First published in the Financial Times on 26th August 2014.
It was the best of times, it was the worst of times: the famous opening phrases of Charles Dickens’ novel A Tale of Two Cities could apply to the current climate for start-ups. I have never known a period with such contrasting business conditions; it is difficult to know whether to be an optimist or a pessimist.
The support for entrepreneurs has never been greater – from banks being bullied by government to lend to small businesses, to the torrents of advice online, to armies of mentors, to crowdfunding, peer-to-peer lending and other forms of finance. Interest rates are at record lows, so debt – if you can get it – is cheap by historic standards. There are more angel investors than in the past, and the overall risk appetite among investors seems strong, as witnessed by this year’s busy IPO market and punchy asset valuations.
The digital revolution has made it cheaper, quicker and easier to test an idea and discover what succeeds, and what fails. Indeed, the attitude towards failure has changed significantly: honest bankrupts are discharged much quicker than they used to be, and insolvency is not the disgrace it once was. This encourages people to take risks, and may be one factor behind the rise in self-employment in places such as the UK – which has risen from 8.7 per cent to 15 per cent of people in work since 1975.
Both old and young appear to be keener than ever to start a business. They realise that the old system of jobs for life, defined benefit pension schemes and suchlike are dead and buried. Culturally, it has become steadily more acceptable – fashionable even – to forge a career as an entrepreneur. Whole freelance communities have sprung up, inventing new career structures and markets, using technology to reach customers, source goods, finance, invoice and deliver services. Many are part-timers, combining a microbusiness with studying, parenting, employment or even running several small operations simultaneously. They understand that self-employment can offer freedom, independence and flexibility that traditional full-time jobs cannot.
A peculiar phenomenon of this era of start-ups is the way some nascent projects are bought for large sums, despite making losses. Especially in the technology sector, acquirers seem willing to pay premium prices for innovative intellectual property, customers, even management teams – often at an early stage of development. But very few of us are ever likely to experience such windfalls: for most, we have to build a business than can become self-sustaining, and provide a living – with a sale at the end a bonus.
The reality of being your own boss has never been the soft option. And that sobering truth unquestionably applies now. Globalisation means the world is more competitive than ever. Being first to market, being the lowest-cost operator – these are hard goals to achieve.
Almost all customers are online, so both retail and wholesale pricing are far more transparent. Complaints are easier to make and publicise – and consumers are more much confident about asserting their rights. Meanwhile litigation of every kind is more prevalent – employment, health and safety, discrimination and so forth.
Economic statistics suggest corporate profit margins are at cyclical highs. These figures probably reflect larger businesses’ results. I suspect smaller companies are not enjoying such bumper times. Perhaps the returns on capital seem strong, but that may be simply because the capital needed to start up is typically lower than it was for many 20th century occupations.
Certainly, I see many, many industries where profits and returns on capital are being squeezed by a multitude of pressures – increases in the costs of utilities, insurance, regulation and taxes among them. Meanwhile many sectors suffer from quasi-monopolistic operators – examples being Google and Amazon. Their market power means new entrants – suppliers, customers, rivals – struggle with asymmetric relationships.
But despite these challenges, I would encourage those who have the inclination to start something to give it a go. Recent British research suggested three-quarters of those who become self-employed want to stay that way, even with the pitfalls. Ultimately it is a state of mind: nothing beats the satisfaction of controlling your own destiny.