Limits Of The Entrepreneurial Economy

Entrepreneurs are now all-pervasive: they have captured the imagination of the television viewing public and are lauded by governments who believe these buccaneers will lift economies out of recession and policies are tailored to accommodate there every desire. But are entrepreneurs false idols? Are they actually a drag on the economy and rather than creating wealth are they merely heaping up piles of money?

First we need to clear up one small but significant point: innovators and entrepreneurs are not one and the same – they might have been twenty years ago but today they are two very different animals. The parting of ways came during the Dot Com boom. A surplus of cash from pension funds combined with artificially low interest rates saw large amounts of money looking for levels of risk that would yield a decent return - it found that risk in the small start ups run by innovators. During this period stock markets rose exponentially encouraging banks and venture capitalists to throw money at any innovator who fogged a mirror. The VCs realise that, at the end of the day, stock traders would leap at IPOs and, in so doing, take on debt at inflated prices.

Recently a veteran innovator claimed the drying up of capital markets, and a cut in bank lending, was holding back innovation in the UK - acting as a deterrent for would be entrepreneurs. He was not talking about a lack of funds to pay engineers or buy equipment but a shortage of bank lending to leverage seed capital - and a buoyant stock market to provide a quick exit for company founders. At some point between the 1980s - when this innovator started his first company - and today, his benchmark for success was transformed. Success was no longer the creation of a sustainable company but, instead, cashing out on the right day. The business model had been re-engineered to run in reverse: instead of small ideas generating large amounts of money large amounts of money were now used to develop small ideas. Innovation moved out of the lab and into the boardroom. And, around the end of the Dot Com boom, entrepreneur-innovators learned it was best not to pay too much attention to what was happening in the rear view mirror. The short termism of the banker - that the innovator once derided - became a key component in the entrepreneur’s own business model.

Does this really matter to anyone other than entrepreneurs themselves, as they seem quite happy with their newfound role as reality TV stars? They worry little that in some quarters the words ‘entrepreneur’ and ‘spiv’ have become interchangeable. But there are wider implications – especially now the government itself is promoting entrepreneurship as an end in itself. Here are just a few ways in which the entrepreneurial culture, or at least the UK’s version of it, has a negative impact on the economy:-

Ask any medium sized high technology company what is the most pressing problem it currently faces and, without hesitation, it will say ‘recruitment.’ It has become near impossible to find skilled engineers - universities are churning them out by the thousands but they are just not making it into established companies. Instead they are setting up on their own. Once seed capital from the Bank of Mum and Dad is in place they start churning out business plans. Of these fledgling companies only around 1 in 4000 gets funded by a venture capitalist and of these 8 out of 10 limp along for the next decade at almost zero growth. “But look at Arm, and Google.” Our entrepreneur exclaims. True, these are two successful companies created by innovators – but this is akin to pointing to someone holding a cheque for £150 million and claiming the Euro Lottery makes economic sense. The Euro Lottery is a tax on the daft, but at least most of the people who buy tickets and sit hopefully in front of their televisions on Saturday evening have got real jobs to go to on Monday morning. The tens of thousands of highly skilled wannabe entrepreneurs filling out their business plan templates are doing this full time. Add the thousands of skilled people employed by venture capitalists to read these business plans and the creation of a couple of rollover winners such as Google and Arm looks about as efficient as the sledgehammer and nut style five year economic planning of the former Soviet Union.

Eventually, once they have exhausted their family’s patience and savings, engineers start turning up on the doorstep of established companies. All their testosterone expended on fruitless PowerPoint presentations and their most creative years behind them: regarding themselves as failures. The mittlestand companies of the UK have become retirement homes for burnt out entrepreneurs. And this matters a lot because it is medium sized companies that provide incremental improvements to established products and services – the sort of innovation that generates wealth and improves the county’s competitiveness. While it is not a narrative that plays well on Dragon’s Den improving something a customer is already buying, rather than creating a brilliant flash in the pan, is what improves most people’s lives.

True to form just as an economic model is revealing fundamental flaws the government rushes in to prop it up. So we are seeing the entrepreneurial approach applied to state funded initiatives in healthcare and energy. The government are hoping their seed capital can be leveraged with some of the dwindling pile of venture capital squirreled away during the long tail of the Dot Com boom – they may well be disappointed. The shortcomings of this initiative are all too apparent. The ‘frictionless capitalism’ touted by Bill Gates may have seen the birth of thousands of ventures. However, that very lack of friction saw many ventures produce lightweight products – mobile phone apps being a prime example. As a result the UK economy has become fragile and increasingly reliant on consumer spending. Sectors such as health and energy, where large-scale overarching solutions are required, have as a result of the government’s Dragon Den style competitions, degenerated into a collection of devices. Devices that are by and large are neither interoperable nor operate within the sort of frameworks large and medium sized companies are capable of building. Important parts of the UK economy are starting to resemble a bazaar full of toy makers at the heart of a crumbling city.

Attempts by government departments to build the frameworks necessary to provide a coherent and coordinated approach to innovation merely give us the worst of both worlds. The Department of Energy and Climate Change’s (DECC) Green Deal is an example of a labyrinthine state plan deployed by a vast crowd of entrepreneurs - each developing technologies that compete with each other, are incompatible with each other and are unlikely, either individually of collectively, to meet the twin targets of eliminating fuel poverty and reducing carbon emissions. Although the Green Deal is DECC’s idea the entrepreneurial approach to reducing carbon emissions is not: responsibility for this lays with the Technology Strategy Board. The TSB have also taken a similar reality TV show approach in its plans to develop healthcare IT. The result is a bewildering array of devices few of which are compatible with each other or communicate with centralised services.

At some point the government’s love affair with the entrepreneur will come to an end: probably when major venture capital companies run out of money. Shows such as Dragon’s Den will disappear from TV schedules and the entrepreneur will join estate agents and bankers on the list of people to blame for our economic woes. Once again the innovator will be free: the tyranny of the business plan and PowerPoint presentation will be over. After all, even the most ardent lottery player stops buying tickets if there is no jackpot.