I had a long, and enjoyable, discussion on the impact and consequences of wealth inequality in the UK yesterday. Who with does not matter: at the end of nearly two hours of discussion I was asked to identify a likely tangible consequence of this growing inequality, which was a surprisingly easy task. I was able to foretell the end of entrepreneurial Britain.
Although many readers are unaware of it, and many opponents ignore it, I have a bit of history as an entrepreneur, having created not only a successful firm of accountants but also a couple of dot.coms and chaired, been CEO or CFO of about ten other companies over a period of about twenty years, most of which are still trading now or have successfully merged. So entrepreneurship is something I know something about, not least because I advised (and still do on occasion advise) many other companies.
In that case let me summarise my concern. Experience tells me that the vast majority of small businesses do not access conventional capital markets. They do instead raise money from family or friends or via bank borrowing, which when it gets to any serious level is dependent upon bank security charged on freehold property. Without that borrowing secured on property most small business cannot and will not grow.
But the fact is that most young people - and most new, entrepreneurial ideas unsurprisingly come from young people - will not own property in the future, let alone property in which inflation has provided them with a convenient equity stake. So their access to capiral will virtually disappear when at the same time they will be burdened by student debt and, if family or friends have been willing to help, it's probably been to help them mitigate the costs of university or get a deposit for a property in the parts of the country where prices are not growing because those are the only places they can afford to live.
So, entrepreneurship is going to be denied to tens or hundreds of thousands of potential small businesses which, however good their ideas, will not grow in the future.
But what, you might say, of those with wealthy parents? I am afraid you should not look there for hope. Time and again it has been shown that the psychology of wealth is to preserve it, not risk it. So those with wealth invest in rents i.e. buy to lets, portfolio stock market investments, secured loans and other low risk income streams because their greatest fear is losing what they already have. Their motive is retaining, not growing, which means they make very poor entrepreneurs, but very good bankers and senior managers in large companies who have never taken a risk in their whole careers at potential real cost to themselves. In contrast, entrepreneurs are usually those who have little and want more: the attitude is wholly dissimalar to those with wealth.
The inevitable consequence is that entrepreneurship will wither in the UK for lack of access to capital. And this matters. Small businesses account for about 40% of UK jobs and much of its innovation and growth. Wealth concentration risks all that.
Don't think wealth concentration does not matter then. If you believe in a string mixed economy in the UK (and I do) then the consequences of growing wealth concentration in the UK are deeply worrying. I foresee the decline and death of entrepreneurship in this country, and I would mourn that.
NB: written on an iPad on a train: apologies for typos if they remain. I always find editing hard on the iPad
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Heartily agree.
Nothing to argue with here at all as far as I am concerned.
Your 3rd and 4th paragraphs depicting how entrepreneurs work are most instructive – thanks.
And what happens of course is that entrepreneurialism is choked off which means that there are no new ideas, products or innovations or even better and brighter people to make the world work. This means that decline usually sets in but not just in say industrial output or competiveness but also within the families themselves who sit at the top of the tree.
Meanwhile investors (people already with money) basically asset strip companies in the name of ‘shareholder value’ which results in more decline, less R & D (a common post Thatcherite curse in this country) and more sweating of ‘existing assets’, also killing innovation.
Truth be told, it is redistribution by taxation and genuine Government support for small businesses that creates truly functioning markets and not this neo-lib dream world that keeps being rammed down our throats.
Hilarious. If this was on a site spoofing you it couldn’t be funnier.
Your assumptions ridiculous.
Parents will suddenly stop helping their children?
Friends will suddenly stop having bright ideas and pooling resources?
The entrprenurial spirit is as strong as ever in the UK and will remain so. There will always be people who understand the benefits for themselves and their communities of running their own businesses and they will always find a way.
As always it will be pointless asking you for even the slightest sliver of evidence to back up your silly theory. More wishful thinking.
And also as always you show how behind the times you are as you overlook the growth of crowd funding which is helping hundreds of young companies grow. In the US, crowd funding raised $5.1 BILLION for new companies in 2013. No banks required. It’s new here but growing rapidly here in the UK. One website alone (Crowdcube) raised £11 million for 47 new businesses in the first half of 2014. You really must make more effort to keep up to date.
Geoff
If you really think £11 million and 47 businesses change the argument your evidence is sadly lacking
And from where will these patents without wealth manage to conjure it from to support their children?
Your logic is poor as your evidence
I’ll stick to my experience
What is yours? Please tell….
Richard
Richard
As I said about UK crowdfunding, it’s new but growing in the UK. I see you pick out the bit about UK funding (from just one website) but ignore the $5.1bn raised in the US.
11m & 47 businesses from one site, and a 10 second google finds Crowdcube with £51m & 178 businesses. But even when crowdfunding reaches comprable levels to the US you’ll still stick your fingers in your ears and refuse to hear what you don’t wnat to hear.
My experience? A carreer in tax/accoutning/business and my 9 most recent years spend in an OMB department advising start-ups and growing businesses.
Even putting crowdfunding aside, there are plenty of PE houses out there investing in businesses with as low as £0.25m entry level investments. To suggest that a business must have property as security so it can borrow to grow or else it is stuck is (again) laughable. Investment in return for an equity stake has long been the preferred route, putting together expereinced entrepreneurs with the next generation.
Of course, you might think £0.25m is a huge investment but that would say more about the level of business at which you used to operate than it would about the ambition of the UK’s next generation of entrepreneur.
So I’m working on a daily basis in the real world with growing businesses and you’re painting a picture of the world as you see it in your head and relying on your supporters being too ready to lap up what they want to hear.
I too have worked in that sector
For rather longer
And to say your description sounds like a sales pitch is to be kind to you
What this topic is really about is social mobility which is is under threat from having too much money in the economy in the wrong place (entrepreneurialism is part of the social mobility ‘infrastructure’ – think about it).
Crowd Funding will make a contribution to entrepreneurialism but it should not be the only way or the cavalry riding to the rescue as you seem to suggest. All we need to see is a mixed economy of funding new ideas and new people – right? Choice – real choice.
Crowd funding is just another way of using other people’s money to start a business. It’s just a new funky way to raise cash without going to the established means like the financial sector who bascially do the same thing (use other people’s money but take a cut of it as it passes through their hands). At least crowd funding cuts out the expensive financial sector middle man. Or doesn’t it? Can you tell us? Isn’t it just another form of speculation?
Also, we know that investment pressures (returns, how much, how often, for how long) create their own problems for businesses – especially new ones. Does crowd funding avoid these? How is crowd funding a better option?
In terms of evidence, what are the projected returns for those who crowd fund? How does it actually work Geoff?
If you’re serious about the benefits, lets see a bit more detail – not a simple rebuttal. Go on Geoff – knock yourself out mate………….
Mark
On crowdfunding, You’d have to read the prospectus to find out what each individual company is offering.
How does it work? Typically what is offered is a minority shareholding in a company in return for a cash investment – My most recent involvement with a company saw them issuing shares representing 20% of the company in exchange for a £180,000 investment – the average investor put in about £5k.
Investor pressures? None, see above. The founding directors still own 80% of the company. The minority shares cannot be sold without director approval so the investors are ‘along for the ride’. The prospectus sets out clearly the plan which if it all comes off envisages a sale of the company with a 5 year time-scale. The investors know that when they invest. It’s an informed decision.
I’ve seen companies fail and investors lose everything, I’ve seen a company which increased 15 fold in value in a year before it was bought out.
“let’s see a bit more detail”? If you’re reliant on this website to learn more about how business works in the real world, I’m afraid you’re in the wrong place. Why don’t you try a bit of research for yourself instead of blindly relying on the opinion of me or Richard?
“knock yourself out”? It was really no effort. It’s what I do for a living.
Name the firm please Geoff
Geoff
Thanks for your measured response. Very informative and a good jumping off point for me. It’s good to talk and share isn’t it Geoff?
I’m not reliant on this site for facts and figures but I do appreciate it when people add depth to their contributions with a bit more detail. You’re obviously a big fan of crowd funding and I hope that it works out for those who use it (you too) but you could have come in with a more factual basis for your initial contribution rather than one that was a bit dismissive.
‘Research’ – I know about research thanks, which is why I expected more detail from you to be honest. My high standards seem to have had an effect on you. The little you have provided – as I’ve said – has got me interested.
Crowd funding seems to have potential Geoff and I’ll enjoy discovering it thanks to you – but it is no panacea for the ills of finance or business in this country or any other for that matter . If we could get banks doing what they should be doing (delivering a real service instead of focussing on their own margins), then that too would be a big help to new business.
I wonder if Geoff would like to crowd source funding for this blog?
I am in need of new funding
we seem to follow American trends. Social mobility -once known as the “American dream” is now lower than in many European countries. I think this bears out the trend you identify.
I think the situation is mixed. Let’s say Entrepreneurship is handicapped by the forces you describe. Entrepreneurs will overcome obstacles But I know from my own experience of business acquisition that finding the money is not the hardest part, it’s the lack of good business ideas. I think you can trace this back to the State Education system where there is over conformity.
Stephen
To describe that comment as crass is being kind to it
Do you have any experience of the state education system and how stunningly vibrant it is?
Richard
Stephen
I just don’t know what to say…………on one hand bodies like the CBI bemoan that school leavers don’t have enough skills in the job market so the National Curriculum is created to deal with that; now we are being told that the curriculum is now strangling innovation!!! The public sector just cannot win!!!
You know what………..increasingly all this claptrap about the state being responsible for everything that is bad about this nation is just a load of excuses for the non-functioning of markets that are under-regulated and that pander to already established interests.
The hardest part for any new venture is the start up which includes market entry. It’s the cast iron grip that existing corporations and the financial sector exert on new business that contributes to the killing of innovation – not the state education sector. Investors don’t want risk – they want certainty in order to ‘get their money working for them’. That is an investor side problem not an ideas supply problem. Understand?
Instead of conning business into things like credit default swaps, the financial sector could have extended its terms of investment to give new businesses better terms to grow and be successful. Fat chance!
Agreed
With all due respect different people have different experiences of the state education system. The sector is far too large for any individual to know what it is like across the board. It depends upon many things, in particular where you happen to live. Without doubt there are some incredible state schools, some are incredibly good and some are incredibly poor.
I agree
But that still makes the original sweeping comment totally crass
My niece – bog standard comp (in Wales)
9 GCSE A
2 GCSE A stars
A B.
My niece is bright but no genius in the view of my sister: 20% school, 10% sister, 70% effort (niece). Spoke to a footballer’s WAG on a plane (degree in biochemistry – bright lady) she noted that kids from private schools struggle at uni’ cause they have it handed to them on a plate at their private school (ditto comments from a good friend working at one the the UK’s leading private schools – as a teacher). The problem is not a lack of good ideas, but structures to make sure they move from being good ideas to … a business – That is Richards point – you should get out more Mr Griffiths (or perhaps read the Daily Heil less).
Isn’t this what Marx referred as the ‘internal contradiction of capital accumulation’?
I couldn’t possibly comment
🙂
This sent me scurrying for my copy of Capital where I found:
” It follows, therefore, that in proportion as capital accumulates, the situation of the worker, be his pay high or low, must grow worse. Finally, the law which always holds the relative surplus population or industrial reserve army in equilibrium with the extent and energy of accumulation rivets the worker to capital more firmly that the wedges of Hephaestus held Prometheus to the rock. It makes an accumulation of misery a necessary condition, corresponding to the accumulation of wealth. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, the torment of labour, slaver, ignorance, brutalization and moral degradation at the opposite pole, i.e. on the side of the class that produces its own product as capital.”
They don’t write like that anymore! I think Marx is due some rehabilitation.
This corresponds with figures in the US showing declines in the number of small businesses being formed..
..On the plus side there have been some developments making it easier to set up and finance businesses, such as the steep decline in IT hardware costs and availability of crowdfunding platforms…
Doesn’t Mariana Mazzucato also show in The Entrepreneurial State that state funding is often an essential underpinning of innovation, and ‘small government’ necessarily will mitigate against entrepreneurism?
She does, brilliantly
I recently had entrepreneurship defined to me, by a prominent business person, as having moved from “the hunter gather mode” to being “Agrarian: farming”. As someone who obtained loans at the age of 32 and 37, in both instances signing my house as collateral, I fully endorse Richard’s idea of an entrepreneur. My many colleagues who have been and are entrepreneurs were of the same mode, we were scientists and engineers, we took ideas and formed companies. We did the science, engineering, marketing, sales, travelling, installation, phone enquiries, book-keeping etc. I do agree that you needed a source of collateral and that youngsters today have less access to collateral that they can borrow against. If you work in industry, you can still see such an entrepreneur by breaking off and forming your own company often taking your own IP. If you work in the public sector or in the university then things have changed. That type of entrepreneurship is disappearing because public sector/university staff have employment contracts now regarding IP they create and do not have the time, they once had, to take on such ventures. Any spare time we ever had in public sector has gone due to the frantic nature of current jobs and paper chase. From my observations, there is a continuing progression of corporate capture within public sector/university where larger corporations come in and literally hoover up projects they have some interests in, either taking them on or leaving them in a “cupboard of good ideas and innovations” that can be picked from later. Public sector staff sign away their IP rights to the employer, if an idea is to be developed you can not be the entrepreneur that Richard describes because essentially you give that idea to the teams within much larger industries and they take it through their pathways. Additionally for scientific and engineering projects, the earlier entrepreneurs were auto-didacts, generally you could read it up and learn a new skill quite quickly. Today electronics and software is so specialised and often unfathomable that you need specialists and teams. Hence the remark that entrepreneurship is more agricultural than hunter gather. Whilst I accept this latter description particularly to leverage large sums of monies from government, EU or investors there is still room for the hunter gather entrepreneur. From my experience I know which type gives the greater satisfaction.
Agree with all that
What irritates me is people who have spent their entire lives with month end salary checks calling themselves entrepreneurs
They are managers