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)

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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

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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

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INNOVATION FINANCEFINANCE

CULTURECULTURE

BIG ENTREPRENEURIAL

SOCIETY

Analysis of the Weaknesses in the Entrepreneurial Environment

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Finance – Market Trends

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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

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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

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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

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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

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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

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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

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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

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Business Angel Networks

FUNDING

AWARENESS

IP OWNERSHIP

MATCHING

FINANCE

SCALE

DEMAND

IP OWNERSHIP

MATCHING

Putting it all togetherInnovation

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Putting it all togetherCulture

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Graduates

School Children

Society

FEAR OF FAILURELEGISLATIONMISCONCEPTIONSABSENCE OF ROLE MODELS

Framework for Policy Analysis

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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

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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