We have pinched the American dream
First published in the Sunday Times on 1st March 2015.
At every British entrepreneurs’ event I’ve ever attended, someone says: “Why can’t we be as enterprising as the US?” Well, I have news for the pessimists: we have arguably become a nation of go-getters, just as the American start-up scene slumps.
According to StartUp Britain, which I chair, last year was an all-time record for new company incorporations here — 581,173, an increase of almost 10% on the previous year. This was a net increase of almost 350,000 firms.
By contrast, in the US there were 70,000 more company closures than start-ups in 2014. In other words, businesses in America are dying faster than they are being born.
Since 1978, according to the Brookings Institution, a think-tank, the proportion of US firms that were new — less than a year old — had halved to 8% by 2011. In that same period, the annual number of British incorporations per year rose eightfold. Moreover, if current trends continue, there will soon be more self-employed people in the UK than work for the government — roughly 15% of the workforce. In the US, the self-employed represent only 10% of the workforce — just two-thirds of the number who work for their government. So who is more entrepreneurial now?
Corporate dynamism matters a great deal. New companies contribute disproportionately to job creation and innovation. Generally, mature firms are more risk averse . They are much less likely to undertake creative destruction, the real engine of growth, and achieve technological breakthroughs. Usually they are more bureaucratic and less flexible — and thus less well placed to adapt to fast-changing times.
Why is America falling behind? I suspect the biggest cause is the sharp drop in so-called millennials who are starting businesses. In 1996, those aged between 20 and 34 were responsible for 35% of start-ups; by 2013, their proportion of start-ups had fallen to 23%. Given America’s image as a nation of Mark Zuckerbergs, this trend is shocking. Increased student debt is a factor, as is weak asset accumulation: the net worth of households under 35 fell by 43% between 1995 and 2013.
There are other factors. In areas like the environment, product safety and employee protection, the burden of regulation has increased. It is named by small business owners as their biggest problem. There appears to be a direct correlation between this rise in red tape and the slump in business creation. It might also be linked to a falling savings rate.
Some commentators blame President Barack Obama for increasing capital gains tax from 15% to 28% — the same rate as here, except most British start-up founders can benefit from entrepreneurs’ relief.
One reason Britain has become such a hotbed for start-ups is immigration. A Centre for Entrepreneurs survey last year showed that one in seven businesses here are run by migrants. And in a curious way I think the NHS helps to fuel start-ups: when founders here leave established employment to build a business, they do not lose health coverage, since they still qualify for the state’s medical system.
It strikes me that in the past few decades there has been a cultural shift here: we have discovered an appetite for risk and self-employment. There are more positive role models, sources of advice and types of funding, and, thanks to the digital revolution, it is easier and cheaper than ever to test new ideas. I also think university students now see starting a business as a serious career option. That was not the case when I graduated in the 1980s.
Of course, America is still far better at developing its winners. Sherry Coutu’s Scale-Up Report, published last November, was a reminder of the challenges we face in producing more gazelle companies — the magic 7% of start-ups that deliver most of the new jobs and add the greatest value to an economy. Silicon Valley corners 20% of the world’s total venture capital, and has extreme concentrations of programming talent. It boasts 40% of the world’s unicorns — start-ups worth more than $1bn.
Yet London offers attractions to technology entrepreneurs. Almost 600,000 people are now employed in the tech/digital sector in the capital, and it is a more diverse, cosmopolitan place than the monoculture that is Silicon Valley. The UK boasts four of the world’s six great universities. And Britain suffers nothing like the night-mare of litigation that is so endemic in the US. Meanwhile, our crowdfunding scene is more buoyant, thanks to lighter rules.
The past five years have seen various government initiatives to boost entrepreneurship, and I believe the efforts are paying off. Meanwhile, our economy is enjoying almost 3% annual GDP growth, unemployment is below 6%, and there is negligible inflation and ultra low interest rates — a fine backdrop for anyone thinking of taking the plunge and starting a business. We should be proud the UK is becoming a world beater in start-ups, job creation and enterprise culture. The best is yet to come.