Global Entrepreneurship and Development Index Launch 1 March 2011 Professor Saul Estrin, London School of Economics Professor Michael Hay, London Business School Carol Gaddum, London School of Economics Notes for presentation: not to be quoted without the permission of the authors Entrepreneurial Profile of the UK: Analysis and Policy Recommendations

Outline of Presentation Not to be quoted without the permission of the authors2 The UK’s Position in the GEDI Strengths in the Entrepreneurial Environment Weaknesses in the Entrepreneurial Environment Weaknesses and Policy Responses Finance Innovation Culture Framework for Policy Analysis Policy Recommendation

The UK’s Position in the GEDI Not to be quoted without the permission of the authors The UK ranks 14th in the GEDI with 0.56 points The UK’s overall entrepreneurial performance is perfectly in line with the development predicted by the trend line It outperforms the trend line in terms of entrepreneurial attitudes and activity Here the difference is quite significant in the case of entrepreneurial activity (13 th ) and only marginal for entrepreneurial attitudes (11 th ) By contrast the UK is positioned significantly below implied level of development in terms of entrepreneurial aspirations (21 st ) 3

The GEDI points to strengths in three key areas: Opportunity perception: A high percentage of the population is able to identify viable opportunities to start a business Entrepreneurial Activity: The UK consistently ranks in the top 33 percent of countries e.g. quality of human resources, new products, new technologies Competition: Entrepreneurs in the UK are primarily positioned in industries with few competitor offering the same product Strengths in the Entrepreneurial Environment Not to be quoted without the permission of the authors United Kingdom67% percentile33% percentile 4

GEDI points to three key areas of deficiency: Lack of enterprise culture, reflected in a weak performance among most of the individual attitude variables A shortage in product and technology innovation, which in turn limits companies’ abilities to grow and expand internationally A substantial problem in the provision of informal venture capital Weaknesses in the Entrepreneurial Environment Not to be quoted without the permission of the authors United Kingdom67% percentile33% percentile 5

INNOVATION FINANCE CULTURE BIG ENTREPRENEURIAL SOCIETY Analysis of the Weaknesses in the Entrepreneurial Environment Not to be quoted without the permission of the authors6

Finance – Market Trends Not to be quoted without the permission of the authors7 Market saturation and consolidation UK hosts one of most developed and sophisticated angel markets in Europe Evolved from fragmented system to co-ordinated network of angel groups Market shows signs of stagnation whereas the French market is growing rapidly Increasing investment activity 41% increase in the number of investments per year since 2000/01 Total deal value has jumped from £49.6m to £123.2m (+148%) since 2000/01 Participation in co-investment schemes Angels involved in 45% to 59% of public-private co-investment deals Source: Mason et al. (2010); BBAA (2010) Traditional Strengths Challenges Disconnect between angels and venture capitalists Disadvantageous design of EIS and failure to protect angels against dilution Deal flow Lack of awareness of investment opportunities impedes inflow of new angel investors Shortcomings in training and education of novice and inexperienced angels Lack of investment readiness continues to be a factor limiting the efficiency of the angel market Need for infrastructure enabling investors and entrepreneurs to more easily locate one another Exit Opportunities Lack of opportunities due to disconnect, depressed IPO market and lock-in periods

Finance - Policies Not to be quoted without the permission of the authors8 Fiscal Incentives: To increase the number of business angels by improving the risk reward ratio Business Angel Networks: To reduce information inefficiencies in the market so that investors seeking to invest and entrepreneurs seeking finance can more easily locate one another Co-investment Vehicles: Government-financed venture capital funds, which leverage investments made by business angels to increase deal size and allow follow-on investments Securities Legislation: Changes to securities legislation that prevented entrepreneurs from circulating business plans Capacity-building for Entrepreneurs: Training for entrepreneurs to improve their investment readiness Capacity-Building for investors: Training for investors to increase their competence in making investments Deal Flow Dilution Co- investment among Angels Source: Mason (2009) Exit

Innovation – Market Trends Not to be quoted without the permission of the authors9 Low business R&D intensity Industrial structure with a high proportion of output generated in services Limited range of innovative sectors (many of these contract or move abroad) New developing sectors face difficulties in growing in the global innovation economy Problems in translating R&D into commercially viable products Risk capital Business-academia relationships IP framework “IP to license” model where IP is sold to foreign investors or SMEs are acquired by multinationals Entrepreneurial spirit and fear of failure Lack of future skills needs Management skills Technical skills (STEM graduates) Source: Miles and Daniels (2009) Traditional Strengths Strong innovation performance in international comparison EIS (2009) ranks the UK 4th in terms of innovation performance behind Sweden, Finland and Germany GCI 2009/10 ranks the UK 15th in innovation performance NESTA Innovation Index (2009) indicates that UK invests more in innovation than traditional R&D measures suggest Challenges

Innovation – Policies Not to be quoted without the permission of the authors10 Lack of Scale Managerial & Technical Skills Risk Capital Innovation Demand Supporting Business Innovation Demanding Innovation Research Base Innovative People Innovation in Public Services Innovative Places Source: Innovation Nation (2008) Business Links R&D Grants R&D Tax Credits Innovation Platforms Knowledge -Transfer Partnerships Innovation Voucher Investigation into Service Innovation Review of IP Legislation Small Business Research Initiative Innovation Platforms Better Regulation Initiative National Skills Strategy Train to Gain Coaching for High Growth STEM Skills Promotion Innovation Platforms Science Cities

Culture – Role Not to be quoted without the permission of the authors11 The culture of European societies has been identified as one of the key reasons for the gap in Europe's entrepreneurial activity compared with the US Source: Huggins & Williams (2009) CULTURE Culture plays a central role in cultivating entrepreneurship Culture shapes what individuals perceive as opportunities and therefore entrepreneurial alertness is linked to capabilities of judgment, creativity, and interpretation Culture matters at the national, regional, firm, and individual level

Culture – Market Trends Not to be quoted without the permission of the authors12 Fear of failure Lower fear of failure than France and Germany, but high compared to Scandinavian countries and the US 43% of people in the UK compared with 19% in the US believe a new business should not be created if there is a risk that it might fail Fear of failure has been increasing in the UK Misconceptions about risks Society does not sufficiently celebrate returns from enterprise and overstates the likelihood and consequences of failure Risk aversion is based on misconceptions about the risks inherent in starting a business People underestimate the potential income from running a business and overestimate the difficulty of obtaining finance Celebration of Success Historically embedded phenomenon and partly attributable to the evolution of bankruptcy law in the UK Until the 19th century bankruptcy was considered a crime and a bankrupt in the old laws was considered an offender Although public attitudes and legal consequences changed considerably, stigma of bankruptcy remained Challenges

Culture – Policies Not to be quoted without the permission of the authors13 Absence of Role Models Conceptions about Risks Stigma of Bankruptcy Fear of Failure Awareness Raising Campaigns: For instance Enterprising Britain, a competition that recognises and rewards local organisations that have worked together to drive the social and economic transformation of a place Legislation: Enterprise Act of 2002 announced major changes to the UK competition and insolvency law School-level Education: Schools play a key role in developing attitudes towards careers and providing enterprise education as part of the curriculum can turn attitudes into action University-level Education: National Council for Graduate Entrepreneurship to promote a culture of entrepreneurship within higher education through research, education, and facilitation Source: Huggins & Williams (2009) Building Entrepreneurial Capacity

Co- Investment scheme Business angel Venture capitalist High net worth individual AWARENESS COMPETENCE DILUTION TAX INCENTIVES AWARENESS COMPETENCE Entrepreneur MATCHING INVESTMENT READINESS Putting it all together Finance Not to be quoted without the permission of the authors14 Business Angel Networks FUNDING

Entrepreneur Universities Collaboration Partners AWARENESS IP OWNERSHIP MATCHING FINANCE SCALE DEMAND IP OWNERSHIP MATCHING Putting it all together Innovation Not to be quoted without the permission of the authors15

Entrepreneur Putting it all together Culture Not to be quoted without the permission of the authors16 Graduates School Children Society FEAR OF FAILURE LEGISLATION MISCONCEPTIONS ABSENCE OF ROLE MODELS

Framework for Policy Analysis Not to be quoted without the permission of the authors17 Co- Investment scheme Business angel Venture capitalist High net worth individual AWARENESS COMPETENCE DILUTION TAX INCENTIVES AWARENESS COMPETENCE MATCHING INVESTMENT READINESS Business Angel Networks FUNDING Entrepreneur Universities Collaboration Partners AWARENESS IP OWNERSHIP MATCHING FINANCE SCALE DEMAND IP OWNERSHIP MATCHING Graduates School Children Society FEAR OF FAILURE LEGISLATION MISCONCEPTIONS ABSENCE OF ROLE MODELS

Entrepreneurial Policy Recommendation Not to be quoted without the permission of the authors18 Legislation IP - Protection Bankruptcy Law Protection against Dilution Co-investment Schemes Tax Incentives Education Investment Readiness Training Competence of Business Angels Managerial Skills Innovation Skills Technical Skills Socialising Skills BIG ENTREPRENEURIAL SOCIETY Networking between entrepreneurs and Angels Innovation Partners & Universities Society, Graduates & School Children