that. I’ll just focus on three areas where our work has had some influence on what was announced.

First off is the so-called “super-deduction”. The biggest announcement for the UK’s competitiveness is the proposed increase in the main rate of corporation tax to 25% on 1st April 2023. This will only apply to businesses making a profit over £250,000, with it tapered between £50,000 and £250,000, and a small profits rate (SPR) of 19% for companies with profits under £50,000.

Even if you won’t pay this, as the Office for Budget Responsibility states, it “will increase the cost of capital, lowering the desired capital stock and business investment”. As Paul Johnson from the Institute for Fiscal Studies writes: “With this increase Mr Sunak is taking a gamble that raising corporate taxes further up the international pecking order won’t have too terrible an effect on investment.”

On the face of it, at 19% it looks like the UK should be able to raise corporation tax without too much trouble – only Hungary, Ireland and Lithuania are lower. However, while former Chancellor George Osborne was gradually cutting corporation tax, capital allowances were also being scaled back, meaning that in 2019 the UK’s effective marginal tax rate was only the 25th best out of the 36 OECD countries analysed.

That’s why the Chancellor had to pull the “super-deduction” rabbit out of the hat. It’s an idea I’m very familiar with because our Research Director, Sam Dumitriu, has been instrumental in making the case for increasing capital allowances since 2017. He was one of the first to raise the idea of full expensing in the UK, with his report for the APPG for Entrepreneurship, and last year in a more detailed report, with Pedro Serôdio, estimating that moving to a system of full expensing would permanently boost investment by 8% and overall productivity by 3.5%.

He has written an article explaining the policy, which I recommend reading if I haven’t explained it clearly enough. If you read it, you’ll learn we need to do two more things to help offset the negative impacts of the increase in corporation tax. First, we (and others) are trying to get clarification that intangibles can be included under the super deduction. Some commentators assume they can’t, though there is already wiggle room for claiming tax relief for them.

Second, Rishi should have announced that when the 130% super-deduction ends, we will move to 100% full expensing. The stakes are high. Without this, in 2023 we could have one of the worst tax systems for businesses in the OECD.

Good points
As quoted in City AM, I think UK entrepreneurs will welcome the new ‘elite points-based visa’ announced in the Budget. It will come into force by March 2022 and allow those with a job offer from a recognised UK scale-up to qualify for a fast-track visa. Setting the criteria for what counts as a scale-up or high-growth firm will be a challenge, but if it leads to more high-skilled immigration then I’m supportive of it.

Also, allowing holders of international prizes and winners of scholarships and programmes to automatically qualify for the Global Talent visa will offer the necessary assurance to the very best and brightest that they are welcome in the UK.

We also welcome the expansion of the Global Entrepreneur Programme and a review of the Innovator visa. The Innovator visa is currently unfit for purpose, needing fundamental reforms to align incentives so the pricing is clear and more high-quality organisations become endorsing bodies. As our Job Creators report found, prior to Brexit 49 per cent of the fastest growing businesses in the UK had at least one foreign-born founder. If we are to continue to attract the best and brightest then we need to ensure that the visa process is as fast and unbureaucratic as possible.

And we had more good visa news yesterday. As our Adviser Zenia Chopra writes, the new Graduate visa will be returning on 1st July 2021. This is the much anticipated return of the post-study work visa and will mean that graduates can stay in the UK for two to three years after they have graduated. For startups, it will mean that it will be a lot easier to employ graduates out of university, with no need to worry about visas – at least for the first couple of years.

And yet more good news. Apparently the UK is prepared to offer good terms on high-skilled migration as part of a free trade deal with India. Don’t forget: Indian high-skilled migration played a big part in building Silicon Valley.

Grow up
The Budget also announced Help to Grow (you can already register on the website), a new scheme designed to help businesses adopt management best practices and productivity enhancing software. We have long championed the value of management practices and technology for improving UK productivity.

Our Management Matters report showed that management practices explain almost a third of the differences in productivity between and within countries. And as our Upgrade report argued: “If the UK’s 1.1m micro businesses doubled their uptake of key digital technologies, it would lead a £4,050 average productivity boost for the 4.09m workers employed by micro businesses, restoring four-fifths of lost productivity growth since the financial crisis, enabling businesses to bounce back faster post-lockdown.”

As Sam says: “It’s right then to harness the UK’s world class business schools to deliver a programme of peer mentoring to get more businesses to adopt best practice. It’s also right that they’ll be provided with free, impartial advice and financial support to purchase productivity enhancing software. But there’s a risk innovative business-to-business startups will be cut out from the scheme. It is vital that startups are involved in the design of the scheme and that software vouchers do not only go to tech giants.”

For those of you who are subscribed to the APPG for Entrepreneurship Newsletter, you’ll have seen our broad summary of the reactions of some of the main business groups (there's more in the News and Views section). And we will send out Policy Updates (sign up here) in the coming weeks as the practical implications of the Budget announcements are unpicked.

Sign up to the newsletter here and read the whole thing here.

Our Budget 2021 Response

On the announcement of a 25% Corporate Rate and a 130% Super Deduction, Sam Dumitriu, Research Director of The Entrepreneurs Network said:

“A higher corporate tax rate will discourage investment and make the UK less competitive internationally, so it is right that the Chancellor has combined it with a new 130% Super Deduction for investment.

“However, when the two years are up and Corporation Tax rises to 25%, the UK will fall far down the list on international tax competitiveness. Although, we currently have a low headline rate, the effective rate that businesses actually pay is mid-table by international standards due to stingy capital allowances.

“To avoid an investment slump, as the OBR forecast, when the Super Deduction expires, the Chancellor should allow businesses to write off the full value of their investments – the so-called full expensing he mentioned at the despatch box.

“But a high rate, even with full expensing, increases the incentive to engage in sophisticated tax avoidance and shift headquarters. To counter that, the Chancellor needs to think hard about fundamentally reforming how international profit is taxed.”

On the new ‘elite points-based visa’, Philip Salter, Founder of The Entrepreneurs Network, said:

 “UK entrepreneurs will welcome the new ‘elite points-based visa’, which will come into force by March 2022, allowing those with a job offer from a recognised UK scale-up to qualify for a fast-track visa. Also, allowing holders of international prizes and winners of scholarships and programmes to automatically qualify for the Global Talent visa will offer the necessary assurance to the very best and brightest that they are welcome in the UK.

“We welcome the expansion of the Global Entrepreneur Programme and review of the Innovator visa. The Innovator visa is currently unfit for purpose, needing fundamental reforms to align incentives so the pricing is clear and more high-quality organisations become endorsing bodies. As our Job Creators report has found, prior to Brexit 49 per cent of the fastest growing businesses in the UK had at least one foreign-born founder. If we are to continue this record, we need to ensure that the visa process is as fast and unbureaucratic as possible.”

On support for businesses to offset corporate tax losses against their last three years of tax, Sam Dumitriu said:

“This will be a boost to businesses who have run up large losses due to the pandemic providing much-needed cashflow.”

On the announcement of Help to Grow, a new scheme designed to help businesses adopt management best practices and productivity enhancing software, Sam Dumitriu said:

“Management practices explain almost a third of the differences in productivity between and within countries. And pre-pandemic data suggests that if the UK’s 1.1m micro businesses doubled their uptake of key digital technologies, it would lead to a £4,050 average productivity for the millions of workers they employ.

“It’s right then to harness the UK’s world class business schools to deliver a programme of peer mentoring to get more businesses to adopt best practice.

It’s also right that they’ll be provided with free, impartial advice and financial support to purchase productivity enhancing software. But there’s a risk innovative business-to-business startups will be cut out from the scheme. It is vital that startups are involved in the design of the scheme and that software vouchers do not only go to tech giants.”

On the Chancellor’s decision not to raise Capital Gains Tax, Sam Dumitriu said:

“Before the budget entrepreneurs warned the Chancellor against ill-thought out plans to equalise the rates between Capital Gains and Income Tax.

If the UK is to remain a destination for entrepreneurs and support repeat entrepreneurship, it is vital that we keep Capital Gains Tax rates competitive and take into account the risk taken by the job creators across the UK.”

Will Rishi tax the sharing economy?

The last time a Chancellor tried to tax the Gig Economy, it didn’t end well. Philip Hammond’s plan to increase the National Insurance contributions paid by the self-employed led to an embarrassing U-turn. Months later, when the Office for Tax Simplification recommended the Chancellor lower the VAT registration threshold from £85,000, he wisely, at least from a political perspective, chose not to pick another fight with sole traders.

Another dust-up might be on horizon. The Treasury has issued a call for evidence on VAT and the Sharing Economy. They seem concerned that sharing economy platforms such as Uber, Deliveroo, and Airbnb are not paying their fair share of VAT.

Take the case of Uber. Under the status quo, Uber only pays VAT on its cut of the transaction while the money going to the driver is typically untaxed. This is because, for VAT purposes, the driver is a separate business and will almost never earn more than the VAT registration threshold. The extent to which the recent Supreme Court ruling changes this is unclear. The same is true of Airbnb, Deliveroo, and TaskRabbit.

As the sharing economy grows, more and more transactions will be exempt from VAT as a result. This understandably is concerning for the Treasury. After all, VAT brings in around £130bn each year.

They’ve also noticed the traditional case against lowering the VAT threshold, that it would be overly bureaucratic for sole traders, might not apply when a multi-billion platform can handle the grunt work on their behalf.

But while the revenue loss is a key concern for the Treasury, the effect on consumer behaviour should also be looked at closely. The aim for policymakers should be to avoid distorting consumer choices by arbitrarily favouring one service over another.

The hotel industry, for example, has argued that Airbnb rentals enjoy an unfair tax advantage over traditional hotels. If I ran a VAT registered hotel and my bookings suddenly dried up as travellers switched to cheaper non-VAT registered Airbnbs, then I would be entitled to feel a little cheated by the taxman.

The tourism sector has suggested lowering the registration threshold for accomodation to £5,000 to balance the playing field. In this case, taxing sharing economy platforms may reduce the impact of VAT on consumer behaviour and encourage competition on the merits (price and quality). 

But in many cases, applying VAT to sharing economy businesses could give offline businesses an unfair advantage. Take the case of household services like cleaning or childcare. If you use a platform or agency, instead of responding to an ad in the local paper or Facebook, you would end up paying 20% more. It would put platforms at an unfair disadvantage and discourage innovation in the sector.

This would also be the case for private hire vehicles. The Call for Evidence singles out digital platforms. But it is far from clear why minicabs booked over the phone should be taxed at a lower rate than minicabs booked via an app. We shouldn’t be nudging consumers towards services that are potentially less safe (i.e. not tracked by GPS) and more likely to be cash in hand (thus harder to properly tax).

This isn’t the only problem for competition. Even if you made sure VAT applied to all minicabs, app-based or traditional, it would still create a massive advantage for Black Cabs which customers can hail from the street. In the case of London, this would come on top of allowing them to use bus lanes and to avoid paying the congestion charge.

Before they act, the Treasury should also think hard about driving people towards the grey economy. Many sectors with high levels of tax evasion (the cash-in-hand economy), have moved out of the grey due to sharing economy platforms. Pushing people towards the informal economy would not only make it harder to protect consumers, but it would also reduce the overall tax take.

What should the Chancellor do then? One principle he should stick to is neutrality between online and offline. My decision to hire a cleaner through an app or through word-of-mouth should have nothing to do with the tax system.

A sector-by-sector approach could have advantages here. Hotels do have a legitimate gripe about the status quo. I would probably use airbnb less and hotels more if Airbnbs cost 20% more. At the same time, singling out the sharing economy for VAT in sectors where the alternative for most consumers are unregistered sole traders seems unwise.

This debate has high stakes in the UK due to our high VAT threshold. If the threshold were reduced closer to the European average then the case for reform would be weak. It would also remove damaging disincentives to grow sales. Most private hire vehicles, whether minicabs, Ubers or black cabs would be forced to register. The issue is that lowering the threshold would mean higher tax bills for scores of SMEs and sole traders. 

A middle way where the VAT Registration threshold is lower, but smaller traders can offset payments or access additional help in the years after registering, might be the best option. But designing it would be tricky to say the least.

If you’re an entrepreneur and want to give your thoughts to HM Treasury. You can read the terms of the call for evidence here. The consultation closes on March 3rd.

Kalifa Review

The Kalifa Review of UK FinTech is out today. Ron Kalifa, the former CEO of Worldpay, has overseen the production of a comprehensive and ambitious report. There’s way too many policies to unpick here, so I’ll just focus on just a few.

The UK already punches well above our weight in Fintech, representing 10% of global market share. So why should we focus on fintech when it’s already thriving? First, we have a proven comparative advantage here, which we should try to maintain. And second, we didn’t become a fintech hub (just) by chance. Of course, our deep history of financial services mattered, but so did innovations like the Financial Conduct Authority creating the world’s first regulatory sandbox.

One of the headline recommendations is the creation of a £1bn Fintech Growth Fund. According to the report, part of this could be seeded by UK private pension schemes. The report is right to highlight this. When I last looked at the data, public pension funds contributed 65% of the capital in the US VC market and 18% in Europe, but just 12% in the UK. The problem is a regulatory one, specifically with the 0.75% cap on annual charges for DC pension funds. With the right regulatory changes, a large Fintech Growth Fund, or another large fund for that matter, might be able to provide the scale to meet somewhere in the middle in terms of fees and get pension funds investing into growth companies.

The Kalifa review also calls for allowing dual-class structures, as seen on the NYSE, NASDAQ, Euronext, Deutsche Börse, the Hong Kong Stock Exchange and the Singapore Stock Exchange. As the report argues, this flexibility can be particularly attractive to founders who wish to raise funds but still retain control and guard against unwelcome take-overs. It also suggests reducing the need for 25% of its shares as a free float, perhaps copying the NYSE and NASDAQ, which impose value thresholds rather than a percentage depending on the market. The NYSE and NASDAQ made up 53% of total fintech IPO listings between January 2015 and December 2020. There are trade-offs, but this is something we have called for, with our Research Director Sam Dumtriu setting out the reasons succinctly in this article.

One thing I’m a little hesitant about in the review, however, is the call for the creation of 10 Fintech Clusters. It reminds me of the decision to have 10 Freeports, and the way that their location automatically becomes highly politicised. It’s worth pondering on the responses of Stian Westlake, Tom Forth and others to this Sam Gyimah tweet. Tom’s point that the locations might be better served by focusing on another industry that takes account of what they excel in is correct, I think. While there are notable outliers like Atom Bank, which is headquartered in Durham, it would take a lot to convince me that we have as many as nine hubs that can compete with London and the rest of the world for fintech companies.

There is much to recommend though – and I’ve not even mentioned the visa policies which regular readers will know is a bit of an obsession of mine. It’s a report that deserves to – and will – be taken seriously.

Capital losses
Our friends at Beauhurst have released the findings of their report on the mooted alignment of capital gains tax with income tax, which many of you responded to when we shared it here. It finds: 85% of founders would actively consider moving their companies abroad; 72% of angels would be less likely to continue investing into UK companies; and 84% of founders would be less motivated to build a large-scale business. You can read the report here.

Augar well
If you’re interested in education, and not yet subscribed, I can’t recommend James Croft’s Education Entrepreneurship Monthly newsletter enough. This month he covers everything from the Government’s response to the Augar review of post-18 education, its Further Education White Paper 'Skills for Jobs’, and Ofsted’s new report on remote education. Read it here and sign up here.

Education Entrepreneurship Monthly: February 2021

Welcome to the February issue of Education Entrepreneurship Monthly from The Entrepreneurs Network – our monthly update covering news, views, research and events of interest to entrepreneurs in education.

As the prospect of emerging from lockdown draws near, sobering reports from the National Institute of Economic and Social Research (NIESR) and The Resolution Foundation added their analysis of just how bad the economic impacts of Covid-19 have been – predicting lower than expected economic growth and a slow economic recovery. The British Chambers of Commerce and the IPPR contributed to wide consensus in support of extensions to the furlough scheme, loan guarantees, and targeted grant support, and concern that young people should not be overlooked.

Last month, the Government’s response the Augar review of post-18 education highlighted an entitlement to lifelong learning, provision aligned to employer needs, and ‘high-value’ courses (where incentives are aligned to encourage courses with good job outcomes). With reputational and revenue issues at the fore, an international education strategy update of a fortnight later stuck to core targets on student recruitment and income generation. Passing the task of figuring out what its provisions for quality improvement to the Office for Students (OfE), the Education Secretary expressed his wish that "higher education providers who do not demonstrate high quality and robust outcomes" should be subject to financial penalties and in extreme cases stripped of their degree-awarding powers. WonkHE summarised the proposals here.

The Government’s Further Education White Paper 'Skills for Jobs’ built on its previous efforts to counterbalance the degree route with a ‘high-quality’ technical one, and drew support from the Association of Colleges (AoC), the Collab Group, and the Association of Employment and Learning Providers (AELP). Some remained sceptical, however, arguing that without increased funding, little would change. 

On a related note, the Public Accounts Committee reported on its inquiry into college finances in England, concluding these remained ‘fragile’ with a number of pressure points including Covid, pension, and VAT costs. Among its recommendations was a funding formula based on current rather than lagged data.

In summary, while the government's continued emphasis on quality improvement in FE and post-18 education and training are to be lauded, critics are right to point out that aspiration alone - with the regulatory pressures that tend to follow - without equal attention to implications for funding and financial sustainability, can, do and will continue to undermine even the best of aspirations. Here the indications are that necessary trade-offs are not being squared at cabinet level. In this instance, it's clear that the Treasury is not fully on board with the official government line on the importance of well-funded public services for a healthy economy, and DfE decision-makers habitually over-promising and under-delivering as a result.

In schools, whether, when and how they should re-open has become a matter of wide debate, coming to a head on the issue of teachers’ (and other frontline workers) being prioritised ahead of others for the vaccine. The government has stuck to its focus on the clinical case, saying only that, subject to the data, schools will probably re-open on or around 8th March (now confirmed).

Meanwhile, Ofsted published a new report on remote education, suggesting that despite concerns about accessibility and pupil engagement (especially for SEND pupils), schools had done better than might have been expected. The regulations for schools to publish on their website their remote education offer formally came into effect. Lending support for this policy emphasis, at the end of the period the government reported that the number of laptops and tablets dispatched since the start of the term had passed ~500,000. As I’ve commented in previous issues, readiness to deploy digital resources of high quality will in future be a key determinative of market growth, as also will teacher development. Relatedly, this month the government announced 6 new Teaching Hubs (making a total of 81) – intended to operate as local centres of excellence for teacher development. There are evidently some strong market drivers in play here.

News and Views

Without capital. Frequently seen as the default route for founders, venture capital isn’t the only route. Kjartan Rist, Founding Partner of Concentric, the London & Copenhagen-based venture capital firm, considers what bootstrapped firms have to teach us. 

Pitching at Series A. Phil Boyer, partner at Crosslink Capital, shares five tips for start-up founders who are ready to raise their Series A round. 

Venture capital funding reaches new heights. VC funding secured by UK Firms reached its highest level during Q4 2020 – more than double that of firms from France, which was the next most active European country.