Now that the hysteria surrounding Start-Up Britain has died down, Wol Kolade explains where the government is going wrong on start-ups.

Now that the hysteria surrounding Start-Up Britain has died down, Wol Kolade explains where the government is going wrong on start-ups.

Another day, another announcement from the government that it is planning to kick-start the economy by backing entrepreneurs to found their own businesses.

The latest one is Start-Up Britain, unveiled in March and fronted by none other than Richard Branson. The press release hailed the ‘groundbreaking’ news that the government and 60 leading brands are offering start-ups the princely sum of £1,500 to get going, as well as advice and other practical support such as money off business insurance.

Don’t get me wrong – there is nothing bad in this. Governments should be encouraging the inventors of tomorrow and these are all good intentions. But good intentions are not going to get us out of the economic hole in which we find ourselves today.

Start-ups are great, but thousands of tiny businesses are simply not going to employ the hundreds of thousands of people looking for jobs. So what is the real solution to unemployment?

Finding the answer

A good starting point is looking at the fundamentals of the British economic psyche compared with the US (on which the Start-Up Britain concept was based). In the US, there is a decades-old ecosystem based on military and industrial knowledge and a grassroots of entrepreneurs who act almost as bees in a colony – flying from company to company and using their experience to develop and nurture.

For example, the people who founded Sun Microsystems were the venture capitalists behind Google. And anybody who has been to the cinema lately will know that the founder of online music business Napster played a major role in the early days of Facebook.

In the US, it is cool to get behind a business and help it on its journey, and what they have ended up with is a virtuous circle that we have not got anywhere close to replicating over here.

What we had in Europe, and particularly in this country, was a dotcom boom and subsequent bust, which at least legitimised entrepreneurship. Suddenly it was not seen as barking mad to leave your steady nine-to-five job and start a business or get behind someone with a vision.

A fantastic start… but we are still light years away from achieving the same sort of environment that America enjoys when it comes to entrepreneurs.

I’m not deriding the government’s desire to support start-ups – all I’m saying is, let’s be realistic. Start-ups employing just a few people need to run for years before they achieve the size capable of helping the UK economy out of its current dip.

I was interested to see some research published recently by the University of Strathclyde’s Entrepreneurship Centre that looked at the characteristics of high-growth companies in Scotland. What they found was that the majority of high-growth companies were not, in fact, those that had grown rapidly since start-up.

Instead, they were companies that were at least ten years old and often in fairly mundane sectors rather than in the more “sexy” areas of technology or R&D. And this is not to say that the companies were not innovative; they were, just not in the traditional way of thinking about innovation. These were companies that had innovated through their business models rather than just making a revolutionary product.

And yet it is these very companies that are the ones generating the new jobs and opportunities for the workforce. By all means, let’s back high-tech start-ups, but the principal focus should be on those companies that are already growing but need to be turbocharged to help them reach their potential.

There are five million SMEs in this country, and if just half of these took on only one extra worker then we would no longer have unemployment.

So how do we get there?

For a start, we need to look at regulation. The government is currently implementing a rule that says no new regulation can be brought in unless the originating department can show that its impact is neutral in terms of net cost.

But we all know that more than half of the new regulations introduced come into this country because of Europe, so while the government’s intentions are all well and good, its rule is only half of the story.

What we need is a measure in place that recognises that regulation and compliance is a drag on the economy, and for the government to acknowledge that its job is to get the cost down rather than just trying to keep it neutral. Wouldn’t it be a brave government that tried to get the absolute cost of regulation and compliance down?

And if we’re really going to help SMEs, what about tax and working capital? Capital gains tax should be about encouraging risk-taking, and there can be little question that the 10 per cent tax rate was a major boost to entrepreneurship in this country.

And on the flip side, it is all very well companies pushing hard to win new contracts, but what happens when the finance director says there is not enough working capital to enable the business to fulfil the order? Game over.

So while there is nothing wrong in start-ups and hoping for the next Microsoft, all I’m saying is, let us not forget where the economic generation comes from – the millions of small businesses up and down the country. It is those that really need the help.

Wol Kolade is managing partner of ISIS Equity Partners, having joined in 1993. His role encompasses overall responsibility for the strategic development of ISIS, and active involvement in investments. He was chairman of the BVCA in 2007/08,  is a governor of the London School of Economics and Political Science, and is a trustee of the Guy’s and St Thomas’ Charity.