Better Together

In our regular meetings with government, it’s not uncommon to be asked: why haven’t we produced a Google, Facebook, Apple, or Amazon, and how can we get one in the UK? It’s a question that everyone outside of Silicon Valley asks – including in other US states – so the answer has less to do with anything particular to the UK, and a lot to do with the particular story of the Valley.

A more interesting question might be why the UK has managed to build its own incredibly successful blessing (yes, that’s the right term) of unicorns. We have billion-dollar startups spanning a range of sectors, “from fintech and artificial intelligence, to cybersecurity and healthcare, each with vastly different business models and methods of growth.”

Whether we’re talking about unicorns ($1bn), decacorns ($10b) or hectocorns ($100b), acquisitions are an important way for businesses to scale, with 1 in 3 UK unicorns having made at least one acquisition prior to reaching their billion-dollar valuations. For example, The Hut Group, the Manchester based e-commerce company, made six acquisitions prior to becoming a unicorn and has since made 15 more.

While acquisitions are a fundamental part of a flourishing entrepreneurial ecosystem, regulators around the world are increasingly concerned about the competition implications of them. Facebook’s acquisition of Instagram is seen by many as a mistake – even though at the time the standard view was that Facebook’s purchase of the social media site for $1bn was evidence enough that a tech bubble was about to burst.

Nevertheless, this and other perceived post hoc failures have left regulators around the world feeling like something must be done. None is proposing to go further than the UK Government, informed by the Competition and Markets Authority (CMA), which would target the likes of Google, Facebook, Apple, and Amazon with the threat of blocking acquisitions that have a ‘realistic prospect’ of reducing competition – defined in law as being “greater than fanciful, but less than 50%.”

We think this is a bad idea. In a new paper out today with ICLE – to coincide with the Government’s consultation on competition in digital markets which we’ve responded to – Sam Dumitriu and Sam Bowman argue how the proposal risks damaging the startup ecosystem.

First, from a competition perspective, it risks protecting Big Tech incumbents from each other, as Sam Bowman argues in an article for CapX. For example (and there are plenty more), “Google bought Android in 2005, and used it to build an open source alternative to iOS. Without Google’s entry into the market, it could have been years before the iPhone had a serious competitor, allowing Apple to charge higher prices and work less hard to improve its own offering.”

Second, “getting acquired by a Big Tech company is an important way for startup entrepreneurs and their investors to ‘exit’ their firms and actually make a return,” writes Bowman. London’s investors aren’t keen either. When polled by Coadec, half said they would significantly curb the amount they invested.

Over recent years, nearly as many UK startups were bought by Microsoft, Google, Facebook, Amazon, and Apple as listed on the stock market. If the Government were threatening regulation to stymie IPOs there would rightly be an uproar (in fact, they’re rightly trying to reinvigorate IPOs by deregulating corporate governance and allowing dual-class shares).

The sale of a company isn’t the end of the story. Consider Alex Chesterman. In 2001 he started Lovefilm and sold it to Amazon in 2011. But that was just the start of his journey. He has since founded and exited two unicorns: Zoopla and Cazoo. How different would his story be if there was no opportunity to exit his first company?

I don’t know where the next Google, Facebook, Apple, or Amazon will be born. We have dozens of ideas for policies that increase the chances of it happening in the UK, but we shouldn’t lose sight of the fact we’re one of best places in the world to start and grow a business and remember what got us to where we are.

Join Us
Our Supporters and Advisers are vital for supporting our work – you might well be one of them, for which I thank you. For the rest of you, now’s the time to consider getting more involved.

First, we’re increasingly having to turn people away from events as they fill up quickly. Even virtual roundtables have to be capped so everyone can have their say. Of course, we will always host events and webinars that are open to everyone – for example, the Late Payments Task Force Webinar with the Small Business Commissioner – but with a growing network, demand is increasingly outstripping supply.

Second, next year we’re going to put the price up from £50 and £500, to £100 and £1,000. This won’t be the case for Supporters and Advisers who are already signed up. All subscriptions are frozen in time – the cost for us in inflation will be a deserved reward for your early support and loyalty.

Third, and most importantly, I think what we do really makes a difference to the state of entrepreneurship in the UK. A lot of our polices have gone on to become law. We don’t (and wouldn’t) take funding from government, and your support helps us undertake our independent research. If you want to know why we do what we do, read about it on our website.

You can easily join us here. Please feel free to drop me an email if you have any questions, or book a 15-minute Zoom call in my diary here.

First Resort

Being an MP can be a bit of a thankless job – actually, worse than thankless given the abuse they get on social media. And they’re underpaid compared to what their peers earn in the private sector; or even the public sector: 667 people at local authorities across Britain earn more than the Prime Minister.

So whether or not you agree with any MP's particular vision, a major reason many are in the job is to try to make the country – or at least their constituency – a better place. (Like all of us, no doubt prestige and power also play a role).

As part of their public service, most MPs spend a lot of time engaging with organisations like ours. We’re just one of many think tanks, but an email to the office of an MP almost always leads to a meeting or event – the latter sometimes during unsociable hours. There is nothing in their contract that says they have to do this, and they could quite easily slip below the radar and just decline invitations.

This public service is reflected in a new format for engaging with MPs that we’re trialling – convening entrepreneurs and experts to discuss with MPs how to support their entrepreneurial ambitions in their constituencies. We do this already on a national level, but haven’t done this on a local level. Until now.

The idea came from a chat with Robin Millar, Conservative MP for Aberconwy. The main urban centre in his constituency is Llandudno, and on Wednesday we’re having a virtual roundtable discussion on how to promote entrepreneurship in both this seaside town and the wider region.

No doubt some of the discussion will be focused on it being a North Wales coastal resort, but there are also general lessons that can be applied from other places on how to create an environment that nurtures growth, fosters ambition, and attracts new industries and businesses.

Robin is particularly keen to have entrepreneurs from across the country around the virtual table. Local councillors will also be on the call, so your ideas could feed into local policies like how the £4.8bn Levelling Up Fund is spent.

So even if you don’t have any ties to Llandudno, or even Wales, this is a chance for your own bit of public service, to help spread prosperity throughout the UK. And, like all our events, it will also be a chance to meet others with a similar ethos. Just drop me an email if you want to join.

Street Supply 
Britain suffers from a shortage of buildings where people want to live and work. As our Senior Researcher Aria Babu writes, fixing this needs to be a top priority for the Government.

While the growing discontent understandably focuses on housing and the fact that people can’t afford to buy or rent a home where they want, the impact on businesses and the economy is neglected. Compare this to the debate in and around Silicon Valley, where the impact of high housing costs on startups has been a hot-button issue for a while.

Some of this is understandable. We know that agglomeration effects result in more innovation when people and businesses are able to cluster, but we don’t really consider the marginal person that isn’t able to move to an entrepreneurial hub, or the marginal business that isn’t created. It’s a mistake to ignore what is not seen, but it’s the way of the world.

But I can’t fathom how the obvious impacts of this dearth of buildings on businesses is underreported. As Aria writes: “We have some of the highest office rents. In fact, the most expensive office in the world is in London, charging £277.50 per sq ft. The shortage of office space costs businesses an extra £32 per sqm. For a firm of 200 office workers, this would cost them an extra £48,000 per year.”

Building more isn’t easy because people understandably don’t want more buildings where they live. Aria raises the policy of Street Votes, which might be added to the Planning Bill, and allows streets to control their own development. She also raises the prospect of a votes-based system beyond housing, making it easier to turn shops into offices, homes into labs, and cafes into co-working spaces, where there is local demand. 

This is a policy area that we’ll continue to investigate. Please get in touch with Aria if you want to get involved in supporting our efforts on this.

Housing and Entrepreneurship

Britain is suffering from a major building shortage. We often think of it as a “housing crisis” because the most obvious signs of it are the eye-watering rents and house prices in our towns and cities. But the problem is much wider reaching than that: there are not enough buildings, of any kind, in places where people want to live and work.

As a general rule in the UK, the more people earn in a city, the less space they have per person. London has 353 sq ft per person, New York, one of America’s most expensive and desirable cities, has 531 sq ft. This is more than Blackpool (480 sq ft), which is Britain’s city with the most space per person.

The UK also has some of the highest office rents. In fact, the most expensive office in the world is in London, charging £277.50 per sq ft. The shortage of office space costs businesses an extra £32 per sqm. For a firm of 200 office workers, this would cost them an extra £48,000 per year.

Additionally, the UK seriously lacks the lab space it needs to grow its research base and analysis of planning data show that there are few plans to build many new labs anywhere in the country. To put the scarcity in perspective, London has only 90,000 sq ft of lab space in total while New York has 1.36 million square feet available.

In most markets, if demand exceeds supply then prices rise and the market attracts more producers and sellers. Property prices far outstrip construction costs, and yet, developers aren’t rushing in and closing the gap. Why?

The answer is the Town and Country Planning Act. Local governments have almost complete control over what can be built in their jurisdictions. Decisions are not driven by supply and demand - instead they are driven primarily by local politics and there are powerful incentives that make approving new housing difficult. Local residents have an active interest in limiting construction near them. They think that new homes can decrease the value of their homes, increase the strain on local services, the building work will be noisy, and the new buildings are often uglier and less attractive than what they replace. They are often right on all of these counts.

So when developers want to build anything, they have to battle the council. This is an expensive process and Section 106 means that councils can extract expensive commitments from the developers, who will, in the process of building new houses to sell, also have to build new roads and affordable (subsidised) housing.

This makes it very difficult for small builders to succeed. While development can be very profitable when a project is successfully approved, it is such a high risk endeavour that developers need to spread this risk over multiple projects, meaning that it is more difficult for smaller SME builders to compete. This is bad for innovation and competition in the sector.

Some argue that the problem is not scarcity. Sometimes people will blame high costs on the price of land or on interest rates. A piece of land in Oxfordshire without planning permission granted to it sells for 1% of what an identical piece of land with planning permission granted can sell for. The value of the land itself makes up 1/100th the cost of the sale price. The planning permission is the valuable thing. Others argue that high prices are caused by low interest rates. They are failing to understand why interest rates would have a direct impact on the value of houses: in the absence of supply, cheaper finance and lower returns on other assets push house prices up so house prices are primarily driven by how much people are able to borrow and save rather than by how much such homes cost to build. In the North, where supply is more elastic, house prices are less impacted by interest rates. Borrowers in Doncaster face the same interest rate as borrowers in Cambridge. In cities where planning is much more liberal, this relationship barely exists.

A lack of buildings causes a number of wide-ranging knock-on problems for the economy by damaging entrepreneurship.

People have less money. High housing costs are potentially the greatest squeeze on the cost of living. Both rents and house prices have continued to rise faster than wages and 66% of households either pay rent or have a mortgage. This money is generally a transfer of money from poorer people to richer people. This money doesn’t disappear, it goes to landlords or the former owners of homes who may spend or invest it but it would be better if more of it stayed with younger people.

If people are living paycheck to paycheck or putting all of their savings towards a deposit for a house, they aren’t going to have the money to start a business. Especially because home equity is often used to fund early-stage businesses.

There is even greater damage than this being done to the UK’s entrepreneurial dynamism. People are less able to relocate to where they are most productive. If we want more successful entrepreneurs in the UK, we have to be capable of building a hub like Silicon Valley, where people can meet, found businesses together and hire each other.

Take Los Angeles for an example. Everyone knows that LA is where a person goes to make films and this makes films cheaper to run. Aspiring actors move to the city which means there is a wealth of talent to draw upon, people who want to make costumes or sets move there, and filmmakers move there. These people then go to the same parties and meet in the same coffee shops and come up with ideas for new projects to embark on together.

Silicon Valley, and to a lesser extent London, is like that for tech. And Oxford and Cambridge are like that for Life Sciences. But high housing costs dampens innovation by pushing up the cost of living in these places, meaning that fewer would-be entrepreneurs, tech workers, and researchers are able to live side by side and start new projects together.

This makes it less likely that people will start companies and more expensive for them when they do. Because high housing costs discourage people from moving to productive cities, startups find it harder to hire people. Because offices and labs are expensive, entrepreneurs have to pay more for space. As a result, entrepreneurs are punished for wanting to start companies in the UK.

This then has a devastating impact on the economy as a whole. Academics in the US estimate that lowering building constraints in their most productive cities to the limit imposed on median cities would increase US GDP by 9.5%. No such studies have been done for the UK, but because the UK has an even more restrictive system it has been estimated that solving the housing crisis could boost GDP by as much as 30%. 

As part of the “science superpower” agenda, the government should make solving this issue a priority. Lab-space is a low-hanging fruit and we should immediately embark on a scheme to make it easier to build labs across the country. But that would only be the start and would do nothing about housing or office costs.

One way of reforming the system would be to liberalise the planning system completely and allow anyone who owns a piece of land to do whatever they like with it. That would be politically untenable and would, in any case, be an overcorrection, because it would create a market which fails to price the externalities of building. 

Attempts at liberalisation have faced stiff opposition because reforms are win-lose and people fiercely want to protect their house prices and what they see as their rights. A viable solution needs to balance two things: it needs to bring market forces into planning, so that housing is built in places where it is most expensive, and it needs the popular consent of the people who will be affected by it. If we can get this right the gains are so large that everyone can be a winner.

For example, a street of 26 bungalows in Barnet, if redeveloped to terraced housing could make about £54m, when the building costs and the cost of rehousing the current occupants is taken into account. This is enough money to compensate everyone if the rules governing such a system were properly drawn up.

This sort of win-win proposal is set out in Policy Exchange’s Street Votes:

Residents of a street should be able to agree by a high majority on new strict rules for designs to make better use of their plots. A street of suburban bungalows, for example, could agree on the right to create Georgian-style terraces. In many cases, an adopted ‘street plan’ would greatly increase the value of residents’ homes, giving them strong reasons to agree on it.

These proposals will foster gentle intensification within about half a mile of existing transport and town centres, creating better and greener places with more customers to support struggling local high streets. More people will be able to live in neighbourhoods that pass the ‘pint of milk test’, living in walking distance of somewhere they can buy a pint of milk, along with other essential social infrastructure.

These ideas were put forward in a presentation bill to parliament last week. Before Wednesday’s reshuffle, the then Secretary of State for Housing, Communities and Local Government Robert Jenrick, supported these reforms and was going to put them into the upcoming planning bill. Micheal Gove may be keen, and has indicated in the past that he is in favour of ideas like this.

Of course, street level democracy cannot be the only way new buildings are created. It is best suited to urban and suburban areas which already have public transport links and low density housing. 

There are many villages in the UK which will also need new homes, and it may not be viable to make street-by-street design codes. There may also be places in the country where we want to build entirely new garden villages, for example, along the HS2 and Crossrail lines. The government should conduct pilots of how the core principles of fixing the broken incentives and transaction costs in the planning system can also be applied to those, for example by giving local people more power to bargain for greater benefits from such schemes.

Poundbury is a popular housing development in the South West. It was built as a project by the Prince of Wales. It was created to be walkable and sustainable and it borrows from traditional forms of architecture. It is incredibly popular and homes in Poundbury are worth 43% more than those in neighbouring villages. If we can work out how to build new, beautiful, and sustainable villages then this should be encouraged.

And on top of these reforms it should be easy to convert properties between different types of use. The economy is fast-moving and dynamic. We have seen regions that used to be full of factories turn to wastelands as the economy has moved on. While people bemoan the death of the high-street, calls to allow commercial property to turn into other uses of building space are scarce.

With a similar votes-based system, we should make it easy to turn shops into offices, homes into labs, cafes into co-working spaces, and we should make it easy to turn them back again.

When looking at the system as a whole, it is obvious that making it easier to build in the UK would solve a whole host of problems. It would make the country more dynamic, productive, entrepreneurial and a much nicer place to live.

Lost in the Reshuffle

Being a Government Minister can be a wild ride. Just take Nadhim Zahawi as an example. Having spent the last 10 months or so focusing day and night on all things vaccines, he’s been promoted to Secretary of State for Education and will now be doing a radically different job. While he and his successor, Maggie Throup, will have advisers and the civil service to help with the continuity, this sort of disruption would be a bad way to run a business and when you take a step back it’s a rather odd way to run a country.

As well as reshuffling people, governments sometimes reshuffle whole departments – normally after an election. For example, the Department for Business, Energy and Industrial Strategy (BEIS) came about after Theresa May merged the Department for Business, Innovation and Skills (BIS) and the Department of Energy and Climate Change (DECC). These departments had been created from the previous merger of the Department for Innovation, Universities and Skills (DIUS) and the Department for Business, Enterprise and Regulatory Reform (BERR), which took the place of the Department of Trade and Industry (DTI) which somehow managed to survive without a rebrand from 1970 to 2007. They probably should have just stuck with the name DTI all along, or just changed it once to the Department for Business – it would have at least saved money on new signs.

This isn’t to say all departments should remain ossified in the 1970s – particularly when changes in the world demand new things from the government. Tech is the most obvious example here, but its ever-growing importance is at odds with it sitting alongside culture, media and sport in the Department for Digital, Culture, Media & Sport (DCMS). Digital/tech used to sit across BIS too, which came with its own challenges, but when they decided to place it in one department they probably picked the wrong one.

Tech policy would fit better within BEIS (or whatever they decide to call it next). This isn’t about who is in charge. Whether you’re more a fan of new minister Nadine Dorries or her predecessor Oliver Dowden (or neither), they shouldn’t have to juggle digital policy with culture, media and sport.

To some extent, this will be mitigated by junior ministers. Chris Philp, as Parliamentary Under-Secretary of State for Digital Economy, will take the lead on a lot of tech policy. But you would be hard pressed to convince me that ultimately the responsibility is more at home with the person tasked with thinking about museums and galleries than the person whose job it is to "ensure the UK remains at the leading edge of science, research and innovation."

Exit Strategy
Our friends at Coadec have a report out on the potential impact of the Digital Markets Unit (DMU) from the perspective of tech startups and investors.

It’s a punchy report, built around a survey of investors and echoes some of the concerns touched on in our Conflicting Missions report about the significant risks that the DMU poses to competition, innovation, and entrepreneurship.

The report finds that there is concern among investors for tackling anti-competitive behaviour, with 80% of investors surveyed either concerned or very concerned about incumbent companies making it harder for new entrants to break into markets. But investors are particularly concerned with barriers to entering markets dominated by incumbent non-digital companies, rather than other tech companies.

With 90% of investors agreeing that the ability to be acquired was very important to the health of the startup ecosystem (not sure what the other 10% think, as exits are how they make their money), it should be hugely concerning that half of investors would significantly reduce the amount they invested in UK startups if the ability to exit was restricted, while 22.5% said they would stop investing in UK startups completely.

The report suggests a real lack of trust between UK investors, regulators and government, with 80% of investors feeling that the government has only a basic understanding of the startup market; 60% think that UK regulators only have a basic understanding of the startup market; and 70% of investors believe that UK regulators only think about large incumbent firms when designing competition rules, rather than startups or future innovation.

Part of the challenge for Government and regulators is that entrepreneurs rarely want to speak publicly about their concerns around regulation. For example, they understandably don’t want to alert the regulators to the fact that they might one day hope to exit their business (even though this is a completely reasonable thing to aspire to do). We had an event with the DMU not long ago and for the first time since starting the think tank, the majority of entrepreneurs on the call were more happy to listen than talk about their concerns despite being very vocal about them in private.

Investors can speak more openly, which is what makes Coadec’s report really important. While the interests of entrepreneurs and investors aren’t always aligned, those that have taken VC money will be eyeing up some sort of exit at some point, so the views of investors are a useful proxy for entrepreneurs' opinions on this matter. The evidence here confirms what is being said in private conversations – there are growing concerns from startups about competition policy.

Cookies Crumble

Ever since Brexit (as well as during the campaign), we’ve been promised regulatory divergence from the EU. Yesterday evening we got a glimpse of what this could look like, as the Government announced plans for a new data regime.

Yesterday’s announcement was trailed in a recent Telegraph interview with Oliver Dowden MP, the Secretary of State for Digital, Culture, Media and Sport. The plans aim to iron out some of the deficiencies that the government sees with GDPR. But while the Telegraph article focused on us being subjected to fewer cookie popups – after all, that’s what your average man/woman on their smartphone cares about – the most interesting idea could be around removing barriers to responsible data use.

An example of what's possible can bee seen from researchers from Moorfields Eye Hospital and the University College London Institute of Ophthalmology. They made a breakthrough in patient care using AI, training machine learning technology on thousands of historic de-personalised eye scans to identify signs of eye disease and recommend how patients should be referred for care. The expectation is that identifying and clarifying lawful grounds for research processes would lead to more innovations like this and AI outperforming doctors’ diagnosis of breast cancer.

There will be concerns about privacy. But people seem to care about data privacy less than you might think. One study found that “86% of respondents express no willingness to pay for additional privacy when interacting with Google. Among the remaining 14%, the average expressed willingness to pay is low.”

Nevertheless, as the plans acknowledge, there are differences in how large tech firms and small hairdressing businesses should be regulated, which is why they are planning to tweak GDPR rules to move away from the “one-size-fits-all” approach. (Hence the focus on fewer cookie popups.)

The plans also consider ​​bias in algorithmic systems. This is clearly a legitimate concern, but it’s also an opportunity. As Caleb Watney writes on that fallibility of humans: “We judge people based on how traditionally African American their facial features look, we penalize overweight defendants, we let unrelated factors like football games affect our decision making, and more fundamentally, we can’t systematically update our priors in light of new evidence. All this means that we can gain a lot by partnering with AI, which can offset some of our flaws.” (Read Sam Dumitriu’s article from 2019 for a thoughtful consideration of the evidence.)

We’ll respond to the consultation around these plans, so if you want to feed into our response, send over your thoughts to Sam via email.

Queen’s club
Everyone wants to be appreciated. From the twisted olive branches for victors in the Olympic Games, to chalices in the Middle Ages, through to the numerous awards of the modern world, being recognised incentivises us. That’s why we called for a new order of chivalry so that entrepreneurs and innovators are properly appreciated.

And while we think they fall short of our proposal, entrepreneurs may want to consider applying now for the Queen’s Awards for Enterprise. You can apply in the categories of innovation, international trade, sustainable development or promoting opportunity through social mobility.

Winners will be: invited to a Royal reception; presented with the award at your company by a Lord-Lieutenant; able to fly The Queen’s Awards flag at your main office, and use the emblem on your marketing materials; and be given an official certificate and a commemorative crystal trophy.

The deadline for entries is midday on 22nd September 2021. Find out more here.

Hidden Gems

The Global Entrepreneurship Monitor (GEM) is hot off the press. As the world’s most authoritative comparative study of entrepreneurial activity, it’s a vital source for understanding the state of entrepreneurship in the UK.

The survey of close to 10,000 adults found that in 2020 total early-stage Entrepreneurial Activity (TEA), ie. the percentage of the population involved in nascent entrepreneurship, dropped to 7.9%. This is significantly lower than 2019, when it stood at 9.9%, but not too dissimilar from 2018, when it was 7.9%. For context, this puts us behind the US (15.4%), but ahead of Germany (4.8%).

This shouldn’t come as a surprise. While many great businesses are started during crises, it’s understandable that many wannabe entrepreneurs are holding fire. After all, larger companies are more able to survive pandemics and other shocks than are smaller businesses. And people will have been reticent to leave stable work where they can receive furlough payments, and start something higher risk.

However, with the climate improving, brace yourself for a resurgence in entrepreneurship: 16.2% of working age adults expected to start a business within the next 3 years. This is up from 11% in 2019. Once again, we sit between the US (18.6%) and Germany (12.7%)

The British public is optimistic, with the share of those agreeing that starting a business would be a good career choice jumping significantly from 58% to 75%. So while the pandemic has given wannabe entrepreneurs pause for thought, if we could fast forward to next year’s report I expect we’ll see that many will have taken the leap.

Cookie Monster
On the blog, Sam Dumitriu has written about the news that the Government is looking at reforming our data laws. While he welcomes the opportunity to diverge from some of the sillier aspects of EU data protection law, he thinks the government should instead prioritise no longer bringing in the bad regulations.

After all, many startups prefer to tolerate the excesses of GDPR in exchange for our data adequacy agreement with the EU. And the damaging aspects of GDPR have already been realised, with compliance practices already standardised.

Sam raises the example of the age-appropriate design code, which aims to protect children from harmful content online. While its aims are laudable, it would severely tilt the playing field against startups and towards incumbents, as consumers will understandably be reluctant to hand over personal information such as their passport details to new businesses.

Ain’t No Party
Many of us will be at the upcoming Party Conferences in Brighton and Manchester, speaking on panels inside the secure zone.

We often host our own events outside the secure zone, so we can ensure entrepreneurs who don’t have a conference pass are still able to attend. Anyone working with an organisation that wants to partner on an event should get in touch with me to discuss what we could do. Also, if you’re attending either conference, let me know if you would like to arrange to catch up with me and the team over a coffee (or perhaps something stronger) – either inside or outside the secure zone.

Better than deregulation

Last week, we heard that the Government is looking at reforming our data laws. Outside of the European Union, there is the opportunity to diverge from some of the sillier aspects of EU data protection law. It seems likely that ineffective and irritating cookie notices will disappear (n.b. If you really hate cookie notices, there are dozens of browser extensions that automatically remove them).

On the face of it, this is welcome news. There’s evidence that GDPR reduced investment in European startups and entrenched market power in the digital advertising markets.

But I’m not holding my breath for two reasons. First, any real divergence risks undermining our data adequacy agreement with the EU. I suspect most startups would tolerate the inconveniences and problems of GDPR if it was the price of admission to trading with the EU.

Second, the harms of badly designed regulations often can’t be unpicked by deregulation. Implementing GDPR was expensive for SMEs as in some cases it meant rebuilding email marketing lists that had taken years to build. But moving forward, most email marketing services have GDPR compliant practices as standard. In some cases, they have become international norms as US firms seek access to the EU market. Of course, there are still ongoing costs. The fact that many newspapers geoblock content for the EU and UK is proof of this. But in general, the biggest costs of regulation are in transition. Redesigning your website so it has a Cookie Notice was expensive, but once you have it the costs are insignificant.

The truth is deregulation is an inadequate substitute for not passing bad laws. If policymakers care about eliminating burdensome requirements and growing the UK’s tech sector they should spend less time deregulating and more time blocking bad new regulations. It’s easier to make omelette out of an egg than an egg out of an omelette.

Take the age appropriate design code, which aims to protect children from harmful content online. Its aims are laudable but it will carry major costs. As Coadec argues it could tilt the playing field against startups and towards incumbents.

Tech companies may have to build multiple versions of their products, one for adults and one for kids, which will inevitably favour tech giants over startups and SMEs. Alternatively, they could apply the rules to all users but that would force significant business model change that will be hard to unpick later.

The biggest problem is the requirement for age assurance. If you want to avoid the onerous restrictions of the age appropriate design code, as most businesses that operate online services will, then you will have to implement an age gate collecting personal information about all of its users. As the FT notes, this will be concerning to retailers and newspapers as well as social media platforms. The News Media Association warn that:

“In practice, the draft Code would undermine commercial news media publishers’ business models, as audience and advertising would disappear. Adults will be deterred from visiting newspaper websites if they first have to provide age verification details. Traffic and audience will also be reduced if social media and other third parties were deterred from distributing or promoting or linking titles’ lawful, code compliant, content for fear of being accused of promoting content detrimental to some age group in contravention of the Code.

Ahead of the code’s implementation, we have seen many tech firms implement new global changes aimed at protecting children on their platform. However, as the NSPCC’s Andy Burrows points out “The code is going to require age assurance, and so far we haven’t seen publicly many, or indeed any, of the big players set out how they’re going to comply with that, which clearly is a significant challenge.”

It is worth considering how onerous this requirement is. As Open Rights Group’s Heather Burns writes:

“To implement the age gate, all businesses within the Code’s scope will be required to collect age verification data, such as a passport or credit card, for all users, and to process and retain it in full accordance with GDPR. This age gating will render all internet usage access in the UK personally identifiable to an individual, creating massive private databases of personal internet access.”

This is technically very hard. But as The Guardian’s Alex Hern states:“very soon UK law isn’t going to take ‘it’s hard’ as a sufficient excuse.”

This move could tilt the balance against startups as consumers are understandably reluctant to hand over personal information such as their passport or credit card details to new businesses. 

It is ironic that the Government is discussing eliminating inconvenient cookie notices while simultaneously proposing to age gate the internet – a much, much more inconvenient requirement.

Attempts to eliminate poorly functioning regulations should be welcomed, but in many cases the damage is already done. To really ease the regulatory burden on the UK’s startups, the Government should focus on blocking bad new laws.

Brooke Knows Argument

The Chief Business Commentator at the FT, Brooke Masters, has an excellent article in the FT on what we can learn from Cambridge’s pandemic-fuelled tech success.

With a record £1bn raised in the past 12 months, Cambridge is flourishing. So what are the lessons?

First, success has been a long time in the making, with Masters tracing it back to the decision in 1970 to set up the first UK science park there, and of course we could go back even further, to the founding of the university in 1209. Whatever the key date, the obvious lesson for politicians is to think long term, beyond the election cycle.

Second, according to Masters a liberal approach to foreign ownership has helped. Even after selling, entrepreneurs have stayed in Cambridge to start, advise and invest in new companies. This is a very timely observation. As discussed in our Conflicting Missions report (and in more detail in a forthcoming report), the remit of the UK’s new Digital Markets Unit risks severely hampering the ability of founders to sell their businesses, and so reinvest their time, expertise and money back into the innovation ecosystem.

Third, Masters lauds the role of Cambridge Enterprise, linking through to this Air Street Capital article that champions the practice for student researchers to own the rights to their IP: “If they wish to patent their inventions and start a business based on this IP, they must license it from the University for a fee. However, the University is not automatically granted shares in the spinout. Instead, the University and Cambridge Enterprise (its TTO) manage an investment fund that spinout founders may pitch to raise capital in exchange for shares.” Again, watch this space for a report on how to reform TTOs.

But while Cambridge has become “a safe place to do risky things”, there are headwinds. Masters emphasises the cost of good housing and the complexity of planning rules as critical to keeping Cambridge’s entrepreneurial ecosystem competitive: “the UK needs to act now or risk strangling the Silicon Fen just as it comes into its own.” (In this respect it’s not so different to Silicon Valley.) New neighbourhoods like Eddington are all to the good, but I think the killer policy would be introducing Street Votes, allowing homeowners to vote on upgrading their streets while making them more beautiful in the process (which seems particularly relevant for Cambridge).

However, not everywhere in the UK has a world-class university an hour from a metropolis in which to build an entrepreneurial ecosystem. But that doesn’t mean one can’t be developed – it will just be at a different scale and not look much like Cambridge. The town of Boulder, Colorado is the oft-cited example of what can be built in seemingly unlikely locations.

That’s why we’re in the process of planning a virtual event with Robin Millar, MP for Aberconwy, in which experts, entrepreneurs, or anyone with a well-evidenced idea can pitch to Millar and the council on how to make ​​Llandudno – the so-called “queen of the Welsh Resorts” – more entrepreneurial.

Nobody is expecting a Silicon Valley, Fen, or Roundabout, overnight – or at all. But we think that with the right policies for a town, city or region, a real difference can be made at the margin. If you have an idea you would like to pitch, drop me an email. And if you’re an MP who wants to do something similar, also get in touch.

Digit-all
Our good friends at Coadec are campaigning to expand the Help to Grow: Digital scheme. Coadec is concerned that the scheme might not reach its full potential – and we agree.

The scheme incentivises small businesses to use productivity-enhancing software. But as it’s currently designed, small businesses must have at least 5 employees to be eligible and businesses can only access limited types of software.

Software is limited to CRM, accounting and e-commerce, but Coadec thinks it should be widened to include additional software like cloud compute, ERP, project management tools, payments software, and HR software.

Coadec wants the support of companies that would currently fall through the cracks. So if you’re involved in a business with fewer than 5 employees (not sole traders), a business that would benefit from access to software not currently in scope, or a business that could offer software not currently in scope, get in touch with Charlie from Coadec to see how you can get involved in the campaign.

Going Green
I’ll have more information next week, but I’m delighted to announce that we will be kicking off a new Forum: the Green Entrepreneurship Forum. It is supported by our long-time partners, Mishcon de Reya, and will be built around virtual roundtables with the founders of some of the UK’s most ambitious green businesses. If you are the founder of one of these businesses, or want to nominate someone who is, get in touch with Katrina Sale.

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Taasiseseisvumispäev

You don’t need to be a libertarian to believe that too many of life’s most tedious and infuriating moments involve the government. Perhaps because of our relative powerlessness, these frustrations can feel inevitable. But they aren’t.

I came back yesterday from Estonia. As well as (arguably) having the highest number of unicorns per capita in the world, it also has one the most advanced digital states. These two things aren't a coincidence.

I met President Kersti Kaljulaid and Prime Minister Kaja Kallas – both of whom talked eloquently and candidly about the country's limitations and strengths, with the latter born out of the former. Central to the country's identity is being an advanced digital state, which was built following their post-Soviet restoration of independence exactly 30 years ago today.

In the UK, there is a gap in the market of political ideas for politicians and parties to adopt the sort of techno-progressive policies that have come to define Estonia. Technological innovation offers the best prospect of meeting the progressive goals that all major British political parties now claim to want – but increasingly seem at a loss to achieve.

In healthcare, technology could reduce the substandard care poorer patients receive by putting them on a par with richer, more demanding patients. While in education, each student could receive more personalised learning (alongside traditional human-led support), as the late, great Clayton M. Christensen predicted in his 2008 book Disrupting Class, narrowing the difference between state and non-state schooling.

The UK party that delivers pre-filled out tax returns so they can be completed in a few clicks would get votes; the party that automatically directs welfare, training and job opportunities to the unemployed would get votes; the party that doesn’t require patients to fill in gaps in their medical history when talking to their doctor would get votes; and, the party that saves the UK equivalent of the 1,345 years of entrepreneurs’ time Estonia escapes in bureaucracy would get votes.

Estonia is also welcoming start-ups – including those from abroad – into the heart of government through Accelerate Estonia, “a test bed for moonshot ideas”. It’s different to the UK's Industrial Strategy Challenge Fund (which entrepreneurs may also want to check out), with successful applicants getting more active support from the public sector. There are currently challenges open in green entrepreneurship, mental health and wild card ideas.

I’ve written before about the digital future the government should be delivering. Much of the failure to emulate Estonia is down to a lack of political will. That’s one reason why we’re in the very early stages of planning a project to link up businesses and governments from the two countries. The other reason is that the UK is also an incredibly successful country for entrepreneurship – after all, 319 of the 1,000 most valuable tech start-ups created since 2000 were British, compared to 149 for Germany and 143 for France – so while we have a lot to learn about their digital state, there is a thing or two that we can teach them in return.

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Seeing is Believing

Last week, I pointed readers in the direction of an article from Matt Clancy which considered the contagious nature of entrepreneurship. Today, I can’t resist directing you towards his excellent follow up article, which should be essential reading for anyone who wants to help make the UK more entrepreneurial.

Clancy argues two things. First, that entrepreneurship transmits from peer-to-peer more readily when peers are similar, and second, that the positive impact of being around entrepreneurs falls off quickly once that idea has been planted.

“You have to see it to be it”, or a variation of the quote, has been attributed to many people, including Billie Jean King when making the case for getting girls to participate in sports. But is it true? When it comes to entrepreneurship, the answer is yes.

We cited some of the same evidence in our 2018 Mentoring Matters report as part of our Female Founders Forum project with Barclays, but Clancy’s summary confirms it. He notes that “adopted sons are more likely to become entrepreneurs if either parent is an entrepreneur, but the effect of fathers on sons is generally more than twice as strong as the effect of mothers. For daughters, the effect is even stronger. It turns out adopted daughters are more likely to become entrepreneurs only if their mother is an entrepreneur – adopted daughters raised by entrepreneurial fathers are no more likely to become entrepreneurs than those raised by non-entrepreneurial fathers.”

It’s not just gender. Clancy’s article cites evidence that an entrepreneur’s employees are more likely to be inspired to follow in their footsteps if they share characteristics like being of a similar age, having similar educational backgrounds, or being born in the same place.

But this doesn't have an effect when another significant intervention has already taken place. In other words, if a mother has already inspired their daughter to become an entrepreneur, it doesn’t matter if they then go on to be an employee of a female founder. They’ve already got the entrepreneurial bug.

This suggests that when we aim to inspire people to start businesses – whether that’s through government schemes, the education system, charities, or private sector initiatives – focusing on those who have never had any previous exposure to entrepreneurship should yield the best results (although this would be worth running as a randomised to control trial, to add to the weight of evidence).

And it seems that the person making the intervention matters too. Once again, the impact of competing shared and unshared characteristics would make for a great experiment, but until then we should be guided by the folk wisdom and evidence that people are inspired by people similar to them.

A lot of these interventions rely on entrepreneurs giving up their time – for example, by going into schools, colleges or universities. But not everyone has the same time on their hands, especially if they’re busy breaking barriers. So if it turns out, for example, that meeting an entrepreneur from the same ethnic background is very significant for young people being inspired (again, we could do with more evidence around this), then it may well be worth compensating entrepreneurs for their time – especially in cases where we may want more founders from a demographic that is under-represented. By virtue of there still being so few of them, they will be harder to find.

One final thought. We also need to think about the quality of the businesses that come out of these interventions. We don’t want people being inspired to start businesses that are destined to fail. While failure isn’t always and everywhere a bad thing for individuals and society, interventions that inspire but don’t adequately equip entrepreneurs to succeed could be doing more harm than good.

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D:Ream On

With a seemingly growing number of inspiring innovations on the cusp of revolutionising our world, politicians could, perhaps, be forgiven for focusing their policy interventions exclusively on high-tech sectors. However, a new report from the Institute for Government’s Giles Wilkes suggests that this would be a mistake.

In his analysis of the UK’s flagging productivity since the 2008 financial crisis, the former adviser to Theresa May and Vince Cable argues that no one sector is to blame for the decline. As Wilkes explains in this handy Tweet thread, if we had kept to the trend of 1998-2008 GDP growth, the economy in 2018 would have been £300bn+ larger. He concludes that entrepreneurs across all sectors need the right policies to thrive if in the next decade we will once again feel like things can only get better.

Politicians reading his report may need to extend their thinking around innovation to sectors not always associated with it, such as hospitality and retail. Wilkes recommends a whole gamut of different policy levers to pull, from upgrading management practices, stimulating the adoption of technology, making sure the population is skilled, improving infrastructure, and ensuring businesses have ready access to finance. Of course, this isn’t just a role for the government, and they are already doing a lot of this, but we and other organisations aren’t short of good ideas of how these things can be done better.

Wilkes finds that many so-called lower-value sectors have eked out impressive productivity gains over recent years, and makes a convincing case that policy makers shouldn’t regard high-employment sectors as fundamentally a drag on growth. Off the back of this report, entrepreneurs in less sexy sectors should take the opportunity to be even more vocal about what they need to help them grow. Along these lines, it’s important that organisations like ours resist the temptation to just focus on high value sectors in our efforts to impact policy.

Decent exposure
In a compelling article, Matt Clancy tears through the academic literature on the impact that exposure to entrepreneurs has on encouraging entrepreneurship.

Study after study shows a positive link. Whether it’s scientists collaborating with peers who have a history of commercialisation, people working with former entrepreneurs, or even living in entrepreneurial neighborhoods, the vast majority of evidence suggests that entrepreneurship is like a bug, jumping from person to person.

Clancy presents evidence to show that this looks like a causal relationship – it’s not just entrepreneurs being drawn to each other. But he also cites an important paper that contradicts the other papers’ findings. Josh Lerner and Ulrike Malmendier used a natural experiment from Harvard Business School (HBS) to show that exposure to experienced and successful former entrepreneurs is doing the opposite, putting peers off starting businesses. Clancy thinks, however, that they might be preventing inexperienced students from pursuing business ideas that would be doomed to fail. After all, about half of HBS graduates do still eventually go on to start one or more businesses in the first 15 years after graduating.

It seems pretty clear that the passion for entrepreneurship can be shared, though we should also care about the message and therefore the messenger. Clancy, who last year wrote our report on Remote Work, will follow up on this in his next article. You can subscribe to his excellent Substack here so you don’t miss out.

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Exhibiting Greatness

Like most organisations, we’re trepidatiously planning in-person events for later in the year. Once again we’ll launch reports on the terraces of the House of Commons and Lords, traverse the UK to host roundtables and panel events – seeing many of you after over a year, and hopefully meeting many of you for the first time.

However, the event I most want to attend isn’t happening (yet).

So far it’s been best articulated by our head of innovation research Dr Anton Howes. It’s modelled on the Great Exhibition of 1851 and he’s written about it in our recent essay collection, which was reproduced as an article for CapX.

After opening on 1 May 1851, the Great Exhibition attracted six million visitors over five and a half months. According to one newspaper at the time, the crowd was “a restless sea of human beings, agitated by the strong impulses of curiosity.” Centred around the prefabricated majesty of Sir Joseph Paxton’s Crystal Palace, it was an incredible success. After a fire in 1936, only scattered ruins remain of the original Palace, but its legacy in spurring and inspiring innovation endures.

A century after the Great Exhibition, the government tried to replicate its success, but fell short. According Anton, the organisers of the 1951 Festival of Britain “did things entirely back-to-front”, and he suspects the organisers of next year’s Festival UK* 2022 are making the same mistakes.

So what was so special about the Great Exhibition?

First and foremost, it wasn’t just about celebrating greatness – it was about improving things. The organisers wanted to encourage invention, introduce consumers to the latest technology, and reduce trade barriers. Also, it was entirely self-funded. The government backed and supported it through a cross-party Royal Commission to oversee the team that did the day-to-day running of things, but a majority of the money was raised through a public subscription.

For those wondering whether a modern-day crowdfunding campaign would work, have a read of what Anton has in mind:

“Visitors would actually get to see drone deliveries in action, take rides in a driverless car, experience the latest in virtual reality technology, play with prototype augmented reality devices, see organ tissue and metals and electronics being 3D-printed, and industrial manufacturing robots in action. They would have a taste of lab-grown meat at the food stalls, meet cloned animals brought back from extinction, perform feats of extraordinary strength wearing the exoskeletons used in factories, fly in a jet-suit, and listen to panel interviews with people who have experienced the latest in medical advancement. Perhaps a commercial space launch using the latest technology might be timed to coincide with the event, to be livestreamed on a big screen for all visitors to see. Visitors would naturally meet the inventors and scientists and engineers who developed it all, too.”

Attracted by the pioneering inventions of the day, people across the country returned again and again to the Great Exhibition. With virtual reality, rockets and literally being able to fly we have the technologies for an even greater exhibition. If Anton gets his way, prepare, once more, to be agitated by the strong impulses of curiosity!

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Hype Potential

Yesterday the Government released its long-awaited Innovation Strategy. It makes the right noises on issues like science funding and regulation, though is so far light on detail. One policy announcement, however, really stands out: immigration reform.

As my colleague Sam Dumitriu tweeted, the Government has gone further than few expected, with the creation of the High Potential Individual visa route.

The High Potential Route is (potentially) truly revolutionary. It will mean that people who’ve graduated from a top global university will be able to come into the UK without the requirement of a job offer. This would be an open door to the sorts of entrepreneurs identified in our influential Job Creators report, who when we last looked were behind half of the UK’s fastest-growing startups.

The scale-up route is also worth mentioning. It will allow scaleups – that is, companies that can demonstrate an annual average revenue or employment growth rate over a three-year period greater than 20%, and a minimum of 10 employees at the start of the three-year period – to get a fast-track verification process for their employees.

The Strategy also promises to revitalise the Innovator route, by simplifying and streamlining the business eligibility criteria; fast-tracking applications whose business ideas are particularly advanced; scrapping the requirement to have at least £50,000 in investment funds; and removing the restriction on doing work outside of the applicant’s primary business.

While people will tell you otherwise, Brexit was fought and partially won over immigration concerns. That seems incredible now. And while some might argue that the High Potential Route won’t offset the loss of free movement, a pretty strong argument can be made that they’re getting close. (Incidentally, we have a few other ideas in our recent essay collection with the Tony Blair Institute.)

More broadly, the Strategy aims to support businesses that want to innovate; attract the world’s best innovation talent to the UK; ensure innovation institutions serve the needs of businesses and places across the UK to spread prosperity; and stimulate innovation to tackle the major challenges faced by the UK and increase the our capabilities in strategic technologies. This reflects our own policy priorities and way of thinking.

But while the framing and analysis of the challenge is first-rate, we won’t know the ‘Innovation Missions’ – which aim “to set clear direction, urgency and pace on the issues confronting the UK that we want to tackle with the private sector in the coming years” until a new National Science and Technology Council has been created.

And while we now know the seven pillars that government is going to focus upon – Advanced Materials and Manufacturing; AI, Digital and Advanced Computing; Bioinformatics and Genomics; Engineering Biology; Electronics, Photonics and Quantum; Energy and Environment Technologies; and Robotics and Smart Machines – there is still a lot to be worked out.

Still, we can't fault the immigration announcements. At least, not yet.

Page the Treasury
After John Spindler of Capital Enterprise raised the problem months ago, we’ve been keeping an eye on early-stage funding. We’re not the only ones. SFC Capital and Beauhurst have just released a new report showing that the number of first-time funding rounds into UK seed-stage startups declined for a second consecutive year. There were 1,427 first-time seed-stage deals completed in 2020, down 17% from 2019’s 1,715, and a 36% drop from the 2,055 completed in 2018.

Commenting on the decline in City AM, Stephen Page said: “some of this decline can be attributed to the impact of Covid-19 in 2020, from dented confidence to changes to the investment landscape and founders’ priorities caused by the Government’s introduction of the Future Fund and other financial relief programmes. But only some.”

Page calls on the Government to focus on SEIS reform, increasing the amount of public money allocated to seed-stage funds, and simplifying bureaucracy for early-stage fund managers. 

Over the years we’ve undertaken a lot of work supporting SEIS and EIS and reforms to the processes. We've also been very supportive of the work of the ​​EIS Association. If you’re interested in getting involved in this policy area, we have a virtual roundtable with Stephen Page in September as part of our Something Ventured programme with FieldHouse Associates at which we will discuss this. Just drop us an email with a line or two about why you want to attend.

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What proposed tech merger rules mean for startups

The government has opened a consultation on new plans to regulate Big Tech. But the proposals it is considering may end up hurting British startups and entrepreneurs unintentionally.

Under the plans being contemplated, certain companies would be deemed by the Competition and Markets Authority (the CMA) to have “strategic market status” in some activity – like Google in Search and digital advertising, or Facebook in social networking and social media advertising. As well as measures to regulate how companies like Google and Facebook run some of their services, and powers to impose Open Banking-like data sharing on them, the government is looking at plans to make it significantly harder for Big Tech companies to acquire other companies.

These companies would face a new and much stricter mergers and acquisitions regime, in which any deal thought to create a “realistic prospect” of reducing competition would be blocked. This would apply to any deal involving the company at all, even in markets and activities in which they have not been deemed to have “strategic market status”.

What this “realistic prospect” test means in practice is ambiguous. It has been interpreted as meaning a deal that has a “greater than fanciful, but below 50%” prospect of reducing competition, which doesn’t really clear things up either, though “greater than fanciful” indicates a very low threshold. This contrasts with the current threshold, in which only deals the CMA judges to have a greater than 50% chance of reducing competition are blocked. And it implies that many deals that could, in fact, increase competition would be blocked too, because of the “greater than fanciful” chance that they would not.

This could lead to many deals being blocked, and more than the government seems to think. It has argued that since the current merger review process already involves a “realistic prospect” test, for deciding which mergers to subject to in-depth review, we can use that as a proxy to judge how many deals would be blocked. But the CMA has limited resources and, in referring deals to additional scrutiny, is likely not to prioritize deals that do have a “greater than fanciful” chance of reducing competition, but probably still a lot less than 50%. Under the new proposals, without that 50% test, it could be far more trigger-happy in its interpretation of “greater than fanciful”.

This kind of regime could make life tougher for British startups. Acquisitions were the cause of 90% of startup exits in the United States between 2008–18, and half of US startup founders surveyed said that acquisition was a long-term goal for them. Over the past five years, Google, Amazon, Microsoft, Facebook and Apple have bought over three hundred smaller companies between them, including British startups like Shazam and Dataform.

Making these kinds of deals more difficult – or, indeed, impossible – could make it harder for entrepreneurs to exit businesses they have built, deterring them from setting up in the first place or preventing them from starting new ones. It could also make it more difficult to access investment, since venture capital investment in startups appears to be sensitive to takeover rules. Some founders may decide that life is easier in jurisdictions like the United States and set up there instead, hurting the overall startup ecosystem in the UK.

These rules may end up reaching further than just deals involving Apple, Google, Facebook, Microsoft and Amazon, too. “Strategic market status” as described by the government is a broad concept, and could end up applying to companies like Uber, Deliveroo, Visa and Mastercard, and big, gatekeeper-like firms in other markets, especially as more and more of the economy becomes digitalised. That means that the knock-on effects for entrepreneurs of these proposals could be broader than many realise, if they find a would-be buyer unexpectedly deemed to also have “strategic market status”.

There is still some prospect for avoiding these changes. Unlike most of the other proposals being consulted on, the government has been explicit that it is more open-minded about proposals for mergers. And, so far, it does not seem to have heard much from entrepreneurs themselves about whether a stricter mergers regime would be good or bad for their businesses and the wider startup ecosystem. It is easy – and usually accurate – to be cynical about government consultations as a box-ticking exercise. But in this case, there may be some possibility of avoiding the worst outcome on the table. You can read and respond to the consultation here.

Way of the Future

Today we’ve released a collection of essays with the Tony Blair Institute, setting out ideas for how to meet the ambition of making the UK a ‘science superpower’. It includes a preface from Tony Blair and a foreword from Stripe co-founder Patrick Collison.

Be warned! This is an anti-cheems mindset report. But I don’t think it’s unrealistically optimistic. We’re aiming to be solutionists. As Jason Crawford writes this week for MIT Technology Review: “Solutionists may seem like optimists because solutionism is fundamentally positive. It advocates vigorously advancing against problems, neither retreating nor surrendering.”  The alternatives – taking a consistently optimistic or pessimistic stance are common, but unhelpful for actually making the world a better place.

Rather than read a summary of ‘The Way of the Future: Supercharging UK Science and Innovation’, I would prefer you read one of the essays. They aren’t too long. Just click on whatever interests you most from the list below.

• Preface: Tony Blair

• Foreword: Patrick Collison, Co-founder, Stripe

• Executive Summary

• A Digital State: Kirsty Innes and I highlight the benefits for individuals and entrepreneurs of moving to a truly digital state.

• The UK Research Cloud: Seb Krier explains why treating cloud compute power as a new form of digital infrastructure could unlock innovation, reduce bias, and promote diversity in AI research.

• Procuring Innovation: Chris Haley explains how effective public procurement can improve public services, reduce costs, and drive innovation in the wider economy.

• Embracing Experimentation: José Luis Ricón Fernández de la Puente and Joao Pedro De Magalhaes make the case for adopting a more experimental approach to funding research.

• Omics UK: Saloni Dattani and Henry Fingerhut explore how a multi-omic research centre would help accelerate targeted treatment design.

• The Atlas Institute: Henry Fingerhut and Benedict Macon-Cooney argue that we need a roadmap for scientific discovery to help us explore the dark corners of knowledge.

• Building Talent Density: Matt Clifford MBE argues that talent density is key to entrepreneurial success.

• Upstream Innovation: Anton Howes calls for the return of the great exhibition and a new order of chivalry to raise the visibility and status of innovation.

• Operation Paperclip 2.0: Anton Howes, Sam Dumitriu and I argue we should proactively pave the way for the globe’s brightest to come to the UK.

• Testbed Nation: Anton Howes and Sam Dumitriu make the case for why Britain should become a nation of early adopters.

You can also read a Twitter thread here, read Sam Dumitriu's City AM article here, read Sam, Anton Howes and me in CapX on why Britain should actively recruit foreign talent here, and read write-ups of the report on Yahoo Finance here, the Express here and Business Leader here.

As always, sharing the report via email or social media would be greatly appreciated. And if you want to get early notification of our reports, you should sign up as a Member (for free) here.

This was a really fun one for us all to research, write and publish. As I’ve written here in the past, the Tony Blair Institute is really impressing me, so don’t be surprised to see future collaborations.

Patronising, Arrogant and Rude

Culture is king. And like all things monarchical, it’s inherited from previous generations. So while we don’t get to pick how entrepreneurial the culture that we’re born into is, we do have the power to shape it for the future.

As academics like Deirdre McCloskey argue, the Industrial Revolution saw a shift in culture where the value of business, innovation, and entrepreneurship were recognised. But while we have a great legacy, I think we have room for improvement.

Take the media. It’s definitely not adhering to the Peter Parker principle, with their latest programme claiming to reveal what it’s like to be an entrepreneur. Unicorn Hunters, which incongruously features former Speaker John Bercow as a judge, sounds like the epitome of bad culture.

According to the Executive Producer: "Unicorn Hunters is a one-of-a-kind show, providing millions of people with transparent access to select pre-IPO investment opportunities." It sounds dreadful: “This new addictive global show creates a new genre, known as ‘enrichtainment’, seamlessly combining entertainment with the opportunity to build wealth.”

It will join The Apprentice, which, in the words of Matt Clifford “has skewed people’s perception of what starting a business is about” and Dragons’ Den. When surveyed by YouGov for the Center for Entrepreneurs, business leaders called out both for showing an unrealistic portrayal of the startup process, with words like “condescending”, “patronising”, “arrogant” and “rude” used to describe the behaviour of the Dragons in the Den.

Is it any wonder that we recently found that almost two-thirds (62%) of people from deprived backgrounds are doubtful they could start a business, despite having a strong business idea?

On the topic of an entrepreneurial culture, we have just arranged an event with Lord Young of Graffham. Few in government can claim to have had a bigger impact on UK entrepreneurship. See below for more details.

One Chance
What is the most impactful policy initiative or idea that the government could implement, either alone or in partnership with others, that would boost start-ups in the UK?

This isn’t a hypothetical question and it’s not my question. It’s from officials in BEIS who have asked me to ask you. I’ll share every response with them and a few startups will be invited to a roundtable they’re having on this topic next week (although you don’t need to be running a startup, or even be a business owner to respond).

Just drop me an email with your answer. I can’t promise that they will do what you ask, but I can promise that the right people will be reading it.

Cool for Evidence
The new format for the APPG for Entrepreneurship is proving successful. We’ve moved away from weighty tomes, replacing them with virtual events and pithy briefing papers. This is allowing it to cover a lot more ground.

Each theme includes a scoping webinar, Call for Evidence, briefing paper and launch webinar. We now have two calls for evidence open for entrepreneurs and experts to respond to on Levelling Up and the Sharing Economy, and we will soon have another on Space Startups and Scaleups (after this event).

You can respond to the Levelling Up questions here, and the Sharing Economy questions here. Please don’t be daunted by the number of questions. If you only have something to say about one or two of the parts that will be absolutely fine. The final briefing paper will be brief (hence the name briefing paper), so we are looking for quality over quantity.

New rules on pensions

The government has announced a loosening of the pension charge cap which will be implemented in October 2021. 

Pension schemes will be allowed to smooth their performance fees over five years. This means a scheme will be able to invest in longer term assets and will give funds a bit more flexibility. This suits investment in private equity which will often have years where returns are concentrated, for example, if several startups from an investor’s portfolio exit in lucrative IPOs in a short space of time. If that were to happen under the new rules, a pension fund would be able to exceed the cap in one year. 

However Mark Fawcett, the chief investment officer at Nest, says that this modest liberalisation is insufficient to persuade DC schemes to invest and told  the Financial Times that:

The total level of fees levied by most private market funds will remain too high for many DC pension schemes to access [them].

This is an important topic and we have written about it before. Liberalising pension schemes could transform the UK venture capital market and would thus greatly increase the amount of money going to entrepreneurs. In the UK pension funds only contribute 12% of the funding in the VC market, by contrast, in the US they contribute 65%.  

TIGRR, the Government’s taskforce on innovation, growth and regulatory reform,  recommended reform arguing: 

With sensible changes to pensions and insurance regulation that preserve the highest standards of consumer protection and uphold financial stability, the Government could unlock over £100bn of investment in small and scaling-up businesses across the UK, green projects, infrastructure and a range of other areas.

The UK’s total pension market value reached £2.2 trillion at the end of 2019, of which DC schemes made up £146 billion thanks to the introduction of auto-enrolment. In 2028 the UK’s DC pension pot is expected to reach £1 trillion, if the UK is able to unlock just 5% of this figure by then, that is a staggering £50 billion in additional investment. The charge cap (0.75%) on the fees and administrative expenses that can be borne by savers is a sensible investor protection measure in principle, but in practice has driven many schemes towards passive investment to keep the charges well within the cap. UK savers therefore have limited exposure to high-performing ‘illiquid’ assets, including private equity and venture capital that tend to outperform public markets.

The largest obstacle for DC schemes accessing private equity and venture capital (PE/VC) funds is the calculation method for the 0.75% charge cap. This currently treats profit-sharing models such as carried interest as a performance fee and includes them in the cap (unlike other countries such as Israel). Whilst we understand the rationale for the cap, it is also a key barrier. It does not accommodate long-term incentive models such as carried interest that benefit both investors’ returns and the growth trajectory of the companies the industry invests in.

We have called for the cap to be lifted before. In our report Unlocking Growth, Sam Dumitriu says

“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.”

There are reasons to keep fees low. Pensions are difficult for people to understand, and often they will just accept whichever pension their employer enrolls them in. We don’t want people to be taken advantage of by having their retirement in the hands of people who charge unjustified high fees.

As part of these reforms, the Government is also going to implement new regulations which will challenge small defined contribution pension schemes to demonstrate that they offer value for their members. There are about 1,800 pension schemes which will come under this scope, with less than £100m in assets, and it will largely impact employers who run their own pension instead of choosing to join established pension funds.

If these measures manage to ensure that pension schemes are providing value for members, then that could provide the government and the people investing with the security they need to loosen the charge cap further.

One way to protect people from excessive fees would be to only increase the cap on carried interest. This means managed pension funds would still be restricted by the 0.75% charge as a management fee, but then they could charge a more standard 20% on the extra money they make.

That would lead to more money for private equity, intangible assets, and venture capital, which would mean more money for entrepreneurs, and a thriving startup ecosystem. For young people just starting to contribute to their pensions now, it may even mean about 7-12% more savings in their pension by the time they retire, as their money is put into more lucrative investments.

It’s a tough problem to crack but one which could help to make the UK a richer and more innovative place. Let’s hope the government can get this right. 

Female Founders Forum: Building a Team You Can Trust

On Wednesday we hosted a Female Founders Forum webinar on How to Build a Team You Can Trust. We discussed hiring, how to support your staff once you have them and how to create a positive and productive company culture.

Our panel included Vanessa Tierney, the founder of Abodoo and director of Yonderdesk.com; Karina Robinson, the co-director of The Inclusion Initiative at the LSE and the CEO of Robinson Hambro; and Louisa Chapple is the HR Director for Barclays Execution Services. These are their top tips.

1. Gather data. This is key for larger companies where you cannot speak to everyone. Barclays sends out a quarterly survey with the same questions in it, so they can track how their initiatives are impacting staff and work out what needs to be improved to enhance employee wellbeing.

2. Make sure you have a mission. Most people want to do something meaningful. If your company has a social purpose and a sense that it is making the world a better place, then staff will be more invested in what you do.

3. Overcome group-think. The most senior person should not be the first to speak in a meeting, because people will be apprehensive about disagreeing with them. Instead, when chairing a meeting, ask the most junior person what they think first.

4. Hire people with cognitive diversity. Good teams are more than the sum of their parts. People working together who think differently can create much better outcomes. One way of finding someone who thinks differently to the rest of your team is to hire people who used to work outside of your industry, but who have the right transferable skills.

5. Build an inclusive culture. This is not just because it is the right thing to do, but it is also helpful for your business so that you can understand your customers better.

6. Encourage people to speak up. People will assume that it is extraverts who will struggle the most with working from home, but Vanessa warned that you will not know if introverts are struggling because they may not speak up without being prompted.

7. Make sure quiet people are being offered opportunities. It is often the case that the people who are the loudest and the most proactive are given the tasks which lead to promotion. When giving out tasks, see if there is a more equitable way to distribute them to give more people a chance to prove themselves.

8. Offer people options. Companies like Google have announced that they want people to return to the office. Karina and Vanessa both believe that this offers a great opportunity to start ups. If you feel confident allowing your employees to work from home, then this could be a chance to hire someone from one of these big companies. You may not be able to offer them the same salary, but you can offer them more flexibility.

9. Support employee wellbeing. Barclays has a healthy habits campaign to make sure that their colleagues are taking care of themselves while working from home. They encourage them to exercise and spend quality time with their families.

10. Create ambassadors. If someone has a good experience working at your company, including a good experience leaving it, then you will have an ambassador for life.

11. Find a mentor. Karina says that the secret is not to ask someone “will you be my mentor” because they will say that they don’t have time. Instead, after choosing someone who you want to mentor you, ask them if they will meet you in five months and then ask them for another meeting five months after that. 

Pot Luck

The Treasury is planning to change the rules to allow pension pots worth billions of pounds to be invested in start-ups, infrastructure and green energy projects.

If successful it would allow a slice of the UK's £2.2trn pension funds to be invested through the Long Term Asset Fund (LTAF), which was announced in November, with the LTAF becoming a “default” investment option for savers when automatically enrolled.

We’ve long called for this sort of change, most explicitly in our influential Startup Manifesto which we produced with our good friends at Coadec. (We really need to go back through the list of the 21 policies we jointly called for to see which haven’t been adopted yet by the government – many have.)

In another piece of good news for funding, the latest Office of Tax Simplification (OTS) report has some recommendations to improve the administration of SEIS and EIS. As Sam Dumitriu writes on our blog, we advocated a range of reforms in our Unlocking Growth report with the Enterprise Trust to help these vital reliefs function better.

Among other things, the OTS recommends reducing the information requirements for SEIS raises, the requirement for share issuances the day funds are received, and correcting something as simple (and no doubt infuriating) as the fact that the long application forms can't be saved partway through.

While these sorts of processes and regulations might seem immutable, it’s always worth letting us and other business organisations know when these sorts of issues arise, as these things can be changed – though admittedly not always as quickly as entrepreneurs would like or deserve.

House Grown
Like most businesses, we’ve managed to grow with a lot of help from our friends. Whether that’s our Sponsors, Patrons, Advisers, Supporters or Research Advisers, a lot of people have put in a lot of time and a meaningful amount of money to make sure we're able to support entrepreneurs. Like 99% of entrepreneurship, we don’t survive by tooth and claw but through cooperation.

We are not for want of offers of help – a day rarely goes by when I don’t get an offer to partner on something or the other – but I’ve learned over the years to only agree when there really is an alignment of values.

One partnership that’s going from strength to strength is with FieldHouse Associates. Founder Cordelia Meacher is one of our Advisers and because of their extensive VC connections, we’re running a year-long series of virtual roundtable interviews whereby we speak with leading VCs via Zoom about key issues around investment. By “we”, I mean “you”, with entrepreneurs joining us to ask questions.

Next week we have Sharon Vosmek, CEO of Astia, which has to-date has invested over $27 million directly in female-led companies. In August, we will have Michaël Niddam, co-founder and Managing Director of Kamet Ventures to talk about the latest innovations, particularly in healthcare. And in September we will have Stephen Page, founder and CEO of SFC Capital to discuss the importance of supporting startup ecosystems.

Kicking Off
BEIS has got in touch to ask us to promote a couple of schemes regular readers will already know about, but might appreciate being reminded of.

Help to Grow is an executive training programme delivered by some of the UK’s leading business schools, providing senior leaders at SMEs across the country with support, training and mentoring. You can find out more here and watch a discussion with Business Secretary Kwasi Kwarteng covering it here, which includes three Members of our Female Founders Forum: Debbie Wosskow OBE, Marta Krupinska and Laura Tenison MBE. We’ve been broadly supportive of Help to Grow – particularly as it chimes with the findings of our Management Matters report.

BEIS also wants to make sure you know about the Kickstart scheme, whereby the government funds new jobs for 16-24 year olds on Universal Credit. After loads of people (including us) kicked off about it, you no longer need a minimum of 30 job placements to apply directly for a grant. Businesses may want to read DWP's new employer prospectus or attend one of their employer webinars.

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Simplifying EIS and SEIS

After their last report, there are few phrases entrepreneurs dread more than “Office of Tax Simplification release new report on capital gains tax.” But I suspect entrepreneurs may find a lot to agree with in the OTS’s latest report into simplifying practical, technical and administrative issues relating to capital gains tax.

Of particular interest are the recommendations to improve the administration of SEIS and EIS. It is an issue we have touched upon before. Advanced Assurance, a prerequisite for investment, is difficult to obtain from HMRC. Without professional advice, startups can get caught out by honest mistakes. Worse still, delays in the process can cause deals to fall through.

In our report, Unlocking Growth, we advocated a range of reforms to ensure the vital reliefs function properly.

The long waits could be better tolerated by SMEs if there was clear communication from HMRC on the application’s progress. Furthermore, HMRC should provide SMEs with clear feedback if an application for Advanced Assurance is rejected.

A number of measures could reduce delays and ensure more investment flows to innovative businesses. First, HMRC should work with investor organisations to produce pre-approved standard Articles of Association and Shareholders’ Agreements. Second, businesses using the pre-approved documentation could be fast-tracked. Third, if there was a mechanism to make corrections for ‘honest mistakes’ post-investment, it may enable lower-risk applicants to outsource the process to accredited advisors without fearing loss of relief due to filing paperwork incorrectly.

SEIS and EIS are significant tax breaks, so it is right that there are protections to prevent abuse and avoidance. But as the OTS quote one tax adviser, the rules can function like “elephant traps that seem more designed to help generate fees for advisers than to block misuse”.

There are few key changes the OTS proposes to make it easier for genuine entrepreneurs to access the relief.

First, under the status quo the application process is cumbersome and difficult to use. Some of the problems would be simple to fix. For instance, the OTS notes: “The application forms themselves are difficult to complete online as, although they can be completed on screen, there is no scope for saving partly completed forms.”

Less straightforward to fix, but clearly a problem is the fact that SEIS and EIS have similar information requirements, despite the former scheme being for businesses at an early-stage who are less able to afford professional advice.

Second, some modern commercial practices fall foul of the EIS regulations. We recently came across one innovative sharing economy start-up which had created a tech platform for parents to share and borrow children’s clothing. They were unable to access the relief as their business was considered to be a business that leased assets and therefore ‘low-risk’. However, the OTS is lighter on solutions here, noting:

“There is, however, a tension between what may appear to be restrictive requirements and the need to ensure that enterprise investment schemes are not being exploited”.

Third, a more tangible and easier to solve problem is excessive requirement for share issuances the day funds are received. The OTS point out that:

“shares in companies that qualify for enterprise investment schemes have to be issued when, or shortly after, any funds are received. If payment for the shares is even one day late, the whole investment is ineligible for tax relief.”

This can wreck deals and deter people from using the schemes – perhaps simply because of a timing delay within the banking system which is beyond investors’ control.” To resolve this problem, the report suggests a short grace period for start-ups.

Fourth, there are also problems with how the income tax and capital gains tax relief elements of EIS and SEIS function. Under the status quo, investors cannot utilise the scheme if they are unable to claim an income tax relief. However, this could happen because an investor has made a large income tax loss and has a negative income for the year. This is a problem because EIS and SEIS also provide capital gains tax relief.

To correct for this, the OTS suggest:

“The government ... explore whether Capital Gains Tax relief should still be accessible by the investor even when Income Tax relief has not been claimed. This would smooth out an odd outcome for taxpayers who have made Income Tax losses – which could be a particular issue in the current COVID-19 economic situation.” 

Some of the changes proposed may be administratively difficult, but they would all help a tax relief that since 1994 has helped to raise over £22bn worth of investment into high growth businesses to help more startups. Let’s hope HM Treasury takes them seriously.