Getting to "yes" in a world of "no"…


In November 2010, BIS introduced the Government’s Growth Strategy by publishing “The path to strong, sustainable and balanced growth“: to my great surprise, I found myself disagreeing with a very great deal of it. The report began:

“The Government’s economic policy objective is to achieve strong, sustainable and balanced growth that is more evenly shared across the country and between industries.”

Is it just me, or is there is a Centrally Planned Economy shadow hanging heavily over this very first paragraph? We don’t live in an ideal world, and there will always be imbalances between different parts of the country and different industries. Surely trying to equalize these macro-social issues as a primary policy measure (particularly at such a difficult time) is simply old-fashioned left-wing positive discrimination? The only time for righteous policies is once you have already delivered growth policies that work. And as for “balanced growth”…

“The UK needs to move away from an unbalanced growth model reliant on a narrow range of sectors and ever-increasing government spending. We can no longer have an unsustainable accumulation of private debt that inflated property bubbles and ultimately caused a banking crisis and sharp falls in output. The UK needs to grow sustainably – both economically and environmentally. We need to grow, but we need to grow differently.”

As far as industry goes, I think it’s fair to say we haven’t really had anything like a “growth model” of any sort for a fair while. (In fact, have we even really had any real growth either?) What drove the property bubble was that banks were happy to lend money to anyone for property: offering 100%+ buy-to-let mortgages to anybody that walks in off the street was unsustainable bull-market nonsense. Bizarrely, even that was pretty much sound compared to the sub-prime mortgage fiscal foolishness going on in the US that really sank the system.

As for the UK commercial banking sector over the same period, its equivalent insanity was the vast number of coffee shops it happily helped to fund, all with basically the same designer-cookie-cutter business plan template. Didn’t government ministers walking down High Streets ever pause to think “Hmmm… I wonder which banks financed all these shiny new coffee shops?” [Hint: they all did] And guess what – that same money wasn’t going into the scalable home-grown export-driven IP-owning industries Mr Cable is now, ummm, banking on to rebalance the economy.

So as to the aspiration to “grow differently”, we firstly need to grow at all – new products, services, products-as-services, services-as-products, and IP, but definitely not coffee bars – and to find ways of getting capital to those things with the best chance of multiplying it on a world stage. Coincidentally, my business bank manager told me last week about the barbers and the coffee shop whose EFG loans he had not long ago approved. *sigh* It remains basically business-as-usual for the banks, it would seem.

“A new approach to growth requires a new attitude in Government. Government on its own cannot create growth. It is the decisions of business leaders, entrepreneurs and individual workers which build our economy. […]

Access to finance is a real concern for many small businesses and we have set out a package of Government and industry-led measures to work towards addressing this.”

Here, I think, are the two key concepts which BIS doesn’t seem to grasp are so tightly interwoven. Growth is a multiplier, and its final amount is always relative to the amount you are trying to multiply: while at the same time the lower the amount you start with, the more pressure you come under to exit early (if your curve is pegged low, low puts yield low gets). Hence without realistic access to finance, growth simply goes nowhere – with nothing much going in to the growth multiplier, you get nothing much coming out at the end.

It’s perfectly true that the UK has always had a decent enough supply of brainiacs: but few have the skills to simultaneously execute the kind of financial and technological alchemy needed to summon sufficient risk capital from the ether and to build a whizz-bang growth engine to multiply it up. Yet that is pretty much the kind of Renaissance Man or Woman you’d need to be to swim against the financial tide currently prevailing. You need to find workable answers to both parts of the equation, solving just one isn’t enough.

That is why today we are launching the Growth Review, a rolling programme […] a fundamental assessment of what each part of Government is doing to provide the conditions for private sector success and address the barriers faced by industry.

People with good ideas that are plugged into their particular markets will always see opportunities for growth: but what’s the point of building a jet engine if you’ve only got wood to burn? Hence, all the while that UK angels continue to under-invest slowly at uncompetitive, low valuations, UK startups – however world-beatingly clever and far-sightedly visionary their special sauce may be – will continue to go nowhere. BIS don’t seem to see that there is no private equity cavalry coming to the sector’s rescue, and that their efforts to tweak the taxation system to encourage UK angels just a little bit more are almost certainly not going to have the desired effect. Most angels I’ve talked with are not some notional 5% short of investing but 50% short.

So paradoxically, I think the biggest on-trend thing BIS could do in the interests of UK plc would be to promote ways of (and mechanisms for) helping non-UK angels to invest in UK startups. Of course, UK angel networks (ably represented by the BBAA) would almost certainly lobby BIS hard to argue an opposite position: but then again, they’re still missing all the sweet central government funding they used to get not so long ago, while the way that the majority of UK angel networks now charge entrepreneurs three times over (pay-to-prepare, pay-to-pitch, pay-to-succeed) is nothing short of scandalous, and probably contributes strongly to the current startup funding crisis. Would it really be so bad if the pendulum swung away from them for a change?

PS: note that the report does briefly mention inward investment, saying (p.14) that…

“…the Government will look to boost the stocks and flows of investment to and from the UK. The UK remains a hugely attractive market for inward investors. At the end of 2009, the stock of foreign direct investment in the UK was worth £672 billion while UK direct investment abroad was worth about £1,046 billion.”

…and that…

“The Government will start by focusing on the priorities for action identified in the previous Chapter:
* Planning
* Trade and inward investment
* Competition
* Regulation
* Access to finance
* Corporate governance”

However, my best guess is that BIS is still casting around for good ideas from industry as to how its efforts can stimulate inward investment. I’ll ask Andy Rose at the Advanced Manufacturing Growth Summit this Tuesday, see what he says…

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