Could Brexit lead to increased investment for our start-ups?

In March we released research into how the Government could improve access to funding for entrepreneurs in Unlocking Growth: How to Expand Access to Capital, a joint report from The Entrepreneurs Network and The Enterprise Trust. 

It pointed to the fact that astonishingly, despite all sophisticated forms of investment, credit cards and overdrafts are still the most popular routes to finance for UK firms. And while the bank is still the first port-of-call for most businesses, it’s often only the process of rejection itself that triggers further research into alternative forms of finance. 

We found there was a need to dramatically increase awareness about alternative funding options and suggested reforms to reduce wait-times for early-stage investment tax reliefs and allow pension funds to invest more in venture capital, for example could be transformational. 

But the Internal Markets Bill has mooted rejecting anachronistic EU State Aid rules could help provide the Government with an opportunity to itself invest in tech start-ups. A new source of support not really on the radar when we wrote our report. 

While no tech firm appears to have historically campaigned for the removal of the ‘outdated way the EU state aid rules are drafted’, former No 10 adviser Rohan Silva has suggested scrapping them could lead to future fiscal advantages for tech companies via increased strategic, investment intervention with tax payers’ money. 

Speaking on the BBC, he said plans drawn up to increase support for start-ups during David Cameron’s term in office during the last recession, had been constrained by the rules, which were written in the 1950s. 

He said: “In 2010, the Conservative government was keen to foster investment in the companies of the future by offering generous government incentives, but found itself constrained by EU state aid rules. 

"We couldn't support companies as they grew as much as we wanted for as long as we wanted. If you are going to leave the EU, you should make the most of it.” 

There are some forms of state aid that are illegal within the European Union, due, according to the EU to it “distorting competition” in ways that are harmful to both EU companies and citizens. 

In 2018, Rohan Silva wrote in the Sunday Times: “These are among the most powerful and arcane EU laws of all, designed to stop countries unfairly subsidising their own industries and so impeding fair competition across the single market. 

“For better or worse, these complex regulations have constrained British governments for decades. But if they no longer apply after we leave the EU, all manner of new options open up... 

“...Once we take back control from the EU next year (sic), British governments will be free to help start-ups obtain the capital they need to grow and create jobs.” 

While we wait for more clarity on what this might look like (next year apparently), it has already been hailed as a solution which could see state subsidy bolster the tech sector, catch falling failures and create the British Google. 

But Business Secretary Alok Sharma has confirmed that when it comes to state aid, the UK expects to use World Trade Organisation’s (WTO) rules on state subsidies. “We do not want a return to the 1970s approach of picking winners and bailing out unsustainable companies with taxpayers’ money,” he said. 

A trade deal with Japan announced on Friday September 11 has agreed to a much stricter policy of state aid than that set out to Brussels, so any clarity on how this might impact on funding for small firms in reality is yet to be identified. 

Future resilience

“It’s hard to think that these firms will not retain this new model alongside the existing one, once lockdown has completely ended. ”

While it’s still too early to tell what the final impact on the economy will be in a year, or even two years’ time, one thing that will be on most entrepreneurs’ to do list is how they can build resilience into their business going forward. 

Whether they’ve been adversely affected or not by the COVID-19 pandemic, (around two-thirds of businesses have been working in some form) all firms have had to step well and truly out of their comfort zone and do things they would often never normally consider – for many, that includes taking on board finance. 

A recent report we did with The Entrepreneurs Network Unlocking Growth: How to Expand Access to Capital, pointed to the fact that even before the pandemic, 10 per cent of firms were so-called ‘discouraged borrowers’.  These are people who, for whatever reason, don’t want the risk of taking on board any form of debt.   

As the scramble to fund businesses through this has progressed, the Government’s Bounce Back Loans Scheme (BBLS), for example, has seen hundreds of thousands of firms, often self-funded and uninitiated in the world of borrowing compared to most, take out sums of up to £50,000.  To date the scheme has lent £22bn. 

This undoubtedly includes those classified as discouraged borrowers. You only need to look to how difficult some local authorities have found giving away the £617m grant pot to confirm that’s the case.  Yes, these are unusual times, and yes, the toss up is often to take on debt to survive or throw in the towel. But after many have had no choice but to take the first step towards investment, might they do so again, perhaps less reluctantly? Could they see the need to invest, grow and go on to create more jobs? Will the pandemic lead to a generational change in attitude towards investment? Let’s hope so. 

The other element the crisis has demonstrated is the need for a solid strategy.  For many firms, real, thoughtful and evolving strategy can get shelved because founders are simply trying to get on with the ‘doing’ element. They are delivering.  With time on their hands, a finite amount of cash to play with and a very uncertain-looking customer base, businesses are looking for advice and plotting their come-back.  Will this good practice stick?   

So how do you build in resilience to avoid being in a position again when your business model is suddenly unworkable?  

A recent poll from Enterprise Nation demonstrated that rather than look to things like income insurance, entrepreneurs said they were looking for ways to diversify (63per cent).  For some this meant adding another delivery method to their existing model, or moving from a trade customer base, to predominantly consumer-facing.  If you look at firms like Hampshire-based ChalkStream, which pre-COVID-19 supplied its fresh British trout to top London restaurants, such as those run by Yottam Ottelenghi, to pivot towards the home-cook, producing boxes and products for home delivery quickly and efficiently. And winning the praise of home-cook champion Jamie Oliver into the bargain. 

Similarly Bristol-based Office Pantry pivoted from a firm delivering lunch to office workers to building an e-commerce platform called Home Pantry, picking up the slack from struggling supermarkets to deliver their products safely to homes. 

It’s hard to think that these firms will not retain this new model alongside the existing one, once lockdown has completely ended. 

According to Beauhurst’s report into the impact of COVID-19 on the economy, it’s the scale-up firms, the ones that have already had funding, that are most at risk – or critical in 22 per cent of cases, 43 per cent at moderate risk.  Meanwhile firms at seed-stage are much less likely to be impacted. 

The tech sector is most likely to have been positively impacted. This is because it already has remote working in place. It’s very likely a home-working policy will be retained at many firms that understand the need to be flexible, while bringing a normality to home-working for the future. 

According to Coworking Insights in its Future of Work report, 87 per cent of those working from home during lockdown would recommend it to a friend. It’s hard to see how this can be ignored. 

According to the Sunday Times, the start-up investment ecosystem is down significantly.   

The paper reported EIS investor Vala Capital saw funding in the first quarter of 2020 was down 70% on last year. Wealth Club, another big EIS fund, said investment had dropped 62% in two weeks in April. Two more of the largest funds, Kuber and Sapphire Capital, are understood to have been down more than 50%. 

Beauhurst predicted investments announced were most likely to be follow-on rounds, such as that announced by London-based fintech Smart Pension in May. 

Could this see firms cultivating relationships with investors and working more closely in the future with them in order to simplify the investment journey, whilst creating a more-willing patron available in times of need? 

All of this boils down to resilience and it’s undoubtedly going to spark new tests introduced by investors that will eventually become more widely adopted into normal ways of starting and growing a business going forward. 

future purpose

“One thought is that we might build on this enforced down time and the removal of data caps to make our career path more meaningful and use technology to have more purpose than social convenience but solve real problems caused by climate change and inequality.”

We’ve come a long way since Thomas More, the English scholar, wrote Utopia in 1516 advocating a ‘Universal Basic Income’. 

In recent years that suggestion has been debated again and again as countries including India and Finland and even here in the UK sought to understand whether this social benefit, where everyone receives a subsistence income from Government,  would lead to less unfairness, but also to less mental health issues due to income security and that ‘people would work only for enjoyment’. 

That last phrase is something entrepreneurs and self-employed individuals consider to be a very important distinction that sets them apart from those in employment, and most will consider that’s what they strive to do every day. 

So, it’s interesting then, with Coronavirus in our midst, that we’re seeing this 16th century utopian idyll played out before our eyes. Here we are watching as our own Government seeks to preserve the economy and prevent unnecessary business failures by offering to reimburse those that have lost trade and income, so that they hopefully won’t lose their long-term livelihoods as well. A form of Universal Basic income, if you will, which will see the employed, unemployed and self-employed subsidised by the state. 

Will this artificial economic pause lead to changes in the way we all think about our work and our economy?  At the Enterprise Trust, we had already planned to examine the future of entrepreneurship in a world where advances in technology and artificial intelligence could lead to a very different approach and that enterprise for all could be seen as not only an income-driver, but a creative outlet for otherwise unsatisfied employees. 

In many ways, aside from the chaos, individuals have been grasping onto digital technology, many for the first time, to keep in touch with loved ones and family in order to obey strict social isolation rules imposed by the Government during the crisis. 

According to Weforum.org, in China “...millions of workers are now using tools including Alibaba’s “DingTalk,” Tencent’s “WeChat Work” and “Meeting,” ByteDance’s “Feishu” and Huawei’s “WeLink” for online workplace collaboration. These tools have added new features in the past weeks, including increased quota of video conference participants and call times, online health check-ins and industry-specific solutions.” 

Futurologists, including Gray Scott, think technology itself is leading us to become more naturally isolated. 

And as we normalise meetings conducted by video technology, scheduling food deliveries via our laptops, nervously answering the door to strangers via our phones and even obeying the drones that will inevitably come, to ‘GO HOME’, what’s the logical progression for business following the contactless Cornonavirus crisis?  

Even the BBC finds it can conduct news interviews without anyone coming into the studio (although admittedly, it can’ t film Eastenders). 

Will technology free us up from unnecessary travel for more thoughtful, purposeful enterprise? Will this ban on normal life make us question our shopping habits, for example, and make us finally realise we can live without (some) of the frippery? 

One thought is that we might build on this enforced down time and the removal of data caps to make our career path more meaningful and use technology to have more purpose than social convenience but solve real problems caused by climate change and inequality.  

According to Beauhurst, investment rounds in UK businesses have continued to happen, 39 in the past week despite the crisis.  Amidst the usual mix of banking software, there is a notable exception – a significant investment in Oddbox, a sustainable vegetable box delivery firm that uses odd vegetables and fruit that are often rejected by supermarkets looking for perfection.  

As investment plummets over the next few months, and habits change, could the reality be in the long-run that we begin to appreciate and innovate in the simple things in life? 

Only time will tell.