Thought Leadership written by Mark Sweeny – Technology Leadership Council Member and Founder & Chief Executive of de Novo Solutions.
I haven’t written a blog for a while but let’s give it a go and see where we land…be warned for some controversial opinion ahead. However, as I write I will acknowledge I am and have become more politically minded over the years.
Opportunity to Reset
A breath of fresh air, a new Government and the opportunity for real change. Absolutely no value in raking over the past 14 years, especially the epic car crash of the last 5 and the expiry date of a lettuce. We are, where we are! But now we can bring fresh thinking to the table and most importantly turn strategy (read government policy) into effective action and transform what has been a stagnant British economy starved of investment for decades.
The new Labour Government has stated that economic growth is at the very heart of their policy agenda. Aside the larger initiatives of the likes of Great British Energy, National Wealth Fund, and Devolution of Power, I still get the feeling they might need some real help and encouragement regarding the leavers of growth, as while the individuals that we, the people have elected may be very good politicians, few of them have ever created and run businesses that generate the wealth they so desire and wish to distribute. (James Timpson MP being the obvious exception).
Governments do not create wealth directly, but they can create the environment for wealth creators, aka entrepreneurs, to flourish in building successful businesses, from which “many” can benefit. This is fundamental to growing any economy, more importantly as this country’s economy is made up of 99% SMEs (small medium enterprises), we need policies that encourage, stimulate and celebrate those that can carry this mantle.
Re-iterating the current narrative about building houses to drive growth on an epic scale is all very well, but where are the highly skilled jobs coming from that will pay the salaries that will allow people to buy the houses we are going to build? or are we going to be just giving everything away?
There is more to growth than just quoting an increase of GDP.
The Case for the Smaller State
It comes as no surprise that Labour was always going to state that they would inherit a financial black hole in the country’s finances and consequently the need to raise tax revenues. Winning any election requires gamesmanship and anyone who says otherwise is deluded.
However, growing the economy just to fuel poorly organised and managed public services is not sufficient rationale or argument to raise taxes as there is a high probability the State will continue just to waste more money.
The need to reduce the size of the State is absolute paramount moving forward, and that means investing in services that can be digitalised and automated, whilst ensuring the right people with the right skills are in the roles where we actually need people.
The Mindset of the Entrepreneur
To understand the policies I, and others, are advocating you must get into the mindset of the entrepreneur, so let’s kill a few myths (and this is by no means an exhaustive list).
- Entrepreneurs see the world through a different lens. They do not create businesses just to get rich, they create businesses when they see a clear need to solve a problem and can do something “better, cheaper, faster” (there’s an MBA strategy all in-one if you can knock off 2 of the 3). Profit is important, but is seen as a scoreboard, and cash a by-product for further re-investment.
- Entrepreneurs are generally unemployable, they don’t like the corporate constraints that limit thinking or require 100’s of meaningless sign offs that result in having to move at the pace of a glacier (nod to Miranda Priestly and “A Devil Wears Prada”). Opportunity is there to be seized quickly.
- Entrepreneurs are prepared to embrace risk, and this means they are prepared to put their own financial security on the line, as well as accept the personal sacrifice that goes with it. Forget the nonsense circulated surrounding work-life balance, there isn’t any especially in start-up mode – this is 24×7 and also creates personal collateral damage through sacrifice. If you don’t give it 110% the only guarantee is that the venture will fail. This is not about being a Marta to the cause, this is just the “tax” you pay for success – Just ask my wife!
- Entrepreneurs create opportunities for the many, both on a micro and sometimes on a macro level if there businesses within a given industry get large enough.
- Entrepreneurs have to turn up every day, as you are in a fight constantly dealing with challenge and rejection. As an example, no matter how big you get no greater words of wisdom were ever given to me than by the late Mark Hurd, Co-Chief Executive of Oracle when asked “What do you think about every day in running one of the largest technology business?” his one word answer was “Survival”.
- Entrepreneurs accept failure as part of the game but are still prepared to get back up, learn and go again – as Rocky would say “that’s how winning is done!”
- Finally, Entrepreneurs more than anyone understand the importance of giving back so the next generation can follow and push the barriers of innovation further.
If you are lucky to survive start-up, only 1 in 10 do so in their first year, and only 50% of the “1” are still in business 5 years later, then your focus is on building a sustainable business whilst you scale and grow, without trying to give the company away. The number of entrepreneurs who achieve a financially beneficial exit is very small. It is not an easy thing to sell a company, and those that do find themselves swimming in a very small pond.
Quite understandably, entrepreneurship is not for everyone. Most people will prefer to just be an employee and there is absolutely nothing wrong with this, they don’t want to take the risk, the stress and put themselves and their loved ones through the “journey”, especially as there is absolutely no guarantee ever of success.
But risk has its reward, and financial recognition to those that are prepared to take the risks that create the wealth. I believe it is morally right that are able to retain capital gained and subsequently be able to decide what is to be done with that wealth.
So why provide this explanation? Hopefully it just provides some insight just what it takes to create a business. With a DNA of self-starting and being self-sufficient, it should come as no surprise that on the whole, entrepreneurs believe in having a smaller State entity.
Money follows money
Growing an economy through wealth creation comes about from many forms, primarily though it is through job creation and tax revenues generated in the forms of VAT, Employment Taxes (PAYE, NI) and Corporation Tax.
Capital gains tax, applied on the sale of a Company and something that HM Government now appears to be getting hung up over as having made promises in their manifesto to the electorate that in the life-time of this Parliament they would not raise Income Tax, NI, or VAT, is merely a by-product of success and is never guaranteed.
However, the basic rule of economics is that money follows money. Government through intervention can inject money into the economy, and/or it can encourage private sector investment by creating the environment to encourage external investment.
So how do you grow the economy? Well, based upon the logic that 99% of our economy comprises of SMEs, you need to encourage those that are willing to take on the risks associated with starting a business in those industries that are considered to be high growth industries, as it is all about establishing an industry leading capability in a given market, attracting customers, external investment, and creating jobs which in itself generates tax revenues and distributes wealth that pay for public services. This requires invention, innovation and ingenuity all wrapped up in significant personal risk and those that can and prepared to do this for others, need to be recognised financially if success if achieved.
Radical Thinking Required – A Policy for Growth
Einstein says that “We can’t solve problems by using the same kind of thinking we used when we created them”. Our Public Services are in a poor state of affairs as they have been neglected for over a decade, however the State also wastes a considerable amount of money, the case studies unfortunately are endless.
I am often asked how do you stand out from the crowd when creating a new business? Personally, it is easier to redefine a new market segment and then swim completely in the opposite direction as fast as you can to create space and differentiation. In doing so you create consumer choice, whilst the competition is usually still fighting over market share of a shrinking legacy market. The ability to constantly reinvent and push the barriers of what is the predictability of the status quo is key, but to do this you need to think big!
To translate and play this thinking into growing the economy, HM Government needs to be brave, be radical and think like the entrepreneurs they need to generate wealth and to pay for Public Services. They will find that if you do so and are prepared to take the harder long-term view you will grow the economy in a sustainable way. So in the context of SMEs…
- Stop seeing R&D Tax Credits as tax fraud – make it worthwhile and accessible allowing innovation and fostering investment
- Do away with IR35 – the use of freelancers is necessary to scale a business, it is not a case of disguised employment and reduction of tax
- Reduce Corporation Tax – creating cash surpluses inside businesses allowing them to reinvest annually to fuel their own growth
- Reduce Capital Gains Tax, don’t increase it – Celebrate our entrepreneur’s success and allow them to decide how they wish to reinvest it in the next generation (trust me we are better at this than the Government); they are the Olympic champions of business
- Do away with inheritance tax altogether, empowering wealth creators to distribute wealth as they see fit without state intervention to future generations
- Increase tax rebate levels on EIS and SEIS investments – allow those with capital to place it accordingly whilst mitigating risk where possible
- Level the playing field – by increasing taxes on larger companies that already move their profits offshore and avoid paying corporation tax
- Reduce the size of the state – that will mean somethings we will have to go without, but empower and encourage people to become self-sufficient
The outcome of all the above would be the UK would attract entrepreneurs in droves! We operate in a global economy, and one of the reasons for Brexit (even though it was a complete load of nonsense) was we would be masters of our own destiny.
The Problem with Socialism
To bring this to a close, Margaret Thatcher once said “the problem with socialism is that you eventually run out of others people’s money”. If however, HM Government follows a traditional Labour approach attacking wealth creators by raising those taxes under the righteous banner of equal opportunity, distribution of wealth, and the need to repair our Public Services, all that is going to happen is those that create wealth will just leave and relocate their businesses elsewhere. Jobs, tax revenues and wealth will move away from the UK.
No Government can control a market try as it might through regulation and taxes. Bottom line, if the environment is not conclusive to conducting business, capital will always flow to where it is.
Not everyone can be an entrepreneur, and that is the reality. However, by creating punitive tax liabilities that will stifle growth is not going to help those that you are going to need to be on your side to drive economic growth. It really does take something quite special for an individual to start a business, given the risks and sacrifices faced, but it something we should as a country champion, celebrate and financially reward.
So, my plea to the new Chancellor Rt Hon Rachel Reeves is its time to raise the stakes of what is the competitive game of capitalism – be radical, empower, and embrace entrepreneurs – the wealth creators, by making us a tax friendly country to do business in whilst reducing the size and dependency on the State.
Overall in the long run, you will find that the many will benefit, so feel free to give us a call some time as always happy to discuss. The entrepreneurial community is here to help.
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