Finance for SMEs: isn’t demand part of the problem?

May 3, 2013 by · Leave a Comment
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How challenging is it for businesses to get their hands on finance?

The reason I ask this question is because I have nagging doubts about the recurring media headlines reporting that large numbers of SMEs are being denied the necessary credit to expand, and that the only way to create employment and return to economic prosperity is to force banks to ‘get lending again’.

No doubt the government subscribes to this view. It’s why only last week they extended the Funding for Lending scheme to 2015, and revised its terms to include more generous incentives for banks to dish out loans to their business customers. And on the face of it moves such as these are understandable. Research released this week by the Business Finance Taskforce, for instance, indicate that only 45 per cent of small firms received the funding they asked for from banks. Other surveys say much the same thing.

So why the scepticism? It’s not that I don’t think firms couldn’t benefit from finance – many no doubt would. Rather it’s that large numbers of businesses don’t have the confidence and ambition to expand their operations. In other words, the problem isn’t so much supply as it is demand. As the Barclays economist, Simon Hayes, said in response to the FLS expansion, “confidence is the elusive factor.”

Yet it’s not just cautiousness among CEOs and entrepreneurs that has cut back the demand for finance. Many of the young entrepreneurs we interviewed as part of our Disrupt Inc. research told us of how they wanted to grow their business but were reticent about relying on external finance, in part because they thought they could achieve their ambitions slowly but surely on minimum costs. Savings were often the preferable source of income. The same reasoning could be holding more experienced entrepreneurs back from applying for finance.

Finally, isn’t one of the biggest problems simply a lack of good ideas? When we hear stories of businesses being rejected by bank managers there can be an implicit assumption that the entrepreneur in question was entitled to the loan. But what if the business idea didn’t have any legs? It’s sounds obvious, but sometimes we have to remind ourselves that the supply of finance is dependent upon an equally good supply of feasible business propositions that deserve access to it.

Having interacted with lots of managers who run grant and equity programmes, one of the key challenges facing them is a set of poor, half-baked ideas. Indeed, it’s one of the biggest obstacles that will face the Big Society Bank. What we don’t want to see – but what is already happening in the third sector – is funding bodies giving money to ventures that have no chance of succeeding. That is neither good for the entrepreneur or the institution dishing out the capital.

So while we rightly lament cases where growing SMEs genuinely can’t get access to the funds needed to grow, create jobs and compete on the world stage, we should try and bear in mind that not everyone wants more capital, nor be in a position to use it effectively.

Support for young entrepreneurs too often ‘old school’ argues new RSA/RBS report

March 20, 2013 by · Leave a Comment
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Last week the RSA and RBS jointly launched a new report, Disrupt Inc., which looks at the changing behaviours of young entrepreneurs. Visit our Enterprise page to view the report and find out more.

With the economy stagnating, living standards falling and levels of unemployment stubbornly high in some areas, it is little wonder that building an ‘aspiration nation’ has become one of the central underpinnings of this government’s policy agenda. As David Cameron put it at the 2012 Conservative Party conference, “Aspiration is the engine of progress. Countries rise when they allow their people to rise. In this world where brains matter more, where technologies shape our lives, where no-one is owed a living … the most powerful natural resource we have is our people.”

This ‘exhortation for aspiration’ has been matched by practical steps to help more people start up and run their own business. A significant amount of enterprise support has been directed at young people in particular, around 1 million of whom are still without work. Among other initiatives, the government and its partners have helped to establish the StartUp Britain and Business in You campaigns, the StartUp Loans scheme, the Enterprise Finance Guarantee scheme and the MentorsMe programme. We are also witnessing the growth of many non-state enterprise support initiatives, particularly within universities.

The question is, are these initiatives actually working? At first glance, it seems that perhaps they are. The number of young people in the early stages of planning a venture has increased sharply over the past couple of years. The graph below, put together for an RBS report by the Professors Mark Hart and Jonathan Levie, show that early-stage entrepreneurial activity among young people is at its highest level in more than 10 years. It is now almost equal to the rate among the older generation.

Look more closely, however, and we can see that there are at least 2 key issues still blighting the landscape of young enterprise in the UK. The first is that there remains a large gap between the number of young people who say they wish to start a business and the number who are actually doing so. While 10 per cent say they wish to start their own venture, only 3 per cent are making the leap. The second issue is that many of those who do create a business cease trading not long afterwards. One estimate is that a third of young entrepreneurs drop out within a year of starting up, compared to 1 in 10 of those over 30.

Anyone seeking to stimulate young enterprise in the UK therefore needs to think long and hard about how these kinds of hurdles can be overcome.  It is of some concern then that our latest report, Disrupt Inc., reveals that many enterprise support initiatives may not be up to the task. Informed by conversations with dozens of young entrepreneurs, our findings indicate that much of the support today tends to be grounded too heavily in supporting one ‘type’ of young entrepreneur at the expense of other types who follow less conventional, but increasingly popular, routes to start-up.

The level of debate over the availability of start-up finance, for instance, disregards the large proportion of young entrepreneurs who are reluctant to rely on loans, and who would prefer to grow their business slowly but surely on a shoe string budget. Likewise, the deafening noise about the importance of having experienced mentors distracts us from supporting all those young people who prefer informal assistance from peers. More generally, the language and imagery of entrepreneurship used by some in the government and media may inadvertently put it on a pedestal and serve to discourage young people from starting a business.

If we want to help more young people start and run successful businesses then we need to begin recognising the wide variety of entrepreneurial journeys that they take. Without challenging crude stereotypes and reengineering enterprise support to cater for this new reality, we run the risk of wasting the potential of thousands of would-be young entrepreneurs.

Some thoughts for young enterprise support

January 15, 2013 by · 1 Comment
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Yesterday morning the RSA and RBS hosted a short and sharp seminar to discuss a new project of ours looking at the ‘lived experience’ of young entrepreneurs. The goal of this piece of work, which we are half way through, is to provide lessons for how young enterprise support could be enhanced by better understanding the real (and what we supposed to be the unconventional) ways in which young people start and run their businesses. The research is primarily being undertaken through a series of qualitative interviews with young entrepreneurs, as well as with experts and practitioners in the field.

Our hypothesis when commencing this project was that our assumptions about how young people get their businesses off the ground – whether in terms of securing finance, using social media, or working with customers – is somewhat out of kilter with the reality. Part of the reason being that we rely quite heavily on surveys to find out about what young entrepreneurs think and feel, arguably at the expense of examining their actual behaviours.

Here are 4 of the top-line messages from the seminar:

  • From ‘entrepreneurial’ to ‘venturesome’ – 37 years ago, Howard Stevenson from Harvard Business School coined the term entrepreneurialism as ‘the pursuit of opportunity without regard to resources currently controlled.’ Using this definition, we can start to see entrepreneurial-like behaviours occurring in unconventional places, for instance within the public and third sectors, or within large organisations (aka ‘intrapreneurialism’). If we could broaden our terminology, would it open up more opportunities to encourage this type of behaviour? One way of thinking about it may be in terms of ‘venturesome’ actions (look out for an upcoming article on this by Adam Lent).
  • Get to grips with an unfavourable culture and mind-set – It was widely agreed that some of the most significant barriers preventing people from becoming entrepreneurs relate to a culture that is not conducive to enterprise. There are assumptions about risk and the price of entrepreneurship that are misconceived, for instance that failure will be seen negatively by future employers, or that entrepreneurs earn less than the average PAYE employee. The question is how can we overcome this entrenched mindset? Here we tend to fall back on role models, but perhaps there is also a place for legislation in sending out a pro-entrepreneurial message and setting the right kind of tone that institutions such as councils, schools and universities could follow.
  • Finance is not the be all and end all in the age of the lean entrepreneur – One of the most interesting findings emerging from our interviews was the degree of enthusiasm among young entrepreneurs for a bootstrapping business model. Many would rather try to make ends meet on a minimum amount of money (often using their own savings) than take out a loan from a high-street bank or government scheme. This is particularly curious given that access to finance nearly always comes to the top of the list of things which young people perceive as preventing them from getting up and running. The general feeling of those who attended the seminar was that this rang true with their own experiences. Would young would-be entrepreneurs be better served with micro-loans that enable them to build a prototype and test it at the market?
  • Stoke demand for young entrepreneurs’ products and services – Government efforts to support young enterprise are typically centred on the likes of campaigns, finance, mentorship schemes and entrepreneurial education; all of which are on the ‘supply side’ of support. There may be an argument for turning the idea of support on its head and using the purchasing power of central government, local government and large corporations to stoke demand and create a market for the services/products of young entrepreneurs. One option is to build young enterprise into supply chains, for instance by altering council procurement exercises to favour young entrepreneurs. However, this may be complex and unfair to other firms in the market. A simpler and less controversial solution would be to address the issue of late invoice payments, which often create headaches for young entrepreneurs with limited cashflow.

A report detailing the full findings of our project will be published early in the Spring.

Benedict Dellot is a Senior Researcher within the Enterprise team of the RSA’s Action and Research Centre. @benedictdel

Start-Up Loans: An anachronism in the age of bootstrapping?

January 4, 2013 by · Leave a Comment
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What do people need to begin and run a successful business? A decent idea for a start. No doubt some degree of confidence and a smidgen of luck. Perhaps a guiding hand and some innate business nous, too. But what about money?

Today’s announcement of an expansion to the Start-Up Loans scheme suggests the Government believes start-up capital to be integral to getting businesses off the ground. Previously limited to those under the age of 25, the changes mean that anyone below 30 will now be entitled to apply for the loans of up to £5,000. Like their younger counterparts, the newcomers will also be provided with a formal mentor who will guide them as they grow their operations.

For all the song and dance, this boost to start-up capital should be greeted with a note of caution. It has already been pointed out that only a few hundred loans – the equivalent of £1.5 million – have been channelled to people since the scheme’s inception. This is despite having a budget of some £110 million over 3 years and a target of delivering 2,500 support packages by March 2013.

Part of the reason for the low take-up may be a lack of awareness of the scheme among young people. Indeed, unless you’ve consciously set out to find support to start a business it’s unlikely you’ll stumble across funding sources of this kind (encouraging people to even consider becoming an entrepreneur is perhaps the greatest challenge for policymakers). Yet for all those who haven’t heard of the opportunity, there must be thousands who have (and who fit the bill) but didn’t decide it was right for them.

One explanation for this lies in the rise of the lean start-up culture witnessed among fledgling entrepreneurs. As part of a new RBS/RSA research project, we’ve been conducting a number of interviews with young entrepreneurs to identify whether there are any interesting trends emerging in the way their cohort are starting and running businesses. One of the most interesting findings we’ve come across so far is that bootstrapping is perceived as the easiest and most attractive means of getting an idea off the ground.

This is driven in part by young people’s reluctance to be saddled with a relatively substantial loan (the low rate doesn’t seem to have made much difference), and in part by developments in Web 2.0 which have reduced sunk costs and made it easier to take an idea and turn it into a marketable product in a relatively short space of time. In an age when young people can have an idea, build a website and market a product in the short space of an afternoon’s work, why would they go through the hassle of preparing a detailed business plan (based largely on guesstimates), which is normally guaranteed to be rejected by the first few funders they come across? As many of the people I spoke to said, better to build the business first and then go after the capital when you’ve proven yourself and are ready to scale.

The problem with the Start-Up Loan scheme is that it doesn’t accommodate this emerging kind of business model. The result is that not only does it fail to attract budding young entrepreneurs (and diverts valuable funding that could be used elsewhere e.g. for accelerators), it may also damage the prospects of some of those who actually take part. The danger, as pointed out to me a few times, is that these entrepreneurs build the business around the loan, when it should have been the other way round. Indeed, one of the practitioners I spoke to who’s supporting young entrepreneurs said he rarely mentions the Start-Up Loans scheme to those coming through his doors for fear it will distract them from the task at hand: turning a good idea into a profitable product.

Of course, it would be daft to say that loans don’t have a place in supporting young enterprise. Finance is nearly always at the top of the list of survey responses when it comes to what prevents young people from setting up a business, and there are some industries like manufacturing where sunk costs merit a sizeable initial investment. Yet even with these qualifications, it is obvious that ploughing lots of money into something increasingly shown to be out of kilter with the way young people approach entrepreneurialism is not, in Cameron’s words, the best way to back “all those young people who want to work hard and get on in life.”

The unconventions of young enterprise

November 28, 2012 by · Leave a Comment
Filed under: Enterprise 

“Britain is a country with enterprise running through its veins.” So said David Cameron in a speech given at the launch of the Start-Up Britain campaign earlier this year. With the rate of self-employment at its highest ever level and with the number of newly registered companies close to 450,000 in the last financial year, it’s hard to argue with this statement. The extent to which the Government, support organisations and others are capable of nuturing the kind of environment where enterprise can flourish, however, is more open to question.

Right now at the RSA, we’re particularly keen on exploring how young enterprise can be better supported in the UK – both in terms of encouraging more young people to start a business but also in helping those who already have done so to stay afloat and grow should they wish.

As things stand, there’s plenty of room for improvement in both areas. According to a recent report by the Royal Bank of Scotland, whereas 1 in every 10 young people in the US (18-24 year olds) are in the early stages of starting a business, the figure is the UK is closer to 1 in 17. Young people also fare poorly when it comes to survival rates. The same study found that a third of those under 30 who had started to plan a business dropped out one year later, compared with 12 per cent of those over 30.

It is true of course that failing is an integral part of the journey towards becoming a successful young entrepreneur (and also that it is not the right path for everybody). Yet despite this there is still a strong sense in the enterprise community that a greater number of young people could be creating strong, sustainable businesses if only there were better and more widespread support.

On the face of it, the Government has heard these concerns and is responding with a solid set of policies. They have, for example, established a new national mentorship programme, created the StartUp Loans scheme to ease the supply of low interest finance, rejigged the Business Link website and DirectGov to cater better for aspiring entrepreneurs, and supported the Start Up Britain campaign to encourage more people to think about setting up a business. The extent to which these initiatives are successful will depend on a combination of whether people are aware of them and whether the ‘antidotes’ they are offering match up neatly enough with the challenges facing young entrepreneurs.

With regard to the latter, there is arguably some cause for concern in that the new provision of support may be based on an increasingly outmoded view of how existing and would-be young entrepreneurs operate.  I’m referring here to that neat, linear notion of business creation, whereby people come up with an idea out of nowhere, write a business proposal, go to the bank to get a start-up loan, register their business, begin trading and then scale at some point further down the line. The problem is that this pattern rarely holds true in real life. In practice, for instance, many aspiring entrepreneurs get start-up finance from friends and family, they begin trading informally without registering their business and a good number find advice from informal sources far more useful than from formal ones.

So what does this mean for how we should be supporting young enterprise in the UK? If young people turn to family and friends for support, how much effort should we plough into the likes of Business Link and DirectGov? Or if crowd funding websites are proving increasingly popular as sources of finance, what does this mean for how we organise initiatives like the StartUp Loans scheme and the emphasis we give to bank lending? These are some of the questions we will be exploring in more depth as part of a new project on disruptive patterns of entrepreneurship among young people.

Here are some initial thoughts about what these unconventional behaviours might look like.