In many ways, we now need entrepreneurs more than ever. In a world where the Covid-19 pandemic has disrupted families, livelihoods, and economic activity over a prolonged period of time, the ability for our entrepreneurs to step into the void is vital to the strength of our recovery. Indeed, the seeds which will provide tomorrow’s green shoots are often sown in the darkest of moments.
Riding to the rescue?
Despite the adversities through which we are all living at the time of writing, even with the prospect of a vaccine, entrepreneurs have arguably never had a better playing field. Lower costs in starting a business, the ability to work remotely or on the move, perhaps emboldened further by the pandemic, added to the capability of accessing targeted audiences quickly through the internet and social media, have had the effect of a significant lowering of the hurdles which once existed in starting a business.
This has been assisted further by the move towards a digital and consumption driven economy, and a transition away from higher fixed cost industries which rely on significant investment
s into plant, property, machinery or inventories in order to establish oneself to take on a competitor. A new business in the digital age can establish a brand, website and product collateral in days, enabling it to quickly target consumers as a new entrant at lightning speed. This has perhaps been accelerated further through the inevitable digital ‘up-skilling’ of workforces during the pandemic, who, may be considering a career change, or starting that business they have always wished for. According to statistics, 65% of UK employees want to start their own business. Through adversity comes opportunity, and in this sense the pandemic has presented the perfect platform for many to reconsider their career choices, either enforced or voluntarily.
This combination has provided a huge springboard for burgeoning companies to enter both new and existing markets and to take on incumbents with relatively little firepower. The pre-pandemic evidence suggests that many are trying: there were almost 673,000 start ups founded in the 2018/19 tax year in the UK alone. This equates to 1,843 per day. In 2019, there were 2.4 million more businesses than in 2000, an increase of 69% over the whole period.
Backing the winners
In our day to day role as Investment Managers, one of our responsibilities is to identify businesses that we assess as good investments for our clients’ funds. Key elements we look for are barriers to entry (such that we can be confident that the business can continue to operate for the long term); pricing power, the ability to generate cash from its operations, and, ideally, to steadily compound its dividend over time. The current landscape makes this process more challenging, especially with many incumbent firms placing their immediate focus on surviving the current climate, potentially leaving the door open for competitors. Many of the historic defences that an incumbent firm would have in its arsenal (such as financial resources, skilled labour, intellectual property, brand, distribution networks) have been eroded by this new operating model, enabling less encumbered, more nimble competitors to chip away at their customer base.
There have been many instances where large companies have been guilty of resting on their previous successes; relying on old moats to defend them from attack, which have ultimately dried up to become trickling streams. New entrant firms have been able to hive off the market share of the sleeping giants by innovating what they do. There is evidence of this everywhere we look, not solely in the UK.
AirBnB taking share from large hotel brands, Fevertree taking on Schweppes, or Leon attracting more health conscious fast food customers away from the traditional high street eatery chains, are all examples of where an existing market has been disrupted, as companies have been able to tap into people’s changing tastes and spending habits. It is not only at the mega cap level where this is happening, with newer innovative brands gaining a significant following, such as Love Cocoa, Gymshark or Sea2See. Many of these newcomers attract passionately loyal supporters of their brands who buy into their products and the story behind them.
But they are not all success stories, and it should not be overlooked that being an entrepreneur remains a high-risk pursuit. For every success, there are an abundance of companies who do not stand the test of time, and so this is by no means a guaranteed path to accomplishment. The statistics are stark: 20% of new businesses registered fail within the first year, with 50% failing after 5 years. After 10 years, just one in five will remain. The impact of a failed venture can have significant effects on those involved, not just financially but also emotionally.
Filling the void
Despite the risks, this surge of entrepreneurial activity within the UK surely has to be seen as a good thing, not least in an economy which has struggled with stagnant levels of productivity in recent years, and in which there are large scale long term economic issues at play, outside of those which are pandemic induced. The tectonic shifts in industries such as retail or manufacturing, on top of the current economic decline, have the potential to cause widespread employment displacement in traditional industries, with these workers needing to find suitable replacement jobs. Brexit may also cause dislocations in UK industry depending on the shape of any future deal. As part of its Industrial strategy, the Government seeks to recognise the importance of small businesses as needing to step in to fill the void, offering start-up loans of up to £25,000, furthered by the Northern Powerhouse Investment Fund which provides over £400m of investment to boost small and medium sized business in the North of England. We also have small business support schemes which are designed to help smaller business and the self-employed to weather the current downturn.
Much does therefore rest on the shoulders of entrepreneurs and of small business within the UK, although challenges remain. The backdrop which makes it easier to start a business also comes with its own drawbacks. With so many trying to make it, the sheer averages mean that many will fail, and normal market forces, lack of resource, or a lack of addressable market will remain fundamental roadblocks to success. Social media, whilst a significant enabler for a business to generate momentum, can be just as destructive, especially if negative reviews or trends take hold. This can prove fatal, particularly for businesses at an earlier stage.
We also live in a world of far greater focus on ethical behaviours and sustainability in business practice, and so there are new considerations for all businesses, both young and established to consider (and indeed, problems for new entrants to solve). We as consumers now have a far heightened focus on wanting to associate with a brand or company who operates in a sustainable and altruistic way. Those who are able to bring customers on this journey, and who operate sustainably, are well placed to benefit.
Whilst much has fallen into place for the entrepreneur economy to flourish, there remain ever-changing threats to consider, not solely limited to the pandemic. But with this comes opportunity. To any entrepreneurs out there, we are relying on you.
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