Start-ups – Open for business

In its recent competitiveness white paper, the government directed Business Links to establish 10,000 new start-up businesses. New small businesses are again to be a key part of the strategy to generate new growth businesses and new jobs. But this policy may miss the point. Most start-ups fail within the first three years. Serial or portfolio entrepreneurs have a much better track record of success.

According to government predictions, more than 50% of new jobs in the UK will come from perhaps 2% to 3% of growth companies in the SME field. Westminster has ambitions to improve on this estimate through its plans to create new start-ups. The specifics of how and where these new firms will be launched remain unclear. But relying solely on business start-ups as a vehicle for job creation may be mistaken.

Research among different categories of owner-managers demonstrates a clear pattern. Where individuals have a long track record in business launch firms, they have a much greater record of success than directors of start-ups. Government agencies seeking to stimulate effective job creation should therefore look to experienced SME managers, rather than instigators of greenfield ventures. The distinction lies between a start-up venture and an individual who creates a series of small businesses.

The classical entrepreneur is the owner-manager who traditionally runs one business. This may have several locations but it is still one company. The spectrum of founders and owners of small businesses, however, includes several different categories.

Among the most successful are habitual entrepreneurs. These are people who have previously owned or operated at least two earlier businesses. They can often be sub-divided into portfolio and serial entrepreneurs. Serial entrepreneurs buy or create a business, run it, improve it, sell it on and then move on to another business. Portfolio entrepreneurs juggle several businesses at once.

The psychological profiles of these two classifications are distinctive. By definition, a serial entrepreneur is involved with one business at a time.

The portfolio entrepreneur is a different animal. He or she will typically start or inherit a single business. A good example would be a restaurant. This does well and the owner launches a mini-cab firm next door to ferry the customers home. This leads to a courier service, which in turn could spark a van hire concern.

Some of these separate businesses may be managed by family members or close friends. But, to the world outside, there may be no obvious connection.

In a rural area, one individual may own all the hotels and pubs, for example, in one town.

A finger in every pie …

On the coast, one entrepreneur may own a series of distinctly different gift shops. There are thousands of potential combinations. Some portfolio entrepreneurs will exploit potential synergies through bulk purchase or standardisation of approaches. Others will keep the separate enterprises as far apart as possible.

Most small business commentators also mention the novice entrepreneur, who is new to the field of owner-management and who, statistically, is more likely to fail than succeed. More than 60% of greenfield companies collapse in the first three years.

A recent report by two small business academics attempted to cast light on the habitual entrepreneur. Professor Paul Westhead, of the University of Stirling, and Professor Mike Wright, of the University of Nottingham, argue that a greater appreciation of the distinctions between entrepreneurs is fundamental to an improved understanding of the process of wealth creation. The report seeks to clarify and define the categories more clearly and to show their differences in scope and approach.

The authors broke down entrepreneurship into urban and rural categories.

Inside these separate categories they found that, in the rural area, the five fastest-growing portfolio entrepreneurs produced 69% of new jobs. Serial entrepreneurs were the next most productive and novice entrepreneurs the least.

The differential was less marked in the urban areas study. Some 47% of new jobs were created by the five fastest-growing portfolio businesses.

Serial entrepreneurs made the next largest contribution with novice entrepreneurs making the smallest.

The authors discovered that novice entrepreneurs were much less successful in creating and sustaining new jobs in urban areas than in rural settings.

The conclusion from this is that the skills, resources, knowledge, competencies and networks of the habitual entrepreneur combine to create a stronger chance of surviving and thriving in the marketplace. ACCA believes that start-ups need to be encouraged as well as habitual entrepreneurs, but the early evidence suggests that this latter group is more successful in providing long-term jobs.

Professor Westhead is concerned that public policy indiscriminately favours start-ups, when basic research would reveal that funding habitual entrepreneurs has a better chance of creating jobs.

‘Public policy is geared towards small businesses, and what public policy is obsessed with, particularly in Scotland, is increasing the new firm birth rate. So most businesses are going to be established by novice founders. They are going to go out of business because they have no previous entrepreneurial business experience.’

Some agencies are targeting groups in society which are perceived to be unrepresented in the business population. These include graduates and the unemployed – particularly unemployed women – to start up these new companies. These are, in the main, people who have yet to acquire the skills to run a business successfully.

Leading academics say the process will lead to a high level of failures.

Instead of investing in experienced business managers, agencies are selecting people with little commercial experience. In some environments, especially London and the South-East, encouraging new firms where there are already a large number of new businesses could in itself be detrimental as one business could displace another.

In this environment, it could be desirable to move from a scattergun approach to a finely targeted approach. By concentrating on habitual entrepreneurs, it is possible to maximise the odds on success and also to reach out to several businesses through one individual. The public funds, which are currently directed towards novice start-ups, could find a home in growth companies or companies which export abroad, or hi-tech companies or process development businesses.

The quality of information on this sub-section of the entrepreneurial community is limited. Some research, such as that by Professors Westhead and Wright, has laid a foundation, but further investigation into the activities of habitual entrepreneurs would provide a platform to help these businesses create skills and jobs.

David Harvey, secretary of ACCA’s small business committee, says: ‘We need more data to inform policy makers. Business Links should be able to develop tools help these businesses to grow. Banks should create a series of services and products aimed directly at the habitual entrepreneur.’

Chris Christou is chairman of ACCA’s small business committee.

Related reading

aidan-brennan kpmg