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I speak here as CEO of a small-ish IT services business, and some of what I have to
say is based on my own experience. I‟m also Chair of Intellect‟s SME Group.
Intellect is the UK trade federation for high-tech industries. About 600 of its
members are SMEs, and my talk is also based on their feedback over the three
years I‟ve been in the chair.
I want to make three points today in an attempt to broaden the debate a little:
Firstly, I hope to show that our problem is not with encouraging or funding startups, but with supporting their growth.
Secondly, I want to question our preconceptions about the kind of people who start
businesses – not just in the UK, but in general.
Finally I want to touch on the real nub of the issue – what is it that we, as a
society, want to get out of support for innnovation and enterprise?
I hope that you take what I say not as opposition to Saul‟s very well-made points,
but as an extension of them – it‟s not a case of “No, but”, rather it is “Yes, and...”
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Much of the debate around innovation and entrepreneurship centres on delivering
funding and skills to start-ups; the consensus is that we don‟t have enough startups and that if only we could have more our economy would thrive. So you may be
surprised to hear that, based on last year‟s data, we have as many small and startup businesses as the US, corrected for GDP, and that total investment in early
stage businesses, at £869m, was more than double our nearest competitor in
Europe. (Source: NESTA “Business incubation in challenging times”).
Very large businesses are rare. They also generally take longer to grow than you‟d
expect – the majority are more than a century old. Not only are large businesses
the exception to the rule, the new technology „gorillas‟ that catch our attention are
the exceptions to the exception. Taken across the whole piece, the UK‟s largest
businesses grew faster than their US equivalents last year. (Source: BERR EP#3
“High-growth firms in the UK”).
Where we do poorly is in medium-sized businesses. Comparatively, we have 24%
fewer such firms per $1m of GDP than the US. Of our total number of SMEs (which
I‟m defining here as firms with less than 250 employees) only 4% have 10 or more
staff. Only half a percent have 50 or more. Medium and large firms contribute
about 10% less to employment in the UK than they do in the US.
This failure to deliver strong growth past the SME phase is ascribed to a number of
different factors, including weak management skills, lack of ambition, the
regulatory environment and insufficient capital funding. It seems unlikely to me,
though, that clusters – which are predominantly about the start-up phase – are the
whole of the answer to this problem.
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Larry Page and Sergei Brin are the exception, not the rule. The vast majority of
technology businesses in the US are founded not by college-age whizz-kids, but by
mature graduates: average age 39 and at least 14 years out of college. 92% of all
founders were graduates, but less than 20% percent of them graduated from one
of the top 10 US universities. (Source: Kaufmann, “Education and Tech
Entrepreneurship”). It seems likely that what applies to tech businesses, that
preserve of youth and enthusiasm, is redoubled for the economy as a whole; across
all sectors, the contribution from entrepreneurs starting their first business at age
50 or older is even higher.
It‟s hardly surprising that these numbers are what they are: older entrepreneurs
have greater social, human and financial capital than young ones. They bring
experience of work and business, networks of contacts and their own accumulated
wealth to the party. Interestingly, more UK high-growth firms than US ones depend
on venture capital – the US ones being bootstrapped or angel financed. Outside the
hard-IP sector, bootstrapping is the expectation – this was forcefully expressed to
me by no less than Felda Hardymon at a recent meeting of the Technologist‟s
Company – and college undergrads tend not to have any money of their own.
If this demographic is where the nexus of entrepreneurship is to be found, then
surely it‟s here that we should focus our efforts. Although a US study found that an
average of 45% of founders started their business in the same state in which they
received their degree, this correlates to the percentage of graduates who settle in
the state where they were educated. Anecdotally, thirty-somethings tend to be less
mobile than their juniors, and more likely to start businesses where they live – and
where they understand the markets in which they see an opportunity. This implies
to me that we should bring the business support services to the entrepreneurs, not
the other way around.
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What do we want to achieve by investing in innovation and entrepreneurship? As a
nation, I suspect that it is employment, and the associated tax revenues and
reduction in welfare costs, that comes top of the list. Although this correlates to
enterprise value, there is not a direct coupling of the nation‟s interest and that of
the venture capital industry. VC, in theory (and as distinct from private equity), is
about high risk and high reward. It‟s pretty hard to write a services business plan
that generates 10x or 100x money in a typical VC investment window. It‟s harder
still to do that in the expansion phase. That‟s why VC tends to focus on hard-IP
propositions and start-ups – as it should. But these businesses don‟t generally drive
substantial employment growth – they‟re headcount-light.
In the SME space, where as I‟ve shown earlier we‟re underperforming, service
businesses, especially retail and business services, make up about 40% of all UK
private sector employment. We need to turn more of these business into fastgrowing gazelles – there‟s a good deal of research indicating that a tiny proportion
of growth businesses drive almost all employment growth. These business will be
innovative – more likely in business process than product – and IP will have its part
to play. You can see from the table, though, that the most significant IP factor in
growth is trademarking, not patents – implying that professional marketing and
commercialisation of ideas makes a marked difference.
These businesses, founded most probably by people in their late thirties exiting
from corporate employment and leveraging their accumulated financial, social and
human capital are the enterprises we most need to encourage, and the ones least
well served by clusters 2.0.
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I hope it‟s clear that I‟m not dismissive of clusters. However, I do think that they
have a narrow focus on hard-IP startups, supposedly founded by scarily bright
undergraduates producing potentially enormous returns on capital in the context of
quite small investments. Actually we know that most successful university cluster
spin-outs have been led by older scientists with a good deal of research under their
belts, but even so clusters are a natural extension of research university facilities.
Cambridge has a pretty successful cluster, which is well represented here tonight.
What I hope I‟ve pointed up is that there is a broader context beyond Google –
which is by far the most successful example of a cluster 2.0 company. In some
ways it‟s the only truly successful example. The rest of the US tech gorillas (which
are rather bigger than Google on most measures) are very much cluster 1.0. Intel
is 40 this year, and Gordon Moore was 39 when he founded it. HP predates the
Second World War, and Bill Hewlett was 36 at the time. Most of the household
names are either older than you think, or haven‟t made any money yet. Facebook is
five years old, employs only 700 people, and makes no money.
The meat of the economy, on any measure – employment, GDP, tax revenues – is
in service-sector SMEs. It‟s here, more than in technical innovation, that we
underperform the US. We start as many businesses, but fail to grow them. The
engine of recovery is not going to be a miraculous high-tech company or two, but
sustaining and growing the 170,000 UK businesses with between 10 and 50
employees.
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BERR:
http://stats.berr.gov.uk/ed/sme/smestats2007-ukspr.pdf
http://www.berr.gov.uk/files/file49042.pdf
http://www.berr.gov.uk/files/file47440.pdf
http://www.berr.gov.uk/files/file38295.pdf
Kauffman: http://sites.kauffman.org/pdf/Education_Tech_Ent_042908.pdf
NESTA:
http://www.nesta.org.uk/assets/Uploads/pdf/PolicyBriefing/Business_incubators_PB30_NESTA.pdf
http://www.nesta.org.uk/assets/Uploads/pdf/ResearchReport/shifting_sands_report_NESTA.pdf
NCSB Conference 2004:
http://web.bi.no/forskning/ncsb2004.nsf/23e5e39594c064ee852564ae004fa010/a6
cb7066ea59eda6c12567f30056ef4d/$FILE/Madsen&al.pdf
Small Business Council: http://www.berr.gov.uk/files/file39604.doc
Library House: http://www.libraryhouse.net/publications/download/CC07.pdf
Ingenia: http://www.ingenia.org.uk/ingenia/articles.aspx?Index=475
European Cluster Observatory:
http://www.ingenia.org.uk/ingenia/articles.aspx?Index=475
http://www.clusterobservatory.eu/upload/Policy_Report_United_Kingdom_2008011
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Les Pôles de Compétitivité
http://www.competitivite.gouv.fr/spip.php?rubrique36&lang=en
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