UK: Enterprise - Spring 2015

FOREWORD - THE SEVEN-YEAR ITCH

Guy Rigby looks at how the world has changed in the past seven years, reflecting on the path to recovery from the economic crisis and the rise of an entrepreneurial revolution.

I was recently reminded that I joined Smith & Williamson seven years ago, in the spring of 2008, when the world was very different to today. We were then in an economic bubble with investors seeking to invest, banks eager to lend, and strong merger and acquisition activity, fuelled by liquidity and a very favourable tax environment for exiting entrepreneurs.

And then it went wrong

We all know what happened next. A flood of unsustainable debt washed away every semblance of normality, creating huge uncertainty and stopping the global economy in its tracks.

Here in the UK, we were particularly adversely affected. London's position as the world's leading financial centre and our dependence on financial institutions and markets meant that our fall was harder than that of many other developed countries. Demand for products and services fell off a cliff. Stock markets collapsed.

Rekindling the feel-good factor

Since that time, governments around the world have been wrestling to secure a recovery, creating an unprecedented low interest rate environment and printing money (so-called 'quantitative easing') to create liquidity and support asset prices. In the UK, these and other measures, for example the Help to Buy mortgage scheme, were designed not only to save our economy but to try to rekindle a feel-good factor which would create a virtuous circle of economic activity, instigated by growing demand.

Business-friendly policies

Has this worked? Surprisingly, it has – or, rather, it seems to be working. The UK economy, under the direction of a business-friendly Coalition Government and with the support of the Bank of England, appears to be recovering nicely. Far more nicely than our troubled eurozone neighbours and just as nicely as any other developed economy. While significant issues remain – the much-discussed deficit and ongoing trade imbalances being key challenges – we find ourselves on a path that is beginning to deal with these problems.

An entrepreneurial revolution

But something else has been happening during the recessionary years and it would simply be wrong to give all the credit for our success to policy, as fundamental as that may be. There has been an additional and, in the longer term, far more important ingredient, and one which has now become well-established – an entrepreneurial revolution.

A combination of necessity, opportunity and technology have come together to enable this phenomenon, which has seen an increasing number of business start-ups – more than half a million new businesses were registered in the last year alone. People want more control over their futures. Individual capitalism is on the rise. The 'bulldog spirit', a fundamental part of our heritage, appears to be alive and well.

An unstoppable force

It's interesting to see how these drivers – necessity, opportunity and technology – have come together to create such a powerful and unstoppable force: necessity as a result of job scarcity and lack of trust in the system; opportunity because of access to cheaper and more flexible resources (such as people, equipment, offices and money); and technology because it has facilitated a raft of new business models and opportunities. These factors are too numerous and varied to go into detail here, but there are a few that are worth highlighting:

Social enterprise

A period of hardship and reflection puts a strong focus on corporate behaviour and how this manifests itself among an increasingly well-informed and socially aware public. Companies that fail to include the public interest in their decision-making risk reputational damage and long-term decline. The so-called 'triple bottom line', which measures a company's environmental, social and financial performance, is an increasingly important and necessary development. Taking this a step further, there are now organisations, such as ClearlySo, that are focused entirely on facilitating and promoting impact investing, helping to develop sustainable, social enterprises.

Alternative finance

One of the key challenges faced by entrepreneurs and businesses since the 2008 debacle has been access to finance. For a variety of reasons, bank finance has been scarce, or sometimes even unwanted. This has led innovative entrepreneurs to spawn an entirely new industry based largely on technology platforms which enable peer-to-peer (P2P) giving, lending or investing. Variants include P2P business lending (e.g. Funding Circle), P2P consumer lending (e.g. Zopa), equity crowdfunding (e.g. Crowdcube) and reward-based crowdfunding (e.g. Kickstarter). There is also individual invoice discounting (e.g. MarketInvoice). On the money transfer side, a host of new players have entered the market to increase efficiencies and reduce costs for consumers (e.g. TransferWise). These are new models, driven by the needs of borrowers and investors, and facilitated by technological advancement, which cut out the banks entirely.

The sharing economy

Described generally as a way of sharing idle resources, saving money for users and generating income for owners, the sharing economy has fast become a worldwide phenomenon and is the focus of this issue of Enterprise. With current transaction values estimated at around US$15bn per annum, some forecasts suggest that this will rise to US$335bn by 2025. Typical resources available through sharing economy platforms include properties, parking spaces, cars and a variety of household goods. Well-known names include Airbnb and Zipcar, which we feature in this newsletter.

Time to scale

The entrepreneurial revolution is well underway and our entrepreneurs team considers it an absolute privilege to work with some of the most extraordinary individuals who are innovating and changing our world.

Although the recessionary years have seen incredible innovation, it is now time to focus on scaling up some of our great new businesses. We are therefore supporters of Sherry Coutu's comprehensive 'The Scale-Up Report', which we are proud to feature in this issue.

THE SHARING ECONOMY – HERE TODAY AND HERE TO STAY

All the indicators are that the growth of the sharing economy is accelerating, as it establishes itself as a familiar and everyday part of the broader economy.

In his Budget speech, the Chancellor announced a number of measures designed to support the sharing economy. These were in response to the 30 or so recommendations made by Debbie Wosskow (entrepreneur, investor and sharing economy expert) in her independent review of the economy published at the end of last year. Wosskow's report, which considered what the UK should do to sustain its position as a global leader in the sharing economy, has kicked off a flurry of activity across the industry.

Whether referred to as the sharing economy, the collaborative economy, the access economy or collaborative consumption, these terms all describe the same global phenomenon. So what is the current value of this economy to entrepreneurs and businesses, and does the UK have the right plans in place to ensure its long-term success?

A brief snapshot of the sharing economy

Defined as the "online platforms that help people share access to assets, resources, time and skills" by Wosskow, her review notes that total revenues for five key sectors of this economy – P2P lending, P2P accommodation, music/video streaming, car sharing and online staffing – could grow to £9bn in the UK by 2025, up from £500m in 2014.

A report by the innovation charity Nesta found that 25% of the UK population have used digital technologies to access money, knowledge, goods and services through collaborative activities. Nesta categorises the economy into four "pillars" by activity type: consumption, finance, production and learning.

While most attention is currently focused on collaborative consumption and finance, Wosskow's review suggests a number of potential growth sectors to watch closely for 'sharing' innovation, such as clothes and fashion, food production and distribution, B2B and logistics. Many traditional businesses are expected to supplement their existing services with models that include sharing.

Collaborative consumption

'Collaborative consumption' is probably the most familiar term used to describe the sharing economy. This is about individuals gaining access to goods or services through bartering, exchanging, leasing, lending, renting, reselling, swapping or trading. Popularised by eBay over 20 years ago, many different models have now entered the market, with Airbnb, Uber, Zipcar and JustPark being some of the best-known success stories.

Wosskow's review highlights the real financial benefit to 'microentrepreneurs' doing business in this economy, for example:

  • 20,000 property owners in the UK are renting out their driveways through JustPark, making an average of £465 a year (£810 in London)
  • people renting out their cars through easyCar Club earn an average of £1,800 a year
  • a typical Airbnb host in London earns around £3,000 over 33 nights each year.

Collaborative finance

The online alternative finance market now exists alongside traditional financial institutions and includes crowdfunding (equity, rewards and donations), P2P lending for businesses and consumers, invoice trading, community shares, pension-led funding and debt-based securities.

According to the first comprehensive pan-European benchmarking of alternative finance, published in February by the Cambridge Centre for Alternative Finance, the European market grew by 144% last year to almost €3bn and could exceed €7bn in 2015. The UK is the largest European centre for alternative finance, at £1.78bn (€2.34bn) in 2014, and is regarded as an innovative leader with some of the most advanced online platforms.

Nesta projects that if current growth rates continue, the UK alternative finance market could grow to about £4.4bn this year. Of the alternative finance models, equity-based crowdfunding is the fastest growing, with an average growth rate of 410% for the 2012-2014 period.

By value, P2P business lending takes the biggest share of the market with £749m in 2014, followed by P2P consumer lending (£547m), invoice trading (£270m) and equity crowdfunding (£84m).

Will the UK remain a global leader in the sharing economy?

Some of the most active businesses in the UK sharing economy, including Airbnb and Zipcar, have recently come together to set up a trade body, Sharing Economy UK (SEUK), to act as a single voice for the industry. SEUK aims to champion the sector and ensure best practice across Europe. This trade body will encourage inward investment into the UK, represent the economy to the government, and use the collective buying power of its members to negotiate on behalf of its members, for example with insurers.

The Government's response to the Wosskow review, as outlined in the Chancellor's Budget speech, suggests that the UK is serious about being a leader in the sharing economy arena. In its published report, the Government responded to each of the 30 recommendations made by Wosskow, and detailed a number of initiatives aimed at creating further opportunities within the industry. These measures include:

  • launching a pilot 'Sharing Cities' in Leeds City Region and Greater Manchester in 2015-16, to trial local sharing initiatives in the areas of transport, public space, health and social care
  • introducing legislation to make it easier for individuals to sub-let a room and for non-residential properties to rent out their existing parking spaces
  • exploring the extension of a national service to advertise spare government space to businesses, individuals and community groups
  • engaging with the Start Up Loans company to promote the use of task-sharing sites when starting a business, and directing job-seekers to time bank and task-sharing opportunities where appropriate via Jobcentre Plus staff
  • encouraging local authorities to support the sharing economy, for example through shared workspaces and marketspaces.

Empowering entrepreneurs

In the winter edition of Enterprise, we noted with some surprise that the findings from the Smith & Williamson Enterprise Index, which measures entrepreneurial confidence in the economy, showed that half of our respondents felt that the emergence of the sharing economy would have an adverse effect on their businesses, fearing the disruption it will bring. But all the evidence suggests that the sharing economy is here to stay, and that savvy entrepreneurs and growth businesses will be seeking to embrace it and all the opportunities it offers.

To read this Newsletter in full, please click here.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2015. code 15/404 exp 01/11/2015

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