Entrepreneurial Profile of the UK: Analysis and Policy Recommendations

1. Entrepreneurial Profile of the UK: Analysis and Policy Recommendations Global Entrepreneurship and Development Index Launch 1 March 2011 Professor Saul Estrin, London School of Economics Professor Michael Hay, London Business School Carol Gaddum, London School of Economics Notes for presentation: not to be quoted without the permission of the authors

2. Outline of Presentation • 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 Not to be quoted without the permission of the authors

3. The UK’s Position in the GEDI • 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) Not to be quoted without the permission of the authors

4. Strengths in the Entrepreneurial Environment • 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 United Kingdom 33% percentile 67% percentile Not to be quoted without the permission of the authors

5. Weaknesses in the Entrepreneurial Environment • 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 United Kingdom 33% percentile 67% percentile Not to be quoted without the permission of the authors

6. Analysis of the Weaknesses in the Entrepreneurial Environment INNOVATION FINANCE BIG ENTREPRENEURIAL SOCIETY CULTURE Not to be quoted without the permission of the authors

7. Finance – Market Trends Traditional Strengths 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 Challenges Not to be quoted without the permission of the authors 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)

8. Finance - Policies Deal Flow 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 Fiscal Incentives: To increase the number of business angels by improving the risk reward ratio Co-investment among Angels 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 Dilution 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 Exit Not to be quoted without the permission of the authors Source: Mason (2009)

9. Innovation – Market Trends • 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 Traditional Strengths Challenges • 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) Not to be quoted without the permission of the authors Source: Miles and Daniels (2009)

10. Innovation – Policies Innovation Demand Demanding Innovation Small Business Research Initiative Innovation Platforms Better Regulation Initiative Research Base Lack of Scale Business Links R&D Grants R&D Tax Credits Innovation Platforms Knowledge -Transfer Partnerships Innovation Voucher Investigation into Service Innovation Review of IP Legislation Supporting Business Innovation Managerial & Technical Skills Innovation in Public Services National Skills Strategy Train to Gain Coaching for High Growth STEM Skills Promotion Innovative People Risk Capital Innovation Platforms Science Cities Innovative Places Not to be quoted without the permission of the authors Source: Innovation Nation (2008)

11. Culture – Role Culture shapes what individuals perceive as opportunities and therefore entrepreneurial alertness is linked to capabilities of judgment, creativity, and interpretation Culture plays a central role in cultivating entrepreneurship CULTURE Culture matters at the national, regional, firm, and individual level Not to be quoted without the permission of the authors 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)

12. Culture – Market Trends Challenges Not to be quoted without the permission of the authors 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

13. Culture – Policies Fear of Failure Legislation: Enterprise Act of 2002 announced major changes to the UK competition and insolvency law 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 Absence of Role Models Building Entrepreneurial Capacity Conceptions about Risks 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 Stigma of Bankruptcy Not to be quoted without the permission of the authors Source: Huggins & Williams (2009)

14. Putting it all togetherFinance Business Angel Networks AWARENESS COMPETENCE DILUTION TAX INCENTIVES FUNDING Business angel Co- Investment scheme INVESTMENT READINESS Entrepreneur Venture capitalist MATCHING High net worth individual AWARENESS COMPETENCE Not to be quoted without the permission of the authors

15. Putting it all togetherInnovation AWARENESS IP OWNERSHIP MATCHING FINANCE SCALE DEMAND Entrepreneur Collaboration Partners IP OWNERSHIP MATCHING Universities Not to be quoted without the permission of the authors

16. Putting it all togetherCulture School Children Society Graduates FEAR OF FAILURE LEGISLATION MISCONCEPTIONS ABSENCE OF ROLE MODELS Entrepreneur Not to be quoted without the permission of the authors

17. Framework for Policy Analysis School Children Business Angel Networks Society Graduates AWARENESS COMPETENCE DILUTION TAX INCENTIVES FUNDING FEAR OF FAILURE LEGISLATION MISCONCEPTIONS ABSENCE OF ROLE MODELS Business angel Co- Investment scheme INVESTMENT READINESS Entrepreneur Collaboration Partners Venture capitalist AWARENESS IP OWNERSHIP MATCHING FINANCE SCALE DEMAND MATCHING IP OWNERSHIP MATCHING High net worth individual Universities AWARENESS COMPETENCE Not to be quoted without the permission of the authors

18. Entrepreneurial Policy Recommendation Legislation IP - Protection Bankruptcy Law Protection against Dilution Co-investment Schemes Tax Incentives BIG ENTREPRENEURIAL SOCIETY Education Investment Readiness Training Competence of Business Angels Managerial Skills Innovation Skills Technical Skills Socialising Skills • Networking • between entrepreneurs and • Angels • Innovation Partners & Universities • Society, Graduates & School Children Not to be quoted without the permission of the authors