Word to the Wise

Word on the street – well, not literally of course with the lockdown – is that the Treasury is set to announce a package designed to respond to the concerns of the Save Our Startups campaign (and many others) regarding the failure of current schemes to support startups. If and when something is announced, we’ll send out details in a Policy Update.

On the theme of policy updates, here’s a list of seven things you might have missed in all the noise.

1. Coronavirus Job Retention Scheme Changes
The online claim service for the Coronavirus Job Retention Scheme will be launched on Monday. Any entity with a UK payroll can apply, including businesses, charities, recruitment agencies and public authorities. Employers can now claim for employees that were employed and on their PAYE payroll on or before 19 March 2020, and employees that were employed as of 28 February 2020 and on payroll and were made redundant or stopped working for you after that, and prior to 19 March 2020, can also qualify for the scheme if you re-employ them and put them on furlough.

2. New Coronavirus Business Support Hub
There’s a new Coronavirus Business Support Hub. The hub brings together key information for businesses including on funding and support, business closures, your responsibilities as an employer and managing your business during coronavirus. The hub also includes information for self-employed people and sole traders.

3. New Personal protective equipment (PPE) Hub
There’s a new PPE Hub. The hub contains guidance on PPE and infection prevention and control (IPC), containing information for sectors beyond just health and social care.

4. New Innovate UK Grants
Innovate UK has announced a £20 million for ambitious technologies to build UK resilience. Grants of up to £50,000 will be available to technology and research-focussed businesses to develop new ways of working and help build resilience in industries such as delivery services, food manufacturing, retail and transport, as well as support people at home in circumstances like those during the coronavirus outbreak.

5. New European Union Hackathon
The European Union has announced a pan-European Hackathon to develop innovative solutions to overcome societal challenges related to coronavirus. All 27 EU Member States are taking part as well as Norway, Israel, Switzerland, Turkey, Ukraine and the United Kingdom. The winning solutions will be invited to join a European Innovation Council Platform that will facilitate connections with end users (e.g. hospitals) and provide access to investors, foundations and other funding opportunities from across the European Commission.

6. Exporters Licence Changes
The Department for International Trade has revised arrangements for processing licence applications during the coronavirus (COVID-19) outbreak, and detailed changes and further clarification on compliance checks for open licences.

7. Companies House Changes 
Companies House has announced changes to help businesses avoid being struck off.

The Great Reopening
“The economy is not a machine that can be simply turned ‘on’ and ‘off’. It is a complex system, dependent on billions of relationships that are falling apart.” So opens Reopening Britain, a new paper released today by the Adam Smith Institute.

While acknowledging the need for the temporary shutdown of large swathes of the economy, the authors think many commentators are “substantially underestimating the damage being done and the challenge of reanimating the economy after the lockdown”.

The paper argues that the UK is falling behind other European countries – including Austria, Czech Republic, Denmark, France, Germany, Italy, Norway, and Spain – who have developed and are beginning to execute strategies to reopen their economies.

If the Government wants to safeguard lives and livelihoods they must develop, and release, a phased plan for lifting the lockdown to provide greater confidence for businesses, suggest the authors. A position also adopted by the new Labour leader Keir Starmer. The report also calls for the cutting of unnecessary regulation and taxes that discourage investment.

To a large extent uncertainty is an inevitable part of this pandemic, but the report is right to argue that the Government needs to mitigate this as much as possible. If they fail to adequately devise, implement and communicate a pathway back to a normally functioning economy – and all the stages in between – businesses will be left with no option but to further cut back on investment and production.

The government knows this and we should support their efforts to-date. But we shouldn’t shy away from pointing out when other countries are doing things better. That’s how we all learn.

Pandemics Past & Present 
The Economic Research Centre has undertaken a swift literature review on the impact of pandemics on SMEs. It draws out useful lessons to learn from past pandemics, but the data coming out of China, which is a few months ahead of us in facing and dealing with coronavirus, is perhaps the most instructive.

As the report states: “Early evidence from the COVID-19 pandemic in China emphasises the severity of the short-term effects on SMEs. In February 2020, 30 per cent reported that, due to a cash shortage, they would be able to sustain their business for no more than three months; 30 percent reported that they would be able to sustain their business for six to twelve months. Furthermore, 30 per cent of firms have seen their income fall by more than 50 per cent, with almost a third reporting a 20 to 50 per cent reduction.”

This dramatic economic impact only lends more weight to calls for the UK government to offer a pathway to reopening the economy. Our latest member of the team, Jess Etherington, has written more about the paper on our blog.

Save Our Startups

This week, we launched Save Our Startups. Alongside ten other founding partner organisations, and a further eighteen support partners, we’ve come together to call for an equity based liquidity package for UK startups.

In part, this campaign is a response to the fact that the Coronavirus Business Interruption Loan Scheme (CBILS) isn’t fit for many entrepreneurs. But it’s not a matter of one or the other – UK startups and scaleups need both debt and equity options.

Fixing CBILS
By the terms of EU state aid rules, CBILS cannot be used where an applicant was an “undertaking in difficulty” as at 31 December 2019. The devil is in the definition of “difficulty”, which includes many ambitious startups whose businesses don’t currently turn a profit as they invest to scale up.

But while state aid rules aren’t stopping other countries from being more generous than the UK, the likes of Germany and France are also struggling to get money out the door. Not so in Switzerland, where business owners can fill in a one-page form and get money in a matter of days. They have already distributed more than SFr15bn to 76,034 businesses.

As reported in the FT: “The Swiss scheme has two elements. Under the first, businesses can apply for an immediate loan, worth up to 10 per cent of their annual revenue, capped at SFr500,000. The loan is interest free and provided by Swiss banks, which are underwritten with a full credit guarantee on the amount by the Swiss government. A simple declaration is all that is needed. The second facility lends up to SFr20m, also provided by the banking system. Bern guarantees 85 per cent of the loan, charged at 0.5 per cent interest. The bank assumes risk of the last 15 per cent, charged at a competitive rate.”

Toby Austin and Henry Whorwood of Beauhurst suggest we should copy Switzerland, and Christian Faes of LendInvest argues today in Sifted, it should be adapted to the UK market by opening up the delivery of funding to UK fintechs. There are rumours of more providers, which would be another welcome pivot after last week's changes. But it must happen quickly.

Miss the point
There is no getting away from the fact that debt isn’t suitable for many startups. That’s one reason Save Our Startups already has thousands of signatories.

Despite the odd bit of good news, on the whole investment deals are falling apart, extreme write-downs are taking place, and early-stage funding is drying up. Nevertheless, a couple of investors on Twitter have come out against what they call a “bailout for startups”. Their criticisms are based on a misconception of what is being proposed and a misunderstanding of the economics of the situation.

The misconception is that the Save Our Startups campaign precludes a co-investment approach – that is, an equity solution that requires co-investment from other investors alongside the government. While we think that such a fund won’t serve the bottom of the market – many angel investors don’t have the resources to reinvest now – it would certainly be better than nothing.

The misunderstanding is confusing what is happening with a normal economic crisis. I am sympathetic to the idea that you should let companies go bust in a normal recession. After all, there is a danger in supporting firms during most economic downturns, as it risks capital and people not getting reallocated to more productive uses and so dragging out the recession. But as economists across the ideological spectrum agree  – most critically, including those of a free-market bent who tend to be against ‘bailouts’ – this time it really is different. 

Arguing that many of these firms will go bust in the future is wrongheaded. Yes, many will go bust, but some will go on to great things. You can’t have the winners, without the losers.

The government’s stated aim is to keep businesses intact so they’re ready to go when things return to normality. If we let a generation of startups go bust, there will be no reallocation of resources, but the destruction of our startup ecosystem.

Need for speed
It's not just loans that should be delivered more quickly. Save Our Startups also calls for the payment of R&D Tax Credits and Innovate UK funding grants to be sped up.

The founders of Stripe, PayPal, Linkedin, Shopify, and Y-Combinator (among others), understand the need for speed. That's why they've created Fast Grants. These entrepreneurs are trying to replicate the National Defence Research Council (NDRC), but for US scientists fighting coronavirus.

During World War II, the NDRC accomplished a lot of research very quickly. In his memoir, Vannevar Bush recounts: "Within a week NDRC could review the project. The next day the director could authorise, the business office could send out a letter of intent, and the actual work could start."

A lesson, surely, for both the UK government and philanthropic founders.

Read the whole newsletter here, and sign up here.

Most startups will fail, we should save them anyway

Two weeks into lockdown, many startups are on the brink. Unable to qualify for the Government’s Coronavirus Business Interruption Loan Scheme (CBILS), early-stage businesses will soon need a liquidity injection. In a piece for Sifted, I argued that we need urgent intervention and set out what that might look like, and as an organisation, we are a founding partner of the Save Our Startups campaign.

The key call by the Save Our Startups campaign is for an equity-based solution for startups to complement the debt-based solutions on offer for most businesses. On Twitter, it has provoked a debate between VCs and startup founders over the form that support should take.

Some argue that the limit of government intervention should be co-investment. In other words, only investing public money when investors have skin in the game. Others are calling for a not-for-profit Runway fund where the BBB would invest directly in early-stage (i.e. who have raised less than £5m) in the form of convertible notes that convert to equity at the next funding round.

The former approach has clear advantages and in a normal recession, it would be a better option. It would free up capital and talent from failing businesses, while providing liquidity for the best bets. 

But this isn’t a normal recession. As Sam Bowman and I argued, a couple of weeks ago, there are key differences. The supply-shock is temporary. Mike Bird, from the Wall Street Journal writes: “It’s not like a meteor obliterated our productive capacity. It will come back”. The aim should be to freeze the economy in place to make the recovery as quick as possible. This is broadly the approach the government has taken intervening to ensure as many businesses as possible stay afloat. 

The slight complication is that many of the startups in question will fail anyway. As Matt Clifford writes: “Most startups do die, even in boom times. Jobs and capital are lost. It’s desperately sad - I have to deal with it all the time - but it’s a fact of a well functioning ecosystem. If we pour £Bs into propping up doomed companies, we’re storing up huge problems down the line.” 

Here I think Matt is overplaying it. The funding proposed would only be enough to keep them afloat to their next funding round. The loss-making nature of the businesses in question all but guarantees we won’t be left with zombie startups. For the non-viable businesses, there would still be a reckoning when the market recovers. The key risk is that the funds are wasted. 

But in the absence of funding for startups in the short term, many will take advantage of the Job Retention Scheme or cut staff altogether. If this is the case, then the net cost to the taxpayer of bridging funds is limited.  

But the cost of losing a generation of startups is large enough that we should be comfortable with losing some money on any intervention. Just as we are comfortable to lose some money on defaulted loans.

So why isn’t a co-investment approach sufficient? Many funds lack the ‘dry powder’ to reinvest. If you are backed by a VC with more funds to invest, then you will survive. But if you’re backed by angels or an EIS fund, then you may have real difficulty in going back for more investment. Angels, for instance, may themselves run businesses and prioritise saving them.

This wouldn’t be a huge problem if the VCs in question funded the lion's share of high-growth early-stage businesses. But that doesn’t seem to be the case. Data from Beauhurst shows that of the 1,634 early-stage deals raising between £100,000 and £2,000,000, the 20 largest VCs were only involved in 23 of them. Many of the rest will have relied upon EIS funds, Angel syndicates, and crowdfunding that are unable to reinvest. Co-investment may save the very best prospects but a lot of startups will be left out.

Some have talked about the ability of the startup ecosystem to recycle talent and capital but it can’t do that under current circumstances. Most investors will be risk-averse until the lockdown is over and workers will be extremely unlikely to change jobs.

There might also be a general deterrent effect. In the event of hundreds of startups going under in the next few months, while other sectors are insulated with government support. More people may choose the security of a large company over starting a new business. 

If that’s the case then it’ll mean a slower recovery and a less dynamic economy for years to come.

Saving Startups

As reported in our Policy Update earlier today, the Coronavirus Business Interruption Loan Scheme (CBILS) has been overhauled.

The Chancellor announced the extension of loan guarantees to all viable SMEs – not just businesses who couldn’t access a loan on commercial terms; banks are no longer able to ask for personal guarantees on loans of £250,000 or less; and, the government has announced a new Coronavirus Large Business Interruption Loan Scheme to help the “missing middle”.

Read the statement here, find out more about CBILS on the British Business Bank website and sign up to our Policy Updates here.

We mind the gaps
The CBILS reforms are welcome, but there are important gaps – particularly for ambitious startups and scale-ups. 

Businesses can only access the loans if they would have met banks’ lending criteria in normal times. As a result, loss-making equity-backed startups aren’t eligible. As I’m sure you know, the reason these startups are loss-making is because they’re investing for growth. 

Under normal circumstances, many of this cohort of businesses would go on to produce revolutionary products and services, employ hundreds of people and pay significant tax revenues to fund our public services. But these aren’t normal circumstances. Liquidity is going to dry up and these businesses need support to see them through to the other side of this crisis.

Our research director Sam Dumitiru has set out what we think needs to be done in an article for FT’s Sifted, which I encourage you to read and share.

We think the proposed Runway Fund would help plug the gap. As Sam writes: “It would give early-stage businesses up to £500,000 to take them to their next funding round. Startups would get the cash in return for loans that convert into equity at a discount at their next funding round. A £300m non-profit fund with co-investment from the private sector would be able to help 600 startups. To put that in context, that’s around half of all early-stage equity-backed startups in the UK. This shouldn’t come with a large fiscal cost either. In the long-run, venture capital is a high-performing asset class.” Led by Brent Hoberman and our friends at Coadec, this scheme – or something like it – is vital.

On CBILS, we think the government should broaden the definition of viable to take account of unit economics on current products, past adherence to budgets and credit history. As Elvie, one of Britain’s fastest-growing scaleups, with an eight-figure valuation and profitable product lines, told Sam: "Last year alone we grew revenue by more than 400% and we’re on track for similar growth this year. However, like other hyper-growth tech companies, Elvie is not yet profitable. This means we are unable to access any support under CBILS because of rigid affordability criteria.”

Also, a temporary tweak to Venture Capital Trust (VCT) rules could act as a lifeline for companies they fund. “In normal times, VCTs are restricted from investing more than £12m (£20m for knowledge-intensive startups) in a single company to ensure the scheme is targeted at businesses that otherwise couldn’t raise sufficient capital. If the limits were temporarily raised, the scheme could be repurposed to allow startups to raise bridging capital from investors they already work with.”

This isn’t the only gap – for example, read the ERC’s study on how 750,000 self-employed are missing out on UK coronavirus support – but it’s a glaring one. And these aren’t the only solutions, but we think they should be prioritised. If we don’t act, this will cast a long shadow over the UK’s economic recovery.

A time to innovate 
Innovate UK will invest up to £20 million in innovation projects. The aim of this competition is to support UK businesses to focus on emerging or increasing needs of society and industries during and following the Covid-19 pandemic. By fast-tracking innovation, Innovate UK hopes the UK will be better placed to maintain employment levels, a competitive position in global markets and make the UK more resilient to similar disruption.

Your application must demonstrate both realistic and significant benefits for society (including communities, families and individuals) or an industry that has been severely impacted and/or permanently disrupted by the Covid-19 pandemic.

The project’s eligible cost must be between £25,000 and £50,000. You can claim 100% of your project costs up to the maximum of £50,000 and these will be paid in advance of the project start date. The competition closes on 17 April 2020. Find out more here.

Growth hubs
One local resource we haven’t mentioned in these newsletters so far is Growth Hubs. These are local public/private sector partnerships backed by the Government. The network of 38 Growth Hubs across England are free to use and should be able to advise businesses on local and national business support – including schemes put in place to help businesses through the current Covid 19 situation. 

I should say, we have had mixed reports about how useful they’ve been in the past. But you might be lucky to live in an area with a particularly good one, or, like so many individuals and organisations, I wouldn’t be surprised if they’re rising to this very significant challenge. Find your local hub here.

Stay in touch
We’ve created a short survey to help you keep us updated with how the government schemes to support you and your business are actually working. If you give permission, we can pass on your thoughts to the government and/or the media. I’ll still get back to you via email, but this should make it easier for us to keep track of the hundreds of emails we are getting. Feel free to update us here, whenever you have something that you want to share.

Read the whole thing here, and sign up for our newsletter here.

O? Yes He Did

Though mostly stuck at home, the world is in flux. 

Countries the world over are putting forward ambitious schemes to support their businesses. As we argued very early on, this extraordinary situation calls for an equally extraordinary response from the government: “We should be aiming to keep our economy in stasis, so that it is in as good a position as possible to bounce back.”

The UK Government gets this, but there are still some glaring gaps – particularly for equity-backed startups. Although they represent a small proportion of all businesses, they will have a disproportionate impact on job and wealth creation. They build the products and services that enrich our lives.

We think we should be backing pre-revenue innovative businesses, specifically with convertible notes for early-stage startups, which would convert to equity at a later date. The leaders of Britain’s most ambitious businesses need this government injection because these businesses don't suit the risk appetite or lending criteria of traditional banks. 

Cédric O, France’s impressive Minister of State for Digital Affairs, is ahead of the curve here. He has spearheaded a $4.3B plan to support France’s startups, of which $86.7 million will be used to support equity-backed businesses: “Startups that were in the process of raising a new funding round will be able to raise a bridge round through Bpifrance’s PIA (Programme d’Investissements d’Avenir). Some VC firms might retract term sheets, others might slow down their investment pace. Bpifrance is putting $86.7 million (€80 million) on the table. Private investors will co-invest as much as $86.7 million (€80 million) as well.”

Startups in co-working spaces and accelerators need support too. As we argued in our submission to the Treasury Committee: “Many startups will not benefit from the small business grant funding available for small businesses that already pay little or no business rates because of small business rate relief (SBRR), rural rate relief (RRR) and tapered relief, as they work out of co-working spaces or incubators, and accelerators. Grants aimed at small businesses that don’t pay rates should be extended to startups in these circumstances, if they don’t they risk stifling a vital source of future job growth. In lieu of accurate valuations, the government could use employment and tax data as a proxy.”

The Government also needs to ensure that co-working spaces and accelerators are around to support the recovery. The UK’s entrepreneurial success has grown out of a favourable ecosystem. We need to protect it. The Government will also need to look at whether tax breaks can be tweaked or regulations reformed or delayed – even if temporarily – to support entrepreneurs at this most challenging time.

And finally, we need to hear more about what you need on the ground. No one person or organisation has all the answers. Knowledge is dispersed – help us gather the best of it by sharing yours with us.

It pours
Every other day we’re greeted with an announcement of gargantuan proportions. But rather than run through it all for the umpteenth time, I want to make sure everyone knows where to turn for the right details. While we’ll continue to keep you informed with our Policy Updates which you can sign up for here, the best place to go for the latest information is GOV.UK. Specifically, the Guidance for Employees, Employers and Businesses and the Business Support.

Scotland, Wales, and Northern Ireland have additional guidance, while the British Business Bank hosts useful information for anyone interested in finding out about the Coronavirus Business Interruption Loan Scheme (CBILS). We know there are issues around how the loans are being rolled out. Please keep us updated on how this is working on the ground and we will pass on your concerns to the right people.

Beyond government, you can find a list of the business organisations that have useful coronavirus hubs on their website in the latest APPG Digest, while for those on Twitter I’ve made a Twitter List of government and business organisations you can follow, which might prove useful for cutting through the noise.

We need you
Zenia Chopra, an Adviser to the Network, has put together a short policy update on how visas will be impacted by coronavirus. We're looking to do more of these sorts of articles from outside experts. Just get in touch if you want to help us keep the thousands of entrepreneurs updated on your area of expertise in this challenging time.

Eyes on the prize
Anton Howes, the newest member of our team, has been taking a longer view than many. While coronavirus started with a bat (or pangolin), innovation will finish it off. But this won’t be the last challenge of this sort, and Anton has been looking at how the government can best promote innovation, whether directly with cool hard cash, incentivised by prizes or an Advanced Market Commitment, protected with patents, or fast-tracked with government patent buyouts. It’s a must read for anyone who cares about how we can help mitigate future pandemics.

Anton concludes: “As we look to fight coronavirus and any future pandemics, we should perhaps consider which patents — for antivirals, vaccines, ventilators, and other hygienic equipment — might be bought out in order to remove similar innovation bottlenecks. Whether we decide to use prizes, Advance Market Commitments, or patent buyouts, now is the time to experiment with any new ways to encourage innovation. As the coronavirus has shown us, increasing innovation is a matter of life and death.”

For further reading, check out this new paper on how grand innovation prizes could help address the coronavirus pandemic.

A good note
Along these lines, our friends at Nesta are looking at a number of approaches to the pandemic, considering how best to use innovation methods, such as Challenge Prizes, to support public wellbeing during the crisis, and are exploring how Edtech AI could best support home-schooling. They’re also coordinating community groups, and direct grant funding of some external organisations, and have also supported apps such as GoodSAM, which is playing an important role in coordinating NHS volunteers. Watch this space!

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Innovation: Eyes on the Prize

Scientists and innovators all over the world are doing their bit to combat the pandemic, be it through developing vaccines, testing antiviral drugs on patients, coming up with apps to help people mitigate its social effects, or ramping up production of ventilators and testing kits.

Yet the world may also need to experiment with different ways of encouraging innovation. We can rest assured that there will always be people to bend their minds to such tasks, but the more we can support and encourage them to do so, and for more people to join their ranks, the better.

Direct Funding

Governments all over the world have generally responded to the threat by pouring more money into funding scientists and innovators directly. The European Commission, for example, allocated €164m in grant money and other kinds of investment towards startups and smaller businesses that came up with innovative solutions to the crisis. Similarly, the UK government offered £500,000 to technology companies coming up with ways to support people having to stay at home, as well as pouring tens of millions of pounds into vaccination research. Many charities, larger businesses, and wealthy individuals have also offered support.

Prizes

In addition to direct funding, some governments have responded with prizes — to be awarded only in the case of success. Economist Tyler Cowen, for example, has announced a series of prizes totalling $1m for innovations in promoting social distancing, finding an effective treatment, and for written analyses of the virus. His colleague and long-time collaborator, Alex Tabarrok, has likewise called for governments to offer much larger prizes, in the billions, to find effective vaccines and treatments.

As Tabarrok points out, prizes for a vaccine should ideally be large enough that a pharmaceutical company would rather accept the prize and make the innovation available to the public, than patent it and use their monopoly to sell the vaccine at high prices. As much of the current work to find a vaccine is necessarily conducted by pharmaceutical companies — they have the resources and experience required, both to find a vaccine and then mass-produce it — any such prize needs to take their incentives into account.

Prizes of this sort might be in the form of a lump sum, but for a vaccine it probably makes more sense to tie it to application. We don’t want a situation where a company creates a vaccine, receives the prize, and then it and its competitors have little incentive to actually produce it at scale. The model that may work best here, instead, is to adopt a policy developed by Nobel-prize-winning economist Michael Kremer, the Advance Market Commitment. 

Advance Market Commitments

The policy was used in 2007 to promote the creation of a pneumococcal vaccine for use in developing countries. The problem was that pharmaceutical companies lacked the incentives to create and sell such a vaccine, as those who most needed it would not be able to afford a price that would allow the companies to recoup their research costs.

In response, five governments, along with the Bill and Melinda Gates Foundation, committed $1.5bn to a prize fund. Rather than an up-front prize, pharmaceutical companies bid for 10-year contracts to create and produce the vaccine, to be sold for no higher than $3.50 per dose. The prize money was then used to supplement the amount the company received for each sale. Over the following years, three vaccines were developed, now available for only $2 per dose, which have been administered to over 150 million children. An estimated 700,000 lives have been saved. Thus, although vaccines and treatments against coronavirus are already being developed, the use of such a policy might help make it affordable all over the world — wealthier governments have the funds necessary, though some private benefactors might also be encouraged to commit.

Patents

For the most part, however, businesses will tend to put their own financial resources into developing solutions to the crisis. There is, after all, plenty of demand, and patent protection gives them a temporary monopoly to sell whatever they find. Yet there have been a few cases during the crisis where patents have got in the way of finding solutions. In Italy, for example, when some hospital ventilators broke down the manufacturer was unable to supply new parts quickly enough to save lives. A couple of local 3D-printing companies stepped in to fill the gap, but when they asked the manufacturer for the schematics, it refused and even threatened to sue them for patent infringement. Although the 3D-printing companies went ahead with their infringement anyway and have thus saved many lives, this is not an isolated case. Two patents formerly owned by Theranos, which collapsed when its much-vaunted blood-testing equipment turned out not to work, were apparently being used by their new owners to prevent BioFire from making much-needed testing kits for the coronavirus. Following public outcry, however, the patents’ new owners clarified that their legal action would not cover anything to do with coronavirus.

In both such cases, the public’s reaction has been enough to stem legal action, or to at least embolden the infringers. But when designing innovation policy, we should be careful not to throw the baby out with the bath water. We want pharmaceutical companies to have sufficient incentive to devote major resources to solving the pandemic’s problems, for which we would want to preserve patent protections. We should not rely on their charity or public spirit alone, and patents will be especially vital if we are to find solutions to future pandemics as well as the current one. Ideally, we should preserve the incentives conferred by patent protection, both to invent and to make the details of inventions public, but without the downsides of monopolistic pricing: something achieved by another policy, the patent buyout.

Patent Buyouts

Rather than a prize, the patent buyout involves the government purchasing a patent from its owners and making it open and available to the public to use. The British government has in the past purchased patents or secrets in order to make them public: in 1732, for example, instead of extending the duration of Thomas Lombe’s patent for silk-spinning machinery, it awarded him a large reward. The only condition for receiving the reward was that Lombe had to submit a scale model of the machinery, which was exhibited for public view in the Tower of London. Likewise, the government purchased the secret to Joanna Stephens’s “cure” for bladder stones in 1738 (despite extensive testing by fellows of the Royal Society, it did not work for the reasons they thought it did — rather than a cure, it was in the nineteenth century revealed to be merely palliative). As for purchasing patents, rather than secrets, the best-known example is the French government’s 1839 purchase of Louis Daguerre’s patent for photography, which it then made available to the rest of the world (except the UK, where Henry Fox Talbot had invented a rival process).

The issue with buying out patents, however, is in how to price them. If the government sets a price that is too low, then inventors will be unwilling to sell their rights. And if it purchases the patent compulsorily, as might become necessary during an acute crisis, then offering a price that is too low would be expropriative, thereby damaging the incentive effects of the entire patent system. Fortunately, economists have been exploring how to resolve this issue for the past two decades, again drawing upon the work of Michael Kremer.

In 1998, Kremer suggested using auctions to discover patent prices for a government buyout. In his scheme, private parties would bid on a number of patents being simultaneously considered for a buyout, but only a small and randomly selected proportion of the patents would actually be sold to the private bidders rather than being purchased by the government — that way, even if they actually only received a few of them, the bidders would still have an incentive to provide accurate valuations for all of the patents, allowing the government to discover their market prices. Rather than seeking to replace patents, as prizes often try to do, the patent buyout would be a useful supplement.

And it is a policy that would make a difference to the long-term fight against pandemics, too, by removing bottlenecks to future innovation against pandemics. The buyout and opening up of Daguerre’s patent in 1839 unleashed a period of extraordinary creativity in photography, and the expiry of important patents can often have a similar effect. It was only in the 2010s, for example, that many of the patents for fundamental techniques in 3D-printing began to expire, unleashing even more innovation in the area. Although the technology had been around since the 1980s, the number of related patent applications in the US had never exceeded 3,000 per year. But since their expiry, it has steadily and dramatically increased, to almost 45,000 last year. A buyout of those patents, rather than waiting for their expiration, might have given us this progress decades earlier.

As we look to fight coronavirus and any future pandemics, we should perhaps consider which patents — for antivirals, vaccines, ventilators, and other hygienic equipment — might be bought out in order to remove similar innovation bottlenecks. Whether we decide to use prizes, Advance Market Commitments, or patent buyouts, now is the time to experiment with any new ways to encourage innovation. As the coronavirus has shown us, increasing innovation is a matter of life and death.

APPG Digest: Supporting Entrepreneurs

NB. The self-employment concerns raised here were made prior to the Chancellor’s latest announcement.

This will be a different format to our usual email. We are addressing it directly to Members of Parliament, but I hope it's useful for Peers and the thousands of others who are signed up for it.

It is designed to help you point entrepreneurs in your constituency in the right direction, and update you on what the challenges are on the ground.

Five Steps Entrepreneurs Can Take
 
There is so much information out there that I want to keep it as simple as possible. The government is asking us to direct business owners to this website and this one too. I would also suggest you point entrepreneurs towards the British Business Bank website for details of the Coronavirus Business Interruption Loan Scheme (CBILS), and specific information for businesses and employers in Northern Ireland, Scotland, and Wales.

This is what the Government is suggesting, which we are passing on:

1. Get help with your finances
For small and medium sized businesses, the new Coronavirus Business Interruption Loan Scheme is now available for applications. For more information and how to apply, visit this website. You can also speak to your bank or lender to discuss options. The Bank of England’s new lending facility for larger firms is also open for applications. Find out more on their website.

2. See what you're entitled to
The government is also making cash grants and additional funding available to certain sectors and smaller businesses. Find out more about the schemes available, whether you’re eligible and how to apply on this website.

3. Support your staff
Through the Coronavirus Job Retention Scheme, the Government will pay salaries (at 80% of current pay up to £2,500 a month) for workers who are no longer working and would otherwise be made redundant. For businesses with fewer than 250 employees, the cost of providing 2 weeks of COVID-19 related statutory sick pay per employee will be refunded by the Government in full. Find out more on this website.

4. Check guidance on tax
If you are concerned about paying your tax you can talk to HMRC about managing payments. We have already postponed upcoming VAT payments through to June, cancelled business rates for many sectors and delayed July’s self-assessment tax payments until January 2021. To find out more visit this website.

5. Follow the latest advice
The Gov website will be updated regularly as more information becomes available. The Prime Minister’s daily press conference, live streamed on the @10DowningStreet Twitter feed, will also provide the latest updates on health advice, support for businesses and employees, as well as a range of other issues.

Useful Business Hubs

Business organisations are working hard and collaboratively at this critical time. Many entrepreneurs find them vital for explaining how the dramatic changes taking place will impact their business.

For our part, we are keeping people through our Policy Updates, which can be signed up for here, as well as my Friday Newsle. But there many other organisations are better placed to update specific businesses. I would direct business owners to the following organisations:

• Federation of Small Business's online hub – particularly small businesses and the self-employed

• Enterprise Nation's online hub – particularly small businesses and the self-employed

• Tech Nation's online hub – particularly tech companies

• Confederation of British Industry hub – particularly larger companies

• IPSE hub – particularly the self-employed

• Institute of Directors hub – particularly the directors of established businesses

• Tech UK hub – particularly larger tech companies

• ICAEW hub – particularly for advisers of businesses

This is just the tip of the iceberg and there will be sector-specific organisations that might be better placed to help individual businesses; however, this should be a good place to start.

Business owners on Twitter might also want to follow this Twitter List, which might help filter out some of noise if they want timely information about what is being announced.

Challenges for Entrepreneurs

There is still a lot of work to be done. Following are some of the key challenges still faced by business owners:

An Update from IPSE
"In the last two weeks, millions of self-employed people have seen their income decimated, their projects indefinitely postponed and their contracts cancelled. Many we have spoken to say they have savings to last out up to two months of income interruption, but little more. We hope that the Chancellor will deliver a package of support that will keep our smallest businesses afloat during this crisis. This should give a time-limited, targeted cash injection to the freelance businesses that are struggling most. It is a significant ask, but it is what is needed to keep this vital sector going through these grave and unprecedented times."

An Update from Enterprise Nation
"The topic of questions in our support hub changed over the weeks; it started with questions on insurance cover and now mainly has moved to how to access money and how to furlough employees. There has been criticism of the CBILS in that it's not available to loss-making businesses and guarantees are being asked for. In response we submitted a paper to Treasury Select Committee on Monday with suggested proposals of how to distribute funds to small businesses and the self-employed through existing platforms and networks. That's available to view here."

An Update for the Federation of Small Business
"Cash flow continues to be vital for FSB members in the wake of this crisis. In addition, we’ve been urging the Government to bring parity of support to the self-employed in terms of wage coverage, in line with the Job Retention Scheme package for employees. We hope to see something in this area announced by the Government shortly. The challenge now moves towards ease of access and ensuring businesses can access cash and facilities like CBILS in a timely manner; as well as making sure all banks understand the immediacy of the situation and lend. We also note the cash grant facility is to be done at local authority level and are subsequently concerned about variation in delivery. Other challenges we are looking to address include securing further protections for tenants, mitigating the supply disruption and asking large businesses to pay their invoices now to ensure cash is available immediately for SMEs in this critical period."

An Update from Coadec
"Liquidity and cash flow have been consistently at the top of the list of concerns raised by startup founders over the last couple of weeks. We have had confirmation from lenders on the CBILS scheme that venture-backed startups will not qualify for loans under the scheme. We've been urging the Government to adopt an equity-based solution in order to provide bridging finance and capital to startups during this crisis. Since private funding is set to slow down, it is also vital that payments from public schemes - such as InnovateUK grants and R&D tax credits - are fast tracked. To protect the wider tech startup ecosystem, we are also urging the Chancellor to extend the one year business rates holiday, provided to hospitality businesses, to co-working spaces. Due to huge declines in membership and companies cutting costs to survive, this vital community resource is now at risk."

I can only echo the above concerns. At The Entrepreneurs Network, we set out what we think is missing here. It draws on the findings of many organisations and the flood of emails we're getting every day.

I hope this is useful. Please feel free to put any business owners directly to touch with me if they still have questions. I'm replying to everyone.

Sign up for future APPG Digests here.

What was missing in the Chancellor’s covid-19 plan?

The Chancellor has taken unprecedented steps to protect incomes and prevent coronavirus-related business failures. We welcome the policies announced on Friday. In fact, we advocated for similar measures, including the move to allow employees to be furloughed with pay and for tax payments to be deferred automatically. 

The measures are necessary because they allow us to preserve the valuable products, processes, knowledge and relationships that entrepreneurs have built over a number of years. That’s necessary if we want the economy to rebound next year. However, the measures are, not yet, comprehensive. There are three key groups in need of further support.

The self-employed

We welcome the Chancellor’s decision to allow the self-employed to defer income tax payments and to suspend the minimum income floor allowing the self-employed to claim the equivalent of Statutory Sick Pay. However, the measures will be insufficient for many of the self-employed, who will experience significant drops in income over the coming period. 

First, the £16,000 savings limit should be disregarded for the next six months. In some cases, the savings will be set aside for future tax payments that have now been deferred. As Mike Brewer of the Resolution Foundation notes: “The goal should be a more comprehensive version of the Coronavirus Jobs Retention Scheme that encompasses the self-employed.” Removing the savings limit temporarily will help align the treatment of the self-employed and the employed.

Second, the self-employed may experience significantly larger falls in income than an equivalent employee on the same income previously. For instance, a self-employed worker earning £2,500 per month will normally take home £470 after tax. However, if they are moved on to universal credit, their earnings will fall to £94.25 per week (plus local housing allowance). This is a much steeper drop than the 20% drop that an employee would experience. To protect the income of the self-employed, we agree with the recommendation of the Bright Blue think tank that the ‘furloughed’ self-employed receive should at least be equivalent to the Maternity Allowance, £148.68 per week.

Under this system many of the out-of-work self-employed would still receive less than an equivalent furloughed employee. While we understand the administrative challenge of accurately calculating earnings of the self-employed, we believe the government should consider temporary hardship payments based on a percentage of the past tax payments for the self-employed, subject to a cap to prevent large payments to high earners. A version of this idea has been proposed by Neil O’Brien MP and a similar system is being used in Norway. 

An additional way to support the self-employed and as well as high earners who have experienced a large temporary fall in income would be to create income contingent loans, modelled on student loans. Under the current student loan repayment terms, earnings above a certain income threshold (currently £25,716/year) are taxed at 9% to repay the loan, with any amount unpaid written off thirty years after the loan was first taken out. The loan incurs an interest rate equal to a measure of inflation (RPI) plus 3%. We could offer different plan terms to people availing of this scheme, cap the amount at a realistic level to reflect average earnings, and the repayment term to a short period of, say, five years.

Low earners would probably never pay back the entirety of the ‘loan’ – since this is a one-off cost, that simply transfers lost income to them from other taxpayers, and it is arguably a feature of this scheme, not a bug. Most other people, depending on their earnings and terms decided on by the government, would pay back as and when they were able to. 

The advantage of an approach like this is that it allows people to self-select into the scheme, eliminating any need for the state to try to decide who is and is not deserving of cash now. 

Equity-backed startups

Equity-backed startups that are not yet bringing in revenue will need targeted support as they approach the end of their funding runways. They are ill-suited to taking on debt as they can lack predictable revenues or security. As a result, many will be unable to benefit from the Coronavirus Business Interruption Loan scheme.

Equity-backed startups will be responsible for a large proportion of job and productivity growth once this is over, they should not be overlooked.

To help equity-backed startups, we support Coadec’s calls for the British Business Bank to create convertible notes of up to £500k. This funding would convert to equity at a startup's next funding round. 

SMEs in co-working spaces, incubators and accelerators

Many startups will not benefit from the small business grant funding available for small businesses that already pay little or no business rates because of small business rate relief (SBRR), rural rate relief (RRR) and tapered relief, as they work out of co-working spaces or incubators, and accelerators. 

There are 205 incubators and 163 accelerators in the UK. Over the past decade, more than 5,000 startups have participated in accelerator programmes in the UK with numbers increasing significantly year-on-year. The companies coming through accelerators are vital to the UK’s future economic growth. Research from Nesta, commissioned by BEIS, finds businesses that attend accelerator programmes have higher survival rates, employ more people, and raise more money. Accelerated companies raise 44% more money and have 75% higher valuations than companies that haven’t attended accelerators.

Grants aimed at small businesses that don’t pay rates should be extended to startups in these circumstances, if they don’t they risk stifling a vital source of future job growth. In lieu of accurate valuations, the government could use employment and tax data as a proxy.

Rishi Sunak’s bold measures will have saved jobs and businesses. The challenge now is to fill in the gaps with better support for the self-employed and equity-backed startups.

Taxing times

Over the past week, we’ve set out a range of policy ideas to help entrepreneurs get through the coming months. You can find most here. But as important as it is to put forward plans big enough to meet the economic challenge, it’s important to ensure that the tools we’re using to deliver them are fit for purpose.

One of the ways the government is trying to help businesses with their cashflow is by giving them leeway on their tax payments. Businesses can ring up HMRC on a special Coronavirus hotline and agree to spread the bill over 12 months (with interest).

On Twitter, Clifford Chance’s Dan Neidle points out a potential hitch. “Micro and small businesses may not have access to advisers… [while] HMRC won't have capacity to deal with millions of time to pay requests.”

He suggests an alternative. The “Government should put "time to pay" arrangements on a statutory footing, at least for the short term, with automatic deferral for small and micro businesses.”

We agree. Anything that reduces uncertainty for small businesses right now should be welcomed.

What it Takes

Earlier this week Rishi Sunak vowed to do 'whatever it takes'. Today we have set out what needs to be done to ensure British businesses survive coronavirus. Sam Dumitriu (Research Director) and Sam Bowman (Adviser) have set out why these exceptional circumstances call for exceptional policies. 

If you’re not going to read the whole thing, here are four key passages:

1. “Solvent businesses may still go bust without additional liquidity – government-backing for business loans is one solution to this, so that they can access credit. But the problem is much bigger than that. The financial hit of several months of low or no revenues, while overheads such as wages and rent still need to be paid, will push businesses that would otherwise have been solvent into insolvency. This is not simply a credit issue – the overhang of those costs means that as we come out of the downturn, many would struggle to pay back any debts incurred.”

2. “We should be prepared to bail out small businesses – provided they keep their workers. Steven Hamilton and Stan Veuger have a novel proposal targeted at SMEs. Loans would be issued to cover any fall in revenue experienced by a participating business relative to previous years (with a benchmark level to be determined for new businesses). However, unlike the Business Interruption Loan Scheme announced by the UK Government, businesses would also receive a tax credit equal to the full loan amount including interest, provided that the business maintains its full-time-equivalent (FTE) payroll through the duration of the crisis. In effect, if a business does not lay off its employees they do not have to pay the loan back. The plan would also cap the net income (after tax credits) of businesses receiving the loan at a given percentage of previous years’ net income, to prevent companies from making windfall profits by cutting variable costs."

3. “A solution that may be easier to implement is to essentially ‘hack’ the statutory maternity pay system and apply it to all workers. The Resolution Foundation is proposing a Statutory Retention Pay (SRP) scheme in which people who don’t have work to do stay formally employed by their firm, but with a significant amount of their pay covered by the state. If the rate were set at 66% (and 80% for workers earning less than £189 a week), then it would cost £8bn if a million workers took part in the scheme. But we should be prepared to borrow and spend much more than that if necessary. The scheme has parallels with the Danish response to the virus, where employers are able to grant a paid leave of absence to their workers. The government will pick up 75% of their salaries, with the employer paying the rest. At the same time, workers agree to give up entitlements to paid holiday."

4. “Startups that are not yet bringing in revenue will need targeted support as they approach the end of their funding runway. These are ill-suited to taking on debt, such as the Business Interruption Loans, and are unlikely to benefit from rates relief or grants, as many use co-working spaces. Startups will be responsible for a large proportion of job growth once this is over, and cannot be overlooked. Two measures should be targeted at them. First, grants aimed at small businesses that don’t pay rates should be extended to startups in co-working spaces. In lieu of accurate valuations, grants could be limited to at startups with fewer than 10 employees. Second, instead of loans the British Business Bank should back convertible notes of up to £500k for early-stage startups. The notes would convert to equity at a later date and avoid the problems of issuing loans for pre-revenue innovative businesses.”

Read the whole thing. Share it widely. These policies will do a lot of the heavy lifting but this isn’t meant to be the last word on policies needed to support entrepreneurs  – and it won’t be ours – so let Sam know what else you need during this most challenging time. (Please see below about how to ask specific questions about government support).

Innovators vs, the virus
We may live in interesting times, but many incredible entrepreneurs, inventors and scientists around the world are fighting back. 

Dr Anton Howes, our new Head of Innovation Research, has explained exactly how. It covers a lot, including:

• Seegene, a South Korean company using artificial intelligence to rapidly identify a test for the virus; 

• The Kaiser Permanente Washington Health Research Institute’s 6-week trial of a prospective vaccine with a cohort of (brave) healthy adult volunteers;

• Scottish whisky distilleries and London gin-makers shifting production to manufacture sanitiser;

• Crowdfunder.co.uk, which with support from Enterprise Nation has opened up their crowdfunding platform for free to businesses affected by Coronavirus;

• Dare to Care Packages (which we’re a Partner of), which is helping to link up healthy people in London with those who may need deliveries of essential supplies while they are self-isolating;

• Bubble, which is supporting hospital staff and other key workers to find vetted babysitters while they go to work.

Read it and share it. We all need a healthy dose of inspiration. And let Anton know of any other amazing work that’s being done in the UK and around the world.

In fact, the Government needs your help. They’ve set up three dedicated emails if your business feels able to support their efforts:

• On vaccines, email: Nervtag@phe.gov.uk

• For Ventilators, email: ventilator.support@beis.gov.uk

• Offers of innovation and tech, email: DNHSX@nhsx.nhs.uk

And applications for funding to the European Commission are welcome until 5pm today from startups and SMEs with innovative solutions to tackle Coronavirus outbreak.

Any questions?
We are asking the Government and supporting bodies the questions you want answers to. A lot of this is feeding into our thinking about what's needed so keep them coming! Below cover the main thrust of the many I’ve received so far.

Questions on the Coronavirus Business Interruption Loan Scheme

• How will the Coronavirus Business Interruption Loan Scheme differ from the Enterprise Finance Guarantee (EFG)? Will it be less bureaucratic and easier to get?

• Are loans appropriate for pre-revenue startups?

• Has any modelling been done on how many applications are expected from launch next week and how long is it going to take to work through them all? 

• What constitutes a valid case for a loan?

• Will the British Business Bank be too risk-averse?

• What is the timeframe for repayment of the loans? Initially one year was mentioned, but the Chancellor in front of the Treasury Select Committee spoke of a ‘long term basis’.

Questions on other policies

• The government wants business owners to keep on employees, but is this really a long-term strategy when it is expected to be funded by business borrowing?

• What about businesses working in the supply chain of businesses severely impacted by this?

• Are businesses that aren’t paying business rates being left out?

• Do co-working businesses and the businesses themselves need to be better supported to help with the eventual recovery?

• Would it help if tax breaks, such as SEIS / EIS, were made temporarily more generous?

• What support will be offered to the self-employed and freelancers?

• Will a lockdown limit the ability for key employees to go to work?

Stay updated with how policy changes might impact your business, sign up to our essential Policy Updates. You can read previous ones here. 

Read to whole newsletter here, and sign up here.

How the UK economy can survive the coronavirus

The UK is shutting down, and a recession is inevitable. Rishi Sunak has vowed to do ‘whatever it takes’ to protect incomes, businesses, and jobs. But what should he actually do?

It is essential that he, and the British public more widely, realise that this is not a ‘normal’ recession like ones we experienced in 2008-09 or the early 1990s. If we treat this recession as a normal recession, it could cause lasting damage to the economy even after we end quarantine measures, and make it even harder to beat this virus before then.

In a normal recession, the government should generally not bail out failing businesses. Instead, while keeping the overall macroeconomy stable with monetary and fiscal policy, they ought to let insolvent and unprofitable businesses go bankrupt, bail-in banks, and support workers as they move to new jobs. We didn’t want Blockbusters and Woolworth’s to survive the Great Recession, we wanted capital and labour reallocated to Amazon and Netflix. Normally, we want a post-recession world to look different to the pre-recession world. 

But this isn’t a normal recession.

First, it’s self-inflicted. When the Prime Minister tells us to work from home and avoid pubs, cafes, and restaurants, he is in effect calling for a reduction in economic activity. That’s absolutely right from a health point of view, but trying to ‘get the economy moving’ by using traditional stimulus policies is in direct conflict with this goal.

Second, it’s (probably) temporary. This will pass. We will eventually develop treatments and vaccines for this disease, or at the very least introduce a workable system to detect and contain it, and eventually life should mostly return to normal. Some sectors may be permanently less profitable, but most won’t. 

Third, it doesn’t care if you’re profitable or solvent. There is no reason to think that good, as in profitable in normal times, businesses will be any more able to weather the storm better than bad businesses. In fact, the opposite may be the case – highly productive businesses that have higher overheads (like labour or rental costs) will be more badly hit than less productive businesses with lower overheads.

Fourth, it’s not failing businesses’ fault. Unlike in the financial crisis, where the promise of bailouts may have incentivised banks to take excessive risk, that kind of moral hazard isn’t a concern here. On this point, we agree with Jonathan Portes: “It’s hardly reasonable to suggest that your local Thai restaurant should have made a business plan that took into account the risk of a three month pandemic-induced shutdown.”

Fifth, there is no obvious private alternative. The costs of this shutdown are so large and so widely shared across the economy that it is difficult to imagine a private body that could insure against this risk. Insurance usually works when costs are not borne by everyone at once, so it can use the premium payments of those who have not incurred a cost to provide cover to those who have. When costs are borne by as large a group of people as these, the cost-shifting has to be across time, and in as large a case as this, only the state may be able to do that amount of cost-shifting.  This, and the fact that they are mostly once-off, is why we are relatively relaxed about the cost of these measures: there may be some free market ‘nirvana’ where a private agency did the cost shifting, but in our world the state must act as the next best alternative.

Because of these factors, many of the remedies we would usually support during a recession may backfire. Our immediate aim should not be to prevent a sharp reduction in economic activity – unusually, this is the goal. We do not want people going out and spending in bars and restaurants. The economic priority is instead to facilitate this sharp reduction in economic activity, but doing so in a way that doesn’t cause long-term damage to the economy.

First, we should distinguish between two different kinds of business that may be threatened with bankruptcy during this period. Solvent businesses may still go bust without additional liquidity – government-backing for business loans is one solution to this, so that they can access credit. But the problem is much bigger than that. The financial hit of several months of low or no revenues, while overheads such as wages and rent still need to be paid, will push businesses that would otherwise have been solvent into insolvency. This is not simply a credit issue – the overhang of those costs means that as we come out of the downturn, many would struggle to pay back any debts incurred.

As for workers, many simply cannot work remotely. Most of them will either be laid off or have their hours cut significantly, with little prospect of alternative work for many of them. The short-term hit will be painful to anyone affected by this. And, if we expect to go back to normal at some point after this, it will be enormously wasteful.

As Steven Hamilton and Stan Veuger write, we don’t want to lose “the valuable things these businesses have worked hard to build—the products, processes, knowledge and relationships that make them unique.” Entrepreneurship isn’t easy. You can’t simply re-assemble a business overnight. And matching workers with the best jobs for them is a slow, difficult process – consider how long you have spent in your life looking for new jobs and carefully deliberating about the best option between different choices.

Economic policy when every day is like Sunday

To avoid this, we need a response that keeps much of the economy in stasis for the shutdown period. As much as possible, businesses should be kept alive and workers should stay attached except when normal factors might lead them to leave – a better offer elsewhere, say. The aim should be to keep as many existing business relationships alive and viable as possible, so that they can return to normality once the shutdown period is over. A temporary fall in economic activity need not lead to a depression. As Wojtek Kopczuk notes, “the economy does not collapse on weekends and it does not collapse in Europe in August when seemingly nobody works.”  We should be aiming to keep our economy in stasis, so that it is in as good a position as possible to bounce back, almost as if we were an off-season seaside resort. 

The policy response should be designed to protect businesses, protect jobs, and to protect affected individuals. Support for the unemployed and inactive self-employed will be important, but the priority is to keep workers on payroll, even if they can’t actually work. This could be achieved in a number of ways that could be rolled out soon, some using existing payment mechanisms and administration to act swiftly. 

Remember that these are not intended to be economic ‘stimulus’ in the conventional sense of trying to increase economic activity. They are not really ‘macro’ policies at all. Rather they are policies designed to keep individual firms and workers afloat during the next few months - a ‘big micro’ approach, you might call it. We’re also relatively relaxed about large businesses that can access capital markets, and so in general can access support that way if they are long-term viable.

Saving businesses

First, we should be prepared to bail out small businesses – provided they keep their workers. Steven Hamilton and Stan Veuger have a novel proposal targeted at SMEs. Loans would be issued to cover any fall in revenue experienced by a participating business relative to previous years (with a benchmark level to be determined for new businesses). However, unlike the Business Interruption Loan Scheme announced by the UK Government, businesses would also receive a tax credit equal to the full loan amount including interest, provided that the business maintains its full-time-equivalent (FTE) payroll through the duration of the crisis. In effect, if a business does not lay off its employees they do not have to pay the loan back.The plan would also cap the net income (after tax credits) of businesses receiving the loan at a given percentage of previous years’ net income, to prevent companies from making windfall profits by cutting variable costs. 

The benefit of this scheme is that it makes support for businesses conditional on keeping workers attached. The key drawbacks are that it’s untested and may be difficult to roll out quickly, because there are no existing institutions we can adapt to do it. Dr Michael Ryan of the WHO didn’t have the economic response in mind when he said that “perfection is the enemy of the good when it comes to emergency management. Speed trumps perfection”, but his logic applies here too. The challenge is putting something in place that will stop layoffs now. If this takes weeks to assemble, many businesses may start laying-off workers immediately. Making it clear, urgently, that this kind of structure will be in place may lead firms to hold off on layoffs, even if it takes a few more weeks to put it into place.

Second, a solution that may be easier to implement is to essentially ‘hack’ the statutory maternity pay system and apply it to all workers. The Resolution Foundation is proposing a Statutory Retention Pay (SRP) scheme in which people who don’t have work to do stay formally employed by their firm, but with a significant amount of their pay covered by the state. If the rate were set at 66% (and 80% for workers earning less than £189 a week), then it would cost £8bn if a million workers took part in the scheme. But we should be prepared to borrow and spend much more than that if necessary.

The scheme has parallels with the Danish response to the virus, where employers are able to grant a paid leave of absence to their workers. The government will pick up 75% of their salaries, with the employer paying the rest. At the same time, workers agree to give up entitlements to paid holiday. 

Startups that are not yet bringing in revenue will need targeted support as they approach the end of their funding runways. They are ill-suited to taking on debt, such as the Business Interruption Loans, and are unlikely to benefit from rates relief or grants, as many use co-working spaces. Startups will be responsible for a large proportion of job growth once this is over, and cannot be overlooked.

Two measures should be targeted at them. First, grants aimed at small businesses that don’t pay rates should be extended to startups in co-working spaces. In lieu of accurate valuations, grants could be limited to at startups with fewer than 10 employees. Second, instead of loans the British Business Bank should back convertible notes of up to £500k for early-stage startups. The notes would convert to equity at a later date and avoid the problems of issuing loans for pre-revenue innovative businesses. 

Protecting incomes and jobs

It is important to target businesses as well as individuals. The aim is not just to protect incomes but to ensure workers have a job to go back to. 

A temporary basic income wouldn’t do this and would cost more. It would also be poorly targeted – many workers do not need support and transfers to them create additional tax burden in the future that need to be paid back, and that should be avoided if there are alternatives that can be better-targeted.  

However, means-testing is difficult at the best of times, and impossible in this kind of circumstance. A ‘third way’ might be to, effectively, open the student loans scheme to any UK worker that wants to access it, allowing them to borrow money now to be paid back on an income-contingent basis over their lives. Under the current student loan repayment terms, earnings above a certain income threshold (currently £25,716/year) are taxed at 9% to repay the loan, with any amount unpaid written off thirty years after the loan was first taken out. The loan incurs an interest rate equal to a measure of inflation (RPI) plus 3%. We could offer different plan terms to people availing of this scheme, cap the amount at a realistic level to reflect average earnings, and the repayment term to a short period of, say, five years.  

Low earners would probably never pay back the entirety of the ‘loan’ – since this is a one-off cost, that simply transfers lost income to them from other taxpayers, and it is arguably a feature of this scheme, not a bug. Most other people, depending on their earnings and terms decided on by the government, would pay back as and when they were able to. 

The advantage of an approach like this is that it allows people to self-select into the scheme, eliminating any need for the state to try to decide who is and is not deserving of cash now. The difficulty may be setting this up quickly enough for it to work in time to help people who need cash now. It may also be worth calling this something other than ‘debt’ to avoid putting off people who may misinterpret it as being akin to credit card-type debt – saying that people can access grants in exchange for a temporarily higher National Insurance rate for five years, for example.

Not all workers are employees. Five-million are self-employed. Many will have seen work dry up as their customers cancel commissions. In the case of cleaners, carers, and tradespeople, they must choose between putting themselves at risk of contracting the virus or losing their income. There should be targeted support to help this group. Norway has pledged to the self-employed 80% of their average income of the past three years. We should look to do something similar, capped at a level to avoid large payments to the high-earners. Alternatively, we could temporarily remove the minimum earnings limit to Universal Credit and increase payments.

Some people will lose their jobs. They should be protected through boosts to Universal Credit (UC), with payments coming sooner and work conditionality and sanctions temporarily abandoned. The normal trade-offs of welfare policy do not apply here. We should be relaxed about the welfare system discouraging job-hunting during the shutdown period. 

Still, some job changes are desirable. In the next six months, some sectors will need more workers. In the US, Amazon is hiring 100,000 extra workers to meet demand for home-delivery of food. In the UK, Morrisons and the Co-Op  are hiring 3,500 and 5,000 new staff respectively. Other delivery companies, the NHS and the social care sector will likely need more staff too. We don’t want to impede this. So work must pay, by making sure workers on UC do not face too high a withdrawal rate as they start to earn.

All of this assumes the shutdown is temporary over three to six months - if it turns out not to be, an extremely costly and painful reallocation of resources will be needed. But the objective of the shutdown, we hope, is to put in place measures that allow us to contain the virus with testing and local quarantines, and eventually develop a vaccine or cure. 

Getting there over the next few months will be very difficult. The success of the Government’s economic response will be judged on lives saved and our ability to go back to normal as soon as possible. The measures advocated above are radical, and should be temporary. A policy package designed to weather a once in a century pandemic isn’t a policy package suited for the recovery, and vice versa. To act as if the normal rules apply right now is worse than delusional – it is dangerous.

Innovators vs. The Virus

From the moment the pandemic started to spread, people with an inventive turn of mind have been applying themselves to the problem of identifying, preventing, and treating the novel coronavirus. Here are just a few of their efforts and the challenges they face.

Testing

Seegene, a South Korean company, began work on creating a test for the virus before it had even spread beyond China. It used artificial intelligence to rapidly identify the chemicals needed for the test – a thought-saving invention that allowed them to complete the process in just a matter of days, rather than the usual months. The test was ready and approved by the authorities within a matter of weeks. And due to South Korea’s widespread use of robots, the tests themselves can be undertaken extremely rapidly. Robotic arms test 94 patient samples at once, returning results in only 4 hours – significantly faster and less prone to error than doing so by hand. As a result, the country has conducted over a quarter of a million tests for the virus – almost five times as many as the UK, despite having similarly sized populations. South Korea continues to test as many people as possible, while the UK has apparently scaled back its testing of mild cases, presumably due to a lack of testing capacity. In the US, due to a severe lack of testing kits, some biologists in San Francisco have organised a volunteer effort to manufacture them.

Preventing

Teams of scientists all over the world are currently testing potential vaccines for the virus, at least one of which will hopefully bear results. The Kaiser Permanente Washington Health Research Institute, in Seattle, has just begun a 6-week trial of a prospective vaccine, mRNA-1273, in healthy adult volunteers. It has shown promising results in animals, but the human test will be the clincher. This is not just a matter of determining its effectiveness and safety, but about working out the most effective dosage – those brave volunteers, for example, are testing doses of 25, 100, and 250 micrograms. Likewise, scientists at Russia’s Vector Institute have begun vaccine tests in animals, and researchers at China’s Academy of Military Sciences are beginning human trials too. Israel’s Institute for Biological Research is also about to begin its own trials.

Even if the trials are successful, however, getting vaccines to the world’s population will take a lot more ingenuity. Successful ones will need to be produced at great scale, and with great care. 

Treating

Despite the extraordinary rapidity with which vaccines have been able to get from the lab into human patients - largely thanks to advances in artificial intelligence and genome sequencing - having one that works and is available to everyone who needs it will take a matter of months.

In the meantime, the sheer number of cases worldwide has given us the opportunity to learn more about how to treat the virus. Initial reports have suggested that a few already-existing antiviral drugs may be effective against it. Yet these experiments still need to be replicated and confirmed. One of the top candidates is remdesivir, which was apparently successful when used to treat the US’s first patient. The drug now needs to be properly compared with placebos, though fortunately its general safety for humans is already well-established. It had already been tested as a candidate for treating ebola and MERS. Remdesivir is now the subject of a few randomised controlled trials, some of which should be reporting soon, and the manufacturer is already ramping up production just in case.

Chinese officials have also reported success using favipiravir, after trialling it in hundreds of patients, though Japanese trials (it is a Japanese-made drug) so far suggest it only works in milder cases and there are concerns there about potentially serious side-effects. Physicians in various countries have also reported success with drugs like Kaletra (a combination of lopinavir and ritonavir), typically used to treat HIV, as well as chloroquine, which has been used to treat malaria for decades (as well as a variant, hydroxochloroquine). As with remdesivir, however, we’re still waiting for their efficacy to be fully confirmed in randomised controlled trials.

Should none of these candidates prove effective, there are also a host of other organisations developing drugs from scratch. We can expect many of them to be tested in humans over the coming months, particularly as the authorities have become far more willing than usual to approve such tests.

Apart from the chemicals, the treatment of coronavirus has physical challenges. There is a widespread concern that many countries lack sufficient respirators to provide oxygen to those patients who have severe cases of the disease. There are so few ventilators in the UK, for example, that we would have to “flatten the curve” to impossibly low levels unless there is a dramatic increase in ventilator capacity. In Italy, this has already become a severe issue, though some inventors have stepped in to fill gaps in the supply chain. When a hospital in Brescia desperately needed new valves for its machines, and the manufacturer was unable to supply replacements, they turned to a number of local 3D-printing companies to manufacture the part - despite the fact that the manufacturer apparently refused to share blueprints and threatened the 3D-printing companies with legal action for patent infringement. Similarly, some people have begun sharing open-source designs for ventilator parts on Facebook.

There are, however, legitimate concerns about the safety standards for manufacturing ventilators. Even small mistakes can be life-threatening, and defective ventilators may in some cases be worse than no ventilator at all. To resolve this, the UK government has successfully persuaded large manufacturers to switch production to ventilators, and has a screening process in place to ensure that the new ventilators and their components are provided by manufacturers with sufficient experience of compiling to existing safety regulations.

Similarly, although there have been severe shortages of hand sanitiser due to stockpiling, some entrepreneurs have begun to step into the gap. A few Scottish whisky distilleries and London gin-makers have shifted production into manufacturing the stuff, though the government may need to look at whether alcohol duties should be altered to enable them to carry this on without incurring major losses. Perfume makers in France, too, have shifted to making the gels.

For those people treating the virus at home, there has also been some research into what works best, though without the rigour of proper randomised controlled trials - at least not yet. There have been rumours that ibuprofen and similar non-steroidal anti-inflammatory drugs have worsened the disease in some patients, and while many of these rumours seem to be unfounded, some health authorities have recommended that paracetamol be used as a preferred painkiller just in case (while urging people not to stop taking ibuprofen if they were already doing so under doctor’s orders). A team at the Spiez Laboratory in Switzerland has also reported that taking echinacea extract might have been somewhat preventative of similar diseases like SARS and MERS, raising hope that it might have the same effect for the coronavirus. But such work has been announced so recently that it has not yet even been peer-reviewed.

Dealing

Although governments are beginning to assemble bailout packages for the most severely affected businesses, like restaurants and cafés, some inventors are helping people direct money to their favourite places, to help them through the difficult next few months. Crowdfunder.co.uk, for example, with support from Enterprise Nation, have allowed the use of their platform for supporting affected UK businesses entirely for free. Likewise, in San Francisco, married couple Kaitlyn Trigger and Mike Krieger spent a weekend setting up SaveOurFaves, a platform for restaurants to be able to sell gift cards, getting some up-front cash to enable them to reopen when the crisis is over. Similar initiatives seem to be popping up all over the world.

When it comes to supporting the vulnerable, too, a number of apps have been developed seemingly overnight, to link up healthy people with those who may need deliveries of essential supplies while they are self-isolating. We at the Entrepreneurs Network, for example, have partnered with a scheme covering London, called Dare to Care Packages.

As for shortages of items like toilet paper, apparently due to stockpiling, I’ve yet to see much in the way of innovative solutions. In the meantime, however, do not use kitchen roll or wet wipes as direct substitutes, as flushing them down the toilet will utterly wreck the country’s sewage system.

As social-distancing measures ramp up and schools and other childcare providers close, companies like Bubble in the UK are supporting hospital staff and other key workers to find vetted babysitters while they go to work (though the government should probably look at adapting its tax-free childcare policy to such solutions, as the system is not yet set up to account for digital platforms).

Next time

The pandemic has brought attention to a number of others organisations that may help us deal with future cases. Nextstrain, for example, uses open genomic data to aid our understanding of this outbreaks and other ones, tracking coronaviruses, flus, and other strains as they evolve.

Even when the worst of this particular crisis is over, the world’s businesses and governments must step up their support for research into general vaccines and treatments for future pandemic-capable strains. This has been a devastating, deadly wake-up call. It must never happen again.

2021 Immigration Changes

Given the coronavirus pandemic, it’s understandable that the upcoming changes to immigration rules will be low down in priority, but for some, having the right talent will be essential for bouncing back when things return to something closer to normality.

On 19 February 2020, the UK government announced the upcoming changes to the UK’s points-based immigration system that will come into effect from 1 January 2021 after the freedom of movement with the EU ends on 31 December 2020, although, in light of the Coronavirus pandemic, there is a real possibility that the UK might extend the transition period beyond 31 December 2020. As per UKVI, “this new immigration system will treat EU and non-EU citizens equally and will aim to attract people who can contribute to the UK’s economy.”Below is a summary of the upcoming changes.

Tier 2 (General): The Tier 2 visa  is an employer sponsored visa route which allows skilled migrant workers to enter the UK on a long term basis to fill a skilled job vacancy.

• Regulated Qualifications Framework (RQF) level: In order to sponsor a migrant under the Tier 2 (General) visa route, employers are required to offer a role that is RQF level 6 (roles skilled at a Degree level) or above as per the current immigration rules, however, when the new immigration system launches in 2021, the threshold for the RQF level requirements is being dropped to RQF level 3 (roles skilled at an A level). This means medium-skilled jobs (except those that are on the Short Occupation List) that sit below RQF level 6 and are currently not eligible to be sponsored under the Tier 2 (General) visa route will also be eligible. While this will be a welcome change for some employers offering medium-skilled jobs, this threshold will not include lower-skilled jobs which remain an important issue for affected sectors such as hospitality, construction and social care.

• Minimum salary: Currently migrants must be paid a minimum of £30,000 per annum (experienced workers) or the ‘appropriate rate’ for the type of job – whichever is higher. Similarly, for new entrants, a minimum salary of £20,800 per annum or the ‘appropriate rate’ for the type of job – whichever is higher must be paid to meet the required salary threshold for a Tier 2 (General) visa. In the new immigration system, this salary threshold is being dropped to £25,600 per annum for experienced workers and £17,920 for new entrants. Also, certain jobs that pay less than £25,600 but no less than £20,490 per annum, may still qualify by trading points on specific characteristics. This change will be particularly welcomed by employers based outside of London.

• Resident Labour Market Test (RLMT): Abolishing the RLMT or waiver of advertising to prove that an employer is unable to find a suitable settled worker may be the most welcome change announced by the UK Government in the new immigration system of 2021. This change will allow employers to choose migrant workers from a wider pool of skilled workers and will make the current cumbersome process of hiring a migrant worker much simpler and quicker as they will no longer need to advertise the job for 28 days.

• Cap on Tier 2: The 20,700 cap on the Tier 2 (General) visa applications will no longer be applied. This will avoid  the chaos of 2018, when the Tier 2 (General) monthly Certificate of Sponsorship (CoS) allocation limit was reached in consecutive months. This made it incredibly difficult for many employers to hire migrant workers whose salary wasn’t ‘high’  (£46,000 per annum or more) enough or those that were not filling shortage roles or undertaking PhD level jobs. Although this issue didn’t affect employers in 2019 because Doctors and Nurses were eventually taken out of this cap, abolishing the cap on the Tier 2 (General) visa applications sends the right signal to the rest of the world. 

Immigration Health Surcharge

In 2015, the UK government introduced the Immigration Health Surcharge (IHS) which is yearly a healthcare surcharge charged to non-EU migrants if they are coming to the UK for longer than 6 months to allow them to use the NHS. This charge was £200 per year per migrant in 2017, it then doubled in 2019 to £400 per year and now the Chancellor has announced that as of October 2020 this will go up to £624 per year. The measure also increases the discounted rate for students, their dependents and those on the Youth Mobility Scheme from £300 to £470 per year and will be set at £470 per year for all children under the age of 18. This charge will also be expanded to include EEA migrants when the new immigration system comes in to play in January 2021.

The Government promised to increase the IHS in its manifesto during the 2019 general election campaign, so it is no surprise that Rishi Saunak announced this change in his budget speech last week. Under these new changes if a migrant was applying for a 5-year visa, they would need to pay £3,120 for just IHS alone, alongside the already exorbitant UKVI fees. The increasing costs of the UKVI visa fees and the IHS sends a message that unless migrants have deep pockets they are not really welcome in the UK.

Graduate Visa

After abolishing the very successful two-year Post-Study Work (PSW) visa route in 2012, international students can breathe a sigh of relief as the government is introducing a Graduate Immigration visa route in summer 2021. 

Eligible international students who graduate in the summer of 2021, or after, will be able to take advantage of this visa route. The details of how this visa route will work have not yet been disclosed. If this visa is meant to work like the PSW visa, it will allow international students in the UK who complete a degree level course or above at a Higher Education Provider to remain in the UK and look for work or undertake unsponsored employment with no minimum skill or salary level.

International students or graduates who either do not complete a degree level or above course in the UK or whose Tier 4 (Student) visa expires before this route is introduced can continue to take advantage of the Tier 5 Government Authorised Exchange route which allows them to seek internships with UK employers for little as 4 weeks up to a maximum of 24 months.

What Next?

UK employers should plan for their workforce requirements ahead of January 2021 and consider applying for a Tier 2 Sponsorship Licence now especially if their business relies on migrants (EU and non–EU). A sponsor licence application is usually approved within three to six weeks or it can take up to eight weeks if the UKVI decides to audit the business before issuing the licence but given the unprecedented demand for these sponsor licences, processing times are likely to increase even more. 

Finally, as Leonard Cohen said that “there’s a crack in everything, that’s how the light gets in” – I appreciate the steps this government is taking to reform the current immigration system won’t go far enough for many business owners, but there’s light at the end of the tunnel.

Zenia Chopra is Adviser to The Entrepreneurs Network and works in the Immigration department of Kingsley Napley.

On a Budget

Coronavirus is dominating everything, but the response isn't universal. Our Government is taking a different tack to most countries by not employing strong social distancing.

Many disagree with this approach, including former health secretary Jeremy Hunt, who said: “I think it is surprising and concerning that we’re not doing any of it at all when we have just four weeks before we get to the stage that Italy is at.”

I’m not qualified to comment on whether or not our Government is doing the right thing, but it’s fair to say that its increasingly vocal critics will only get more so if it turns out to have been the wrong approach.

Mitigating the economic impacts of coronavirus was understandably the focus of Chancellor Rishi Sunak’s Budget. As we suggested prior to the Budget, business rate rebates and time to pay schemes were put in place by the Chancellor.

Our Research Director Sam Dumitru has written a concise Policy Update on the Budget, which I recommend you read and share with other business owners. It covers all the main announcements and how they might impact your business.

Many business owners were concerned about Entrepreneurs' Relief being scrapped. It wasn’t, but the lifetime limit was scaled back from £10m to £1m. This means that it won’t really impact the Enterprise Management Incentive (something that we were particularly concerned about), but as Chris Sanger argues in the letters of the FT, the policy was about keeping successful 'rainmakers' in the UK, "so that they go on to start up more new businesses or become business angels, fuelling more growth and employment in the UK.” 

And as I argue in the Guardian: “Entrepreneurs’ Relief is widely understood and cited as part of a package of incentives that helped [foreign-born entrepreneurs] decide to start their business in the UK, or move it here.”

There’s certainly an argument about whether there is a more efficient way to get what we want than a blanket reduction in Capital Gains Tax, but this cut doesn’t get us anywhere closer to that.

Patently obvious
Our new researcher, Dr Anton Howes, wants to know if there are any patents in your sector/industry that you feel currently hold back your industry. If something springs to mind – past or present – drop him an email.

Unlocking growth
I don't want to bang on about it, given you probably already know all about the Unlocking Growth report we released this week with the Enterprise Trust. But just to update, it was covered in The Telegraph, here and here, City AM, and CapX.

You can read the rest of the newsletter here, and sign up here.

Budget 2020

What does the Budget mean for entrepreneurs?

Welcome to our latest Policy Update. In these updates, The Entrepreneurs Network focuses on recent policy development and sets out (nearly) everything an entrepreneur needs to know about the topic. If you’re joining us for the first time, you can read our past updates here. 

Rishi Sunak delivered the first budget in a year and a half, and there was a lot for small business owners and entrepreneurs to take in. Understandably, the Government’s response to covid-19 took precedence but the budget contained a lot (good and bad) for entrepreneurs, from the scaling back of Entrepreneurs’ Relief to boosts for the R&D Tax Credit and employment allowance. There were also a few consultations and reviews announced that might be relevant to your business, in areas such as fintech and EMI.

In this update, we’ll cover all three areas and link to information useful to your business.
 

The Budget

Support for SMEs affected by covid-19

Rishi Sunak framed his Budget as ‘Security Today, Prosperity Tomorrow’. The focus was on protecting jobs, by ensuring businesses don’t unnecessarily go bust during the crisis, leaving long-term economic ‘scarring’.

The measures were targeted and temporary. They cost a combined £12bn, which is relatively little in contrast with measures announced elsewhere such as Trump’s $1tn USD payroll tax cut, but on a par with the stimulus package announced in Australia. The measures aren’t designed to prevent a demand shortfall (the Bank of England is expected to do that) but rather to protect at-risk businesses.

Business Rates

At the previous Budget, pubs, shops, restaurants and cafés in England with a rateable value of less than £51,000 received relief worth 30% of the annual rates bill. In January, it was announced to rise to 50%. To address the covid-19 disruption, Sunak has expanded the relief further to 100% for one year. The relief will be expanded further to the leisure and hospitality sectors. In total, 900,000 properties (45% of all properties) will pay zero business rates in 2020-21. For pubs that do not qualify, the special discounted rate for pubs will be temporarily increased to £5,000. 

If you currently pay little or no business rates, because your only property has a rateable value of less than £15,000, you will receive a £3,000 payment. That’s equivalent to three month’s rent.

Business Interruption Loans

The Government is launching a temporary Coronavirus Business Interruption Loan Scheme to support businesses to access bank lending and overdrafts. 

The Government will provide lenders with a guarantee of 80% on each loan (subject to a per lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The Scheme will support loans of up to £1.2 million in value, and you can qualify provided your annual turnover is no more than £41 million and you are not in a restricted sector (most sectors qualify, but EU state aid rules restrict export-related activities).

The full details of the scheme are still being sketched out. You can find more info on the British Business Bank’s website, where they’ll identify the lenders that will partner on the scheme in the coming weeks.

Time to Pay

If your business is in financial distress and has outstanding tax liabilities, you can apply to HMRC for a time-limited deferral period on tax liabilities with a pre-agreed time period to pay these back. They’ve been used in the past to keep businesses afloat during floods. HMRC has made a further 2,000 experienced call handlers available to support firms when needed. If you think you need support due to Coronavirus, you can call the dedicated coronavirus helpline on 0800 015 9559.

Statutory Sick Pay

Statutory Sick Pay (SSP) will start from the first (not fourth) day of absence and will apply to anyone who is unable to work because they have been advised to self-isolate, as well as people caring for those within the same household who display COVID-19 symptoms and have been told to self-isolate.

For SMEs (250 employees or less), the Government has announced it will refund statutory sick pay in some cases. The refund will be limited to two weeks per employee and will allow employers to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of COVID-19.

As existing systems are not designed to facilitate such employer refunds for SSP, the Government is working to set up a repayment mechanism.

Changes to the tax system

Entrepreneurs’ Relief

The most newsworthy tax change at the Budget was the move to cut Entrepreneurs’ Relief from £10m to £1m. This was trailed ahead of the Budget and changes were discussed in the Conservative manifesto. Around 80% of businesses and most employees with share options will be unaffected by the change. Entrepreneurs who exceed the limit will instead pay Capital Gains Tax at a 20% rate.

It is likely this isn’t the end of tinkering with Entrepreneurs’ Relief. Andy Summers at the London School of Economics notes that many of the most egregious abuses of the relief are unaffected by the change. Expect further anti-avoidance measures in the coming years. Arguably, these should have been the priority instead of the threshold change.

Manifesto Pledges

If you read our last policy update on the election manifestos, you’ll recognise the following measures, which were all pledged in the Conservative Manifesto.

• The NICs Employment Allowance to £4,000. Businesses will be able to employ four full-time employees on the National Living Wage without paying any employer National Insurance contributions (NICs).

• The rate of Research and Development Tax Credit will increase from 12% to 13% from 1 April 2020.

• The rate of the Structures and Buildings Allowance will increase from 2% to 3%, benefiting businesses investing in new commercial buildings.

• Plans to cut Corporation Tax to 17% have been scrapped.

Alongside the pledges, there was also news that the planned SME R&D Tax Credit cap would be delayed for another year. It will be introduced at a level of three times the company’s total PAYE and NIC bill.

Penny for your thoughts?

As is tradition, alongside the tax changes the Budget also announced a number of consultations. They cover:

• Fintech: Former WorldPay Executive Ron Khalifa OBE will lead a review into the fintech sector. The review will identify what more industry and government can do to support growth and competitiveness, to ensure that the UK maintains its global leadership in this vital sector.

• EMI: The government will review the EMI scheme to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme. In our Startup Manifesto, we called for the employee cap to be lifted to 500 and the asset cap lifted to £100m.

• Business Rates: The government is launching a fundamental review of business rates to report in the autumn. In our report for the APPG for Entrepreneurship, we argued for shifting to a commercial landowner levy. You can find the terms of reference here.

• R&D Tax credit: The government will consult on whether expenditure on data and cloud computing should qualify for R&D tax credits. We called for them to allow such costs to qualify in our Startup Manifesto.

If you follow our regular e-bulletin, we’ll let you know when the calls for evidence are open, we of course will be responding too.

We’ll make sure to keep you up to date on any other policy changes we spot in upcoming newsletters. To receive these, make sure to sign up here.

Capital Ideas

I held off sending out last week’s newsletter to coincide with today’s launch of our latest report. Unlocking Growth: How to Expand Access to Capital evaluates the funding options open for SMEs and identifies key reforms to boost SME’s access to capital.

It has been undertaken in partnership with the Enterprise Trust – a brilliant charity that aims to help individuals of all ages and from all backgrounds realise their potential as independent wealth generators.

You can read Richard Harpin, the founder Homeserve (and the Enterprise Trust), in City AM today with his thoughts on the report.

The report makes seven policy recommendations:

1. Experiment with lottery-style funding to channel more grant-funding to startups.

2. Simplify and modernise the R&D Tax Credit by providing better feedback for applications and expanding the score of activities that qualify as R&D.

3. Make data sharing obligatory for incubators and accelerators receiving public funding.

4. Provide more long-term patient capital through the British Business Bank.

5. Improve the mentoring offer for Start Up Loans by providing additional mentoring when businesses finish paying their loans.

6. Streamline the advanced assurance process for EIS and SEIS to unlock more investment in high-growth startups.

7. Unlock additional investment into venture capital from defined-contribution pensions by reforming the fee cap and clarifying rules on the valuation of illiquid assets.

If you like the look of these ideas – we would appreciate a retweet.

Unlocking Growth also doubles up as an introductory guide for anyone looking to raise finance, and is packed with some great advice from some of our Members, Supporters and Advisers. Here’s a flavour of some it:
 
Tammy Kolowski, Co-Founder of NAF! STUFF on securing the Scottish Edge grant:
“I’d urge anyone out there looking for funding to look into your options and shop around. I used to use instant loans as a quick and easy option, and I was always scared of “answering to someone” or getting feedback about my business plans. Those loans worked for me at the time but the interest was high and I didn’t quite understand the value of taking the time to assess how the funding (and possible repayments) would impact my business in the future.”

Jacob Thundil, Founder of Cocofina on raising Peer-to-peer Finance:
“When we recently asked for a small bank guarantee to provide to HMRC our relationship manager discouraged us by saying that they needed to run credit checks etc. when they have the whole history of trading over the last 15 years right in front of them. [With peer-to-peer lending] there was a more open conversation and feedback compared to a mainstream bank, which might not want to have a transparent dialogue on the qualification criteria.”

Richard Mabey Co-Founder of Juro on Venture Capital
“Given our product ambition, we knew we would need a heavy R&D spend to ensure we really executed in the right way on the product before commercialising it. Now that the market we are in is seeing significant growth, the funding also allows us to grow headcount far faster than we could if we were bootstrapping from revenue.”

Coronavirus response
Thousands have already died from the Coronavirus and the global loss to real GDP is predicted to be around $US2.3 trillion. In facing the crisis, the work of entrepreneurs will be vital.

Self-isolation is going to hit some sectors particularly hard. It would be a mistake to let otherwise viable companies go to the wall. As Paul Johnson from the IFS suggests: “This could mean giving more generous payment terms to businesses for some taxes such as business rates and employer NICs.” He also thinks that the government, with the Bank of England, could work with the financial sector to avoid banks foreclosing on businesses in temporary difficulties. 

Keeping otherwise viable businesses afloat should be a key priority for the government. Failing to do so may cause long-term damage to productivity. The following options should be on the table for the government:

• Business rate rebates aimed at specifically affected sectors (e.g. venues, restaurants, hotels). 

• Expanded access to HMRC Time to Pay Agreements for affected businesses (e.g. allow people to postpone tax payments).

• Cooperation with banks to avoid unnecessary failures for indebted businesses.

• Using Universal Credit (assuming the systems are up to it) to support gig workers, who are at the biggest risk of losing income.

Future proofing
Taking a step back from the immediate challenge, Azeem Azhar thinks this should be a wakeup call for governments. To better cope with the next Coronavirus (or worse) he thinks we need to: invest in early warning systems, make supply chains more robust, increase investments into scientific and medical research, and engineer cities to be more self-sufficient.

While public health is a ‘government-sized problem’, entrepreneurs will integral to delivering this.

Azhar also calls for more open data, which can increase trust and confidence for a population dealing with a pandemic. Just look at the data available to the citizens of Singapore. 

We have a long way to go, but a recent trip to Estonia renewed my hope in the future. I met with Taavi Kotka, former CIO of Estonia, who has a 115-step blueprint for how Estonia went from a post-Soviet state with limited internet access and population with no digital skills to being one of the most advanced digital states in the world.

I’ve written about Estonia here, here, and here, but my latest thoughts on what we can learn from Estonia are for another day. 

Now is the time for the Government to act swiftly.

Read the whole newsletter here, and sign up today.

How government can unlock funding for UK entrepreneurs

Unlocking Growth, a new report from The Entrepreneurs Network and The Enterprise Trust, highlights a range of policies to ensure more entrepreneurs can access the finance they need.

• The funding picture for SMEs is mixed: while access to traditional bank loans has been limited since the global financial crisis, we’ve seen a dramatic increase in equity investment – up from £1.6bn in 2011 to £12bn in 2019.

• SMEs have benefitted from the rise of alternative finance. Over £2bn is lent through P2P lenders and close to 400 equity crowdfunding deals take place in the UK each year.

• However, many entrepreneurs fail to access the finance they need. The best available data suggests almost one in ten (9.1%) of SMEs are discouraged from seeking external finance.

• This causes an estimated £1.5bn in lost investment by SMEs (£11,439 per discouraged business). As a result, fewer jobs are created and businesses can fail unnecessarily.

Policy recommendations include:

• Reforms to make it easier for pension funds to invest in venture capital to enable more of the UK to benefit from equity investment.

• Better mentoring for Start Up Loans to address why too few seek external finance again once their loan has been repaid.

• Streamlining the process to access tax-relief on investments in early-stage firms to avoid unnecessary cashflow crunches.

Although the financing options and tax incentives open to UK SMEs are improving year-on-year, almost one in ten small businesses are still not seeking the external capital that would allow them to grow, a new report reveals.

Unlocking Growth: How to Expand Access to Capital, a joint report from The Entrepreneurs Network and The Enterprise Trust, evaluates the funding options open to SMEs – from Start-Up Loans and grants to equity crowdfunding and peer-to-peer lending. The report identifies policy changes that will ensure businesses can access the finance they need to grow.

While traditional lending is down, according to the British Business Bank, the bank is still the first port-of-call for SMEs seeking finance.  It’s only once entrepreneurs have been turned down by the bank that they investigate other types of lending, including equity investment. These alternative forms of finance are effectively filling the gap. 

According to Beauhurst, the demand for equity investment via venture capitalists has exploded.  In 2011 the figure stood at £1.6bn; last year it reached £12bn. 

Despite this, figures suggest 9.3 per cent of all SMEs fall into the category of so-called ‘discouraged borrowers’, businesses with a real need for finance, who fail to apply due to fear of rejection, a belief that raising capital would be too expensive, or concerns the process would be too difficult or time-consuming. 

This leads to an estimated £1.5bn SME investment shortfall, or £11,439 for each discouraged firm.

It also leads to fewer jobs and weaker economic growth through a lack of investment in workforce skills, investment in new technology, and investment in international expansion.

Joy Foster, founder of TechPixies, a digital training firm for returning women, raised £150,000 through EIS and SEIS, but admits she almost didn’t and considered walking away because she was daunted by the amount she needed to raise with ‘no guarantee’ she could pay it back.. 

Similarly Francis Toye, founder of justice software firm Unilink describes not knowing how to grasp opportunity until he joined the Goldman Sachs 10,000 Small Businesses programme and raised £1m through Funding Circle and then another £7m through defined payment terms.

This report makes the case for key policy changes that would unlock new funding opportunities for entrepreneurs including increasing VC capital flow by reforming the way defined contribution pension funds invest or fast-tracking EIS and SEIS applications.

Increasing mentoring to Start Up Loan recipients, who tend to be among those described as ‘discouraged borrowers,’ could also help deliver growth.

Richard Harpin, founder of the UK’s leading home repairs and improvements business HomeServe and new ‘think and do tank’ The Enterprise Trust, said: 

“All evidence points to the fact that businesses that take on investment at key moments in their growth trajectory do dramatically better than those that don’t.

“These founders go on to create jobs, generate taxes and contribute to UK economic growth.

“Yet, navigating the funding sphere has often become so difficult that it has left nearly 10% of founders discouraged from raising the finance they need to survive and thrive.

“It’s clear that finance is out there, with a dramatic uptake in Start Up Loans, equity finance and crowdfunding.  However, it is also clear that this capital is not always getting to where it needs to be. We need to change that.”

Sam Dumitriu, Research Director of The Entrepreneurs Network and author of Unlocking Growth: How to Expand Access to Capital

“By helping small businesses manage cashflow, invest in better equipment, and expand into new markets, access to the right type of finance can be transformational.

“The meteoric rise of alternative finance and VC should be celebrated, but still too many businesses fail to access the finance they need to grow. 

“Reforms to reduce wait-times for early-stage investment tax reliefs and allow pension funds to invest more in venture capital will allow more businesses across the UK realise their growth ambitions.”

Full Policy recommendations:

• Experiment with lottery-style funding to channel more grant-funding to start-ups. New Zealand’s Health Research Council uses this approach to allocate funding to proposals that are “transformative, innovative, exploratory or unconventional, and have potential for major impact” and it works well.

• Simplify and modernise Research & Development Tax Credits by providing better feedback for applications and expanding the score of activities that qualify as R&D. It could be improved on three fronts: feedback, speed, and scope. Solving these problems would enable more start-ups to benefit from the relief and reduce the risk of theirs turning to specialist tax credit advisers who can take up to 25% of the relief claimed.Make data sharing obligatory for incubators and accelerators receiving public funding. This will allow us to identify the most successful programmes, and better understand why they work. It will also allow us to identify the schemes best at expanding access to entrepreneurship among disadvantaged or under-represented groups.

• Improve the mentoring offer for Start Up Loans by providing additional advice when businesses finish paying their loans. The programme’s evaluation found high numbers of discouraged borrowers among participants.

• Streamline the advanced assurance process for EIS and SEIS to unlock more investment in high-growth start-ups so businesses using the pre-approved documentation could be fast-tracked and delivery more efficient.

• Unlock additional investment into venture capital from defined-contribution pensions by reforming the fee cap and clarifying rules on the valuation of illiquid assets. In the US, VCs invested more than 10 times as much as UK VCs in 2017. This is partly explained by the impact of pension fund investment in venture capital. In the US, VCs are overwhelmingly (98%) funded by institutions such as pension funds, insurance companies, and endowments. Pension funds play a much larger role in the US. They contribute 65% of the capital in the US VC market and 18% in Europe, but just 12% in the UK.

• Provide more long-term patient capital through the British Business Bank. The government should encourage the British Business Bank to investigate if funds can be better directed towards solving market-failures. For instance, there may be a case for prioritising investments in regions under-served by venture capital or tying funding from the BPC to support for start-up community building, such as training for emerging fund managers.

Reaching out

Fewer than one in five equity investments made in 2018 went to startups with at least one female founder. As a result, women are under-represented in high-growth entrepreneurship. The equity funding gap has myriad causes, from a lack of role models and mentoring to biases in the investment industry. As VC investors often rely on referrals and face-to-face introductions, access to networking opportunities could be a powerful tool for closing the gap.

However, a new study from Sabrina Howell and Ramana Nanda finds simply expanding networking opportunities by exposing female entrepreneurs to more VCs isn’t sufficient to solve the problem.

To test the idea, they looked at Harvard Business School’s (HBS) New Venture Competition (NVC).

“In the first round of the NVC, each team is assigned to one of about 15 panels, each composed of about six judges. Having delivered a pitch to the judges and answered their questions, the participants are in a position to reach out to the judges after the competition, leveraging the connection to secure financing for their ventures. The competition does not, however, explicitly encourage such follow-up. The core dataset for our analysis consists of comprehensive team and judging information for HBS NVCs held between 2000 and 2015, comprising 964 participants. 

Our research design exploits random variations in the number of VC judges across panels, which arises from the way judges are allocated to panels in the NVC. Specifically, assignment is random conditional on sector, which is to some degree taken into account.”

If exposure to venture capital was enough to close the gap, then we’d expect the students exposed to more VC judges to be more likely to get equity funding. But Howell and Nanda found that exposure to VCs only boosted VC-backed entrepreneurship among male students.

Why does exposure to VCs help men, but not women? Men were twice as likely as women to “proactively reach out to VC investors” after the competition. Interestingly, the researchers find VCs are no more likely to respond to male entrepreneurs reaching out to them. Similarly, VCs reached out to men and women at the same rate. They also find little evidence of explicit bias from VCs.

“We do not find obvious evidence of explicit bias by male VCs against female participants in our sample. In addition to VCs responding to outreach equally by participant gender, we show that the private scores of VC judges are in fact slightly lower for male-led ventures than for women-led ventures. Also, while there are too few female VC judges to establish precise effects by a judge’s gender, we do not find evidence that female VC judges are differentially beneficial for female participants. Still, less observable discrimination may be at play, and the lack of outreach by women could reflect expectations of bias or harassment.”

Two key things need to happen to narrow the gap. First, female founders should be encouraged to reach out more. To that end, mentoring and networking may help build confidence. Second, organisations like accelerators should take a more hands-on approach to facilitating networking opportunities. It’s not enough to simply expect people to send emails after events. Closing the gap will require more than exposure alone.

Bank On It

Yesterday, the British Business Bank released its latest Small Business Finance Markets Report – a comprehensive assessment of finance markets for smaller businesses.

The report finds evidence that the current period of uncertainty is pushing small businesses to use external finance to put in place contingency plans, or reduce finance requirements as they delay longer-term investment and expansion decisions.

Although 56% of SMEs don’t expect the UK leaving the EU will impact the growth of their business, the number expecting it to have a negative impact has risen to 29% from 22% in 2017. Just 5% expect their business to grow more because of it.

And just 36% of smaller businesses now use external finance compared to 44% in 2012, with over 7 in 10 firms saying they would rather forgo growth than take on external finance. However, equity finance, asset finance and marketplace lending have grown by 4%, 3% and 18% respectively, and awareness of alternatives to traditional finance has continued to grow, with 52% of small businesses aware of peer-to-peer lending, 70% aware of crowdfunding platforms and 69% aware of Venture Capital (up from 47%, 60% and 62% respectively in the previous year).

For those still looking to learn more about finance options, our friends at Intelligent Partnership have just released a NIFTY guide which might be useful.

You’ve got mail
The Daily Mail has got in touch as they’re looking for case studies to coincide with the Budget. They are particularly keen to speak with entrepreneurs who could be affected if Entrepreneurs’ Relief was to be cut. You would need to be willing to chat to them and be photographed. Just let me know if you’re game, and I’ll connect you to the journalist.

Expanding horizons
The government is creating a Regulatory Horizons Council – a new expert committee that will advise the government on emerging technologies and the regulatory reform needed to support their introduction. 

They are looking for experts in health and life sciences; digital, data and cyber; engineering and energy; innovative business models; and citizens and the environment. It’s 1-2 days per month (£380 per day) and the application deadline is 23rd March. 

I think it’s vital that these sorts of roles are filled by our very best and brightest talent, which is why they should probably pay a bit more. But hopefully civic duty is enough to attract the right people. Please share widely. Find out more.

Officers and a Gentle Plan

The All-Party Parliamentary Group for Entrepreneurship is back! 

We are relaunching the APPG in the House of Lords on Tuesday morning with Andrew Griffith MP, the Prime Minister's Chief Business Adviser. You might still be able to get a ticket if you’re quick.

Lord Leigh of Hurley, who is a successful entrepreneur in his own right having co-founded Cavendish Corporate Finance, and Bim Afolami MP, touted by the BBC as a rising star, have joined as Officers. We also have loads of new MPs and Peers as Members.

We are the Secretariat of the APPG, which means it’s our job to help ensure Parliament and the Lords are kept updated about what entrepreneurs need to thrive. To this end, we will be hosting a series of roundtables on all matters related to entrepreneurship – all of which will be written up into snappy briefing papers to inform policymakers. We will build sponsored roundtables around core activity based on the brilliant research of the Enterprise Research Centre (ERC). Get in touch if you want to get involved.

We don't want to hog the APPG. It should be for everyone supporting entrepreneurs. That's why the APPG will launch the research of other organisations' doing interesting work on entrepreneurship. First up, the APPG is co-hosting an event with Lord Howard Flight and the Enterprise Investment Scheme Association (EISA) on this vital tax break for entrepreneurs. Drop Mark Brownridge an email to enquire about a place. And watch this space for a paper launch with Tech Nation.

You can read the minutes from the APPG AGM minutes here.

Factory tax
This week, our Research Director Sam Dumtiru had a report out on full expensing – making the case for abolishing the so-called 'Factory Tax'.

We are currently ranked 33rd in the OECD on the Tax Foundation’s Capital Cost Recovery index, discouraging entrepreneurs investing in capital. This is hitting manufacturers in the Midlands and North particularly hard (hence calling it the 'factory tax'). 

For over two decades, the UK has had the lowest level of private investment in fixed capital as a share of GDP in the G7. This can be turned around by letting businesses fully deduct the costs of investments in equipment by accounting for inflation and a real return on capital.

Allowing businesses to immediately write-off capital expenditures would boost investment by 8.1% and labour productivity by 3.54% (£2,214 per worker).

In the Telegraph (Paywall), Ryan Bourne backs Sam's plan, and The Times (Paywall) is convinced, concluding that the new Chancellor, “Mr Sunak will come across worse ideas.”
 
In a spin
Our friends at Beauhurst have revealed that investment into university spinouts declined in 2019 (£1.24 billion), compared to 2018 (£1.38 billion).

The drop-off – which isn’t reflected in overall equity investment activity – has been particularly acute for foreign investors. “The UK’s spinouts secured fewer deals with international investors in 2019 compared to the previous two years, and the value of the deals they were involved also declined. Most foreign-backed deals were backed by US funds, but even these investors halved their deal activity compared to last year.:

Hopefully it's a blip, not a trend.