Start me up. Creating Britain’s entrepreneurial ecosystem


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Whether it’s Cambridge’s ‘Silicon Fen’, London’s TechCity or Oxford’s ‘business incubator centres’, labelling locations as ‘hotspots’ for technological innovation has become commonplace. Such labelling produces a honey-pot effect, which subsequently attracts venture capitalists, big consultancy firms and other specialist organisations that attend to the needs of growing firms in complex industries.

Does promoting these hotspots shut out other cities and towns across the UK and exacerbate regional inequality?

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Start me up. Creating Britain’s entrepreneurial ecosystem

  1. 1. Start me up: Creating Britain’s entrepreneurial ecosystem A Barclays report, written by The Economist Intelligence Unit
  2. 2. 3 Foreword 4 Executive summary 5 The shifting ground of the labour market 8 Growth of innovation hotspots 9 The UK’s emerging innovation hotspots 12 Case study 14 Entrepreneurial challenges and opportunities 17 Case study 22 Conclusion 23 About this report Contents 2 This report was written by Anna Lawlor and edited by Zoe Tabary and Monica Woodley.
  3. 3. 3 Foreword With a competitive global market and rising social challenges such as youth unemployment and an ageing population, there exists an opportunity to create an environment here in the UK that values and practices lifelong enterprise learning; one that encourages direct ownership and responsibility to respond to these challenges. Entrepreneurs are a huge source of economic growth, innovation and job creation. And in the UK they represent a diverse cluster of individuals. New businesses, ranging from tech start-ups to manufacturers and retailers, are pioneering new products and services. From Bristol to Leeds, Cambridge to Glasgow, entrepreneurs are thriving. But there is much more that can be done to support their growth. Stakeholders of the entrepreneurial ecosystem must share a willingness to think critically and creatively about solutions. Together we must provide access to financial capital and human capital, the right education and skills, a competitive business environment and clear, non-onerous regulation that does not needlessly burden business models. The economic potential of entrepreneurs is tremendous. And unless this potential is properly harnessed and budding entrepreneurs provided with the skills and resources they need to build their ideas into successful businesses, the UK economy will not flourish in future. This report takes a closer look at the entrepreneurial potential across the UK and presents the opportunity to understand how it can be better supported. It is based on primary research undertaken by The Economist Intelligence Unit as well as a roundtable discussion conducted at The Escalator in Whitechapel, London. I would like to take this opportunity to thank all those involved for their contribution to this report. Antony Jenkins Chief Executive Barclays
  4. 4. 4 An innovation ecosystem refers to the combination of factors for innovation that function together in a symbiotic relationship. The real-word application is the environment within which entrepreneurs function as one integral component. This has a knock-on effect on the broader economy, which thrives off the vitality of innovative entrepreneurs. This Barclays report, written by The Economist Intelligence Unit, looks at how to create an environment where entrepreneurs can flourish in the UK, drawing on best practices from other innovation ecosystems around the world. Based on in-depth interviews of entrepreneurs and other experts, substantial desk research and social data mining, its key findings are listed below. Entrepreneurial communities extend beyond the capital, London, and South East England London accounts for the largest share of online activity relating to discussions about innovation and entrepreneurialism, with a 48% share of ‘voice’. However, the next largest shares of ‘voice’ come from Cambridge (9.3%) and Manchester (6.9%), and there is a clear northern corridor stretching from west to east (Liverpool to York). Mike Wright, Professor of Entrepreneurship at Imperial College London, explains: “We looked at the notion that there’s a ‘golden triangle’ in the South East for entrepreneurship in terms of access to finance, but found Entrepreneurial Britain is beginning to flourish as policy changes and increased investment in the UK’s innovation ecosystem take root. Executive summary that some successful university spin-offs were actually not located in the South East but were, nevertheless, able to attract finance from there. That’s one example of where the ecosystem isn’t quite as location-based as we might admit, and may suggest that we need different mechanisms to stimulate a more virtual ecosystem rather than a physical location.” The labelling of innovation hotspots produces a compound effect that fosters entrepreneurialism This view rewards an interventionist approach across the education system, start-up incubators and centres of excellence, which empower and facilitate British people of all demographics to fulfil their entrepreneurial potential. In so doing, it is argued, thriving sector hubs and the publicity ‘buzz’ that accompanies them broaden equal access to entrepreneurial opportunity, wealth creation and employment. Entrepreneurs are made, not born Entrepreneurialism is not an innate trait, but rather something that can be fostered with the right mix of learned skills, access to opportunities and confidence, according to experts interviewed for this report. Government and the school system alone cannot create entrepreneurs, but they can send significant signals about entrepreneurship, that ‘failing well’ (taking calculated risks and learning from failures) is key to success, and that starting a business is a viable and respected career route. Creating an environment where entrepreneurs can thrive requires a co-ordinated strategy covering a range of areas Encouraging entrepreneurial hubs beyond traditional city boundaries, strengthening ties between education systems and the business community, removing demographic- specific barriers to entrepreneurialism and better matching the funding needs of entrepreneurs are some of the specific priorities that policymakers, businesses and academia need to address.
  5. 5. 5 The shifting ground of the labour market This evolution has increased regional inequalities, and one of the consequences of the 2008 financial crisis on the UK economy is that young people (aged 18-24) have borne the brunt of unemployment and have been the most affected by underemployment. Employment by sector Percentage of workforce in each industry The UK has evolved from a manufacturing- and product-based economy into a service-sector- and knowledge-based economy. Source: Office for National Statistics1 . Source: Office for National Statistics2 . 12 1841 2011
  6. 6. 6 The financial crisis prompted increasing numbers of employers to introduce ‘zero-hours contracts’, giving them the flexibility to employ casual labour as and when required, with none of the responsibilities associated with hiring employees. Young people are again the most vulnerable to such employment practices. Research from the University of Stirling found that while national underemployment rose to 9.9% in 2012, for 16-24 year olds the rate was significantly higher, at 30%4 . Some argue that this has led educated and technologically proficient young people to discover their entrepreneurial flair, pouring their efforts into start-up business ventures and turning to non-traditional funding routes such as online crowdfunding sites Kickstarter and Indiegogo. However, while the volume of newly registered businesses is growing and is often heralded as a sign of flourishing British entrepreneurialism, they could simply be reflecting an increase in ‘bedroom businesses’ (a colloquialism for businesses starting out of the home, requiring little or no start-up funding) and in the number of people repurposing themselves as self-employed consultants as a result of redundancy. Such changes in labour dynamics can skew what appears to be promising data about the true extent of the UK’s entrepreneurial activity on economic productivity. There is concern that business start-ups are too easily categorised as being entrepreneurial even though many compete on price and service rather than by providing a unique offering in the marketplace. This increases the challenges of addressing barriers to innovative entrepreneurialism and identifying new Source: Office for National Statistics cited in Parliament3 . Youth unemployment compared with working-age unemployment 3 4 and commercially viable solutions to problems because, while they are frequently regarded as the same, entrepreneurs and start-up businesses often face very different challenges and operate very different business models. Some, such as Martha Lane Fox, a serial entrepreneur, believe there is not the same risk appetite among British entrepreneurs as there is in the US or the EU. This creates its own problem in that the British like to think there is a rich seam of entrepreneurialism in their country when in fact, Ms Lane Fox argues, there are limited examples of British start-ups that have gone on to become internationally-renowned brands and have remained British companies. Will Hutton, Principal of Hertford College, Oxford University, and Chair of the Big Innovation Centre, says that the lack of a British innovation ecosystem is a “principle deficiency in the UK economy. One of the longstanding areas of weaknesses has been financing and commercialising new ideas.” However, he says change is afoot; the current government is at last speaking the language of innovation ecosystems, introducing entrepreneurial programmes and putting forth government funding to support them. “Is it enough? No. Is it following the trend towards open
  7. 7. 7 innovation, sharing, relaxing of intellectual property law that needs to take place? No. But it would be unfair and wrong to say that nothing has happened.” Business births by UK region Source: Office for National Statistics. 2009 2010 2011 2012 “The UK is a world leader in tax- incentivised seed and angel investing”. Doug Richard, Founder of School for Startups Doug Richard, Founder of School for Startups and a serial entrepreneur, says that the UK is a world leader in tax- incentivised seed and angel investing. The Seed Enterprise Investment Scheme (SEIS) has, he says, increased the likelihood of angel investment for very-early-stage British businesses by minimising the risk as much as possible for the investor. “I don’t know of any other country that has anything as close to aggressive as that [in using tax incentives].”
  8. 8. 8 Such public labelling has a compound effect; the soft power inherent in the (often government-backed) promotion of areas as innovation hotspots creates a honey-pot effect, which subsequently attracts venture capitalists, big consultancy firms and other specialist organisations that attend to the needs of growing firms in complex industries. Such labelling may also become self-fulfilling in terms of encouraging a location-specific culture of entrepreneurialism, with their own success cases and role models, enticing would-be entrepreneurs from ‘safe’ salaried roles to university spin-offs in order to instigate their start-up plan. Detractors of location-specific hubs contend that while promoting hotspots attracts resources, infrastructure and esteem for the few, the many other cities and large towns across the country are excluded, their success stories and role models eclipsed. Arguably, the approach contributes to more acute regional inequalities and deepens a southern concentration of wealth, opportunity access and employment. Clive Holtham, Professor of Information Management and Director of Cass Learning Laboratory at Cass Business School, says: “I’m pretty sceptical about [the idea] that we can get scientific and business innovation through large sums of money going to a few people. Centres of Whether it is Cambridge’s ‘Silicon Fen’, London’s ‘Tech City’ or Oxford’s ‘business incubator centres’, labelling locations as ‘hotspots’ for technological innovation has become commonplace. Growth of innovation hotspots Excellence, for example, are part of the huge amount of rhetoric and fashion in high-level allocations of money, which give the impression that there’s a top-down solution. It’s an ecosystem, so you need all the components.” Regional funding from GrowthAccelerator schemes Top 10 sectors funded by GrowthAccelerator schemes Source: Source: North East North East East Midlands East London 4% 9% 8% 9% 16% 16% 11% 12% 15% South East South West North West West Midlands
  9. 9. 9 In order of conversation size Share of geo-located innovation content onlinePulsar, developed by UK-based company FACE, is a social data intelligence platform that is reinventing social media monitoring, customer service and enterprise collaboration. It scoured 200,000 posts over three months to March 16 2014, mapping the UK locations that had the highest volumes of online conversations about the search terms ‘innovate’, ‘innovation’, ‘entrepreneur’ or ‘start-up’. While fewer than 5% of social media users make their location publicly available, the findings are an indicator of where online conversations about entrepreneurialism and innovation are occurring, when users choose to share their locations. While London tops the list with 7,705 results, northern cities are prevalent, with a clear corridor stretching from west to east (Liverpool to York). While not statistically significant, the findings caution against a narrow conception of entrepreneurial communities thriving only in southern England. Source: Pulsar. While academic examination of Britain’s entrepreneurial community draws from hard, statistical and often lagging data, social data (from publicly available social media conversations) provide an alternative ‘bottom-up’ perspective, taking the pulse of entrepreneurs – what they actually talk about and how they communicate with key stakeholders and each other. The UK’s emerging innovation hotspots City Number of results London 7,705 Manchester 426 Sheffield 202 Edinburgh 189 Liverpool 166 Glasgow 153 Oxford 152 Nottingham 147 Darlington 136 Leeds 132 Brighton 130 Birmingham 130 Bristol 127 Cambridge 107 Poynton 106
  10. 10. 10 Locations of high-volume social conversations about innovation In order to extrapolate more comprehensive social data, Pulsar applied a ‘smart filter’ to all publicly available social content on the Internet, irrespective of users’ set locations. High-density urban areas and high-ranking universities are both widely considered to be key factors influencing the emergence of an innovation ecosystem. “Clustering can bring positive productivity benefits for individual sectors, although the effect is nearly always outweighed by the importance of being in a large urban environment,” the Manchester Independent Economic Review stated in its 2009 report, The Case for Agglomeration Economies5 . The report went on to argue that larger cities make it easier for different types of workers and firms to find each other, which chimes with the view of Jaideep Prabhu, Jawaharlal Nehru Professor of Business and Enterprise at the Judge Business School of the University of Cambridge (England). He says that city dwellers are at a greater advantage, particularly those connected to universities, because there is a constantly replenishing supply of diverse communities and young, educated people with fresh ideas. Mark Glover, Director of Business Planning at the Technology Strategy Board, adds: “Innovative people with bright ideas are an important element of any localised cluster. High-calibre universities are likely to attract and train these people, and often have additional infrastructure (such as science parks) to help commercialise ideas. This is the case with Cambridge, Silicon Valley and Stanford University.” By combining the UK’s top ten universities6 , top ten urban cities (by population size)7 , plus locations that Tech City named as ‘Cities to Watch’ for innovation8 , 18 key locations were added to Pulsar’s data filter: London, Birmingham, Leeds, Edinburgh, Glasgow, Sheffield, Bradford, Liverpool, Manchester, Bristol, Newcastle, Cambridge, Oxford, Durham, Bath, Exeter, St Andrews and Warwick. The Pulsar data find that London still accounts for the largest share of online activity (48%) relating to discussions about innovation and entrepreneurialism. The next largest share comes from Cambridge (9.3%), Manchester (6.9%) and Oxford (5.9%). The next largest cities by population after London – Birmingham, Leeds, Glasgow and Sheffield – do not have a corresponding share of ‘voice’. Rather, the social conversations about innovation, entrepreneurs and start-ups are happening in Cambridge, which is not a high-density urban area and is situated in a region that has received just 9% of the government’s GrowthAccelerator funding. However, its world-renowned university (as with Oxford) has become known for university-based technology spin-offs. Cambridge University has a portfolio of 68 companies – including ARM, the world’s leading semiconductor intellectual property supplier, valued at £12bn9 (US$20bn) – which have raised over £800m in further investment and grant funding, and together generate an annual turnover of £170m10 . Manchester’s proportion of the share of ‘voice’ leapfrogs that of larger cities, including neighbouring Leeds. Again, academia appears significant as Manchester Business School is the second most highly-ranked for postgraduate entrepreneurship courses in the UK11 , behind University of Cambridge’s Judge Business School. The city was also listed by Tech City as a ‘City to Watch’12 – along with Birmingham, Bristol and Newcastle – and at the time of the data collection had just announced that it had been awarded £1.5m in government funding for a Social Enterprise Accelerator scheme. 5 6 7 8 Source: Pulsar. The remaining eight locations accounted for less than 2% of share of voice. London 48% Share of voice of the 18 selected cities in topic-specific conversations Cambridge 9.3% Manchester 6.9% Birmingham 4.9% Leeds 3.1% Bath 3% Bristol 3.2% Edinburgh 2.8% Liverpool 2.7% Oxford 5.9%
  11. 11. 11 9 company_research.html 10 11 12 Source: Pulsar. London Cambridge Oxford Manchester Birmingham 1 new new new new new 2 time university world business business 3 years time university time time 4 world world years people 2014 5 year year time world firms 6 help years work 2014 years 7 good technology people years people 8 technology home best united year 9 business good business Leeds free 10 university group research start work This funding-related conversation vacuum could either be considered cause for concern – a sign that government initiatives are not truly trickling down to the entrepreneurial communities that they are designed to support – or cause for celebration, if social silence indicates that further debate about funding options is unnecessary because entrepreneurs are confident in their access to resources and simply do not wish publicly to discuss their financing needs. The social conversations within each location also reveal the nuances of their specific ecosystems. While social conversations mentioning London have a large share of ‘voice’, the data show that the noise is crowding out any nuances, highlighting each of the key topics as equally connected to each other (see chart below). By contrast, the Manchester data set identifies an infrastructure for supporting young entrepreneurs in fast-growing creative fields such as game development. City-to-city connections In terms of evidence of locations participating in a broader, national ecosystem, one might expect a high level of referencing of other locations when discussing innovation. This is true for London, which mentions Cambridge, and for Cambridge and Birmingham, which mention London, during online conversations about innovation and entrepreneurialism. The highest volume of location-referencing posts comes from Manchester discussing Leeds in this context (it is the ninth most mentioned keyword), which could reinforce the concept of the northern corridor. However, inter-connectedness between locations is lower than expected and social conversations regarding Oxford do not mention any other location. Oxford also produces university-based spin-off companies, with a similar number to Cambridge at 65, and currently valued at £40m, so it is surprising not to see the data represent a more similar social conversation pattern. Content clusters from online conversations Across all 18 locations, social networks are dominated by conversations about technology, new techniques, social innovation and, interestingly, Cambridge. Twitter as a channel tends to be more London-centric, with a high prevalence of start-up, business-centred conversations involving innovation and entrepreneurialism. Universities and related topics such as ‘college admission courses’, ‘studies’, ‘degree’ and ‘prestigious university’ are all very prevalent in these online conversations, but particularly conspicuous is the absence of social discussions about funding, crowdfunding, business loans, grants, investors, or even tax breaks and government schemes for entrepreneurs. Top 10 keywords mentioned by each location
  12. 12. 12 As can be seen in the associated chart, large nodes in the network universe indicate very active online participants, with the Centre for Entrepreneurial Learning (CfEL) Cambridge the most active during the data period. CfEL Cambridge is a not-for-profit organisation based in Judge Business School, which provides courses for undergraduate, postgraduate and non-academic aspiring entrepreneurs designed to share best practice, unlock entrepreneurial potential and ‘plug-in’ attendees to a network of CfEL Cambridge alumni, mentors and facilitators13 . Virgin StartUp, a not-for-profit organisation that promotes business financing through its partners (including Virgin Money) and then connects start-ups with business mentors14 , is the second- largest influencer in the data set. The third is Interestingly, the Pulsar data finds that accelerator programmes and those providing funding guidance and introductions to funding resources are key ‘influencers’ across the social web. Case study – Accelerator programmes dominate online conversation in the UK 13 14 15 Influencers’ network Source: Pulsar. Includes ‘smart filtered’ data. Entrepreneurial Spark (ESparkUK), a business accelerator in Glasgow, Edinburgh and Ayrshire that offers free office space, IT and structured support for 18 months to high- growth, early-stage businesses with an annual turnover of less than £1m15 . This data indicates that sources of practical support and funding provisions are integral to the online conversation about high-growth businesses and start-ups in the UK and a valuable social signal guiding entrepreneurs to resources and role models.
  13. 13. 13 London data set: inter-related key topics Connection in social conversations between ‘Game Design’ and other key topics – ‘development’, ‘training’ and ‘young entrepreneurs’ In the bundle chart below, the prominence of this ‘virtual ecosystem’ linking the key categories of ‘game design’, ‘development’, ‘young entrepreneurs’ and ‘training’ is visible. This topic was sparked by Twitter engagement related to the announcement of a Manchester-based game design studio providing training in game design and development for young entrepreneurs. Today, the UK is the fifth-largest video-game developer in the world, with the sector contributing £947m to GDP in 2012, employing more than 9,000 people in game development and indirectly supporting almost 17,000 further jobs, according to trade association, TIGA16 . What the social data does not show is that the young entrepreneurs to whom the game developers are appealing are themselves promoting innovation in this space. Engagement in social media includes relatively passive actions such as forwarding and ‘liking’ content posted by others – in this case, a game design studio – not necessarily commenting on the post, although the content is being digested by its intended audience. A similar innovation ecosystem is evident in the Cambridge data set, with the key topic ‘co-founding group’ mentioned in the same posts as ‘pharmacology’ and ‘prestigious university’. Top tweets during the period feature ‘hot Cambridge shares’ and content about the Cambridge Satchel Company expanding into China. The Pulsar data finds that technology is not as strongly linked to academia- related topics as might be expected; instead ‘technology’ is mentioned in conjunction with ‘social innovation’, ‘new technique’ and ‘world’. In the Manchester-related social conversations, the government’s announcement in January of a £300m tax break for retail businesses around the UK appears to have gained significant traction in online conversations, as it is featured in the data as a key topic. While this looks positive on the surface, when the data is analysed it shows that this topic of tax breaks is the result of digital publishing, rather than social conversation; traditional news publications reporting online and sharing news of the tax break across their social media accounts. Manchester data set: relationship between ‘£300m tax break’ topic online 16 Source: Pulsar Source: Pulsar Source: Pulsar college-admission courses college officials co-founding group costly lab pharmacology studies potential social innovation cambridge degree startup technology time london tech entrepreneurs game design leeds dev training young entrepreneurs bizitalk liverpool startup business manchester entrepreneurs 300m tax break retail firms innovation tech entrepreneurs game design leeds dev training young entrepreneurs bizitalk liverpool startup business manchester entrepreneurs 300m tax break uk nhs technology nhs boss retail firms cbe innovation
  14. 14. 14 Fostering tomorrow’s Generation Creative Too often innovation is considered from a top-down perspective and too rarely from a bottom-up, child-centric solution for creating the UK’s future generations of entrepreneurs, say experts. Prof. Holtham claims that Britain’s school system limits creative thinking because it does not reward a diversity of approaches, which means that the UK produces young people ill-equipped to become tomorrow’s entrepreneurs. “Unless you address the education system, either within schools and universities or subsequently in adult life, you’re never going to achieve a satisfactory level of innovation in society,” he explains. The role of further education is equally important as higher education in creating a UK entrepreneurial ecosystem. Gazelle Colleges Group, which launched in January 2012, operates entrepreneurial programmes within 22 colleges around the UK, providing applied learning models and working strategically with local enterprise partnerships, students and employers to develop entrepreneurial capacity in those local communities17 . In higher education, the Peter Jones Enterprise Academy18 works with 31 regional colleges to provide one-year practical ‘learning by doing’ courses designed to provide young people with the skills and confidence to think like an entrepreneur and potentially start a business. To address the question of how best to power the UK’s economy by empowering its entrepreneurs, a host of eminent thinkers and doers in the field of entrepreneurialism were consulted. Here, they share what they perceive to be the biggest barriers prohibiting innovative businesses from thriving in the UK, and set out proposed solutions. Entrepreneurial challenges and opportunities 17 18 Source: Rosan Bosch. Telefonplan school in Stockholm, Sweden
  15. 15. 15 Borrowing from the Latin root of ‘education’, Prof. Holtham says that education at all levels in the UK needs to ‘draw out’ the intrinsic creativity of people, be that creativity in conceiving an idea previously unimagined or in generating an alternative approach to systems and operations. To flourish, he says, “the innovation process needs all types of people, generally working together in teams”. Jane Chen, Co-Founder of Embrace, believes that the types of workshops undertaken in graduate and postgraduate design and entrepreneurialism courses can easily be adapted to and introduced at an earlier stage in the education system, as well as within existing companies, to help cultivate a creative approach. Such workshops are based on an understanding that all brainstorming and approaches are valid, with no judgement from any participants made if an idea is outlandish or does not work. Organisations such as Google have long advocated and provided creative work environments for their staff in order to assist work-based creativity. In the UK, companies such as Mind Candy in London, Melbourne Server Hosting in Manchester and Virgin Money in Edinburgh have followed this trend19 . This prompts the question of whether Britain’s schools should consider introducing similar liberal and design-led ideas, such as those embedded in Sweden’s Telefonplan school, which emphasises both independent and collaborative working. It is argued that traditional work spaces – from formal education through to the workplace – quash creativity and collaborative working, which is now a prerequisite for a technology-enabled workforce and a service-driven economy. Prof. Holtham relies on the academic model of innovation for courses at the Cass Business School, an ecological ‘Creative Problem-Solving’ (CPS) model in which the four components – Product, Process, People and Place – all positively interact with each other. He argues that policymakers’ and business leaders’ attention is too narrowly focused on product-based innovation or place- specific entrepreneurs. Eze Vidra, Head of Campus London and Google for Entrepreneurs Europe, says there needs to be an ‘alternative education’ outside the formal education system, where ‘the need is biggest’ as there are no professors on tap and no access to classroom facilities or resources. He points to schemes such as Google’s Campus for Moms20 , which is a baby-friendly eight-week start-up school, at the end of which the participants pitch their business idea to course leaders, guest entrepreneur speakers and venture capital investors. Demographic-specific barriers According to the Women’s Business Council21 , the entrepreneurial gender divide is robbing Britain of more than 1m more entrepreneurs; total entrepreneurial activity in 2012 (calculated as the proportion of the working-age population either in the process of starting a business or running a new business) was 11.6% for men compared with 6.3% for women. As Ms Lane Fox says: “Women don’t need special treatment, they are not disadvantaged by anything other than long-rooted cultural reasons”, illustrated by claims that men are neurologically ‘hard-wired’ differently to women, making them innately more entrepreneurial. Examples of misogyny facing women in certain sectors, including science, technology, engineering and mathematics (STEM) are prolific. In such a culture it is unsurprising that, statistically speaking, women do not fulfil the ‘typical’ profile of an entrepreneur; this is a consequence rather than an explanation. Kathryn Parsons, Founder of Decoded, a technology education business, says research on Decoded pupils found that women are generally 30% less confident than their male counterparts in believing they can master coding. Childcare issues also provide a challenge to professional women, who continue to be primary care givers despite increases in flexible parental leave. The pace of technological change magnifies any period away from work, yet the benchmark for basic digital literacy in the UK is frighteningly low, and the economy cannot afford to exclude women from future digital business, Ms Parsons adds. It is not just women who face having “entrepreneurship institutionalised out of them”, as Jill Huntley, Managing Director for Corporate Citizenship at Accenture puts it, but older people too. While the potential for engaging this demographic in entrepreneurial activity is huge (there are 3.6m people in the UK aged 50-64 who are not economically active), too often the focus is on fostering young entrepreneurs. “Unless you address the education system, either within schools and universities or subsequently in adult life, you’re never going to achieve a satisfactory level of innovation in society.” Clive Holtham, Professor of Information Management and Director of Cass Learning Laboratory, Cass Business School
  16. 16. 16 Alastair Clegg is Chief Executive of The Prince’s Initiative for Mature Enterprise (PRIME), which is the only national organisation dedicated to providing over-50s with the support to set up their own business. He explains that while many people dream of starting a business in their 30s or 40s, they can be hindered by family and financial commitments in a way that over-50s are not. “There is enormous entrepreneurial zeal in this age group,” he says. “What we do is give them confidence and point them in the right direction of what steps they need to take to start a successful business, such as getting a business plan in place or seeking advice from mentors. The over 50s tend to have the skills so it’s more about demystifying the process and giving them the right tools so they can get up and running.” Fear and a sense of risk-taking comes from not understanding how something works or what to expect – areas that can be demystified through coaching and support. Programmes that aim to dismantle the barriers affecting specific demographics should be applauded, but Ms Huntley urges corporations to facilitate change within their organisation. “Given the future of work and the structural changes to the economy, in order to grow established businesses there needs to be a better cultural pipeline of innovation and entrepreneurship and some of that needs to come from inside the company,” she says. “We run a number of programmes internally to try and open the innovation mindset and encourage employees to bring ideas, and [for us to] provide mechanisms of funding those and spinning them out if necessary,” she adds. The role of universities in seamlessly moving entrepreneurs into the business environment University spin-off companies are not new, but Mr Hutton argues that British universities should shift away from their “extremely conservative view about intellectual property rights” and about how to divide any commercial gains emanating from university spin-offs, to adopt what he described as the “MIT or Stanford model”. He says that the US benefits from universities attracting companies, which support emerging entrepreneurial ventures by acting as a bridge from academia to business. By linking the entrepreneurs with influential alumni in a mentoring and networking capacity (as was the case for Embrace Innovations), universities are able to fast-track the commercialisation of early-stage ideas. Mr Hutton further suggests that promising university projects could be funded by embedding grants into the participants’ PhD or masters degree to fund their development for a further one or two years, effectively buying time to enable an innovative concept to be developed to a commercial level on completion. “It’s very hard in academic life simultaneously to be an entrepreneur and have an academic career; the system is not structured to help you do that. Universities are not as significant as they should be.” According to Prof. Wright, UK universities are already moving away from the traditional approach of commercialising entrepreneurial activity through licensing agreements and equity stakes in spin-offs, and moving towards gaining from ‘indirect returns’. He identifies these as being the virtuous cycle of successful alumni providing practical business 19 Top-10-coolest-offices-in-UK.html?frame=2383634 20 helping-women.html 21 support to entrepreneurial students, which makes alumni more invested in the university and likely to donate financially. “I think the US has been better at that than the UK but we’re starting to see a connection between two areas in universities that are quite separate: the development office, which is trying to convince alumni to donate, and the offices that are trying to promote commercialisation,” Prof. Wright says. For example, the National Centre for Entrepreneurship Education, based at Coventry University, launched a programme called ‘Make It Happen’, which has helped with the launch of 1,900 new businesses since 2009 by providing resources, tools and online mentoring for graduates starting up a company. David Gill, Managing Director of St John’s Innovation Centre (owned by St John’s College, Cambridge), says that despite some 20 years of policies to encourage universities to provide a link with the business community so that university-associated enterprises can flourish commercially, this remains a “missing piece … in the majority of [UK] universities”. Mr Gill advocates collaboration between universities and hubs of entrepreneurial activity, such as innovation parks where pioneering start-ups with the potential for high growth are provided with flexible and subsidised work space and supported by ancillary services based in the same place. He explains that “gatekeepers who understand the needs of both sides” are vital, and encourages university students to undertake work placements within start-up businesses, so that they can share and apply their knowledge in a business setting, while the start-up benefits from a student’s expertise at no cost.
  17. 17. 17 Case study – Turning a crisis into an opportunity: Embrace which allowed them to consider the challenge of regulating a neonate’s body temperature unburdened by medical preconceptions. She believes corporations would benefit from “bringing that diversity of backgrounds and viewpoints into their work” and encouraging innovation-based corporate spin-offs in the same way as universities do. Ms Chen also advocates “vertical integration” of the supply chain, such as manufacturing and sales, areas that the team first assumed could be outsourced to third parties. “You’re selling a brand new concept, which doesn’t plug into any existing sales infrastructure. We tried to partner with third-party distributors and even multinationals and that simply did not work. So, for ground-breaking ideas, I think you need vertically to integrate to some extent,” she explains. Consequently, Embrace has developed a small-scale manufacturing, training and sales team, which Ms Chen says not only gives Embrace end-to-end control of its product, but also provides insights into the price point, effective sales pitches, control over how its product and brand is positioned in its market, as well as product-specific feedback. While improvements have been made to the UK innovation ecosystem, it is still considered to be some way behind in many areas compared with the US. By contemplating the journey of a successful, innovative enterprise that follows what will later be discussed as ‘the Stanford model’, British policymakers and business leaders can take heed of, and even enhance, similar factors and practices in order to strengthen the UK innovation ecosystem. During her MBA at Stanford University, Jane Chen and her peers on a multi-disciplinary ‘entrepreneurial design for extreme affordability’ class created the world’s first low-cost baby incubator, which costs about 1% of the usual US$20,000. What started as an academic challenge evolved into the award- winning social business, Embrace Innovations, which has distributed Embrace Warmers that have reached over 60,000 hypothermic infants in 11 developing countries around the world23 . Process: design-led innovation Ms Chen asserts that the design process can be taught and fostered across academic and business fields, drawing on the creativity inherent in each individual. That process is to understand the problem; list the criteria required to address the problem; use rapid ‘low-resolution’ prototyping and iteration based on trial and error; and to co-create with the end user, not just in terms of receiving feedback but in order to “understand the ecosystem around something that’s going to make your product successful or not”. The Embrace Warmer uses an innovative wax incorporated in a sleeping bag to regulate a baby’s temperature. It stays warm without electricity, is safe and intuitive to use – a crucial factor given the high numbers of babies born in remote rural areas, without access to hospital facilities, meaning that family members need to be able to operate the product themselves. The entrepreneurial structure Pulling together multi-disciplinary teams is also important, Ms Chen says. The Embrace project team originally comprised an electrical engineer, an aerospace engineer, a computer scientist and (in Ms Chen’s case) a public health professional, “Corporations would benefit from bringing a diversity of backgrounds and viewpoints into their work and encouraging innovation-based corporate spin-offs in the same way as universities do.” Jane Chen, Co-Founder, Embrace
  18. 18. 18 Ecosystem support for entrepreneurs Stanford University played a critical role in assisting Embrace, not least by facilitating access to other influential stakeholders and funding opportunities. Embrace won US$125,000 in seed funding from the Stanford Business Plan Competition, and Echoing Green Fellowship awards. As a non-profit organisation, Embrace receives contributions from foundations and individual donors, as well as a small percentage of funding from royalties on commercial sales of the infant warmer to governments and private entities that can afford a low-cost solution to neonatal hypothermia. Both Stanford and Echoing Green Fellowship additionally provide access to their respective alumni and partners, which Ms Chen considers to be crucial in Embrace’s success. 23
  19. 19. 19 Could valuing intellectual property unlock mainstream start-up lending? Prof. Wright considers funding less of a barrier for entrepreneurial start-ups because the initial costs for many knowledge-based businesses are now low. However, Mr Hutton advocates Britain creating its own market for intellectual property, which he believes will create more mainstream lending opportunities to start-ups that would otherwise not qualify for such funding. British businesses now invest more in intangible assets, such as intellectual property, branding and design – investing £138bn on ‘knowledge assets’ in 2011 – than they do in buildings, engines and machinery (£90bn in 2011)24 . That such assets are currently ‘unbankable’, according to the Intellectual Property Office25 , provides a huge opportunity for new financial instruments to unlock this latent value. In its recent report, Banking on IP: The role of intellectual property and intangible assets in facilitating business finance26 , the Intellectual Property Office stated: “Balance sheets do not represent their value, and current regulations actively work against consideration of IP (intellectual property) as an asset class but the result is a real and important disconnect between banking regulation and practice and the UK’s ambition for growth.” Mr Hutton explains: “One of the interesting developments in the US has been NCAB, a company that underwrites the value of intellectual property, against which banks can lend. This gives inventors and entrepreneurs some profit but also gives bankers some comfort that even though nothing has been commercialised, there is an idea behind the potential commercial venture that has some intrinsic value.” As Chair of the Big Innovation Centre at The Work Foundation, Mr Hutton supports the creation of a government-backed national Innovation Bank, which would draw together some of the UK’s biggest companies, such as GlaxoSmithKline and BAE Systems, with a university consortium including Oxford, Cambridge and University College London. The vision is that such an Innovation Bank would develop insurance schemes to underwrite the value of intangible assets, as well as mentoring UK businesses and players in the financial sector, including banks and venture capitalists. However, Mr Richard is critical of any move to foster a market for intellectual property, encouraging financial institutions effectively to value concepts before any commercially viable product or service has been produced. “They’re taking a notion at one stage of a business with the type of activity that happens at a different stage and saying: if we realise the intellectual property and give it an asset value, then [start-up businesses] could borrow against the asset. It’s not the lack of asset backing that stops them from getting a loan at that stage of the business, it’s the lack of serviceability on the loan,” he says. The future of seed-stage funding is social While advocates of an IP valuation market believe this could help start-ups gain funding at seed stage, Mr Richard thinks this is unlikely because traditional bank loans hinge on two questions: can you pay back the loan; and, if you can’t pay the loan back, what asset can be claimed in its stead? “If the business is failing then the intellectual property may have been proved in the marketplace to be of no value,” he says. At seed stage, the business is simply “a concept, a dream, a desire”. Simply valuing IP does nothing to free start-ups from reliance on investments from the “three F’s”– family, friends and fools – because the concept is not asset-backed. Instead, he offers, social loans can provide a solution. They are unsecured loans provided under very different lending criteria to traditional loans (designed for start-ups) by commercial financial institutions and underwritten by the government, with a low nominal interest rate of 6%. Loan recipients are matched with a business mentor to guide the deployment of the loan funding wisely and to pass on real-life experience that the mentor has gained by being a successful entrepreneur. The average loan size is £6,000 and School for Startups is the largest delivery partner of the Start Up Loans scheme in the UK, through its launcher programme, says Mr Richard. “Social lending is interesting because it preserves the entrepreneur’s equity. People think that a loan is worse somehow than the sale of equity, but in truth the sale of equity is the most expensive money you’ll ever spend, if you succeed,” he adds. “Social lending is interesting because it preserves the entrepreneur’s equity. People think that a loan is worse somehow than the sale of equity, but in truth the sale of equity is the most expensive money you’ll ever spend, if you succeed.” Doug Richard, Founder, School for Startups 24 25 26
  20. 20. 20 However, Mr Richard believes that the UK government could be more innovative itself in its funding strategy for entrepreneurs. Traditional loans, he says, do not fit start-ups because they typically have a volatile cashflow yet loans require regular repayments. Instead, countries such as Colombia are creating custom financial instruments to suit the start-up, be that a stepped acceleration in interest rate towards the end of the loan to encourage quicker repayment sooner or a certain percentage of the loan to be repaid depending on varying revenue levels. Mr Richard says such approaches defy traditional lending, but lending to start-up business has never been part of the traditional banking remit because it is deemed too risky. That risky element of the market in developed economies can be addressed, he explains, by borrowing and adapting innovative approaches that work well in developing countries where they seek to assist the ‘unbanked’ (people excluded from the banking sector). Combating sell-out ‘gazelle’ companies The fact that UK technology start-ups being snapped up by far larger US competitors on an acquisition bent is so celebrated in the UK highlights “ambition and scale barriers” that could be partially geographic, suggests Ms Lane Fox. “If you’re born in the US then your home market is immediately 300m people, which gives you a different idea of scale and ambition compared with the UK, where the home market is 60m people. To get access to real scale, you have to go into Europe and that’s harder,” she says. Start-up Loans: Key stats and demographics Source:
  21. 21. 21 Mr Hutton agrees: “The Americans have a single market. The market in Europe is for marketing manufactured goods, not in knowledge services, where all the action is. That makes it very difficult for British entrepreneurs to pitch their start-up capital with any chance of building a billion dollar corporation, because the single market in which it might do that doesn’t exist.” At the heart of the Eurozone project is the concept of borderless free-trade movement (of people and goods) but, unlike in a domestic single market the size of the US, UK companies face different legal and administrative environments, different languages and cultural nuances on the Continent, as well as the need to select a suitable corporate structure for expansion – whether to franchise, partner or otherwise enter a less familiar marketplace. Nicholas Davis, Director and Head of Europe at the World Economic Forum, says: “At the EU level there’s a huge amount of work still to be done to reduce fragmentation and create a digital single market. This would allow companies that start here in Britain to seamlessly access 500 million people rather than just 8 million in London, for example.” Ms Lane Fox also says that European businesses tend to have “longevity and levity”, which UK businesses lack, suggesting “there’s a cultural point about that kind of ambition and really not trying to get out of your business before you’ve achieved scale”. Mr Hutton adds: “Too many companies have to exit or sell all their equity at the crucial juncture of £2m turnover. [As entrepreneurs] they have no scope to grow unless they sell out completely and that indicates a dysfunction in the system.” Prof. Wright believes this dysfunction is compounded by government policy, which is too narrowly focused on measuring start-up volumes and using that as an indicator of entrepreneurship in the UK, without also focusing on whether the start-ups actually grow or create wealth. “I think there’s probably not enough done after the incentives to start up a business to help it to grow,” he says. “There are a lot of problems there with policy; the growth side [of businesses] is where the impact from innovative entrepreneurship is really going to be.” There is also a case for greater promotion of alternative funding and growth options, making it less attractive for successful UK businesses to sel out to acquisitive (typically foreign) competitors, which then benefit from the UK’s cultivation of a business during its riskiest phase and draw the future profit potential of the business away from the UK economy.
  22. 22. 22 As the UK’s economy is weighted towards knowledge- based enterprises, encouraging entrepreneurialism that advances new approaches, processes and products that can be both commercialised domestically and scaled up to rival international peers is crucial to the future of the UK economy. Without a well-functioning and optimally supported entrepreneurial ecosystem, the UK risks acting as a national start-up incubator supplying foreign multinationals. Experts interviewed in this report offer advice on how to succeed in building a UK entrepreneurial ecosystem. • While sole traders, the self-employed and small and medium-sized businesses make a considerable contribution to the UK economy, greater care must be taken to address the specific needs of each of these groups and caution exercised so as not to allow terminology to be used interchangeably to describe businesses that are so diverse in terms of their business model, risk appetite, scalability and capacity for employment growth While improvements to foster an innovation ecosystem in the UK have begun, much more can and should be done. Conclusion • Location-based hubs of entrepreneurial activity should not be considered simply within city boundaries. The social data included in this report make a case for fostering entrepreneurial activity along the Liverpool- to-York corridor rather than providing city-specific support and ignoring the agglomeration. Support for entrepreneurs in such agglomerations may need to be indirect, such as providing enhanced transport infrastructure and fostering support and business networks that span the multiple cities and areas connecting them • The social data indicate that sources of practical support (such as accelerator programmes) and funding provisions are integral to the online conversation about high-growth businesses and start-ups in the UK. Consequently, these ‘influencers’ can be used to amplify the successes of British entrepreneurs and provide awareness of role models to help cultivate a more ambitious culture of entrepreneurialism to rival those of the US and Europe • These influencers should be used not only to signpost entrepreneurs to resources, but should be considered as long-term partners for entrepreneurs while they grow their businesses from start-up phase through to higher-scale maturity, complete with options for expanding above the £2m turnover threshold • The ties between academia and the business community must continue to be strengthened and publicised so that a wider range of businesses can benefit, and less business-minded universities can be encouraged to follow suit. Partnerships between alumni and university enterprises, with the former mentoring the latter on how to commercialise their projects is one element, but broader integration into the local business communities will ensure wider participation in a knowledge economy. Given that universities are publicly funded, a sharper push towards a wider non-academic contribution to enterprise activity is needed • An innovative approach to financial instruments that are better able to match the funding needs and practical constraints of entrepreneurs at the different stages of their businesses’ lifecycles is required. Traditional financial institutions will be pivotal in providing this. The government, which can wield tax and other financial incentives, also has a crucial role in reducing the barriers that entrepreneurs come up against in getting funding to commercialise their ideas, and the barriers that the market faces in pricing risk around entrepreneurial ventures. For start-ups, matching funding with mentorship appears to be a good first step, but more can be done to match the risk and liability profile of businesses at different stages. This should be approached collaboratively from both a government and financial services standpoint to ensure a cohesive funding strategy is adopted for the UK.
  23. 23. 23 In addition to wide-ranging desk research and data from Pulsar, a social data intelligence platform, this report is based on qualitative interviews and a roundtable discussion with experts. Our thanks go to the following for their specific contribution. Jane Chen, Co-Founder, Embrace Alastair Clegg, Chief Executive, The Prince’s Initiative for Mature Enterprise (PRIME) Nicholas Davis, Director and Head of Europe, World Economic Forum David Gill, Managing Director, St John’s Innovation Centre, St John’s College, University of Cambridge Mark Glover, Director of Business Planning, Technology Strategy Board Clive Holtham, Professor of Information Management and Director of Cass Learning Laboratory, Cass Business School Jill Huntley, Managing Director, Corporate Citizenship, Accenture Barclays approached The Economist Intelligence Unit in February 2014 to investigate how entrepreneurs in the UK are supported and the barriers that hinder them, as well as wider trends that are shaping the UK’s innovation ecosystem. About this report Will Hutton, Principal of Hertford College, University of Oxford, and Chair of the Big Innovation Centre Martha Lane Fox, Co-Founder, Kathryn Parsons, Founder, Decoded Jaideep Prabhu, Jawaharlal Nehru Professor of Business and Enterprise, Judge Business School, University of Cambridge Doug Richard, Founder, School for Startups Eze Vidra, Head of Campus London and Google for Entrepreneurs Europe Mike Wright, Professor of Entrepreneurship, Imperial College London This report was written by Anna Lawlor and edited by Zoe Tabary and Monica Woodley.
  24. 24. Barclays is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No. 122702). Registered in England. Registered number is 1026167 with registered office at 1 Churchill Place, London E14 5HP. June 2014.