Examination of Witnesses (Questions 298-319)
MS RACHEL
ELNAUGH AND
MR DOUG
RICHARD
15 JULY 2008
Q298 Chairman: Welcome. Thank you very
much for coming in. This is an unusual session for us. It is the
last one of our inquiry into how we stay ahead of the game, basically,
in this country, creating a higher value added economy, what we
do to compete effectively with Europe, China, and the rest of
the world and what we can do to make sure our businesses succeed,
innovate, grow, develop and flourish, and so one of our number
suggested we ought to talk to you two. You have a lot of experience,
seeing a lot of people do it, and we look forward to seeing what
we get out of this. We have your CVs from your website. There
is some news today. I see the leader of my party is announcing
some stuff on insolvency. Your business actually went down, did
it not, in 2005?
Ms Elnaugh: It went into administration
and was then bought out the next day and phoenixed, essentially,
yes.
Q299 Chairman: What is that business
doing now?
Ms Elnaugh: In its first year
it made a seven million loss, which is a bigger loss than I ever
made with it, but I do not know what is happening now. We will
have to wait and see.
Q300 Mr Hoyle: So the phoenix had
its wings clipped!
Ms Elnaugh: Yes. We were talking
just before we came in about how, if there had been a way that
I could have paused time and sorted the problems out, I could
have potentially traded through and still be running it totally
profitably. Forcing it through an administration process destroyed
a lot of value.
Q301 Chairman: That may be something
we can return to at a later stage, because insolvency is an interesting
question, but let us crack on. We have six small areas of questions.
The first really is what can government do to help or hinder the
process of entrepreneurialism, innovation, adding value—what
is it all about—and what is the role of government in encouraging
entrepreneurial activity?
Mr Richard: As I am sure many
of you know, I have just spent the last year and a half rather
laboriously trying to write a report on that very subject, so
one could take the view that I have got 75 pages of my distilled
very strong opinions already written down, but, if you are going
to take it from the top, I think there are two separate questions
that have to be answered: (1) what is the ability of somebody
to start a business in Britain, and (2) what is our ability as
entrepreneurs to grow businesses in Britain, and there are, interestingly
enough, somewhat distinct challenges. The biggest challenge I
had in writing the report that I wrote over the last year was
how narrow a remit I had been given. That is to say, I was asked
to talk about what can government do to directly support the fostering
of growth and entrepreneurialism when, interestingly enough, most
of the challenges that entrepreneurs face are not actually related
to government directly at all. Thus, to some degree, government
can do very little, it is more about the larger issues, and I
think we sometimes lose that context. I think the largest challenge,
especially for entrepreneurial innovation businesses, therefore
businesses that are small businesses only because they are on
their way to becoming big businesses, the kind we care to have
in this economy, is that we do not have an adequate culture of
entrepreneurialism growing through our children in our schools
today, and this is a much larger issue.
Q302 Chairman: We want to talk about
that issue next. We will put that to one side and come to that
specifically next.
Mr Richard: If you get down to
the prosaic levels: I am starting a business in the UK. I have
had the privilege of being able to specifically compare starting
my own businesses in California and in London and Cambridge. I
think there is something to be said for narrowing one's comparisons.
California is a state with its own set of conditions unique to
the rest of the United States, just as London and Cambridge, which
are quite advantaged places within Britain to start businesses,
especially Cambridge. Nevertheless, there are some very simple
home truths. It is easier, faster, quicker and more likely to
have a successful innovation business in California than here.
This has been well documented and my own experience completely
lines up with it. The question is why? What is it about my starting
a business in LA or Silicon Valley that means it is more likely
to succeed? First and foremost, one other thing, I do not know
what government can do about it, but the fact is I have a deeper,
broader talent pool of experienced executives to draw upon, and
entrepreneurial businesses, in large part, succeed or fail on
the basis of the talent pool of the team you put together. It
is not the idea, it is not the science, it is not the university
it has spun out from (if it has), it tends to be the quality and
effectiveness of the team, and we have a smaller, less experienced
pool of people who know what it is like to start a business here.
This is particularly true in areas like sales and marketing, what
I call the business side of businesses rather than the technical
administrative operational side. These are endemic challenges;
they are just truths. There is no easy answer. You cannot wave
a wand, it is not a problem that we can solve per se, but
it is a challenge that actually hampers. The other very large
challenge—and I am going to make a rather sweeping generalisation,
but humour me—the regulatory burden of a small business
here is simply greater and the financial burden of a small business
is greater. I will give you a very anecdotal specific example.
If I open an office, if I rent an office in Cambridge as a sole
trader, I sit in that office and I am immediately taxed by the
mere fact that I am in an office. I do not have to have a business.
I am in an office and all of a sudden a tax settles on you. It
is the business rates, of course, I am referring to. That does
not exist as a concept in California, but I watch many entrepreneurs,
young students coming out of Cambridge University, and they say,
"Oh, I am not going to take an office yet, because I will
immediately be encumbered with a tax", and so they stop.
That is pause one. We do not have the time today to enjoy the
leisure of going through the other thousand moments of pause that
are settling on these people, but these things accumulate very
quickly, and the net result is an accretion of things that slow
down, that anchor people in place, they leave them in the dormitory,
they leave them in a garage, they do not put them in an incubated
office. All these things add up very quickly and, at our peril,
we slow down entrepreneurial business. You guys know that. I am
talking to an educated group. The fact is, as you must know, that
even though large corporations represent 50% of our employment
base and small business represents, loosely speaking, 50%, when
it comes to new jobs the vast majority (90% plus) comes from small
businesses, and when you take those small businesses and look
inside them, it is only those small businesses that are potentially
scalable small businesses, i.e. not the lifestyle ones, that in
fact supply the vast majority of those jobs. So it is actually
a rather small percentage of the total business pool that creates
most of the new jobs in the country, and those businesses are
the hardest to start and the ones that are most hampered by the
kinds of burdens I am talking about. Thus, it becomes a very direct
challenge to the growth of the economy.
Chairman: That is a really helpful
introduction. I think Lindsay Hoyle wanted to ask you something.
Q303 Mr Hoyle: I notice that you
are the founder of the Cambridge Angels. What kind of fund is
available for people to access money from you? Presumably you
have got an account there.
Mr Richard: The Cambridge Angels
specifically?
Q304 Mr Hoyle: Yes.
Mr Richard: The Cambridge Angels
is a group. The Cambridge Angels is an interesting organisation,
because when I moved to the UK I moved to Cambridge, partly because
my wife likes Cambridge but in part because it was the closest
thing to a technology cluster that the UK had and I wanted to
settle myself in a place where I would feel at home. My first
thought was, great, I will go find the local business Angel Group,
plug in, meet everybody, and get going. There was no local business
Angel Group. I am an entrepreneur. I figure, if you do not have
something, start it. What I did, like any good entrepreneur does,
I poached the model from somebody else who is doing a good job
of it; so I stole the model from Band of Angels in Silicon Valley,
a very well known business angel group. The way that model works
(and there are multiple models) is that, essentially, we are a
dining club, so it is a group of people, and the only requirement
to join the club is that you started a business, grew the business,
sold the business and put money in your back pocket and are now
willing to potentially invest in future activity, but in the big
bodies you cannot just invest. If you lead in investment you have
to represent other "angels" who are coupling with you
and you have to take an active, though part-time, role in that
business, because what you are doing, inevitably, as an "angel"
is you are trying not only to make a successful investment, you
are trying to increase the likelihood of success by taking your
experience and adding it to the team so that the playing field
tilts in your favour.
Chairman: I am going to cut you off at
that stage, because we are going on to access to finance later.
Q305 Mr Hoyle: Thank you for the
answer.
Mr Richard: Did I answer your
question?
Q306 Mr Hoyle: Absolutely, because
when we were last in California we met some of the angels there,
and it was fantastic, what was done in Silicon Valley, the whole
effect of what had gone on. So, all this great success, all these
benefits you are bringing to us, what benefits you do you think
you have gained from associating with one political party?
Mr Richard: Actually I have seen
no benefit.
Q307 Mr Hoyle: Can we look forward
to your resignation?
Mr Richard: I do not actually
have an appointment, so I cannot resign. The fact of the matter
is I was asked by the Conservative Party to start an independent
task force. I do not even have a right to vote here, for goodness
sake, all I have a right to do is pay taxes and start businesses,
and the deal I cut is that I wrote what I want, I said what I
want, and the Conservative Party can take my opinions and choose
to adopt them as they choose, and I would be very happy for the
Labour Party, the current Government, to adopt them. I do not
know which party they are, but I cannot resign from something
I have not joined.
Mr Hoyle: That is great. We look forward
to getting your notes.
Q308 Chairman: Rather like Lord Jones.
He cannot resign from something he has not joined either. Rachel,
is there anything you want to add about the role of government
in encouraging entrepreneurial activity?
Ms Elnaugh: Back to the question.
Is it easy to start up in business? Yes, it is incredibly easy.
I can got out today and start a business on the web, get PayPal
working and be up and running, but the challenge is, as Doug said,
coming up against all the issues that then start to kick in, finding
how difficult it is to find customers and all the challenges,
once you do find the customers, of how to then service all of
that business. I think that there is a huge amount of support
that we need to give in training people who launch into business
full of optimism and enthusiasm. Have they got the basic skills
to know how to market their business effectively, to know how
to put the back office in place, to service the business, and
then, when they start getting growth, how do they deal with it?
So to me it is very much about training and enterprise education.
Chairman: We are going to come
to that as well as a separate area. Brian did you have a point
you wanted to come in on?
Q309 Mr Binley: Yes, I did. There
is a general view, I am not sure how well researched, in small
business—and I started a small business in 1989 and another
one in 1997—that government needs simply to get off the
backs of small business. I do not share that view. I think government
does have a role, but I just wonder whether that role ought not
to be overseen by government but carried out by business. Is that
fair or not?
Mr Richard: I do share your view
that it is disingenuous and naive to believe there is no role
for government in small business. We do not live (excuse the expression)
in the Wild West; this is the real world. The real question, I
think, tends to be the difference between playing fields and direct
intervention, and so I am not disagreeing. I think it is difficult
to speak in such generalities. It really comes down to what do
we seek to encourage, because there has to be taxation, there
has to be money for the Government to run. The basic truths that
we all live by we sometimes forget. I hear lots of people say,
"The Government has to get out of the way." If the Government
gets out of the way, all sorts of bad things happen; so I think
it is disingenuous. The real question comes down to: if in fact
the Government's role is to improve the conditions for business,
because we want to improve the economy so we have a more productive
economy, therefore it means the engine room is growing. If that
happens to be the focus, then the question arises: do we look
to treat our businesses equally, or (to turn it on its head),
if we were to take any given law and lay it impartially on all
businesses, is the impact the same? The answer is, no. This is
where I see huge issues. If you take any given well-meaning law
or regulation that is intended to protect some individual or party,
the impact on very small businesses tends to be disproportionately
slower, and there is no simple answer to that question. What bright
line do I drive? Do I say it is five employees? Do I say it is
this amount of trading? There are no easy answers. To the degree
we do not acknowledge the fact that very well-meaning regulations
tend to have a very large impact on very small businesses, we
are hampering the growth of small business and there has got to
be some air room in the early days for small businesses to grow
or else we simply continue to be a country where it is harder,
longer, slower.
Ms Elnaugh: Obviously there is
the whole regulation piece, but there is another whole piece which
came out in Doug's report, which is that what businesses most
need is customers, and so actually encouraging the sectors that
we want to grow and that have got value for the future economy
and potentially for the government for being the customer and
actually allowing small business to get that business, to me those
are the kinds of initiatives where government can be really helpful
to encourage the right type of businesses that are going to help
in the areas where there is potential for growth and which also
help other areas within society and other issues which need to
be dealt with. If we can encourage small business to focus on
solutions for those areas, then you have got a win-win situation.
Q310 Roger Berry: The idea of encouraging
sectors: the number of times I have heard the business community
say it is not the job of government to pick winners, it is not
the job of government to encourage particular sectors of the economy,
that is for entrepreneurs to decide. You have just said precisely
the opposite of that, that it is the Government's job to encourage
particular sectors. We are getting conflicting messages from the
business community.
Ms Elnaugh: Okay. Take one sector,
for example, and that is energy. There are huge issues with global
oil prices, and the implications of rising costs of energy on
our economy; and there is a drive towards creating much more sustainable
energy as well as being able to create our own energy here in
the UK. Encouraging that sector to me would seem to make perfect
sense, to encourage businesses to look at innovation within that
sector of business, to actually focus small businesses' minds.
If I am one of the 17 million people thinking of going into business
in the UK because they have watched Dragon's Den, to actually
think, "In what areas would I have most chance of being a
success and add real value?" I think if government can encourage
that it is a useful intervention.
Mr Richard: Roger, do you mind
if I come in on that. I think there is a difference between backing
sectors and creating market places. I will just use energy as
an example, since Rachel brought it up by way of example. Right
now, globally, the number one country for innovation in solar
power is Germany. Therefore, there are more new businesses starting
doing innovative technology in Germany than in any other nation
in the world. Why is that? Is it because Germany happens to have
the research behind it? No, actually the UK, up until a certain
point in time, had more research in amorphous silicon and other
things like it than anywhere else, but in Germany they created
a regulatory environment where they mandated a specific price
by which energy had to be purchased back into the grid and, therefore,
they created a market place. You could make the case quite reasonably
that that was a sector preference. I would have asserted it was
a market place condition that was created. Why did they do it?
They did not do it to encourage entrepreneurs. They did it as
part of an energy issue, in other words in support of other concerns,
but the direct net result was that we now have in Germany a concentration
of activity, and these things do feed on each other, there is
no doubt about it, and thus when I talk to energy venture capital
firms, which I work with a lot, we all agree that the first place
we look for innovation in solar is in Germany. We have that potential
here in the UK. Though it is a terribly conflicted issue, the
fact is that the UK has the opportunity in wind power to do the
same. Everyone here who can read the newspapers knows exactly
why people are for and against big windmills off-shore. Nevertheless,
from creating market places we create sectoral preference and
I think, in that instance, in a good way, not a bad way. The same
thing is true for the Government as a customer. Does that make
sense to you?
Q311 Roger Berry: It makes sense.
Mr Richard: I am not picking industries,
what I am doing is suggesting that market place conditions can
be created to permit industries to survive. What I do not support
is the notion of us making a list of bio-tech semi-conductors,
and everything else, and saying, "Okay, we will back, that,
that and that." Nobody knows what we will do.
Q312 Chairman: The committee is going
next week to see Defence Advanced Research Agency (DARPA) and
the Small Business Innovation and Research Scheme in the States,
which sort of do that, do they not?
Mr Richard: They do, but they
do so in an underlying purpose. Their goal is not to improve the
economy, their goal is to improve the ability of the US to go
on to warfare and, therefore, have advanced technology to support
it. You can agree or disagree with DARPA's remit, but they are
not there to grow the US economy, they are there to have advanced
research for weapons procurement and other systems, so it is an
incidental side-effect, and they might, by the way, view it differently.
Q313 Chairman: Before I hand back
to Roger, can I ask one thing? I find it very strange myself that
we have a department for enterprise and a separate department
for innovation. I know you can define enterprise and innovation
differently, but surely they feed intimately off each other?
Mr Richard: I did not set that
up.
Q314 Chairman: No, but I am inviting
your comment on that structure.
Mr Richard: I am not prepared
to defend something like that. Yes, obviously they are different
things, but I think the challenge we have is twofold. Number one,
every young enterprise, in large part, needs the same things.
One of the things I find very distressing is the fact that we
treat every region of the country as though it is a unique case.
The fact of the matter is starting a small business in the north-east
is no different to starting a small business in Ipswich or starting
a small business in Cornwall. The fact is they are the same. This
is what you mean when you talk about enterprise, you are talking
about the support of small businesses, and though it may be heretical
to say so, the regionalisation of business support is not based
on the most logical of grounds and you end up with very differing
support systems.
Q315 Chairman: We are doing a separate
inquiry into regional development agencies and your evidence on
that might be very welcome.
Mr Richard: I have already written
about it extensively. I am happy to give you all the underlying
statements in support of it.
Q316 Chairman: Give us the references,
please?
Mr Richard: But in the spirit
of it, that is enterprise. Innovation is a cross-cutting question
because innovation is something that we want in large corporations,
we want it in small corporations, we want it in people starting
businesses. Not all businesses are innovation businesses. As it
happens, the small percentages that are tend to be the ones that
then scale to large business and tend to add the most HVA to an
economy. Thus, there is, reasonably, attention focused on that
percentage of small business, but the fact of the matter is that
98% of all business in this country is small business (it represents
15%). Of that 98% only a fraction of a fraction are innovation
businesses. Does anyone here really know how many businesses are
venture-backed in the UK in any given year? We are talking about
1,500, that is one thousand five hundred, the number of venture-backed
businesses in existence in the UK in any year. It is not bad.
Compared to the rest of Europe, we are doing better than the rest
of Europe. Is comparing the rest of Europe an effective measure?
No, because the US is doing slightly better and actually India
on the way to passing us as we speak, but I am bringing a whole
new series of issues up.
Q317 Chairman: We need to be away
by half past 11 so we must be disciplined.
Mr Richard: I do not know if that
helps a lot.
Chairman: It helps a lot. Roger your
questions.
Q318 Roger Berry: People talk about
the culture of enterprise. How do we get it? What was it in your
background that encouraged you to become entrepreneurs, what was
it in your culture that got you moving and why is it there are
not more people like you around?
Ms Elnaugh: This is a fascinating
area for me because I work almost entirely in the small business
sector now and I deal with entrepreneurs every day and I do lots
of consultancy and mentoring and business advice. I really needed
to understand the kind of psychology of the entrepreneur, and
I really do think that there is a definite mindset which separates
someone who is going to be a success with someone who is going
to give up when the going gets tough. If we can somehow instil
that entrepreneurial mindset, which is really all about self-belief,
determination and drive, in people, in children (ideally before
they are five), then we are going to produce the type of people
whose mindset is entrepreneurial, and that does not just have
benefits for enterprise, it has benefits to the whole of society
because it is very much a "can-do", proactive, positive
mentality, as opposed to, "That will never work", and,
"I cannot do that", and when people believe that they
can, that to me is incredibly empowering in whatever sector. So
I think there is a huge amount that can be done to engender that
entrepreneurial mindset through schools, through training, through
the way that we teach children.
Mr Richard: Although I agree with
Rachel, I have a more prosaic view of it. I started teaching people
how to start businesses last year, mostly because I was asked
to and they wanted to know, but it turned out that they did not
want to know how to start a business, what they wanted to know
was how businesses start. Meaning, if I have an idea and I am
sitting here in my cubicle, staring out of the window, I am thinking,
"Gosh, I have an idea. What do I do?" They do not know
how to think about starting a business. They do not have in their
mind a picture of the mechanisms and how all the bits fit together.
What is interesting about that picture is that it is teachable,
it is noble, it is learnable, it is an educational question, and
this was forcibly brought home to me by my daughter and son. My
daughter is at a school in Cambridge and she went through one
of these exercises to help you determine what career you should
be in. It was a laudable exercise. They handed to the children
little cards, on which there were various queries, handed out
randomly, and, prior to handing out the cards, they had to write
down what their aspirations were, the notion being that you should
try to get a query that matches your ambitions and aspirations.
As it happens, my daughter and a young friend of hers, whose father
is also an entrepreneur, wrote down a series of things that, if
you were to look at that list of aspirations, could very well
have been written for an entrepreneur; and my daughter's friend
Bennis received hers and on her card was written "entrepreneur",
and so when her turn came she said, "Great, I got a perfect
match. I want to do these things. I want to be independent. I
want to be my own boss. I want to become successful. I want to
have an impact on the world." That kind of thing. The teacher
said, "Yes, but what about the down sides?" She said,
"What do you mean?" She said, "Well, according
to our sheet from our guidelines, being an entrepreneur has the
following things associated with it: you are likely to fail."
That is number one and you work outwards from there. "You
are not likely to have people to work with, friends. You are likely
to work long hours. Your marriage is likely to fail." This
is the list of down sides. There were up sides, but she started
there, and she also said, "And it is unlikely to succeed"—bottom
line. "The risks are very, very high." Then Bennis went
on to say, "But my father is a successful entrepreneur"
and my daughter, bless her socks, got up and said, "So is
mine", blank, blank, blank, for which (the blank, blank,
blank) she got into trouble. The net result was that the teacher
said, "Yes, but your fathers are lucky, they are the exception,
and you cannot take from them." So this was their entire
education of entrepreneurship. My daughter is at a highly priced
private school in Cambridge, so I had feelings about this when
she came home that night and I said to my wife, "I think
I should share my feelings with the school." I was not permitted
to, because my wife wanted my daughters to continue to go to the
school. Silly an anecdote as it was, this was the careers day.
This was it. This was their moment to learn entrepreneurship and
that was what they learnt.
Ms Elnaugh: Relating back to innovation,
actually the greatest entrepreneurs are the ones who are the most
innovative and who think outside the box, the ones at school who
are the difficult, trouble-makers.
Mr Richard: That is not always
the case.
Ms Elnaugh: There are lots of
examples of that, and I think it is fair to say that in education
we should be encouraging rather than suppressing spotting the
odd-ball mavericks. If you go to America most entrepreneurs there
are complete odd-ball mavericks.
Mr Richard: No, we are not.
Ms Elnaugh: That was my experience
of going to the Ernst and Young American Entrepreneur of the Year
Award in 2002.
Mr Richard: They tend to be a
bit more flamboyant. Do you mind if I add one comment to this.
There is an opportunity here, and I do not want it to be woolly,
I want it to be specific. When we wake up in the morning and our
kids are in school, there are certain things we treat as basics—reading,
writing, arithmetic, English—there is a basic curriculum,
but never do they in any way learn how the world works. I want
my children to be well-rounded, but a huge portion is how do things
get done? How does a thing get built? How does it get purchased?
How does it get bought? How does it get sold? What is the mechanics
of an economy? I want to assert: teach them that, read the notion
of business and enterprise into the core curriculum so that they
are launched into the world with a basic profound understanding;
when they walk down the street they can look at a store and understand
how a store works and how an enterprise works. I think that that
is 90% of the issue. It is not actually, I believe, about inspiration
or enthusiasm, I think they have that. I just think that they
do not take the first step because they have no clue how to take
that first step.
Ms Elnaugh: I think, personally,
it should be woven into every subject. If you are teaching art,
instead of getting people to draw that building out there, get
them to design a brand identity for a product. If you are teaching
geography, look at a country and say, "If I was running that
country what are my natural resources and how could I generate
revenue and wealth from my resources? If you are doing English
literature, look at the biographies of great entrepreneurs. So
you can weave it in. If you are doing maths, teach people how
to work out profit margins and percentages, because people come
into business with no knowledge of the basic fundamentals of how
to work out basic financial stuff. We do not have to have an enterprise
class, it can be themes that run through every single subject.
Mr Richard: We do not want to
ghettoise it in any way, shape or form.
Q319 Roger Berry: Apart from the
dummy product education that you gave us, schools in my area,
which are state schools, do actually teach young people how to
get interested in business, and certainly the view of geography
that Rachel has just described, this is all terribly general and
nebulous, is it not? Do not tell me that the answer is paper,
but what are the top three things that the Government can do promote
cultural enterprise? Obviously other business people. Our Chamber
of Commerce should doing this, the Small Business Enterprise Unit
should be doing this. Has government got a role here? Should we
be rewriting the school curriculum in terms of promoting a culture
of enterprise which you have said is so important?
Mr Richard: With all due respect,
I do not think it is the role of government to promote a culture
of enterprise. There are no quick and handy tools lying on the
table for us to pick up. I think government can have a role in
education, but let us not talk about education. I do not think
that we can mandate a culture of enterprise. I do not think we
can even encourage per se. I think people are rational
actors on an economic stage. I will give you an example. You know
what you can do to promote a culture of enterprise? We can change
the quantum of risk in starting an enterprise so that the fear
of failure becomes less. In the US we have a soft landing system,
we have Chapter 11 and Chapter 7. Here we have a sudden death
system.
Chairman: I have got lots of colleagues
who want to ask questions. Fear of failure is the next point can
will come to. Can we do fear of failure next?
Mr Binley: I wanted to ask a question
on this particular section, because education is not only limited
to school, and we ought to recognise that. Can I ask the question,
Chairman, I assume you will allow me to? Thirty years ago the
banks were much more open to dealing with entrepreneurs than they
are now.
Chairman: Access to finance comes
later, Brian.
Mr Binley: I am not talking about
access to finance, I am talking about education.
Chairman: Education also comes later,
Brian. Can we move on to Mick Clapham.
Mr Binley: I am sorry, we were
talking about education, and that is what I wanted to pursue.
Chairman: Brian, I am sorry, we are going
to move on. Mick Clapham.
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