New research conducted by the Economist Intelligence Unit for Apax Partners shows that north European countries will compete head-on with the US to be the natural home of the entrepreneur. According to the forward-looking index, north European countries will provide the most hospitable framework for entrepreneurs globally.
The ranking, which took into account the quality and attractiveness of the business environment in 60 countries both in the recent past (19972001) and in the near future (20022006), shows European countries occupying seven out of the top ten slots. The Netherlands, Denmark and the UK even outrank the US in terms of their policy, institutional and infrastructure framework for entrepreneurs, although, as the study points out, this does not guarantee greater entrepreneurial activity. France, the UK and Ireland produce more science and engineering graduates per head than the US, and Finland, the Netherlands and Sweden lead in R&D investment as a percentage of GDP.
Around the world government policy, the availability of finance and increased entrepreneurial experience are all helping make prospects for entrepreneurs brighter than ever before. Entrepreneurship and innovation lead to job creation, which in turn produces economic activity, and together they serve as a catalyst for economic growth. A 2001 study by Harvard Business School on behalf of the National Commission on Entrepreneurship (NCOE) showed that of the 1997 Fortune 200, America’s 200 largest corporations in that year, one or more entrepreneurs directly founded the majority.
A secondary level of analysis into the origins of the constituent parts of the remaining firms those whose origins rested in mergers, spin-offs and amalgamations showed that almost all of them began with one or more entrepreneurs. In total, 197 of the 1997 Fortune 200, which in that year accounted for 1.3 million jobs and over $400 billion in revenues, could be traced back to entrepreneurial origins.
Other studies have found a direct correlation between entrepreneurial activity and economic growth. The 2000 and 2001 Global Entrepreneurship Monitor (GEM) studies conclude there is a strong association between entrepreneurship and GDP expansion. According to the GEM 2000 report, about half of the difference in levels of economic growth between countries can be explained by the presence, or lack, of entrepreneurial activity. A study produced for Indiana University’s Institute for Development Strategies corroborates the GEM reports’ conclusions and finds that high economic growth rates in turn stimulate further entrepreneurship, creating a chain reaction of innovation and entrepreneurship.
Governments everywhere are recognising the vital role of nascent businesses in their efforts to achieve economic growth and create new jobs. The entrepreneur is in favour in most of the major economies. In parallel, a broad consensus has emerged in Eastern Europe and Asia championing the open market over the command economy and cutting back the role of the state. Vigorous pro-entrepreneurship actions in the past three years have brought tax breaks in Australia, a package of small-business incentives in Brazil, a new loan-guarantee fund for entrepreneurs in Denmark, an “Enterprise 2010” programme for entrepreneurs in Ireland, tax incentives in Japan, and actions in favour of better business education, easier regulation and lower taxation for entrepreneurs in Singapore. The latest UK budget, unveiled in April 2002, announced cuts in corporate tax and a simplification of the VAT regime for small businesses. And in emerging markets, a new economic orthodoxy based around the small- and medium-sized enterprise is increasingly embraced by multilateral organisations such as the World Bank. Of course, governments don’t get everything right.
Sometimes policy takes two steps forward and one step back. In Germany, for example, the capital gains tax was reduced in 2002 from 56 per cent to 25 per cent and the Government has created an American-style “Green Card” to make it easier for foreigners, including entrepreneurs, to work there. Yet at the same time venture capital funds are being scrutinised by the Ministry of Finance for heavier taxation. Looking ahead, there is a risk that the European Union’s proposed Pensions Directive will impose quantitative limits on investments by pension funds in private equity, potentially jeopardising the flow of capital to new businesses in some member states. But in general, governments around the world are doing more to foster entrepreneurship than ever before.
Investors worldwide are allocating more money to entrepreneurial ventures. EVCA has measured a leap in the number of private equity and venture capital houses operating in Europe from 831 to 1,320 in just four years, with 2001 investments (including buyouts) totaling $23 billion. Fallout in the technology and telecoms sectors may have punctured much of the euphoria surrounding entrepreneurship but it will not slow the momentum built up over the past decade.
The dot.com era taught many people some salutary lessons, but its most lasting legacy may be the fact that, in its aftermath, more people have been exposed to entrepreneurialism and entrepreneurs than ever before. Many employees of large companies who left to join start-ups have returned to the fold, but they have learned skills and gained experience they may draw on again. There is increasing evidence of a reverse brain drain, or so-called brain circulation, from the developed to the developing world as immigrants to entrepreneurial centres in the West transfer capital and expertise back to their countries of origin.
An April 2002 survey, commissioned by the Public Policy Institute of California, of 2,300 skilled immigrants to Silicon Valley most of them Chinese and Indian found 18 per cent of those surveyed had invested in start-ups or venture funds in their native countries. According to the survey, 76 per cent of Indian immigrants and 73 per cent of Chinese immigrants would consider starting ventures back home.
There has been a general rise in public awareness of entrepreneurs from Bill Gates to Michael Dell, leading entrepreneurs regularly feature on the covers of business magazines. The addition of stock options to executive remuneration has also underlined the rewards of ownership and entrepreneurship. And although some entrepreneurs believe their skills cannot be taught, entrepreneurship is becoming a core component of business education courses in the US, the UK, France, Switzerland and Spain.
Apax expects entrepreneurial activity to recover quickly from the 2001/03 dip, as successful new enterprises in Europe and to a lesser extent, Asia replicate the drive and spirit that have long helped sustain US innovation. The question is not so much whether entrepreneurs have a bright future – they do. Rather it is where their energies will be concentrated, and how the private equity industry will evolve in response to these opportunities.
Venture capital firms are at the heart of the entrepreneurial world. Entrepreneurs, whether someone with a bright idea toiling away in a successful medium-sized company, or a scientist at one of Europe’s renowned yet under-commercialized research facilities, are the life blood of our industry.
Helping entrepreneurs meet their potential is more than just a lofty altruistic goal. Only by serving entrepreneurs and their cause can we deliver the high returns we seek for investors and for ourselves. We need to be on the balance sheets of Europe’s best talents. In these precarious economic times, fewer talents appear willing to leave the safe harbour of a steady job at a corporation or research institute. We will have to encourage those that brave the waters – the rare individual willing to work around the clock, battle with employees, the tax man and all the other obstacles out there. We’ve got to help them beat the odds.
How are we going to encourage these few real winners? Our industry must ensure that it delivers a service which has benefits beyond “cash” and that guarantees our seat at the table with entrepreneurs.
There are entrepreneurs working in countless small- and medium-sized companies, which provide the backbone of the economy in many European countries. Much of Germany’s entrepreneurial potential, for example, lurks in its famed Mittelstand. Private equity houses need to do a better job of selling their value proposition to these entrepreneurs, who have preferred instead to rely on old ties with their banks. The time is right for private equity to prove its worth, as banks begin to tighten their credit policies and SMEs become aware of the financing possibilities offered by private equity firms.
We have large corporate networks, especially those of us who invest across all stages of a company’s development. We have international market intelligence, working as many of us do with entrepreneurs in growth sectors across Europe, the US and Israel. Our track record of success enables our companies to attract the boldest of management teams. It is our ability to leverage our non-cash assets to support our entrepreneurs that separates us from other sources of finance. There is an opportunity in these opaque markets to demonstrate how much of a contribution to the entrepreneur and the economy we as an industry can make.
The US still has huge advantages in its large market size, its demographics and simply its cultural attitudes towards entrepreneurship. We need to help entrepreneurs in Europe to get beyond those hurdles. In many countries such as France, red tape makes it difficult to start new ventures. In Germany, the governing Social Democrat-Green coalition is on the best path to choking investment in innovative technologies with new proposals to tax venture capital funds. On a wider level, the European Union’s proposed pensions directive could also threaten the future with proposed investment limits for pension funds. We must lobby both our national and supra-national governments effectively to meet these challenges. Our business is the business of entrepreneurs. Now is the time to support them.
