Feature: A not so level playing field

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A not so level playing field

Paul Wallace analyses a report on the success rate of UK start-up enterprises and looks at the role the British Business Bank plays in supporting them

Every year hundreds of thousands of people start businesses in the UK. And every year hundreds of thousands fall at one of the hurdles. Setting up an enterprise that survives and thrives is one of the hardest tasks anyone can undertake. But is it harder for some than others because of economic, social and regional inequalities? And if so, what should the state-owned British Business Bank (BBB), which was set up to improve access to finance by small and medium-sized companies, be doing about it?

Recent analysis from the BBB and from management consultancy Oliver Wyman – Alone Together – suggests that the obstacle course for starting and running a viable business is more fraught for some. The report was published last October as part of the evidence feeding into the Commission on Race and Ethnic Disparities set up by Boris Johnson. It found that the going was tougher for women, members of ethnic minorities and the less well-off. Location mattered, too.

The gender gap starts with the fact that women make up little more than a third of entrepreneurs even though they constitute nearly a half of total employment. The median turnover of their businesses is just £15,000, a third of the £45,000 achieved by their male counterparts.

An ethnicity gap is clear for black business owners whose median turnover was just £25,000, well below the £35,000 of their white counterparts. The median turnover of Asian and other ethnic minorities was, however, higher, at £40,000. Even so, the report argues that they are also disadvantaged.

The proportion reporting a profit was highest among white business owners, at 84%, followed by their black counterparts, at 72%, and lowest among the Asian group, at 62%. Moreover, more than two-thirds of white business owners said they were meeting their non-financial goals compared with only around half of their black and Asian counterparts.

The report also finds a link between household income and entrepreneurial outcomes. The better-off the household, the greater the success of ventures, whether measured by profitability, growth or turnover. The obvious objection is that the causation runs in the opposite direction: a prospering enterprise boosts income. But the researchers say that the businesses in question are young and median turnover is low, so it is “unlikely that profits from the business are the main driver of higher household income. Instead, it appears that money is leading to success.”

London is a more hostile environment than other regions, judged by those reporting a profit

Finally, place matters. In particular, London is a more hostile environment than other regions, judged by the proportion of entrepreneurs reporting a profit. This was lowest, at 71%, in the capital, compared with an average of 84% across the UK. This finding may seem counter-intuitive given that the capital is renowned for its start-ups. But that start-up density makes the business environment more competitive while costs in London are higher. By contrast, the regions where entrepreneurs especially flourish are the South East and, less predictably, the North East.

The pandemic has made disparities particularly stark. Covid-19 and the measures taken to combat it have taken their toll across the board. Almost half of entrepreneurs have had to close their businesses or have suffered a fall in sales of more than 75%. But black male business owners were especially hard hit, with 70% having to take “drastic action” to protect their businesses.

Small sample sizes, big implications

The analysis in the report is based on a survey of 3,727 entrepreneurs, both those running a business and those aspiring to do so. Each of these two categories, especially the latter, include some who have tried and given up in the past. Business owners constitute just under half the total in the survey. They total around 1,750, of whom some 1,500 are running their own enterprise. This means that when the data is further broken down, such as by region or ethnic identity, the size of the sub-groups can be quite small. Given the usual statistical limitations of any such exercise, the research team is surprisingly ready to reach firm conclusions – for example that higher household income generates business success rather than the other way round.

Whether or not the report is definitive, tackling disparities is hard. For example, there is a long-standing gender pay gap among employees as well as entrepreneurs. One reason is that a much higher proportion of women than men work part-time. They do so because they are also looking after children. That penalises them because part-time pay rates tend to be lower than those of full-timers. Even when women return to full-time work as their children grow up, they often find it hard to make up the ground they have lost in their career.

The researchers at the BBB and Oliver Wyman come up with a similar-sounding answer to the reasons for the gender gap between male and female entrepreneurs. They point to previous part-time work, caring responsibilities and more limited opportunity to build up skills in the workforce as among the root problems. That suggests a fundamental societal challenge for which short-term solutions may prove elusive.

The BBB is already helping a more diverse range of entrepreneurs to begin trading, notably through its start-up loans. Of 75,000 loans, two-fifths have gone to women while a fifth have gone to black, Asian and other ethnic minorities. A third of those tapping funding were previously unemployed.

Money is only part of the puzzle

Based on the findings in the report, the BBB says it wants to do more. But should it? Everyone has a right to try to set up a business, but no one has to embark upon what is inherently a very risky endeavour. When the BBB intervenes, it can do so only because it is backed by the public purse. An explicit objective set for the BBB is to manage the resources it receives from taxpayers efficiently.

Just as importantly, although access to funding is necessary, it is far from sufficient for success. Fostering start-ups may sound an appealing idea but there is a risk of encouraging individuals to strike out on their own when they lack the necessary experience. Indeed, the report underplays the role of age in determining entrepreneurial outcomes.

Other countries have addressed that particular problem more explicitly. In German states such as Bavaria, for example, there is support for young entrepreneurs through an 'old help young' programme. The senior advisers work on a voluntary basis and the start-ups pay only an administration fee.

There is a risk of encouraging individuals to strike out on their own when they lack the necessary experience

The BBB understands the importance of advice. And it points out that ethnic minorities tend to rely upon informal rather than formal business networks. There is no doubt that some entrepreneurs lack access to important expertise while developing their ideas and setting up their business. But the BBB is unlikely to be able to solve that with more funding. To be fair to the bank, the start-up loans programme did not form part of its original brief. It took it on when it absorbed the separate Start-Up Loans Company in 2017.

The BBB has also been recruited to the government’s regional agenda to help reduce funding imbalances across the UK for smaller businesses. The National Audit Office noted a year ago that the bank had faced “pressure on its governance and operational arrangements” as a result of the rapid growth in its activities resulting from these additional roles. If its remit is now extended to doing battle against social injustices, there is a danger of further mission creep and conflicting objectives.

One implication of the report, for example, is that the bank should devote more resources to help entrepreneurs in London, which runs counter to its new regional objective. The BBB must not lose sight of the main purpose for which it was set up, only six years ago. That is: improving access to finance for the small and medium-sized enterprises whose success is so important for the economy.

Addressing this long-standing weakness in the UK financial system requires a relentless focus, which is difficult to achieve when ministers keep piling new tasks on the bank. Ministers need to stand back and consider the whole swathe of problems that entrepreneurs face. Certainly, over the months ahead many in the UK will lose their jobs, often those from ethnic minorities. Some will have no choice but to set up their own business. But developing new businesses – and doing the right thing – is not just about finance.

Paul Wallace

Paul Wallace is the former European economics editor of The Economist and author of The Euro Experiment, published by Cambridge University Press