entrepreneurial profile of the uk: analysis and policy recommendations
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Global Entrepreneurship and Development Index Launch1 March 2011
Professor Saul Estrin, London School of EconomicsProfessor Michael Hay, London Business SchoolCarol Gaddum, London School of Economics
Notes for presentation: not to be quoted without the permission of the authors
Entrepreneurial Profile of the UK: Analysis and Policy Recommendations
Outline of Presentation
Not to be quoted without the permission of the authors 2
The UK’s Position in the GEDI
• Strengths in the Entrepreneurial Environment
• Weaknesses in the Entrepreneurial Environment
Weaknesses and Policy Responses
• Finance
• Innovation
• Culture
Framework for Policy Analysis
Policy Recommendation
The UK’s Position in the GEDI
Not to be quoted without the permission of the authors
• The UK ranks 14th in the GEDI with 0.56 points
• The UK’s overall entrepreneurial performance is perfectly in line with the development predicted by the trend line
• It outperforms the trend line in terms of entrepreneurial attitudes and activity
• Here the difference is quite significant in the case of entrepreneurial activity (13th) and only marginal for entrepreneurial attitudes (11th)
• By contrast the UK is positioned significantly below implied level of development in terms of entrepreneurial aspirations (21st)
3
The GEDI points to strengths in three key areas:
•Opportunity perception: A high percentage of the population is able to identify viable opportunities to start a business
•Entrepreneurial Activity: The UK consistently ranks in the top 33 percent of countries e.g. quality of human resources, new products, new technologies
•Competition: Entrepreneurs in the UK are primarily positioned in industries with few competitor offering the same product
Strengths in the Entrepreneurial Environment
Not to be quoted without the permission of the authors
United Kingdom 67% percentile33% percentile
4
GEDI points to three key areas of deficiency:
•Lack of enterprise culture, reflected in a weak performance among most of the individual attitude variables
•A shortage in product and technology innovation, which in turn limits companies’ abilities to grow and expand internationally
•A substantial problem in the provision of informal venture capital
Weaknesses in the Entrepreneurial Environment
Not to be quoted without the permission of the authors
United Kingdom 67% percentile33% percentile
5
INNOVATION FINANCEFINANCE
CULTURECULTURE
BIG ENTREPRENEURIAL
SOCIETY
Analysis of the Weaknesses in the Entrepreneurial Environment
Not to be quoted without the permission of the authors 6
Finance – Market Trends
Not to be quoted without the permission of the authors 7
Market saturation and consolidation
• UK hosts one of most developed and sophisticated angel markets in Europe
• Evolved from fragmented system to co-ordinated network of angel groups
• Market shows signs of stagnation whereas the French market is growing rapidly
Increasing investment activity
• 41% increase in the number of investments per year since 2000/01
• Total deal value has jumped from £49.6m to £123.2m (+148%) since 2000/01
Participation in co-investment schemes
• Angels involved in 45% to 59% of public-private co-investment deals
Source: Mason et al. (2010); BBAA (2010)
Disconnect between angels and venture capitalists
• Disadvantageous design of EIS and failure to protect angels against dilution
Deal flow
• Lack of awareness of investment opportunities impedes inflow of new angel investors
• Shortcomings in training and education of novice and inexperienced angels
• Lack of investment readiness continues to be a factor limiting the efficiency of the angel market
• Need for infrastructure enabling investors and entrepreneurs to more easily locate one another
Exit Opportunities
• Lack of opportunities due to disconnect, depressed IPO market and lock-in periods
Finance - Policies
Not to be quoted without the permission of the authors 8
Fiscal Incentives:To increase the number of business angels by improving the risk reward
ratio
Business Angel Networks: To reduce information inefficiencies in the market so that investors seeking to
invest and entrepreneurs seeking finance can more easily locate one
another
Co-investment Vehicles: Government-financed venture capital
funds, which leverage investments made by business angels to increase
deal size and allow follow-on investments
Securities Legislation: Changes to securities legislation that
prevented entrepreneurs from circulating business plans
Capacity-building for Entrepreneurs: Training for entrepreneurs to improve
their investment readiness
Capacity-Building for investors: Training for investors to increase their
competence in making investments
Deal Flow
Dilution
Co-investment
among Angels
Source: Mason (2009)
Exit
Innovation – Market Trends
Not to be quoted without the permission of the authors 9
Low business R&D intensity• Industrial structure with a high proportion of output generated in services • Limited range of innovative sectors (many of these contract or move abroad) • New developing sectors face difficulties in growing in the global innovation economy
Problems in translating R&D into commercially viable products• Risk capital• Business-academia relationships• IP framework• “IP to license” model where IP is sold to foreign investors or SMEs are acquired by multinationals• Entrepreneurial spirit and fear of failure
Lack of future skills needs• Management skills • Technical skills (STEM graduates)
Source: Miles and Daniels (2009)
Strong innovation performance in international comparison
• EIS (2009) ranks the UK 4th in terms of innovation performance behind Sweden, Finland and Germany
• GCI 2009/10 ranks the UK 15th in innovation performance
• NESTA Innovation Index (2009) indicates that UK invests more in innovationthan traditional R&D measures suggest
Innovation – Policies
Not to be quoted without the permission of the authors 10
Lack of Scale
Managerial &
Technical Skills
Risk Capital
Innovation Demand
Supporting Business Innovation
Demanding Innovation
Research Base
Innovative People
Innovation in Public Services
Innovative Places
Source: Innovation Nation (2008)
Business LinksR&D Grants
R&D Tax CreditsInnovation Platforms
Knowledge -Transfer PartnershipsInnovation Voucher
Investigation into Service InnovationReview of IP Legislation
Small Business Research InitiativeInnovation Platforms
Better Regulation Initiative
National Skills StrategyTrain to Gain
Coaching for High GrowthSTEM Skills Promotion
Innovation PlatformsScience Cities
Culture – Role
Not to be quoted without the permission of the authors 11
The culture of European societies has been identified as one of the key reasons for the gap in Europe's entrepreneurial activity compared with the US
Source: Huggins & Williams (2009)
CULTURECULTURE
Culture plays a central role in cultivating entrepreneurship
Culture shapes what individuals perceive as opportunities and therefore entrepreneurial alertness is linked to capabilities of judgment, creativity, and interpretation
Culture matters at the national, regional, firm, and individual level
Culture – Market Trends
Not to be quoted without the permission of the authors 12
Fear of failure
• Lower fear of failure than France and Germany, but high compared to Scandinavian countries and the US
• 43% of people in the UK compared with 19% in the US believe a new business should not be created if there is a risk that it might fail
• Fear of failure has been increasing in the UK
Misconceptions about risks
• Society does not sufficiently celebrate returns from enterprise and overstates the likelihood and consequences of failure
• Risk aversion is based on misconceptions about the risks inherent in starting a business
• People underestimate the potential income from running a business and overestimate the difficulty of obtaining finance
Celebration of Success
• Historically embedded phenomenon and partly attributable to the evolution of bankruptcy law in the UK
• Until the 19th century bankruptcy was considered a crime and a bankrupt in the old laws was considered an offender
• Although public attitudes and legal consequences changed considerably, stigma of bankruptcy remained
Culture – Policies
Not to be quoted without the permission of the authors 13
Absence of Role
Models
Absence of Role
Models
Conceptions about RisksConceptions about Risks
Stigma of BankruptcyStigma of Bankruptcy
Fear of FailureFear of Failure
Awareness Raising Campaigns:For instance Enterprising Britain, a
competition that recognises and rewards local organisations that have
worked together to drive the social and economic transformation of a place
Legislation:Enterprise Act of 2002 announced
major changes to the UK competition and insolvency law
School-level Education:Schools play a key role in
developing attitudes towards careers and providing enterprise
education as part of the curriculum can turn attitudes into action
University-level Education:National Council for Graduate
Entrepreneurship to promote a culture of entrepreneurship within higher
education through research, education, and facilitation
Source: Huggins & Williams (2009)
Building Entrepreneurial Capacity
Co-Investment
scheme
Business angel
Venture capitalist
High net worth individual
AWARENESS
COMPETENCE
DILUTION
TAX INCENTIVES
AWARENESS
COMPETENCE
EntrepreneurMATCHING
INVESTMENT READINESS
Putting it all togetherFinance
Not to be quoted without the permission of the authors 14
Business Angel Networks
FUNDING
AWARENESS
IP OWNERSHIP
MATCHING
FINANCE
SCALE
DEMAND
IP OWNERSHIP
MATCHING
Putting it all togetherInnovation
Not to be quoted without the permission of the authors 15
Putting it all togetherCulture
Not to be quoted without the permission of the authors 16
Graduates
School Children
Society
FEAR OF FAILURELEGISLATIONMISCONCEPTIONSABSENCE OF ROLE MODELS
Framework for Policy Analysis
Not to be quoted without the permission of the authors 17
Co-Investment
scheme
Business angel
Venture capitalist
High net worth individual
AWARENESS
COMPETENCE
DILUTION
TAX INCENTIVES
AWARENESS
COMPETENCE
MATCHING
INVESTMENT READINESS
Business Angel Networks
FUNDING
EntrepreneurAWARENESS
IP OWNERSHIP
MATCHING
FINANCE
SCALE
DEMAND
IP OWNERSHIP
MATCHING
Graduates
School Children
Society
FEAR OF FAILURELEGISLATIONMISCONCEPTIONSABSENCE OF ROLE MODELS
Entrepreneurial Policy Recommendation
Not to be quoted without the permission of the authors 18
Legislation
IP - ProtectionBankruptcy Law
Protection against DilutionCo-investment Schemes
Tax Incentives
Education
Investment Readiness TrainingCompetence of Business Angels
Managerial SkillsInnovation SkillsTechnical SkillsSocialising Skills
BIG ENTREPRENEURIAL
SOCIETY
Networking
between entrepreneurs and•Angels
•Innovation Partners & Universities•Society, Graduates & School Children
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