Startup Manifesto: Protect encryption from politicised attacks

Policy 21: Protect encryption from politicised attacks

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

As every technologist knows, policymakers have a tendency to judge the web by the worst abuses of it, and try to legislate it accordingly. That’s certainly the case with encryption, which is routinely singled out as the cause of everything from child abuse to terrorism. In recent months, DNS over HTTPS encryption has come in for particular criticism by MPs who believe that it will undermine the CSE filters provided by the Internet Watch Foundation. This has led to some of them setting up a zero-sum argument: the UK can have child protection or data protection, but not both. In light of the blanket surveillance of everyday internet use called for in the Online Harms framework as well as the Age Appropriate Design Code, that zero-sum argument could become a very dangerous one.

We want policymakers to look at the wider picture with cooler heads. DNS over HTTPS encryption fills in the gaps which leave all web users at risk. It adds a layer of encryption to one of the last remaining fundamental technologies of the web, strengthens protections for users at risk of government censorship, and can help provide user anonymity for vulnerable people who need to stay safe online. It also makes the web a safer place to do business. Despite all that, the UK government is the only government seeking to reverse this technical direction of travel on ideological grounds, risking a British internet which works to its own set of technical standards.

DNS over HTTPS is not a risk to children or the CSE monitoring frameworks which protect them. The solution to those issues lies elsewhere. Encryption must remain end-to-end, and encrypted DNS technologies should not be the subject of legal blocks or filters.

It's also critical that policymakers don't insist that platforms and providers provide "backdoors" for law enforcement to bypass encryption. A backdoor to one phone is a backdoor to all.

Startup Manifesto: Work with startups to shape tech regulation that promotes competition, not stifles it

Policy 20: Work with startups to shape tech regulation that promotes competition, not stifles it

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Further regulation of internet platforms now seems inevitable. But as the Government themselves have admitted, there isn’t a one-size-fits-all framework for tackling the challenges that have risen along with tech platforms (though that doesn’t stop them seeking one…).

One thing is clear: there is a real risk of poorly designed regulation hitting startups harder than the tech giants that the government is aiming at. Where European watchdogs thought that regulation would balance the market, it has actually tilted it further towards the tech giants. Investors agree: 86 per cent of UK investors surveyed worry that policies aimed at tech giants could hit startups harder than their intended targets.

Startups have already struggled under the weight of legislation such as the EU’s General Data Protection Regulation, and are likely to see it again with the recently passed Copyright Directive. The UK’s dozens of committee reports, draft frameworks, working groups, and proposed legislation muddy the waters even further. So whether it’s the domestic Online Harms framework’s proposals on subjective harms, the Digital Charter’s multiple areas of focus, or the EU’s review of intermediary liability provisions in the forthcoming Digital Services Act, the next government needs to be mindful of the impact that sweeping regulation can have on startups. 

That’s also why it’s so important for the next government to take heed of the Furman Review’s findings into digital competition on regulation - and that it doesn’t just cherry-pick the bits it likes. Professor Furman and the panel warned that regulations could “cut across each other if taken forward in isolation”, and that government “should ensure that pro-competition aims and functions are aligned with others, and that the regulatory landscape for digital businesses is kept simple”.

Now the tide of public perception is turning against the tech giants, they are building a regulatory moat to protect their interests - because they are large and profitable enough to do so. The next government should not inadvertently help them by drafting punitive regulation which can only miss its target.

Startup Manifesto: Redraft the Age Appropriate Design Code to be more pragmatic

Policy 19: Redraft the Age Appropriate Design Code to be more pragmatic

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Next year the Information Commissioner’s Office plans to introduce its Age Appropriate Design Code, a series of design standards which aim to make the internet a safer place for children. As it’s been drafted, though, the Code won’t quite achieve that - but it will make the UK an impossible place for startups and scaleups to do business. The draft Code’s provisions would require startups to impose mandatory age verification on all sites, regardless of whether their services even target children, and to collect and safeguard all that user data; create up to six different versions of their services for six age bands from infancy to adulthood; and create parental monitoring systems to let children know they’re under surveillance. That’s just the start of a list of sixteen requirements which will put startups in the business of corporate co-parenting first, and their actual business models second. 

The costs for coming into compliance with the age appropriate design code’s requirements, which will include everything from contracting with age verification providers to beta testing privacy policies on preschoolers, will fall entirely on startups to bear themselves, on top of the costs they are already incurring ahead of leaving the European Union. In fact, the compliance burdens are so overwhelming that many non-UK businesses will either leave the UK market or block UK customers altogether.

While we all have a role to play in making the internet a safer place for children and young people, we know that the draft Code isn’t the right way to do it. Startups and scaleups which don’t even target kids will be forced into an absolutely impossible regulatory burden which, appallingly, will define their noncompliance as child exploitation. It’s in everyone’s interest - both startups and kids - to send the Code back to the drawing board.

Startup Manifesto: Revolutionise the way government collects, stores and shares data

Policy 18: Revolutionise the way government collects, stores and shares data

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

At the extreme, governments’ failure to properly collect, store and share data can destroy individuals’ lives – just ask British citizens caught up in the Windrush scandal. But on a sustained basis, business owners are stymied in their interactions with government, monopolising time that could otherwise be spent focused on running their business.

At present, there is a lack of standards across government leading to inconsistent ways of recording the same data. The National Audit Office has found that more than 20 ways of identifying individuals and businesses across 10 departments and agencies, with no standard format for recording data such as name, address and date of birth.

Tinkering may help, but the next government could and should be more ambitious. Estonia’s X-Road is the model we should shamelessly imitate. The keystone of Estonian digital society since 2001, is “allows the nation’s various public and private sector e-service information systems to link up and function in harmony.” It is estimated that the general savings is around 12 million hours every year. 

Since 2016, X-Road has been available as open source under an MIT License. In fact, the UK was considering using it back in 2013. Finland, Iceland and the Faroe Islands have already adopted the platform. With it’s e-residency card, Estonia even allows entrepreneurs outside the country to start and run a company – which embarrassingly the Mayor of London’s entrepreneurs of the year 2017, Ellenor McIntosh and Alborz Bozorgi, founders of eco-friendly wet wipe brand Twipes, did to avoid Brexit complications.

Estonia’s experiment was a gamble. It could have failed – but it didn’t. We aren’t asking for the next government to take a leap in the dark; they just need to copy what already works elsewhere so Britain’s businesses – and perhaps even those located overseas – can flourish.

Startup Manifesto: Use the Open Banking approach to open everything

Policy 17: Use the Open Banking approach to open everything

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Open Banking allows consumers and small businesses to share their banking data via a secure API with approved third parties, and to allow those third parties to make payments on their behalf. Its objective is to “unbundle” banking services from the traditional current account so that bank customers can access third party services, like accounting and payments software, without the need to move accounts.

The Open Banking principle could be applied to other products as well. The FCA is currently considering whether to extend Open Banking-style APIs to other financial products like savings accounts, mortgages and insurance, and BEIS is considering a wider application of data sharing through secure APIs to markets like energy and telecoms as well.

This “Open Everything” approach will have increasing returns as more kinds of data are made available. Many businesses spend lots of time and money managing everyday expenses like energy and telecoms, or end up spending too much because they get stuck on expensive deals. Data sharing would allow them to delegate the task of shopping around to a trusted intermediary. 

It would also unlock valuable data to innovators, with the owners of that data remaining in control of how it can be used and by whom. In energy, for example, data sharing would make demand-side response viable, so that businesses that could help people draw electricity at times of lowest demand, for example by providing home batteries that can charge in the middle of the night, to save huge amounts of money and allow us to move to renewables that might otherwise be unviable because of intermittency.

Office Politics

Sajid Javid will go down as only the second Chancellor to never deliver a Budget.

Javid was forced to resign after Number 10 asked him to replace all of his advisers. I went into Number 11 a couple of times to meet those advisers and they seemed perfectly pleasant to me. I guess it’s easy to get mixed up with office politics in political office.

The new Chancellor Rishi Sunak is well regarded (even by Javid), and makes all the right noises on his website: “I co-founded a large investment firm, working with companies from Silicon Valley to Bangalore. Then I used that experience to help small and entrepreneurial British companies grow successfully. From working in my mum’s tiny chemist shop to my experience building large businesses, I have seen first-hand how politicians should support free enterprise and innovation to ensure our future prosperity.”

Perhaps his father-in-law can offer some advice. He is Infosys founder N. R. Narayana Murthy.

Among other relevant changes for entrepreneurs, the Department for Business, Energy & Industrial Strategy will be led by Alok Sharma MP, with Kwasi Kwarteng MP and Nadhim Zahawi MP staying on in the department. We have private dinners for entrepreneurs in the works with both Kwasi and Nadhim. Drop me a message if you’re interested in finding out more about how you can attend these.

Paper profit
We are starting to distinguish fact from friction(less) trade.

The Government plans to introduce full import controls for goods moving into and out of the EU after the transition period ends on 31 December 2020. All goods entering the UK from the EU will be subject to the same checks and controls as goods coming from the rest of the world – whether or not we reach a trade deal.

You might need an EORI number, or to hire someone to deal with customs. HMRC has extended the deadline for businesses to apply for customs support funding to 31 January 2021. There is still at least £7.5m available.

If you’re looking to export more, the Department for International Trade has just launched a digital tool to help you navigate the rules and restrictions, tax and duty rates, and the necessary exporting documents.

Go west
NatWest has asked us to let you know about their fully-funded Pre-Accelerator, Accelerator, and Fintech Accelerator programmes.

The Pre-Accelerator is for start-ups. The Accelerator is for businesses who are ready to scale their business. While the Fintech Accelerator is sector specific and is run out of its hubs in Bristol, Edinburgh, London and Manchester. The deadlines are fast approaching. Find out more here.

On the case
As my colleague Annabel Denham argued in The Telegraph last year, rail tickets and fares are too inflexible and ill suited to the way an increasing number of us work.

We think The Rail Delivery Group has some good ideas for better ways of regulating the sector, and they are looking for a business person who can speak about this issue.

Perhaps you can’t travel at the time you want because the fares are too high, or you have to book on a specific train to save money but then end up waiting around after a meeting. Or maybe you’ve decided to drive because the train is too busy. Or perhaps you’ve declined a meeting altogether because of the lack of flexibility.

They are looking for people to get in touch as soon as possible, so if it’s an issue you’re passionate about, drop them an email today.

Startup Manifesto: Promote innovation in regulated sectors by creating a cross-sector regulatory sandbox

Policy 16: Promote innovation in regulated sectors by creating a cross-sector regulatory sandbox

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Regulatory sandboxes allow new firms to operate outside some existing regulations, many of which are constructed with large incumbents in mind. The success of the UK’s fintech sandbox shows how effective they can be. 

An “n+1 sandbox” could replicate this function across other sectors, issuing five-year provisional licenses to innovative companies with business models that conflict with existing regulations, which could then operate outside those regulations. The companies would be required to take out liability insurance, or in some cases the regulator itself may offer it (at a price) if the private sector would not insure an innovative business.

This approach exists in healthcare already, where treatments may be used in certain circumstances even before they have won full regulatory approval, as well as in fintech to some extent. 

This would have two objectives. The first would be to make it easier for innovative companies to come to market, and test out their propositions without having to worry about regulations which may unintentionally have prevented them from operating. The second would be to highlight regulations that are causing problems and holding back innovation, allowing other regulators to see the costs of their actions that would otherwise be invisible.

Good news – and bad – for women on boards

Regardless of the issue in question, public discourse usually follows a similar pattern. 

Take female representation in business. The status quo is challenged (“why don’t we see more women in senior level roles?”) and momentum gathers for tackling it (“we need more women on boards!”). But then a backlash ensues (“don’t we believe in a meritocracy?”). 

What happens from there can depend on the subject matter. Laurence Fox’s Question Time spectacle suggested “anti-woke” celebrities are threatening the liberal consensus. As one author observed in the Guardian last week, “progressives need to wise up to the fact that they are losing the argument and decide what to do in response”. 

In the case of women in the workplace, Amber Rudd wrote an insightful editorial in The Sunday Times that neatly summarised where we are now. 

It’s all very well, the former Cabinet minister wrote, to suggest that we want the best person for the job regardless of gender, race or ethnicity. But if the best candidate is repeatedly a man, “it has to be challenged. It can’t be a coincidence every time.”

Rudd pivots the debate towards the benefits of diversity. It fosters a “broader mix of experience and priorities, leading to better outcomes.” And in politics, “no one is going to fight for women like a woman”. Hear hear. Rudd writes in the context of the forthcoming reshuffle and the rumours that half of the women in Cabinet may lose their jobs.

But with the news last week that one in three board positions at the UK’s biggest companies is now held by a woman, Rudd’s comments could equally be applied to business. The Hampton-Alexander Review found that 349 women currently sit on the boards at FTSE 100 firms. 

Not only will increased representation help tackle unconscious bias and gender stereotypes around what a leader should look like, but if Rudd is right, these women will commit to boosting other women in business. This desire to pay it forward is apparent in the Female Founders Forum, where members give up precious time to champion, advise and even mentor fledgling female entrepreneurs.

Business Secretary Andrea Leadsom was right to point out that businesses had achieved this target voluntarily and without the need for legislation or fines. Perhaps the spotlight on diversity alone has changed the behaviour of big firms. Countless studies have found that it fosters innovation, creativity and empathy in ways that homogeneous environments seldom do. 

Both Rudd and Leadsom have been criticised in a vitriolic, asinine article that insolently dismisses the role diversity can play in avoiding groupthink, ignores the importance of role models, and paternalistically seeks to tell women what they want – especially when they become mothers.

We need reasoned debate, because all is not rosy. There remains a lack of women in senior and executive roles: they make up just 15% of finance directors, for example. 33% isn’t 50%. But rather than cry foul over discrimination, or shrug nonchalantly (or write deplorable blogs) when there is still a way to go before we achieve gender equality in the leadership of British firms, we should strive for balanced discourse that at once accepts progress made, and work yet to do.

Read more about the Hampton-Alexander Review here. And our views on Women in Leadership here and here.

Startup Manifesto: Secure a Data Adequacy agreement as soon as possible

Policy 15: Secure a Data Adequacy agreement as soon as possible

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

Data is the lifeblood of the UK’s startups, and that lifeblood must flow freely. After the UK leaves the European Union, we will become a third country to Europe’s data protection framework. This means that while UK businesses will still be able to send data to Europe as before, information flowing from Europe to the UK will require a lot more work.

Without a data protection adequacy agreement, meaning EU recognition of the UK’s domestic privacy framework as one which protects European data to European standards, startups will need contract-based legal structures to cover their data flows. While these contractual structures are easy for large tech companies, they can consume a startup’s time and funding.

The process of evaluating the UK as an adequate third country cannot begin until the UK has left the European Union - you cannot, after all, evaluate a third country which is not a third country yet - and would take no less than a year to adjudicate. Nor is an agreement guaranteed by any means. A range of issues, including the UK’s domestic surveillance programmes, stand in the way of the UK being deemed adequate.

It will be absolutely critical for government to ensure that an adequacy agreement can be achieved, as quickly as possible, to keep the UK’s startups afloat. This will mean remaining within the spirit and letter of the European data protection framework, supporting startups to devise contractual protections at the speed of business, and resolving domestic issues which could block an adequacy recognition.

Startup Manifesto: Devise a coherent regional startup strategy

Policy 14: Devise a coherent regional startup strategy

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

There has been a growing disconnect between central government and regional tech ecosystems. The needs and requirements of startups in the UK’s wider regions are very different to those situated in London and the South East. Yet there has been a tendency to force top-down reinvented initiatives upon regions which can be detrimental to the local ecosystem. 

The investment landscape across the UK is not uniform and private investment varies from region to region. This is because emerging and innovative funds lack a network of peers and mentors outside London, which increases the perceived risk of investment.  Unlike London and the South East, startups in the wider regions rely heavily on public-backed investment funds. Although some tech clusters have sought to move to a privately financed model because public funds have not proved agile enough, this disengagement from public funding risks leaving large parts of the sector underserved.

To mitigate this risk, we must start to build a nationwide network of peers and mentors outside London for emerging and innovative VC funds to tap into. The British Business Bank’s UK Finance Hub should partner with Capital Enterprise to create a network that could highlight both best practices, and also practices that could be risky for emerging funds in the long run. This would instil confidence in regional investments, enabling emerging funds to unleash capital outside London.

But investment alone brings less benefits than when it is combined with business support initiatives, especially in newer, more emergent ecosystems. It is widely felt that Local Enterprise Partnerships (LEPs) across the country do not understand, and are not always responsive enough, to the needs of the tech sector. Future investment schemes should consider ways to ensure that investment and support are intrinsically linked.

Similarly the digital skills shortage is felt very acutely in the wider regions and it cannot be resolved with a ‘one size fits all’ approach. Intervention has to be targeted, and funded, to deliver for individual regions. The issue needs to be overcome by understanding what is happening at a grassroots level in terms of skills.

The next government must devise a coherent regional startup strategy that is led by a grassroots up approach, developing more networks and infrastructure to share best practice between tech clusters, to bridge the disconnect. This will ensure policy initiatives are targeted rather than mere reinventions from other geographical areas.

Nothing Ventured

Octopus has released its latest High-Growth Small Business (HGSB) Report. At The Entrepreneurs Network we're partial towards HGSBs. After all, these 77,646 businesses (at the last count), making up 2.9% of UK businesses, are vital to the UK’s prosperity.

HGSBs are companies with an annual average growth of more than 20% over a three-year period and an annual turnover of between £1 million and £20 million. They contribute £113 billion in gross value added (GVA) to the UK economy, employ 1.9 million workers, and account for 84% of net employment growth.  Find out more.

Nothing gained
This week I wrote for City AM about pensions reform. Over the years, politicians have talked a lot about Britain as a property-owning, share-owning democracy. Now it’s time to take that aspiration seriously. 

We are struggling on the property-owning front, but auto-enrollment has been a success in getting people to save. However, due to a 0.75% cap on annual charges, pension funds aren’t investing in venture capital. We lag behind the rest of the world: public pension funds contribute just 12% in the UK, in contrast to 18% in Europe, and 65% in the US.

It’s the law of unintended consequences that a seemingly sensible, minor regulation on fund charges is having such a significant impact. It’s not just investors who could benefit from a pension industry more open to venture capital: British businesses up and down the country would gain from this fresh source of capital. Read the whole article here.

Rational expectations
The Department for Business, Energy and Industrial Strategy has asked us to direct you towards an online survey. Filling it in will generate a list of things you need to do between now and the end of the year. I've tested out the survey and it seems to be rationally designed. If you have any feedback, let me know and I will pass it on to the Department. Fill in the survey here.

London calling
Calling London's most ambitious tech businesses! Today is the last day to apply for the Spring Cohort of the London & Partners Business Growth Programme.

You'll have to be running a London based technology company with three or more full-time employees and a minimum viable product. The programme is particularly focused on helping connect you to corporates. Register your interest here.

Read the whole thing here (includes news, views, and events), and sign up here.

Startup Manifesto: Improve access to Innovate UK grants

Policy 13: Improve access to Innovate UK grants

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

The cost of making UK research funding more professionalised in the past three decades has been to make it more bureaucratic and managerial as well. 

This has meant that many innovative firms prefer not to bother with grants from Innovate UK, for example, because of the time and cost of applying and the amount of reporting necessary. The cumulative cost to all the applicants for any particular grant could be a sizeable per cent of the actual grant award: for example, 8 applicants spending 2.5% each on the application would be 25%.  

Apart from the bureaucracy involved, it is not clear that research grants are very well targeted. Inevitably, many good projects will fail the approvals process, and application reviewers end up separating not just good from bad, but good from good, a more difficult and probably less valuable task. 

There could also be clearer focus on Innovate UK’s reason for existing – the market failures, like uncaptured spillovers or collective action problems, that means that private investment may underfund innovation from society’s point of view.

To simplify and better-target grant funding, the next government should pilot a lottery-based funding system, where grant applications are reviewed to pass a certain threshold and those that do are entered into a funding lottery. The assessment could include whether there is a “market failure” case for support where for-profit VCs have decided not to, so that government funding has a clear purpose grounded in the economic case for supporting innovation.

Startup Manifesto: Reform R&D Tax Credits so that they are fit for a modern digital economy

Policy 12: Reform R&D Tax Credits so that they are fit for a modern digital economy

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

When it comes to R&D spend the UK is lagging behind its peers. According to the latest spending data, we only rank 11th in the EU and 19th in the OECD. Although the government has set a target of achieving 2.4 per cent of GDP for R&D investment by 2027, if R&D investment continues at the current rate of growth the UK would not reach this target until 2053... 26 years too late. If we are to meet the 2.4 percent of GDP target we must increase the amount of R&D work carried out by startups.

The UK’s tech sector is growing over one-and-a-half times faster than the rest of the economy, yet tech startups are currently being denied the right to R&D Tax Credit rebates for a range of technologies that are vital to their innovations. 

Take data for example, the lifeblood of any tech startup. Since it isn’t classed as a ‘consumable’ in the R&D process, the cost of data sets can’t be claimed under R&D tax credits. Yet it’s integral to R&D projects of many tech startups, including AI and machine learning. 

Another issue of major hindrance to tech startups and scaleups concerns cloud services. Startups rely exclusively on cloud providers to work with large datasets, train new algorithms and deploy sensors at scale when developing their products. However, more often than not, these costs are not accepted in tax credit applications. It is vital that startups have access to the computing power they need to build world-beating products and services.

Similarly, over 80% of startups undertake significant amounts of user interface (UI) and user experience (UX) research which they considered a vital part of their R&D processes. At the moment, startups are unable to claim fully for the costs they incur building innovative solutions to the front end of their product. Tech firms won’t market a product unless it’s been tested properly with users; they need a clear understanding from HMRC that UI/UX work is critical R&D work, and should be included in the credit.

We know that R&D is going to be critical for the future of the UK economy. We know that startups with limited capital need to invest early to be able to build world-beating products. And we know that the system needs to be updated. The next government must look at modernising this great scheme so that it is fit for the digital age.

Startup Manifesto: Unleash pension fund capital by adjusting the pension charge cap

Policy 10: Unleash pension fund capital by adjusting the pension charge cap

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

For many entrepreneurs, seeking investment from abroad is not a strategic decision — it happens simply because the funds they need to fuel growth are not available in this country. Venture capitalists (VCs) completed £63.7bn of deals in the US but just £5.8bn in the UK in 2017. While the steady flow of investment from overseas can be seen as a vote of confidence in the UK, it does mean that the fruits of the rapid growth delivered by our own startups will be enjoyed offshore.

The government has spent several years examining how to release some of the cash held in Defined Contribution (DC) schemes for investment in fast-growing startups. The next government must follow through on this work as this progressive approach will help the UK to mirror the large amounts of growth capital available in the US and China. In the US, for example, 98% of venture capital funding comes from institutions such as pension funds and insurance companies. This figure stands at just 55% in the UK.

With assets in UK DC schemes expected to exceed £1 trillion by 2029, diverting just 5% of that to venture capital firms would equate to a £50bn funding boost for startups. The British Business Bank has already undertaken a study which found that a 5% portfolio allocation in startup investments appropriately balances against the risks of investing in illiquid assets - thus protecting retirement savings. 

Unfortunately DC funds are currently unable to invest in startups, through VCs, because of a statutory 0.75 per cent cap on annual fees. VC fees are significantly higher than passive asset classes with lower returns (equities) due to the costs of managing an unlisted portfolio of companies, which translates into a performance fee. 

By adjusting the annual fee cap, to account for performance fees, the next government can unleash this growth capital - hugely benefitting savers at the same time. Research has shown that retirement savings for an average 22-year old could be increased by as much as 7-12 per cent, and the average 45-year old could see an increase of 6-7 per cent. This would ensure that a wider group of people reap the rewards from some of the UK’s fastest growing businesses, rather than the profits remaining concentrated in an ever-smaller group of wealthy investors and institutions.

Startup Manifesto: Encourage the British Business Bank to provide more risk capital

Policy 11: Encourage the British Business Bank to provide more risk capital

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

The government helps startups to grow and scale by providing them with patient capital through the British Business Bank (BBB). This is structurally achieved through two “fund of funds” schemes - British Patient Capital (BPC) and Enterprise Capital Funds (ECF) - which deploy capital to various venture capitalists (VCs) depending on their fund size. In theory this structure should spread capital across a broad range of investors and, therefore, a wide range of innovative companies.

Although the barriers to entry are meant to be lower for VCs applying for ECF access, in practice there is little difference in the functionality of the ECF to BPC. The BPC focuses exclusively on well-established VC managers who have already been successful in raising capital without public help. Whereas the ECF currently writes marginally smaller cheques into marginally less established VC managers operating slightly smaller funds. Since both primarily support funds larger than £30m, neither are helping to nurture new emerging managers or investment diversification. 

For the ECF to fulfill its strategic objectives, it must be reformed to become more ambitious in its policy goals, improving diversity and its added value to the VC ecosystem. To do so there needs to be more of a focus on backing genuine emerging fund managers. The BBB should nurture smaller funds of £5m+ through the ECF, with more established fund managers providing mentoring and training programmes for newer fund managers in exchange for their BPC support. These measures would help diversify the VC ecosystem, which would in turn improve the investment pool for startups. 

In order for the BBB to provide effective long-term patient capital, it is also vital that it is given the latitude to be genuinely risk taking. This will require the BBB remaining fairly independent from central government to ensure that long-term investment horizons are not subject to political whim and that success is not deemed by an artificial required rate of return. This will help to ensure that the BBB can become a world class state-backed funding vehicle. 

Startup Manifesto: Reform EIS and SEIS advanced assurance

Policy 9: Reform advance assurance for EIS and SEIS to unlock more investment in high-growth startups

In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are targeted tax reliefs designed to promote investment into innovative startups and scale-ups. They offer substantial tax relief and de-risk investments in early stage businesses who often face considerable difficulty in raising funds. In the 2017/2018 tax year, 3,920 startups raised £1.9bn in investment under EIS, alongside 2,320 startups raising £182m under SEIS. Most business angels (58%) say they would not have invested at all, if the reliefs were not available.

In recognition of their vital role in the UK’s entrepreneurial ecosystem, the next government should commit to maintaining and improving the schemes. In particular, the government should seek to streamline the application process for advance assurance from HMRC, which investors typically insist upon before agreeing to invest. Although the government set a target of 15 working days to approve each application, the waits can often last more than three times longer. Startups often need to access capital quickly and 6 to 8 week waits can place otherwise viable businesses under significant pressure. 

There are a number of measures the government could take to substantially shorten wait-times. For instance, they could work with investor organisations to develop standardised EIS/SEIS pre-approved Shareholders’ Agreements and Articles of Association to reduce the amount of time inspectors must spend on each application. Companies using standardised documents could qualify for a fast-tracked decision. They could also create greater certainty, with regards to wait times, by allowing applicants to track their application status online. 

The advance assurance process is necessary under the status quo as there is no mechanism to make corrections post-investment if they fall foul of HMRC’s interpretation. If there were provisions to make such corrections, it could be possible for lower-risk applications (for instance, those using pre-approved standard documents, within the 7 year limit, and not in certain sectors) to be outsourced to accredited independent advisers.

HMRC should also remove the requirement that investors should be identified in applications for advanced assurance, in order to prevent ‘speculative applications’. While this restriction was a well-intentioned measure designed to reduce the backlog for the advance assurance process, it has created an unwelcome ‘chicken and egg’ situation, where startups need advance assurance to attract investors, but can’t get advance assurance without an investor.

Up to Eleven

Britain formally leaves the European Union at 11pm tonight. This isn’t the real deal though – unless you define leaving as having a blue passport and a fistful of grammatically questionable Brexit coins.

Not a lot will change during the transition period. There won’t be any additional tariffs or checking of goods, freedom of movement still applies, and you’ll even still be able to queue in the areas reserved for EU arrivals when travelling.

The clock is ticking though. The UK is now allowed to start formal trade negotiations with the likes of the US, Australia, and, of course, the EU. Boris is supposed to get an agreement with the EU sorted sharpish so we can leave relatively smoothly by the end of the year. Many experts think it’s a tall order.

A majority of Britain’s business leaders are still clamouring for some clarity. As the latest survey from the Institute of Directors reveals, over 55% of its respondents believe they will “only be able to make planning and investment decisions with certainty when we understand our future relationship with the EU”, as opposed to 35% who think “this withdrawal agreement will give my organisation the certainty needed to make planning and investment decisions.”

It also looks like an EU trade deal trumps all others for Britain’s business leaders, with 61% thinking negotiations on the UK's post-Brexit trade and economic relationship with the EU is more important, versus 20% prioritising trade deals with non-EU countries, like the US, after Brexit.

MAC attack
The Migration Advisory Committee – which advises the government on visa reforms – has delivered its report on a points-based system and salary thresholds.

While the Conservative manifesto called for an Australian-style points-based system to control immigration, the MAC has mostly rejected this idea – instead, recommending an evolution of the current system.

While it suggests elements of a points-based system could be used for a minority of skilled workers coming to the UK without an arranged job, most people would need a job offer that meets a minimum salary threshold, as is currently the case for non-EU migrants.

The report recommends that the current £30,000 cap for non-EU workers be reduced to £25,600. However, this would be higher for some industries (calculated at the 25th percentile of average salaries). While it’s recommended that immigrants under 26 and recent graduates from UK universities should be granted permission to work in the UK with much lower salaries – a minimum of £17,920 per year.

In general, the report should be welcomed by entrepreneurs. However, this isn’t a solution for everyone. Business owners in the hospitality sector, for example, which currently employ a lot of EU workers won’t meet the threshold.

As well as pushing prices up and standards down for consumers, this could damage areas of the economy that are currently flourishing.

Taking an example of an industry I know well, the UK is currently the best place in the world for bars, with London, arguably better than New York. For cultural reasons, Italian and central and eastern European born migrants dominate the bar scene. Those at the top would easily pass the earnings threshold, but they all started as a ‘bar backs’ and worked their way up. Cutting off this pipeline of talent would diminish this industry.

What is true for bars is true for hundreds of skilled roles that fall below the threshold. Some of this could be mitigated by a temporary short-term workers' route or by younger workers at a lower threshold. However, the thousands of pounds it costs for the Tier 2 licence, visa fees, legal fees and immigration skills charge would price most employers and employees out of the market. Also, the system would need to set out a clear path for those coming who want to stay longer.

Freer markets are more efficient, even in people. Ultimately, no system will be better than free movement, which will end (assuming there is no extension) on 1 January 2021. The MAC’s report should be encouraging for most entrepreneurs, but the government may just ignore it, even though they will be hard-pressed to come up with a better workable alternative in the time available.

So what should entrepreneurs be doing now? EU, EEA or Swiss citizens need to apply for the EU Settlement Scheme to continue living in the UK after 30 June 2021. Any EU citizen who moves to the UK before the end of the transition period can apply – so it’s not too late for anyone who might want to move here with a view to staying. It’s free to apply and the deadline is 30 June 2021.

Deep dive
The Startup Europe Partnership (SEP) has got in touch to see if any of you would like to apply for a place at the final Scaleup Summit on 26/27 March 2020 at the London Stock Exchange.

It's a two-day event for international corporates, investors and scaleups operating in specific verticals. It will feature deep dives into Digital Construction, Industry 4.0, Oil & Gas, e-Energy Solutions, Fintech/Insurtech, Telcos, and Cybersecurity. Apply for a place here.

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Right Said Fred

Our latest report, Cashing Out, hit the internet this week. If you can’t read the whole thing, the best explanation is by the author himself, Fred De Fossard, in Wednesday’s City AM.

As I argue in Forbes, cash is in terminal decline, with over half of Britons carrying less than £10 in cash on them at any one time. Less than a quarter of retail payments are made in cash; cashpoints are disappearing from the high street; and a wave of small businesses are turning against handling cash altogether.

Handling cash costs British businesses on average over £3,000 per year. Cash is a faff. As Annabel Denham explains on Medium, “it needs handling, insuring, and transporting physically – and it will always be a target for thieves.”

In response to the rise in card-only businesses, major US cities have banned cashless businesses, and senior British politicians have called for their abolition in the UK. This reaction is understandable – but it’s not the right one.

It’s understandable because Britain still has 1.23 million people in the UK without a bank account. The so-called unbanked are largely the poorest people in our society. But as is all too common in politics, the ban is a cover for a larger public policy failure.

Perhaps ironically, it’s technology that is offering a real way forward. 

As Fred argues, “instead of preserving cash indefinitely, the government should encourage innovation to improve financial inclusion by expanding access to digital finance.” And in a forthcoming article for CapX, Sam Dumitriu explains: “Open Banking-enabled fintechs are addressing the problem. For instance, apps like Pockit are directly catering to the unbanked and Monzo now allows you to open a bank account without a fixed address. Better data, including from rental payments, will allow the unbanked to build credit quicker and access finance.”

The government had a role to play as the enabler behind Open Banking, and schemes like the government-backed Rent Recognition Challenge, a £2 million competition to develop applications that help renters boost their credit scores, access credit and get on the housing ladder, are in the right spirit.

Abolishing card-only businesses would be a retrograde step which would harm a new wave of entrepreneurs, who have embraced the opportunities of the digital economy, and are responding to customers who want quicker, efficient, electronic payments.

The UK economy turns on electronic payments. The key is to give as many people access to new technology as possible, rather than trying to preserve the declining use of cash. It is only by embracing technological innovation in banking and improving the provision of financial services that financial inclusion can be meaningfully increased.

Come write with us
Fred approached us with the idea for Cashing Out. If you are a researcher or know of any other researchers who would be keen to write for us, get in touch. As we scale, there will be increasing opportunities to contribute.

Access all arrears 
Talking of research, we are just getting started on a project looking at access to finance for SMEs – not a small subject! This aims to feed into the 11th March Budget and inform our policy work for years.

We already have plenty of ideas – many of which came from entrepreneurs in our network. But let me know if you have any burning issues you think we should be dealing with, and if you would like your business to be used as a case study for why we need that change. 

We already have improvements to SEIS/EIS, R&D Tax Credits, Innovate UK, bank lending, EMI, StartUp Loans, crowdfunding, venture capital and the New Enterprise Allowance in our sights.

Read the whole e-bulletin here, and sign up here.

Rise of Cashless Businesses is Nothing to Fear

Our new study argues that the decline of cash is good for small businesses. Government should avoid preserving it at the expense of digital payments

• Cash use is falling: a decade ago six out of ten payments were made by cash, today it is two in ten, and it is predicted to drop to fewer than one in ten over the next decade;

• Cash is cumbersome and expensive for small businesses – handling cash costs British businesses roughly £3,000 per year on average;

• Some UK businesses – in particular independent shops – have decided to forego cash entirely, and no longer deal with its associated costs, inefficiencies and risks;

• However, this trend has been criticised by politicians and regulators around the world. The British government has committed to preserving cash in the economy for the foreseeable future. Some US cities have gone further and banned businesses from going cashless entirely;

• This is the wrong approach: banning card-only stores will burden independent shops, inadvertently advantaging cashless online retailers like Amazon; 

• Financial inclusion is a primary reason behind attempts to ban cashless shops. But bans will do next to nothing to materially improve the fortunes of the unbanked. The report argues that fintech innovation can expand inclusion, not limit it; 

• For example, some challenger banks now enable new customers to open accounts without a fixed address, allowing new customers to use a friend’s house or a shelter instead. Rather than abolishing card-only businesses, politicians should allow SMEs to innovate, and instead focus on bringing the benefits of the cashless economy to all.

Cashing Out, a new report from think tank The Entrepreneurs Network, finds that ditching cash is helping independent shops survive in challenging retail conditions.  

Cash is in terminal decline: a decade ago it was used in six out of 10 payments. Forecasters predict that this will drop to fewer than one in 10 over the next decade. Over half of Britons carry less than £10 on them at any one time, less than a quarter of retail payments are made in cash, and a wave of smaller companies are turning against handling cash altogether.

This is a welcome development for small businesses. The day-to-day costs of handling cash sit more heavily on independent high street shops, who face stiff competition from online retailers such as Amazon. Cash is a physical product which needs handling, insuring, and transporting physically, and it will always be a target for thieves. Handling cash costs each UK small business over £3,000 per year, on average, while the rise of low-cost card payments offer them a significant opportunity to reduce their overheads.

Some SMEs have decided to forego cash entirely, in part due to rising insurance costs in the wake of multiple break-ins. However, this trend has been criticised widely. 

Major US cities have banned cashless businesses and senior British politicians have called for their abolishment in the UK – in the interests of financial inclusion. Philadelphia last year announced a ban on card-only retail businesses. Lawmakers in New Jersey have passed a similar bill, and attempts to do the same are underway in New York City, Washington DC and Chicago. 

And in response to the Access to Cash Review, published in March 2019 and supported by Link (the largest operator of ATMs in the UK), then-Chair of the Treasury Select Committee Baroness Nicky Morgan said: “free-to-use cash machines are disappearing at an alarming rate. On top of this, some firms’ insistence on the use of non-cash forms of payment may act as a social barrier. Any significant reduction in access to cash is unacceptable.”

Yet Cashing Out finds that this would be a retrograde step serving to harm entrepreneurship without helping the unbanked.

There has been a significant decline in the number of unbanked since the government began reporting on financial inclusion in 2003, from around 4.5 million to 1.23 million. Nonetheless, many of the unbanked exist on the precarious margins of society and in this context politicians’ criticisms of card-only businesses are understandable.

To some, the rise of fintech has only benefited the already well-off, and card-only retail serves to further alienate the poorest in society, who have limited access to credit. However, Cashing Out finds that abolishing card only businesses increases costs and risks borne by small businesses, while doing little to materially help the poor. The unbanked receive worse, and more expensive services and utilities paying by cash. Further, a 2019 paper analysed rates of discrimination in lending and loan approval in new fintechs compared to traditional providers, and found that fintech algorithms discriminate 40% less.

The Access to Cash Review painted a grave picture of the future of cash. Cashing Out finds its argument forceful but inconsistent: a financial future where we are unable to help pensioners use a debit card, yet where commuters can buy train tickets with implants, seems highly unlikely. 

But the Review was right to acknowledge that new electronic payment systems like iZettle or Square have made accepting card payments cheaper than ever before.

Recent polling of the unbanked has revealed striking results. Most of them had had a bank account in the past and had lost it, and many of them claimed that they did not want a bank account. Many of these people live on the margins of society and distrust mainstream financial institutions. Among the newly banked, meanwhile, satisfaction with banks is poor, these people regularly incur penalties, and around 15% of newly-opened accounts are abandoned.

Six in ten of the unbanked are unaware that banks have to offer everyone a basic bank account, irrespective of their credit rating. A new wave of fintech offerings and Open Banking could transform the way we approach financial inclusion and lead to the poorest in society getting the banking services they need. For example, Monzo lets new customers open accounts without a fixed address, allowing them to use a friend’s house or a shelter instead.

Cashing Out calls on regulators to embrace the productivity benefits for SMEs of electronic payments, and take advantage of the opportunities offered by Open Banking and fintech to our economy. 

Fred de Fossard, author of Cashing Out, says:

“The recent growth in electronic payments and financial innovation in the UK should be celebrated. In trying to support the unbanked and those at the fringes of society, the UK government should embrace the opportunities of Open Banking instead of introducing retrograde measures which will harm businesses and consumers, and do little to support those in need.“

Off BEIS

Noted business thinker Peter Drucker came up with the aphorism “if you can't measure it, you can't manage it”, and while it’s been internalised by many of the UK’s most successful business owners, it doesn’t seem to have been picked up by the government. The National Audit Office (NAO) has reviewed 10 business support schemes run out of the Department for Business, Energy and Industrial Strategy (BEIS) and its conclusions aren’t wholly positive.

According to the NAO, the way schemes are designed and evaluated by the Department did not consistently follow the government’s own guidance. Most of the ten schemes they looked at “lacked measurable objectives from the outset or evaluations of their impact to know if they are providing the most value or if they should be discontinued. Without such analysis, the Department cannot know if its business support is providing value for money.”

In its defence, I’ve read very few NAO reports that aren’t critical, and the report states there “are welcome signs that the Department is improving the set-up and management of new schemes.” But it’s only right that the department's funding is spent as efficiently as possible – both for the good of taxpayers, but also entrepreneurs, who should be benefiting from it as much as possible. 

What a relief
Entrepreneurs’ Relief – which enables business owners to pay a lower rate of Capital Gains Tax (10% instead of 20%) on their first £10m when they sell their business – might be scrapped. Sam Dumitiru has written about why doing so would undermine the Enterprise Management Incentive (EMI) and with it the UK’s most ambitious startups and scale-ups. Most commentators and experts have failed to acknowledge this important aspect of the relief. It’s a very big deal. Read his article here, and please share widely if you agree with his analysis.

Peer pressure 
The Enterprise Research Centre has released Building resilience in under-represented entrepreneurs: A European comparative study. The two year, five-city study (London, Frankfurt, Milan, Madrid and Paris) concludes that female and ethnic-minority SME leaders run their businesses differently.

“Female and ethnic-minority leaders are more likely than their counterparts in all five cities to express socially and environmentally-focused objectives for their firms. Ethnic leaders generally seek less external advice, and both ethnic and female leaders are more likely to consult informal sources of advice (such as from friends and family members) than non-ethnic and male leaders.”

The report recommends promoting resilience (especially for underrepresented entrepreneurs), crisis planning (which can encourage entrepreneurs to assess a wider range of risk factors that may not otherwise be on their radar), and strong networks (which can facilitate peer exchange and expert input would help engage those entrepreneurs less experienced in engaging with formal sources of advice).

This last recommendation echoes the findings of our Management Matters report and Mentoring Matters report as part of our Female Founders Forum.

Forever and always
In the latest Conversation with Tyler podcast episode, Reid Hoffman, founder of LinkedIn, shares an idea for a board game he wants to create: “One would be a political economy game of creation of companies, partially because I actually think teaching the skills of entrepreneurship is important for how do we make progress in society, how do we solve the future of middle-class jobs, et cetera."

We are onboard with Hoffman’s thinking. Building on our Future Founders report findings, we are kicking off a report in partnership with the Association of Business Executives (ABE) looking at evidence for interventions for enterprise education for 11-15 year olds. 

In 2018, I looked at enterprise education at universities for the APPG for Entrepreneurship, but a different age group will require completely different policy levers. Also, this report has an international outlook, as it will be launched at the Commonwealth Heads of Government in Kigali. If you’ve got any experience, evidence or case studies of what works, drop Sam Dumitriu an email with your thoughts.

Nima findings
The latest Brain Business Jobs Index is out. (You may remember that we launched the last report with Dr. Nima Sanandaji.) It’s good news for the UK.

The number of employees of the most knowledge-intensive firms has grown from 2.6 million in 2012 to 3.2 million in 2019. Out of the 602,500 new Brain Business Jobs, 46% have been created in ICT, 31% in advanced services, 13% in the tech sector and 9% in creative professions.

Our main strength is in R&D, head offices & management and film/TV/music. In these sectors, we have close to twice the concentration of knowledge workers compared to the European average.

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