Britain's entrepreneurs need some X Factor to escape the Dragon's Den

Napoleon is said to have disparaged Britain's fitness for war by describing the country as a "nation of shopkeepers…". The phrase is attributed to the economist Adam Smith as Britain began to boom at the start of the industrial revolution.

But as the UK's manufacturing economy has withered over the past 30 years, the populist assertion that Britain is a nation of people that likes to shop (consume) rather than make products that are of use in attempting to assert economic dominance rings more true than ever.

Good news for UK manufacturing results in headlines like: UK manufacturing output increases more than expected.

But is it all bad news? A report from PwC in 2008 claimed that although manufacturing had declined in the UK, the sector had created high levels of productivity.

The future of UK manufacturing:Reports of its death are greatly exaggerated claimed:

In 2008, the UK was still the 6th-largest manufacturer in the world by value of output, as ranked by the UN Council for Trade and Development. 2006 was a record year for UK exports, and according to a 2008 report by BERR (the UK Department for Business Enterprise and Regulatory Reform) 25% of UK exports in 2006 were high-tech goods, compared with 22% in the USA, 15% in France and 11% in Germany. And perhaps most strikingly, over the past two decades Britain’s Manufacturing sector has delivered greater productivity gains than Britain’s Services sector.
 

But that report came out in 2008 - and that is ancient history since the financial crisis has changed the economic rules of engagement for good. 


Napoleon, however, is said to have had great admiration for America.


Today, Americans are proud to declare themselves a nation of entrepreneurs, and that this spirit is what has made the country the greatest economy in the world since the second world war. The respected Kaufmann Foundation supports this position by claiming that entrepreneurs are the real drivers of the economy.

So what can the UK learn? Tech City aims to become the "digital capital of Europe" and has attracted Cisco, Vodafone, Intel and Google, which has committed to funding an innovation incubator. But news that Facebook would prefer to expand its offices in the West End of London than be sitting next to its rivals on Silicon Roundabout should not have come as a surprise.

Companies are clustered in Silicon Valley, but rivals do not make good neighbours: Google has separate campus in Mountain View and Facebook is in Palo Alto. When was the last time you saw a Sainsbury's right next to Tesco's in the UK? Or for those listening in American, when was the last time you saw a CVS next to a Walgreens?

The reason why tech companies have coalesced in Silicon Valley is because of capital and intellectual resources. The VC capital that doesn't come out of Sandhill Road is negligible on a global scale, while Stanford University continues to generate world-changing heroes of the startup world.

Californian gold fever has struck even further afield. The Skolkovo Innovation hub in Moscow which aims to foment the same kind entrepreneurial spirit in Russia.

But Silicon Valley has a real X-factor that's impossible to replicate: it is a complex ecosystem which turns so many Silicon Valley startups into global household names.

Tech City has one ingredient right - its location in Tower Hamlets puts it in a position for cheap rents for startups, but within walking distance of access to the UK's greatest concentration of capital in the City. Although Wellington, the largest VC firm in the UK is located in Mayfair, close to many other PE companies and hedge funds.

But the brain power factor is missing. The UK's centres of clean tech academic excellence are at least a tube or train ride away at Imperial College London or the Cavendish Laboratory at the University of Cambridge. Another downside of Tech City is that it will be focused on trying to find the next Google or Facebook.

James Caan, formerly the nice guy on Dragon's Den, has started a column in the Evening Standard to offering advice to budding entrepreneurs. But in the UK in general, there seems to be a focus more on services, than actually making things or even designing widgets that the world wants but are made elsewhere. And Dragon's Den investors lack the vision (and capital) of their US VC counterparts.

Sir Richard Branson is probably the most successful British visionary entrepreneur of our time. But he hasn't really started companies that make things - most of his companies sell services - with the possible exception of support for algal biofuels which could potentially have a huge impact on the world.

James Dyson is the only other household name who springs to mind who does actually design products, not just sells services. In this list of Britain's top 100 entrepreneurs, how many of them are in the manufacturing sector? As the Economist points out, successful economies of the future should be making products and creating services with global market value, ie we must start making things China wants, and fast.

The UK's coalition government makes a hue and cry about how to Get Britain Working again. Cutting benefits is a short cut to the streets, however. It's not a fast track to entrepreneurial wealth.

Coalition policies are loaded in the wrong direction and someone with a grain of good sense - Vince Cable? - needs to force the Chancellor into decisive action to encourage SMEs. Cutting corporate tax isn't enough… how about tax benefits for investments rather than cutting upfront costs. George Osborne's policies take with one hand, but don't give those savings back to society in the most useful way. Where is his evidence that straight cuts in corporation tax lead to direct investment?

Germany, on the other hand has weathered the economic crisis precisely because of the policies it legislated (and values it espoused in avoiding debt).

Instead of mocking poor ideas on Dragon's Den and lionising forgettable X-Factor stars, why not introduce some real competition into the UK?

The CleanTech Open in the US showcases some of the best energy industry innovations in the world and although its competitors are not household names, it gives entrepreneurs something to aim for - with access to mentoring, networks and potential capital.

How about also looking at the better elements of the US tax code, such as the 48c manufacturing tax credit, which stimulated investment in new factories to make equipment for the solar and wind industries?

One simple way to emulate the US is by changing the laws on bankruptcy. Once a company has gone bust in the UK, it's very hard for that entrepreneur to start over again. We need to eliminate some of the downsides to taking risks and remove the stigma of failure.

Thomas Alva Edison, still America's most beloved inventor, famously said of failure: I didn’t fail 1,000 times. The light bulb was an invention with 1,000 steps.

But he wouldn't have been allowed to fail his way to success without the financial support of John Pierpont Morgan.

The UK shouldn't need a war to force the issue as Germany did. But shouldn't the summer's riots be a warning shot that if left unattended, even Britain's shopkeepers might have to bring down the shutters on their failing businesses.

Britain and US bank on entrepreneurs on road to economic recovery

The road to economic recovery has been bumpy so far and looks endless at times. Unemployment in the US has historically averaged around 5.7% and jobless rates haven't been this high since the 1980s, a generation-long record that won't make the trophy cabinet. Although the UK's jobless total is slightly less, at 8.3%, putting pay cheques into the hands of the 1.6m people without work is a pressing concern.

 

Although Spain trumps both, with an unemployment rate of 22%.

As George Osborne announces an additional £5bn towards the £30bn National Infrastructure Plan and extra funds to electrify the Manchester to Leeds railway line, the inability of US Congress to cut the budget deficit is another example of the dysfunction of federal politics, along with opposition to public works such as High Speed Rail and Barack Obama's proposals for $60bn for essential infrastructure.

But both sides of the Atlantic, hopes are harboured that encouraging entreprenuers and new businesses to flourish will come to the aid of the flagging American and British economies.

At a recent breakfast with the Philip Barton, deputy head of the British mission in Washington DC said that developing and maintaining trade relations with the US was more important than ever, even though global economic focus has shifted to China.

The UK's coalition government wants to slash its 26% corporation tax still further, even though it is lower than the US, to make Britain an even more compelling place for businesses to locate.

That's one way to encourage business. But when you're talking about job creation, it's better to encourage entrepreneurs, according to the National Venture Capital Association.

The NVCA claims that US-based venture-backed startup companies created more than 37,000 new jobs up until October this year in a variety of industries including software, IT, and clean tech/energy.

But the Kauffmann Foundation, which does a lot to train VCs and advocate for their economic impact, goes further and argues that entrepreneurs are the drivers of the economy. New firms create around 3m new jobs a year in the US, it says.

That would be a rate of growth from entrepreneurship that would delight David Cameron, the UK's prime minister. But other than slashing taxes, how does a country like the UK encourage startups?

It's time to go back to college for some pointers from the US. The symbiotic relationship between the venture capitalists on Sand Hill Road and the bright minds at Stanford University is difficult to emulate.

While researching a story on the state of VC funding today, I spoke to Paul Kedrosky senior fellow at the Kauffmann Foundation. He said: "Young companies are the largest net creator of jobs in the United States and have been that way for a long time. There’s no other way it can work – young companies can hardly destroy jobs because they don’t have any! By definition they are walking away from a wall of zero. Companies that have 1000 employees can go either way. It’s a mathematical fact rather than deep economics."

But Silicon Valley's ecosystem is a unique blend of capital, historical accident & design, policy & legislation… and a state of mind.

Kedrosky also took the time to tell me about the coalescence of investment hubs around US universities to create the special ecosystem we see today in Silicon Valley.

The Morrill Land-Grant Act of 1862 created the colleges that were critical in driving the creation of some of these entrepreneurially minded higher learning institutes, such as Stanford University which opened in 1891.

Leland Stanford wanted to create an upscale trade school that would be of use beyond purely academic learning as a counterpoint to the classical learning in Britain, he said.

"Stanford was trying to create something that would teach the practical arts. And that was in response to what he saw going on in the UK and elsewhere: 'This sort of esoteric learning would have been no use to me I’m a practical monopolist and I want something that would have been of use to me'."

This attitude didn't really change until years later, he says.

"People forget that it wasn't meant to be a classical higher education institution because of what happened in the 50 and 60s when it became a recipient of Department of Defense largesse from the semiconductor industry. The reason why Stanford was almost biologically speaking was so receptive to that relationship with industry and had such a permeable barrier with industry which led to so much entrepreneurship is because by design it was a very practically minded institution.

"The institution has become more metastasized within the Silicon Valley ecosystem to the point that now it’s inextricable. There’s a constant flow back and forth and many of the largest and successful companies have links in a meaningful way whether it’s graduates or IP at the back of the institution."

Kedrosky is one of the many who identifies academic contributions in industry and the easy two-way cross-pollination as the factor that encourages Phd alumni to try their luck by spinning out their innovation. While a warm welcome awaits them if they choose to return to academia.

"Stanford has deep in its DNA a consistent ongoing relationship with industry and a path to [academic] tenure could credibly include trips back and forth to the dark side of the private sector and back into the institution. And not only that was that not seen as a bad thing it was seen as something that would add to your capacity to get tenure.

"It’s very rare at HE institutions that you attract the best faculty and create the permeable barrier. You never get the synergies except at places like Stanford in the US."

But is that "permeable barrier" the missing link in encouraging more entrepreneurship from UK universities? No, targeting universities in this way is the wrong approach, says Kedrosky.

"Universities aren’t particularly important in terms of driving entrepreneurship in the US there’s a whole lot of mythology that’s attached to it at certain times. But it kind of becomes a public works project when you say well we want to have an entrepreneurial cluster in cities so we need to put more money into our universities. That’s very much the drunks at the lamppost problem: I get why that’s appealing to policymakers because it’s better than looking for your keys out in the field. It’s much brighter under the lamppost but it’s not directly addressing the problem. It's the classic policy problem – we’d much rather put money into our universities because entrepreneurs are objectionable people."

Read tomorrow's blog for more on policy approaches to entrepreneurship…

California's energy regulators make UK counterparts seem powerless

Energy prices in the UK, and the rest of Europe, are much higher than those in the US.

Residential rates from my energy supplier PG&E average $0.18549 per kWh. Business rates are equally low - I've even heard businessmen report that they tell factory owners in China to start manufacturing in the US because the price of energy is so cheap. But in the UK, my electricity tariff would be according to this comparison site between 8.7675p per kWh (Npower) and 23.6355p per kWh (British Gas).

In the US, these kinds of prices would spark a revolution.

The UK government is currently struggling with utilities to keep prices in check. But it appears to be failing.

Britain's energy secretary, Chris Huhne, recently tried aggressive tactics in urging customers to exercise their right to vote with their wallets in the "free market" energy sector by changing supplier.

Huhne is as free-thinking a politician as you'll see in the current British government. Last week he attacked his Conservative colleagues for placing environmental regulations on a list of red tape to be considered for scrapping. Regulation he argued, isn't always bad and often creates vigorous markets, citing the difference between the boom in European mobile telecomms that far exceeded the industry in the US:

"At one point the USA had no less than 16 separate and incompatible networks. In contrast, the EU adopted a single standard, GSM, which established global roaming. This was so effective that today, of the world's largest 20 mobile networks, six are European and only two are American – and they're in 19th and 20th places."

But Huhne's complaints against the UK's electric utilities suggests that the regulations aren't quite set right yet.

The Guardian reported earlier this month that Scottish Power announced it would raise gas prices by 19% and electricity tariffs by 10% from August this year, adding 48p a day, or £175 a year, to the average daily combined gas and electricity bill of its 2.4 million customers.

It is all very well for Huhne to publicly attack the "Big Six" - Scottish Power, nPower, EDF, Scottish and Southern, E.ON and British Gas - and urge consumers to go elsewhere. But where do energy customers go? The electric utilities in the UK appear to act like a cartel and all raise their tariffs after the first power company has broken ranks. Profits may have "slumped" last year at Scottish Power, but profits at its Spanish owner Iberdrola were a bouyant €2.87bn last year.

It is unthinkable that California's utilities would be able to act in this way without reference to the state's Public Utilities Commission, or its consumer watchdog, the DRA. Consumers in the UK by comparison appear remarkably unprotected and the country's defences against price hikes seem toothless - its energy minister and regulator Ofgem expose weaknesses in the system.

Michael Peevey and other commissioners at the CPUC would be able to put the brakes on …

But the UK energy industry's regulatory issues do not end there. Despite having the world's only legally binding targets on reductions in CO2 emissions and reasonably aggressive targets on renewable energy something really is amiss in the integration of policy and regulation across the energy industry when the National Grid has got itself into a power purchase agreement that means it had to pay wind farm operators £2.4m to switch off its turbines during a low period of demand thanks to an unusually warm May.

Perhaps coal-burning power stations are also compensated in this way, but I doubt it since they carry the UK's baseload. And I am still searching for an example in the US of a utility being compensated in this way.

But it raises serious questions about the UK government's strategy when it comes to integrating renewables into the grid. Premiums for renewable energy is an acceptable part of trying to bring the market to maturity and will eventually lead to price parity with fossil fuel energy.

But when Scottish Power receives £720,000 for not producing electricity and raises prices without reasonable explanation, then the UK consumer has every right to ask questions about the effectiveness of the government and the regulators to protect them - whether from oil shocks in the Middle East or unseasonally warm springs.

These snags in the UK's renewables sector really need fixing if it is serious about clean energy. Perhaps it's time Peevey shared some tips with his UK counterparts…