Any other business

What British start-ups are still missing

Plus: Our place in the Prosperity Index, and polishing a pedestal for Michael O’Leary

8 November 2014

9:00 AM

8 November 2014

9:00 AM

This issue includes the new Spectator Money supplement, in which I hope you’ll find a bouquet of stimulating ideas. The cover piece by the enterprise campaigner Michael Hayman waxes lyrical on the important theme of investing in high-tech start-ups: important because it’s an exciting thing to do with the slice of savings on which you’re happy to take higher risks, but also because bold new businesses hold the key to future growth.

At a dinner hosted by Hayman last week, I met a selection of business founders and early-stage investors. The mood was one of optimism in what’s seen as an increasingly benign UK arena for start-ups, buzzing with world-class ideas and underpinned by programmes such as the Seed Enterprise Investment Scheme. But the impression I came away with was of a garden of British creativity that threatens to fall short of its full potential for lack of three kinds of fertiliser.

The first is education: our colleges don’t produce enough scientists and software kids, a gap that can only be filled by immigration — or by entrepreneurs moving to the US to tap the talent there. The second is finance: our venture capital pool is shallow, our private equity firms are rapacious, and our banks won’t touch start-ups. The third is ambition: to achieve scale, digital businesses need to tackle the whole of Europe as their target market — but few are both brave enough and sufficiently well capitalised.

Corporate cash

One way of overcoming problems of finance and market access, I learned, is through ‘corporate venturing’ — a concept which has had a mixed reputation in the UK since McDonald’s bought into Pret A Manger, and Innocent smoothies sold out to Coca-Cola. But we heard the example of Telefonica, the Spanish-based telecoms giant, which invests in many ventures in London through its Wayra ‘start-up accelerator’, offering the best of them access to Telefonica’s global networks. We also heard about JLab, a competition run by John Lewis (in partnership with Manchester venture capitalists) to incubate start-ups in retail technology: the winner, Localz, pinpoints shoppers’ locations in order to send relevant offers to their mobile phones.

If every big company ran an incubator in its own sector, what an impact that would make — not least by pushing short-termist City money to the sidelines. But the City could do it too, incubating innovators in fashionable ‘fintech’. This nexus of cash and brains might make up for our lack of the ‘clusters’ of techies and financiers that make the US start-up scene thrive.

How to give it a better chance of happening? Gordon Brown introduced incentives for corporate venturing in 2000, but the timing was poor after the dotcom crash and the scheme expired in 2010. An RSA study in 2012 found the level of UK corporate venturing ‘modest’, despite its attraction ‘as an approach which offers greater diversity and longer time frames for investments than the ailing conventional venture capital sector’. There have been recent pleas to Business Secretary Vince Cable to reintroduce an enhanced version of the tax scheme, but alas he seems too busy with his new campaign for more ethnic minorities in FTSE 100 boardrooms. Someone should slap a Post-It on his pate with the single word ‘Priorities’.

Brakes on prosperity

The Legatum Institute’s Prosperity Index, published this week, ranked the UK 13th in the world on wide-ranging indicators of income and wellbeing. We came in behind Iceland and Ireland, both Lazarus-like recovery stories, but satisfactorily ahead of Germany and France — prompting George Osborne to praise himself for ‘the difficult decisions we have taken to deliver economic security and control the public finances’. If that’s (as it were) a bit rich in the light of public borrowing this year so far 10 per cent higher than last year, the Chancellor was on firmer ground when he said ‘It’s fantastic to see Britain leading the way for entrepreneurship’: in that sub-index, the UK ranked eighth, with notably low business start-up costs and a high level of belief that ‘people can get ahead by working hard’.

Two other components of the survey make me think that conditions for entrepreneurship could be greatly improved, however. One is that 53 per cent of UK poll respondents think ‘business and government are corrupt’. That’s healthier than Greece, Italy and Spain, where the figure is 88 per cent, but still the exaggerated collapse of public trust in all forms of institution is a hidden brake on honest enterprise, large and small. Secondly, 87 per cent of UK respondents apparently declare themselves ‘satisfied with the quality of education’, when (as I gathered at the Hayman soirée) perhaps they ought to expect and demand better. Both cynicism and complacency are enemies of prosperity.

My hero O’Leary

Michael O’Leary of Ryanair has long been an anti-hero of this column. I loved his airline when it was consistently rude to me as a passenger, because it set benchmarks of ruthless punctuality and rock-bottom fares that shook the whole European airline sector. I was suspicious of the idea that, having exhausted other routes to growth, he was going to polish up his customer service and stop ‘unnecessarily pissing people off’; but the new tone is a triumph, and Ryanair’s profit is expected to top €750 million for the current year. ‘If I’d known being nicer to customers was going to work so well,’ O’Leary says, ‘I’d have started many years ago.’ Having once been so dismissive of the internet that he hired a student and a sixth-former to design Ryanair’s first website, he has even turned techie and created ‘Ryanair Labs’ to develop state-of-the-art ‘user forums’. We should put him on the ‘most admired’ pedestal that I fear — after last week’s tragic Virgin Galactic crash — has just been vacated by Sir Richard Branson.

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  • This is an area I know a bit about. The problem in Europe is that it’s not straightforward to sell your product to the whole continent, whereas in the US it is, though as English is used more widely by each generation of European youth, perhaps that will help. Yes it makes some sense to establish corporate (or industry) incubators, though I don’t know that there is much evidence of this working in the past: incumbents don’t tend to be supporters of disruption. But you do touch on one point which seems very important, that is the City, a genuine world class part of the British economy, is still quite separate from the “shortditch” startup world, and that if that gap can be closed it can lead to better sources of capital and better access to global corporate markets.

  • Sean Grainger

    Having read the last FT Weekend mag — excellent as usual — what British start-ups are missing appears to be Larry Page, Larry Page, Larry Page.