Entrepreneurs’ Survey 2011 A regional perspective of the Yorkshire and Humber region
Contents
01 Foreword 02 Introduction 04 Key findings 06 Case study: R3 Products 08 Challenges and opportunities 10
Case study: Fan Frames
12 Funding 14 Case study: Little Helper 15
Case study: Tailormade Conference Management
16
Priorities for businesses in the region
18
Case study: VeryPC
20 Enterprise culture 22
Case study: Go Outdoors
24 Methodology 25
About us
Entrepreneurs’ Survey 2011
Foreword
This report is both timely and illuminating. While the Government is calling for an enterprise-led economy, the entrepreneurs surveyed are displaying the characteristics which single them out from the crowd. They’re independent (most firms are self- or family-funded): many have realistic plans for growth: the majority are cautious of carrying debt (only a quarter has any bank borrowing): and they know that cash is king (the priority for 90% of them is cash flow). In other words, they’re born survivors. While self-reliance is commendable, it can also have its drawbacks. Fifteen percent of firms have raised external equity finance, less than half of them from publiclysupported venture funds and a similar number from EISqualifying private investors. Also, many are experiencing skills gaps, with finance and marketing singled out for mention. Three years ago when the economy turned tail, reducing costs was a good survival strategy. But going forward, firms are unlikely to grow without more capital. And, external informal investors – venture funds and business angels – have much to offer businesses besides injecting new money. We bring advisors and non-executives with fresh thinking and additional skills. We generally have a wider perspective than a single business owner and offer a sharedrisk approach. It’s clear from this survey that, with wider exposure, venture funds and angels can play a major role. I commend the sponsors of this survey, Nabarro and Barber Harrison & Platt for supporting this work.
Andrew Burton Chairman, Yorkshire Association of Business Angels
Entrepreneurs need an environment that rewards successful risk taking. Equally as important, an unsuccessful business venture should not be treated as a failure but as an aspect of learning about business on the route to future success. Entrepreneurs have a ‘can-do’ belief which is in the DNA of this region. This needs to be further fuelled by Government, business advisors, teachers and parents. We also need to build more links between industry and academia and build practical knowledge of industry and technology trends. We hope that this excellent survey will serve as a catalyst for some of these issues and that this year’s MADE: The Entrepreneur Festival in Sheffield will provide the platform for further debate and action.
Brendan Moffett Director, Marketing Sheffield
Introduction
“If you’ve been turning over a good idea for years - now is the time to make something of it. If you’re working for a big firm but know you could do a better job on your own - now is the time to make that leap. If you’ve been dreaming about starting up the next great British brand – now is the time to make it happen.
Government policy With the Government’s call for an enterprise-led economy and with the vast majority of the country’s enterprises comprised of SMEs, much weight is being placed on entrepreneurs to deliver the increase in private sector jobs to meet economic growth forecasts.
“There are thousands of people out there who are entrepreneurs but they just don’t know it yet. There are millions of success stories that haven’t been written yet. So seize this moment. Take these opportunities. Make it happen - and together we can drive our economy forward.” Prime Minister David Cameron on StartUp Britain
Focus of report This report seeks to identify the key trends and factors affecting enterprise and entrepreneurship in the Yorkshire and Humber region (the “Region”). It also seeks to focus on areas where the Government’s strategies are intended to make an impact and looks at some of the key opportunities and challenges for SMEs and factors affecting entrepreneurial culture. From these findings the report seeks to identify the key priorities for the Region.
The Coalition Government has set the challenge of making this decade the most entrepreneurial in the UK’s history. It has committed to creating the right long-term environment to help people to start and grow their enterprises; focusing on improving small business performance and growth. It has set its budget and programme with the intention of galvanising growth, encouraging enterprise and supporting small business particularly through the initiatives highlighted in the box opposite.
The report also includes a number of case studies from companies within the Region at various stages of development, from a start-up to an entrepreneurial company which is achieving great success.
Entrepreneurs’ Survey 2011
Government initiatives include: • creation of a national network of Technology and Innovation Centres (announced in October 2010); • establishing 22 new Enterprise Zones; • introducing a package of tax reforms to reduce rates of corporation tax, increase the threshold for national insurance contributions and providing a national insurance holiday for Regional new businesses; • extending the lifetime limit for Entrepreneurs' Relief from capital gains tax from the first £2m to the first £10m of gains; • increasing and extending Enterprise Investment Scheme tax relief; • committing to a cut in regulation – introducing a ‘one in, one out’ rule to reduce regulatory burden; • introducing measures aimed at ensuring 25 per cent of Government contracts will go to SMEs; • extending the Enterprise Finance Guarantee Scheme for the next four years; • introducing a number of tailored business solutions including: on-line advice (e.g. the new StartUp Hub); a mentor scheme through the Mentoring Gateway; and the targeting of established SMEs with high growth potential through the Business Coaching for Growth initiative (to be launched January 2012); • specialist support for manufacturers (with the Manufacturing Advisory Service being relaunched in January 2012); and • discussion at regional level between the Government’s UK Trade & Investment Department and Local Enterprise Partnerships on trading internationally.
“After all, it’s not Government that creates wealth – it’s private enterprise” Mark Prisk, City of London Conference, The Guildhall, London
Key findings
Challenges and opportunities • A diverse range of businesses cited “cash flow and funding” as their biggest challenge (44 per cent reporting this). Other common challenges included markets and customers (23 per cent), time pressures (13 per cent) and the need to generate greater sales and address skills needs, primarily in finance, sales and marketing. Funding and priorities • 81 per cent have used self-financing or family resources to fund their businesses. • 75 per cent have not borrowed from a bank. • 86 per cent expect future working capital to come from cash generated internally, with only 13 per cent expecting it to come from banks. • 39 per cent intend to reduce debt in the next year. • Only 7 per cent have received investment from Finance Yorkshire, South Yorkshire Investment Fund and Partnership Investment Finance (the Region’s Government-backed funds for SMEs). • External equity (15 per cent) comes from private equity and venture capital, including family and friends, with only 1 per cent from angel investors. • Only 8 per cent have made use of Enterprise Investment Scheme relief (EIS). • No one had used the Enterprise Finance Guarantee Scheme. • Of those that have looked for funding in the Region, over half believe there are constraints with access to funding. One third do not know how to go about accessing funding more widely. Growth and opportunities • 75 per cent with an established business achieved or exceeded projected revenue growth. • 73 per cent are projecting more than 10 per cent growth in the next 12 months and of these 22 per cent in excess of 50 per cent growth. • Key growth strategies include development of new products, technology and innovation (6 per cent), and expansion into export markets (8 per cent). 34 per cent expressed an interest in moving into new markets and export. However, 83 per cent are currently trading in the UK and still see the UK as the best opportunity for growth over the next three years. • 61 per cent of respondents believe that they have opportunities to expand and grow.
Entrepreneurs’ Survey 2011
Priorities • Priorities include cost reduction (more than 50 per cent), increased productivity (71 per cent), new products and services (75 per cent) and new markets (70 per cent). • 6 per cent cited failure of competitors as their main opportunity. • Low priority was ascribed to renegotiating finance and growth by acquisition. Enterprise culture • Those surveyed were the decision makers, and of these, 65 per cent were aged 35–54 with only 1 per cent aged under 25. • Almost all surveyed were men. • 74 per cent employ fewer than five people; 86 per cent fewer than 10 people. • One third use staff incentives to remunerate staff. • Advice is readily sought from accountants (74 per cent) and less frequently from lawyers (38 per cent). • 30 per cent intend to use mentors in the next 12 months.
Pictured (l-r) Doug Anderson and Kevin Parkin of R3 Products.
Entrepreneurs’ Survey 2011
Case study R3 Products Start-up, shortly to commence trading
Kevin Parkin has an impressive track record in turning around lossmaking manufacturing companies. His most recent success being the turnaround at DavyMarkham. Kevin’s latest business venture is a start-up called R3 Products which he co-founded earlier this year. The company manufactures products for the civil engineering and construction markets from mixed waste plastic, catering for companies which need to meet environmental targets and green legislation requirements. The start-up expects to achieve turnover of £3m and employ 20 people in its first year and has ambitions to trade internationally. Full production will soon begin at a 45,000 square-foot factory in Sheffield, close to the M1. The launch was funded by a £3m investment, including a mix of asset based and invoice finance. Kevin, the non-executive chairman, is joined in the launch by a finance director (Paul Sapsford) and a sales and marketing director (Doug Anderson). Kevin attributes the success of the start-up to the management’s perseverance in pursuing potential funders and the strength of their contacts in the different marketplaces. R3 is a great example of how bank funding is available for start-ups with a strong business plan and a management team that is willing to invest a great deal of time, effort and expense in order to get the
business out of the starting blocks. 33 per cent of the funding came from private equity and 67 per cent from the banks. However, Kevin stressed that obtaining bank funding was extremely difficult. “It took two years and only one bank supported us from the five that we approached. “It’s probably the most difficult deal I have worked on in terms of the levels of deal fatigue, red tape and overall frustration. Funding decisions have taken much longer than I expected. Some of the banks say they do not do start-ups and I respect their honesty. Others said the company needed more equity. We needed equipment financing and invoice discounting facilities – some could not offer both”. Kevin is critical of the attitude of some banks, which he said failed to be transparent in their decision making. “The banks need to tell their customers exactly what the process is rather than just saying that it is being reviewed. There should be a defined timescale agreed with milestones and feedback.”
R3 will need more funding over the next eighteen months to further expand the business. Kevin estimates that the business will create up to 50 new jobs over the next three years. But, future growth will not be without its challenges; he cites red tape and funding as they key barriers going forward. Kevin believes that the success of the start-up was independent of any regional support. “The region, given the exception of the professional advisors we engaged, played no role at all in starting up our business and we didn’t get any support, there were no grants and no assistance in recruitment.” Kevin is keen for changes to be made at a Government level both locally and centrally to help entrepreneurs like him. Despite the lack of support, Kevin remains keen to operate from the region, but he believes there is much more the region can do to help entrepreneurs and business start-ups, “I would like to see a regional fund for debt and equity to support start-ups like R3”.
Challenges and opportunities
61 per cent of respondents believe that they have opportunities to expand and grow.
Challenge of cash flow and financing The entrepreneurs who participated in the survey appear to have two major and fundamental challenges facing their businesses. The key challenge (44 per cent of respondents) is cash flow and financing. This is against a background of 85 per cent of the businesses being less than five years old and approximately 75 per cent of the respondents not borrowing from their bank. Some very interesting questions come out of this: • Were the businesses undercapitalised at the outset i.e. when they first commenced trading? • Why do such a high proportion of the respondents not borrow from banks? • Are the businesses less profitable than expected/is it taking longer than expected to achieve profitability? In turn, this raises questions about understanding the fundamental importance of business planning, performance monitoring and financial disciplines. What are the key challenges/hurdles you are facing for your business? 3%
3%
1%
Cash flow and finance (44%)
6%
Markets and customers (23%) Establishing the business and expansion (13%)
7%
Staffing and employment (7%) 44%
13%
Location factors (3%) Wider economic factors (3%) Other (1%)
23%
No factors cited (6%)
Other key challenges The second key challenge that emerges is markets and customers (23 per cent). This should come as no surprise as smaller businesses typically have a narrow customer base and equally a limited product or service offering. As a
Entrepreneurs’ Survey 2011
consequence there will be times when the business-owners feel very exposed to competition and/or changes in the market. This challenge will not disappear as the business grows – it is a fact of business life. The other key challenges facing entrepreneurs generally arise as a result of the pressures of establishing the business and expansion. As a generalisation, young businesses have limited resources at a time when there is much to do. Time pressures are an important issue for 13 per cent of respondents with staffing and employment being a top priority for 7 per cent. Key Opportunities Turning to key opportunities, there is one statistic that stands out above all the rest – 61 per cent of respondents believe that they have opportunities to expand and grow. Interestingly, a significant number of respondents were not specific as to how this development is to be achieved. Nonetheless this is a clear, positive and optimistic message. Export and new products In addition, 8 per cent of smaller businesses see exporting as an opportunity with 6 per cent of respondents seeing key opportunities in new products, technology and innovation. These findings should be considered in the context of the 23 per cent who have indicated markets and customers as a key challenge. Conversely 6 per cent of respondents felt that their main opportunities would arise from the failure of their competitors with 2 per cent seeing opportunities in improving the level of service that they offer.
What are your key opportunities? 2% 3%
3%
Growth/expansion/new markets (61%)
7%
Export (8%) Failure of competition (6%)
4%
New products/technology/innovation (6%)
6%
Internet (4%)
6% 8%
61%
Renewable energy (3%) Improving service (2%) Other (3%) None (7%)
Ability to exploit opportunities The belief that opportunities are there to be taken raises some fundamental issues in the context of the high level of concern over cash flow and finance. Growing businesses require certain basic ingredients and one of these is finance. It is generally acknowledged that it will not be easy for businesses to obtain new funding for the next 12 months at least. Accordingly, management in businesses requiring finance for expansion will need to find both the time and the resource to put together a very well-considered, professional and compelling business case to attract the serious attention of funders. They will also need to demonstrate to potential funders that they have good systems, financial controls and reporting within their business.
Pictured (l-r) Keith Gibson, Chris Birkett and Paul Gibson of Fan Frames.
Entrepreneurs’ Survey 2011
Case study Fan Frames Commenced trading April 2011
Fan Frames’ business has developed from their innovative concept of sports branded eyewear. It commenced trading in Hull in April 2011 and is projecting first year turnover of £240,000. The company is hoping to create jobs in its second year of trading. The Fan Frames team all live in the Hull area and have been supported by the University of Hull’s Enterprise Centre, which was funded through Yorkshire Forward. One of the founders, Keith Gibson, believes that the support and network that the Enterprise Centre has provided has been vital to the speed and roll-out of the business; “Clearly keeping costs down is key at the start of any business and we have been able to do this through the Enterprise Centre. This includes rent, telephone etc.” Keith comments on how helpful the region has been in setting up their business, despite the lack of grant funding. “Fan Frames received support from the FEO (For Entrepreneurs Only) group based in Hull. They provided an experienced business mentor who meets with us regularly to discuss any aspects of the business where we feel we need assistance.” The funding to set up Fan Frames came from a variety of sources, including loans from the Acorn Fund (Hull Business Development Fund), Sirius (Business Advice Centre), Santander and some personal funds. “Santander were very supportive and we obtained a £25,000 loan from them but we did struggle with other banks.”
Fan Frames has secured £75,000 investment for 15 per cent of its equity from family and friends. “In the early stages Fan Frames believed we would not need this assistance and we looked at a number of options but eventually decided to go with equity finance. We were very lucky to have this support and believe without our investors it would have been extremely difficult to proceed.” The Region could be doing more. “Most of the banks are unwilling to lend even with the Enterprise Finance Guarantee Scheme which we found astonishing. Grant funding should be available. Even small amounts of cash can help many start-up businesses. We were very lucky to receive financial support but this has not been achieved without challenge. I believe there are many businesses that don’t start up simply because they can’t obtain cash and feel taking on a loan is too much risk. We have found that any unsecured loan to the company has to be secured personally.”
As with any business, Fan Frames sees both opportunities and challenges ahead. “We have huge opportunities, not only in selling these products into football clubs directly but also targeting large optical retailers for the optical frames for adults and children.” The biggest challenge Fan Frames will face going forward will be the UK’s economic situation. Ultimately, what goes on locally, nationally and globally will impact on people’s disposable income. Keith believes there will be many economic challenges ahead: “It is important that we have a stable base financially to be able to deal with any of these challenges. Setting up a business is a new experience for all the Fan Frames team and the journey has thrown up many issues but we have been able to deal with these with a common-sense approach to business which is what we feel is vital to this company. The whole experience has been challenging and will continue to be so.” As for the future of Fan Frames, the directors are looking to expand and would like to import into and distribute from their own warehouse and office which will be based in the Yorkshire and Humber Region. “We would like to expand internationally over the coming years but intend that the Region will always be our home.”
Funding
Growth – outlook Much of the growth that is hoped for in the Region and across the UK economy is expected to come from successful entrepreneurs, hence the Government’s focus on improving small business performance and growth. The respondents to the survey have a very positive outlook with 73 per cent projecting growth of more than 10 per cent in the next 12 months and, of these, 22 per cent anticipate growth of 50 per cent or more. Access to funding A critical platform for the future growth of any business is to have a suitable funding structure in place. 44 per cent of the respondents indicated that a key challenge to growth in the next 12 months is access to funding to finance expansion. The next biggest challenge to growth was the impact of markets and customers which was highlighted by 23 per cent of the respondents. This puts into perspective the importance of access to funding to businesses in the Region. Further evidence that access to funding remains difficult is the source of finance that businesses have utilised in their business. 75 per cent of businesses had not borrowed from a bank; in contrast 81 per cent of respondents had used their own funds. 86 per cent expect future working capital to come from cash generated internally. So what does all this mean? On the one hand it reflects the difficult funding environment, on the other hand business owners appear to be reluctant to take on the risk of external funding in the current challenging economic conditions.
Entrepreneurs’ Survey 2011
Government initiatives If the commercial banks are having difficulty providing the level of funding required by entrepreneurs, what of Government initiatives in this area? None of the respondents had obtained funding from the Enterprise Finance Guarantee Scheme which has now been running for over two years. Perhaps more importantly, none of the businesses believe that working capital will be funded by the scheme in the next 12 months. Other sources of funding The Yorkshire and Humber Region is fortunate to have organisations such as Finance Yorkshire and networks of business angels such as the Yorkshire Association of Business Angels (YABA) on the doorstep to provide a route to alternative sources of finance. Finance Yorkshire is continuing to collaborate with banks to enable funding packages to be put together to provide development and working capital funding for companies in the Region. Of the businesses surveyed, however, there appears to be very little third party funding. Only 16 per cent of businesses had received any form of external equity funding. More interestingly, a mere 7 per cent had received debt or equity financing from the local public sector-backed funds (Finance Yorkshire, South Yorkshire Investment Fund and Partnership Investment Finance). This is disappointing. ‘Go for growth’ In summary, entrepreneurs need to focus on what makes them special – ‘go for growth’. Businesses need to have the confidence to take the step to embark on growth projects but will need to approach funding with a little more imagination. Collaboration with a number of funders will often be a key feature of any solution. It is even more important than ever before for projects to be strategically sound, properly planned and researched, adequately funded and presented professionally.
44 per cent of the respondents indicated that a key challenge to growth in the next 12 months is access to funding to finance expansion.
Case study Little Helper Commenced trading in 2005
More than six years ago, parents Kim and Sean Johnson conceived the FunPod to keep their daughter safe in the kitchen. The Little Helper brand was initially launched to enable Kim and Sean to sell the FunPod and the FunPod High Chair to UK consumers. Now operating across four continents and offering over 1,000 SKU’s, the company has grown from the original concept, but still aspires to the same values. The company designs and manufactures fun, funky and safe children’s products, but now also distributes high quality, inspirational children’s furniture and nursery goods. Based in Sheffield, Little Helper now employs five people, and Kim puts the success of the business down to hard work and perseverance, along with building a team of people with complementary skills. As she explains, “because South Yorkshire was an Objective 1 area, we benefitted from enormous help in terms of advice and support from Business Link Yorkshire and Yorkshire Association of Business Angels (YABA) and were lucky to obtain grants and investment which were pivotal to the company’s growth. Without the grants and investment, we would not have been able to get the business up and running as fast as we have done nor expand our product range as quickly. We have been able to invest in R&D and protect our designs and products for future security. Business Link were also able to put us in touch with a great bank manager who supported us in the early days.”
The initial funding to set up and grow the business came from a mix of sources – the bank, angel investment, personal funds and grants. “YABA were instrumental in helping the company obtain investment and we found this a fluid process. Alongside our initial investment, we have a syndicate of professionals via YABA.” Little Helper found that in the early days bank finance was a lot easier, they operated with funding provided by HSBC under the Small Firms Loan Guarantee Scheme and a small overdraft. Recently, they have found it much more difficult getting funding despite good financial performance and they have had to rely on cash flow and investment. A major challenge that is being faced by Little Helper as they grow is funding the supply chain from overseas suppliers, and also dealing with large UK national customers who operate on long payment terms. “We want to grow our product range constantly and as such, we may need funding in the next 12-18 months to help to achieve this objective and create more jobs in our region”.
The team at Little Helper were disappointed at the demise of the local Business Link adviser team. “With Business Link you knew that you were dealing with people who had access to a vault of knowledge and contacts. Grants aren’t always the answer but good quality and affordable mentoring can be invaluable” Looking forward, Little Helper definitely plans to continue trading from its Sheffield base. The children’s sector is growing substantially within the national retail sector and the company has a huge opportunity to get a foothold with these retailers – having recently set up accounts with Boots and Tesco whilst substantially growing the business with Kiddicare, Mothercare and Amazon. Many retailers want an abundance of products, and new products from one brand so this is a great opportunity for them. “The challenges for us will be the funding and systems placement to facilitate these opportunities.”
Entrepreneurs’ Survey 2011
Case study Tailormade Conference Management Established business, commenced trading in 2002
Established in 2002 by Chris Wilson, Tailormade Conference Management (TCM) offers a variety of conference management services to all those involved in planning and organising events across the UK and internationally. The company currently employs 7 people. Chris came up with the idea for the business whilst running the York Marriott Hotel. He identified the opportunity for a conference management company in the Region owing to a large, untapped market, good infrastructure and limited competition. TCM is the driving force behind the successful Venturefest Yorkshire entrepreneur event that takes place at York Racecourse each year. The event attracts more than 1500 delegates, 100+ exhibitors and showcases the activities of Yorkshire’s entrepreneurs. Chris puts the success of the business down to delivering consistent levels of good customer service to their clients. Whilst Business Link provided some advice at the outset, it was Chris’ hotel management background that gave him the skills needed to make the business the success it is today. As no large costs were involved in setting the business up, it was possible to refinance the venture entirely from personal savings.
Over the next 12-18 months, Chris will require bank funding for a move to larger premises which will enable the company to target new customers and hopefully create up to 15 new jobs. Chris envisages operating in the Region long term. “It’s ripe for opportunity from a conference and events perspective. York, Harrogate and Leeds are big markets for us. They have the infrastructure in place to bring visitors into the region and have a reliable and trusted network of suppliers.” However, Chris believes that much more can be done to help entrepreneurs in the region, especially when it comes to bureaucracy. “Rules and regulations relating to small businesses are too stringent, you creep beyond what is permissible and there is little flexibility. The myopia is beyond belief when it comes to business documentation.” His main challenge going forward will be how to remain competitive whilst creating good margins. “Competition has increased over the last year, coupled with a decline in work from the public sector. There are a lot more companies bidding for the same work”.
Chris is also setting up another venture - a consumer product for the retail market and will need significant investment to push the button on the production process. Chris will be looking for investor partnerships and has started discussions with YABA and Finance Yorkshire. Chris is keen to promote entrepreneurialism and to assist young entrepreneurs in setting up in business but firmly believes that the support should start at school and college. Chris has been into colleges to present on working in the conferencing and events sector but in some cases came away feeling deflated by the apathy and the low level of desire and business acumen in students. “This needs to be addressed within the education system. Young people need to be inspired. I offered the students opportunities for experience on some large projects we were running but very few came forward, it was very disappointing.” Chris concludes that despite this there are some great beacons of light in the Region “NYBEP in York and the Peter Jones Academy in Sheffield are positive steps to foster the right sort of environments for the future”.
Priorities for businesses in the region
Whilst the findings above report on respondents’ key challenges, the chart below considers the relative priorities for the year ahead of those surveyed. Business owners were asked to rank various factors as high or low priority during the next 12 months. High priorities cited by entrepreneurs were the management of cash flow (87 per cent giving it some priority in the next 12 months) with more than half indicating a need to tackle cost reduction and 71 per cent suggesting increased productivity as one of their priorities. 75 per cent are prioritising development of new products and services, with 70 per cent giving some priority to new markets with export seen as a growth area. In contrast, low priority was ascribed to renegotiating, finance and growth by acquisition. Does this reflect Provide an indication of whether the following are of high or low priority over the next 12 months in terms of business strategy Cash flow
87
13
New products services
75
25
Increasing productivity
71
29
New markets
70
30
Reducing costs
46 44
New capital 39
Reducing debt
High Low
56 61
36
Re-negotiating finance
64
23
Growing by acquisition
77
9
Buy backs Asset disposal
54
91
4
96 20
40
60
80
100
Entrepreneurs’ Survey 2011
the caution of entrepreneurs in the Region? In summary, it appears that there remains an element of ‘battening down the hatches’. Cash flow, funding and productivity Addressing cash flow appears to translate into reducing costs, increasing productivity, introducing new products and accessing new capital. The Government’s initiatives have focused on schemes to facilitate provision of debt and offering tax incentives to encourage external investment. These do not seem to be having any significant impact on the Region with only 8 per cent of those surveyed having made use of the Enterprise Investment Scheme and no use of the Enterprise Finance Guarantee Scheme. One third of those who have sought finance do not know how to access wider funding. Only 23 per cent have indicated that banks have provided funding with 39 per cent citing a priority to reduce debt. This suggests that bank products are either seen by the Region’s businesses as unaffordable, not in line with cost expectations or just not available. This is against 44 per cent who indicated accessing new capital as one of their priorities with 86 per cent expecting future working capital to have to come from their own cash resources. The Government’s recent initiatives to expand the Enterprise Investment Scheme to encourage wider business angel investment and also to deregulate to allow SMEs to raise up to €5m (£4.4m) in equity finance without a prospectus and to a larger pool (up to 150 from 100) may help with funding opportunities and open up a wider investment in SMEs to alleviate the reliance on internal cash resources and fund growth. Clearly, a priority must be to raise the importance of cash management and improve the understanding of the wider funding resources available. A more sophisticated and open-minded attitude may need to be nurtured and fears alleviated and expectations reset that alternative forms of funding will not result in too much external, unwanted interference. Expansion into new markets and products Whilst 34 per cent expressed an interest in moving into new markets and to export, 83 per cent still expect the UK to be their best opportunity for growth over the next three years. New products are the lifeblood of a strong business. Again, this is one of the priorities for a significant majority of the Region’s businesses. If established, regional SMEs are to grow at a rate which will deliver the rebalance needed in the economy and, in particular, to increase employment to have a meaningful impact, support for expansion into new and export markets should be a priority. The barriers to accessing new markets need to be better understood and then addressed. Mentoring and management The Survey indicated that 30 per cent intend to access mentoring services. Regional businesses recognise the importance of mentoring and the need to access skills. Whilst they recognise this, will they take up the challenge and will they be willing to develop and, perhaps, more importantly, change in order to grow? Will the Government’s initiatives in this area provide the help so clearly sought?
Clearly, a priority must be to raise the importance of cash management and improve the understanding of the wider funding resources available.
Pictured (l-r) Simon Bown and Peter Hopton of VeryPC. Image supplied by MAS. MAS is delivered by GLE Enterprise Partners.
Entrepreneurs’ Survey 2011
Case study VeryPC Commenced trading in 2004
Peter Hopton is MD and founder of VeryPC, manufacturers of high performance, sustainable desktop computers and servers. Their products are being used in businesses, universities, schools and organisations across the world and they lead the way in the development of energy efficient computing solutions, delivering long term value to the customer. Peter started the business in Sheffield in 2004 and in 2008 appeared on the hit BBC show, Dragons Den. He did not receive the backing of the Dragons, but that didn’t stop him. The Company now turns over £2m with 16 employees, plus revenue from two spin-out companies (one based in the US), each turning over approximately £500k and employing 13 people. Peter believes that his business is successful due to hard work and dedication. “Hard work from the VeryPC team and the opportunity presented in the market as a result of ‘peak oil’ conditions, such as rising energy costs and carbon taxation are the main reasons I believe that the company has been so successful.” But what role did the region play in the success of VeryPC? Peter came to university in Yorkshire and decided that it would be a good place to start a business. “The region offers low cost of living and skilled labour which has helped the business to grow, but the lack of local capital investment has made things more difficult. We didn’t receive any support from the Region when we set the business up. “We obtained start-up training where the advisors wanted to discuss our Intellectual Property (IP) but refused to sign a Non Disclosure Agreement (NDA). Fortunately we were wiser
than to continue with this service as disclosure of our IP without a NDA could have destroyed our ability to patent.” Peter believes that changes could be made to help small businesses by both local and central Government, by changing culture to make risk in procurement acceptable and having a service that supports smaller firms to win larger contracts. “I think the Government needs to force public sector entities to work with smaller businesses, currently there is a ‘no risk’ culture that discriminates against small businesses bidding for contracts.” Peter has successfully financed the company’s growth through a variety of means. Small amounts of savings from the directors set the company up and investment by family and friends has assisted the Company to get to this point. VeryPC’s spin-out, Iceotope is venture capital backed to the tune of around £1.5m and it is a case study for Finance Yorkshire; “Obtaining finance was a long process but we eventually got lucky at Enterprise Ventures/South Yorkshire Investment Fund by obtaining funding through their ‘Rising Stars’ and ‘Seedcorn’ funds. We also received a £70,000 loan from Viking Fund Managers”. The banks have also played their part. VeryPC got a bank loan for £10,000 in
the early days, which wasn’t difficult to obtain. The company’s expansion is now financed with a modern, low cost factoring facility. VeryPC, like most SMEs experiencing their level of growth without significant investment, is undercapitalised. Peter explains how VeryPC is now pursuing equity funding in order to break from organic growth to seize the opportunity it has in the market, which could result in a significant number of jobs in the region. Peter hopes that Enterprise Investment Scheme relief will help to entice investors. Going forward, the big challenge for the company is to secure funding to take advantage of their lead in the market, to continue investment in innovation and to add barriers to entry for their competitors. Peter cites carbon taxation, funding for energy efficiency measures and legislation in this area as potential inhibitors to growth. As for the future, Peter is determined to remain headquartered in the Region. But, he warns; “there must be better investment options for businesses, better support from local Government and the local public sector in terms of ‘pioneering’ higher risk products/companies through good risk management.”
Enterprise culture
The Region needs a greater number of business leaders who are driven to accomplishment and to thinking that ‘small’ is failure.
Addressing the jobs deficit The hope is that the entrepreneur will jump start job creation and innovation to support re-focus from a public sector to a private sector led economy. But is entrepreneurship in the Region able to deliver on this? The report puts into question the ability of SMEs to address the jobs deficit speedily. Of those surveyed, 74 per cent employ fewer than 5 people and 86 per cent fewer than 10. This suggests that, without considerable growth, the Region will have to develop many more of these types of businesses in order to deliver jobs creation of the magnitude needed, particularly in the light of pressure to reduce costs. Who are these entrepreneurs and their businesses? Of those interviewed (senior decision makers), 38 per cent were between 35 and 44 with only 1 per cent under 25 and 10 per cent between the ages of 55 and 64. This contrasts with the often peddled image of the young entrepreneur. Is this an indication of the nature of business throughout the Region? A number of respondents were from manufacturing, building and construction backgrounds; often associated with more established and traditional sectors. IT and design were, however, the largest sectors represented, with significant numbers in marketing, services and retail. This supports a shift in sector emphasis for the Region. Given the findings, those in ‘minority’ groups, (for example, women) do not appear to be engaged significantly in enterprise. Barriers to entry need to be explored and addressed. There was a surprisingly low number of respondents in the younger age groups – this has to be addressed. Is this the product of a society which has focused too heavily on university education making the young averse to taking the risk of enterprise and not equipping them in the other skills needed to start and grow a business? Or is it perhaps a result of bankers and investors too often looking for experienced management teams to de-risk their investment decisions (‘back the jockey, not the horse’) with younger entrepreneurs getting stuck in the ‘experience gap’?
Entrepreneurs’ Survey 2011
Entrepreneurial culture? Only a third of businesses interviewed use any form of incentives package to reward their personnel. This suggests that entrepreneurial culture is not embedded within the businesses surveyed. A significant number indicated a need for improved finance, sales and marketing skills. A combination of mentoring of senior management coupled with a re-look at incentive programmes for staff may help to address this, particularly given cash flow constraints. Inevitably, addressing skills deficits may have additional cost and, therefore, investment needs and related funding issues addressed in the rest of this report may also be relevant. Do you incentivise your employees with share options or other incentives? 100 90 80
Percentage
70
65
60 50 40
35
30 20 10 Yes
No
GAZELLE vs SELF-EMPLOYED BUSINESS OWNER Should a distinction be drawn between the true entrepreneur and the self-employed small business owner and is this a particular issue for the Region? The fact that so few of the businesses looked (and intend to look) for risk capital for their growth, may be an indication that the majority of these businesses comprise successful (most being in profit or break even) selfemployed small business owners rather than true entrepreneurs. It suggests the Region needs more highly aspirational Gazelles. The increase in growth and jobs that the Government is looking for requires true entrepreneurs to deliver. The Region needs a greater number of business leaders who are driven to accomplishment and to thinking that ‘small’ is failure. Impact of strategy It will be interesting to see how the Government’s Business Coaching for Growth initiative (targeting high-growth companies) will impact on the Region once launched. Coupled with Technology and Innovation Centres and the work of the Local Enterprise Partnerships, the strategy is aimed at creating a dynamic combination of cutting edge, innovative businesses with clear vision, a unique selling point and the skills to succeed in international markets. However, there are many who would argue that lower taxes and deregulation coupled with access to capital may have more impact and these do not necessarily involve people intervention. Business people need to be inspired to raise their sights and ambitions and consider their businesses from a global perspective in an environment that is not interventionist but supportive.
John Graham of Go Outdoors.
Entrepreneurs’ Survey 2011
Case study Go Outdoors Well established rapid growth business
Go Outdoors sprang from CEO John Graham’s innovative concept of a superstore based on his passion for climbing and love of the outdoors. In the mid-1990s he put this vision into action, catering for the huge demand for stores that met all the wider needs of outdoor enthusiasts; stores that had a range of clothing and equipment for anybody who wanted to take part in activities such as walking, climbing, camping and cycling. John believed that the market was potentially enormous – to cater for people, like himself, who live and breathe the outdoor life. John’s belief in the demand for outdoor clothing and equipment, his confidence in his own abilities to find the right products, combined with his ambition to run a business that would keep him in climbing shoes for the rest of his life, urged him to buy the Sheffield business Camping & Caravanning Centre (CCC). He completed this acquisition in 1998 when the turnover of the business was £2m. In the following six years, John opened a small shop in Hathersage and acquired another superstore. Shortly afterwards the business adopted the name Go Outdoors. Since then, Go Outdoors has become a national brand which has grown to a turnover of £115m and 30 superstores. It currently has 1,500 employees and expects to create more than 500 jobs nationally over the next 12–18 months, with a number of these in the Yorkshire and Humber Region.
John believes that Go Outdoors’ success has come from a combination of being innovative and listening to customers. “We were the first large format retailer of outdoor clothing and equipment in the UK, selling everything for the outdoor enthusiast – we like to say that we can kit customers for any outdoor activity from walking the dog to conquering K2! Go Outdoors communicates regularly and directly with all of its customers and seeks to care for their needs – we sell a full range of products across a wide price range.” John puts the company’s success down, in part to those who have supported the growth by providing finance. With funding from the Bank of Scotland (now Lloyds Bank) and private equity from British Smaller Companies Venture Capital Trust and 3i, John has become accustomed to working with investors. “Private equity investors are demanding, but if you really want to grow your business and you need their funds to achieve this growth, their requirements are understandable”.
Even though he is leading a business that he loves, it has not always been plain sailing for John. He thinks that the relaxation of planning laws and a reduction in VAT and employment taxes could really boost the economy and help businesses like his to continue to grow. He also sees challenges ahead from “cost price increases, the squeeze on consumer spending and fuel prices.” However, John is positive about the opportunities for Go Outdoors – especially in the Yorkshire and Humber Region where they have four superstores (Leeds, Sheffield, Wakefield and York) and where the company’s headquarters are based. “Go Outdoors started in Sheffield, gateway to the Peak District and a hub for outdoor activity. It has now grown way beyond that. People from all over the UK buy our products to have fun and adventure both when they are at home and on holiday.” John stresses that being a good entrepreneur is not just about having good business acumen; “entrepreneurial spirit comes from the heart”.
Methodology
The research was carried out during July and August 2011. Voice, an independent agency, was commissioned to conduct telephone interviews with senior decision makers at owner managed businesses in the Yorkshire and Humber Region to obtain their views on a variety of issues including: key opportunities and challenges, technology, growth, international expansion, funding, priorities and the Region. In total, 100 companies were interviewed. To ensure a balance of views companies were chosen from within the Region across a range of industry sectors and at varying stages of growth. The companies targeted were less than 5 years old. 94 per cent of respondents were entrepreneurs and 6 per cent were intermediaries. In addition, in depth interviews were conducted with six of the Region’s entrepreneurs which have been included as case studies in the report. This report was launched in September 2011 at MADE: The Entrepreneur Festival in Sheffield. We are grateful to all those who participated, for giving their time and sharing their views.
Entrepreneurs’ Survey 2011
About us
Barber Harrison & Platt (BHP) has a specialist Entrepreneurial Advisory team made up of some of the region’s leading specialist advisors. The team has developed its skills and experience over decades of supporting many of Yorkshire and the Humber’s leading entrepreneurs through all stages of growth and development. In addition, BHP has developed in-depth sector knowledge of a number of the region’s key business activities. The firm has particular expertise in supporting entrepreneurs in developing their businesses through: • Funding growth -- raising finance • Supporting growth including -- tax planning -- outsourcing (accounts and payroll) -- management information -- strategic business planning • Planning for growth -- business planning and forecasting BHP’s team of specialist advisors works with entrepreneurs to fulfil their ambitions by providing both practical hands-on financial and commercial support as well as advising on business strategy and planning.
Nabarro is a major commercial law firm renowned for its positive and practical approach to our client’s business needs. It operates in a number of industry sectors and legal disciplines with a single aim: to deliver the highest quality legal advice as clearly and concisely as possible, no matter how complex the situation. Nabarro has a designated entrepreneurs group which is focused on the needs of the entrepreneur community, having been closely involved with young growing companies and their investors for many years. We understand the needs of entrepreneurs, so no matter how complex the situation we offer plain, unequivocal advice, not pages of jargon. We have developed various products that aim to make the process as straightforward as possible, whether it’s raising equity capital or bank finance or seeking advice on such issues as the Enterprise Investment Scheme, share incentive plans, employment law, protecting intellectual property rights, terms of business, real estate contracts and dispute resolution.
Yorkshire Association of Business Angels (YABA) is a unique regional forum which brings together the finance and expertise of business angels with entrepreneurs and their business ideas. Since its inception in 1995 and with support from Yorkshire Forward, the Regional Development Agency, since 2000, the YABA membership has grown steadily to over 170 Angel and Associate members. The Association which is not-forprofit regularly holds investment forums at various venues throughout Yorkshire & Humberside to see entrepreneurs introduce their ideas to an audience of business angel members, associate members and some of the most influential business leaders in the region. Approximately 3 in 20 businesses receive investment following these forums, and this in turn often releases further funding from other institutions. YABA’s introduction service enables entrepreneurs to not only personally present their business proposals at the forums, but also publish an executive summary on the YABA extranet where the angel investors can login to view summaries and contact the entrepreneurs direct.
Barber Harrison & Platt Lisa Leighton T +44 (0)114 266 7171
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For further information visit:
www.yaba.org.uk
© Barber Harrison & Platt, Nabarro LLP 2011
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Detailed specialist advice should be obtained before taking or refraining from any action as a result of the findings and comments found in this report. The information is correct at the date of publication.
