The UK is prioritizing startup investors over startup entrepreneurs

And I think it’s a huge missed opportunity.

The UK Prime Minister, Rishi Sunak, has exciting ambitions for the role of tech in the UK’s future. He went so far as to put a joke in binary on the door of Number 10 Downing Street. It seems the priority is to attract external investment.

I’m a big fan of deep-pocketed investors arriving with bucketloads of cash and generating loads of jobs.

But I would also like to see an environment where startup entrepreneurs and early stage staff go on to build 2nd, 3rd and even more companies. I’d like to see a virtuous circle which encourages home-grown entrepreneurship.

Sadly, the current regime favours investors so much that it discourages serial entrepreneurs from build a vibrant startup ecosystem in the UK.

Here’s a story about how great government support is for UK startup investors:

I was recently involved in a pre-Series A funding round. It was into the 7 figures, so not a tiny round, but equally not a huge institutional round. The investors came from various countries around the world. Investors could choose to receive preference shares or ordinary shares. We don’t need to go into the details of what the differences are between these types of share. It’s enough to understand that preference shares are better for investors than ordinary shares. The clue is in the name.

Sure enough, the non-UK-taxpayers all chose preference shares. No surprises there. The UK taxpayers all chose ordinary shares. Bizarre behaviour. Why would you choose to have a share that would likely make you less money?

The answer is a pretty amazing tax incentive for UK taxpayers: SEIS/EIS or [Seed] Enterprise Investment Scheme. It gives an investor in early stage companies a credit on their income tax bill. It also comes with extra downside protection in case the investment goes under.

The UK taxpayers chose ordinary shares to guarantee that they could benefit from this EIS tax incentive¹. Let that sink in: the tax regime is so pro-startup-investor that, as an investor, you’re better off limiting the value of your investment so you can maximise the tax benefits. Still, as they say, “don’t hate the player”, so I am absolutely not surprised about why people chose what they did.

So much for the incentives available to investors. What about the entrepreneurs and startup employees actually doing the work?

There used to be something called Entrepreneur’s Relief. This was a preferential rate on the capital gains tax that business owners would otherwise have to pay when selling (parts of) their business. It used to have a very generous lifetime limit of £10m. It’s now been rebranded as Business Asset Disposal Relief and the lifetime limit reduced to £1m². Employees typically get EMI share options that share similar capital gains tax benefits to Business Asset Disposal Relief.

“So what”, you might say, “all these tax breaks are for the 1% of the 1%, why should I care?”

For sure, this is a very niche concern, which presumably is why the rules are the way they are. But, if you want to take a long-term view and build up a tech startup ecosystem, then surely you want to encourage more serial startup founders, rather than discouraging them?

To be clear: I’m not advocating for the abolition of anything here, nor for free money for anyone. I’m simply pointing out an imbalance that the UK needs to fix if it wants to encourage serial entrepreneurs. As things stand, UK taxpayers in 2023 are better off getting a regular income and then using the money they earn to make EIS investments, rather than doing the hard graft of creating a business themselves.

I can understand, if you’re taking a transactional view of individual taxpayer decisions, why you’d want to prioritise investors vs entrepreneurs and employees. An investor is making a conscious decision to invest into startup A vs in index fund B (or whatever) with every investment. On the other hand, tax planning is something that factors into the decision-making of approximately zero first-time founders and early stage employees. It’s the second-time (and later) founders where this kicks in. All that expertise and energy is actively encouraged to become semi-retired rather than starting new businesses.

This is not an isolated case. There are other examples which show how the UK takes startup entrepreneurs for granted these days:

1. R&D tax credits are becoming less attractive for SMEs.
2. The future fund that was supposed to encourage startups but didn’t: Some of the deal terms are awful, the sort of thing a VC’s lawyers would come up with and your lawyers would tell you to never agree to.
3. Oh, and even rebranding “Enterpreneur’s Relief” (exciting, aspirational) to “Business Asset Disposal Relief” (boring, administrative). What genius came up with that change? Why consciously go to the effort of changing something that sounds cool to something that sounds tedious?

I hope this whole area gets a good going over and somehow we move more towards an environment that makes life easier for startup entrepreneurs to build business after business after business.

Footnotes

1. There was some debate amongst the lawyers if you could structure preference shares in such a way that they would just about qualify for EIS, but none of these investors were prepared to take the risk ↩︎
2. As a comparison, £1m is the annual limit for EIS investments (or £2m if in “knowledge-intensive” firms) ↩︎

In-Person vs Remote

I’m seeing a lot of debate about whether it is right for a company to be in-person, hybrid or remote. There are examples of successful companies in both camps. It’s nonsense to claim that there is one optimal way of organising.

Based on what I’ve seen over the years, people I’ve talked to, and even a survey we did at a company I was once in, I’m pretty confident that the ‘in-person’ vs ‘remote’ debate is more about the sort of person you are and where you are in your life/career. Here are a few examples:

Prefers In-Person	Prefers Remote
Lives alone or in a small flatshare	Has a young family and a garden
Short commute	Long commute
Prefers informal chats / brainstorming	Prefers written communication
Feels that they get the most out of people if they are together	Values being able to access talent wherever it is in the world
Relatively junior / needs guidance	Has pre-existing relationships with co-workers / knows the ropes

Remote working works

The UK press has recently seen senior politicians criticising remote working. They are misguided.

I’ve worked in remote and hybrid environments for well over a decade. Remote work, when done well, works excellently. One example from my own experience: the ability to employ stay-at-home mums who balance employment around childcare commitments has been a game-changer for businesses that I’ve been in.

You cannot turn back the clock.

For sure, I’m one of the laptop class who can easily work from pretty much anywhere. I have a young family in a nice house and a decent home office setup. My commute to Central London and back is about 2.5-3 hours per day. I have a lot more productive time available to me in a remote-first environment than in an office-based environment. And I get to spend more time with my kids. It’s a true win-win.

This is not to say that it’s easy to make the most of remote working. There are challenges to getting remote working right. The best thing to do is to face up to these challenges and figure out how to solve them.

Here are examples of the sorts of person or organisation that struggle with the transition to more remote working:

1. Commercial landlords. In the short term demand for offices in central locations goes down as remote working goes up. Though in the longer term we will see offices being recreated as hybrid living/working spaces. The city centres that are dead at the weekend will change for the better.
2. Managers who don’t have the skills to connect with staff remotely. It’s one thing to be in an office watching people, picking up on body language cues and grabbing people when you need to talk to them. This can’t simply be replicated on video calls.
3. People without a decent work-from-home setup. If you’re in a small flat then spending too long in there will drive you crazy. If you can’t get good broadband at home then you will struggle to work remotely.
4. Companies who can’t provide a decent remote-first infrastructure. Computer systems need to be accessible securely and quickly over the internet, not just from inside the office.
5. Companies who support office workers. For example the lunch stops and the flower seller who saw his business collapse 50% even before London’s official lockdown started.
6. People who are most comfortable with face-to-face networking. In the olden days (1990’s) the place to be was the smoking room in which everyone was an equal irrespective of rank. Then the place to be to pick up on tidbits of career-enhancing information would have been in the coffee area or the pub at lunch/after work.
7. Organisations who haven’t figured out how to do training remotely. The nature of training and developing junior staff has changed. You can’t provide shadowing or guidance as easily remotely as when you are sitting next to each other.
8. Organisations which have a culture which encourages ‘out of sight out of mind’. If 80% of staff are in the office and 20% are dialling into calls then the 20% will quickly become second class citizens.
9. People who struggle to set boundaries between work and personal lives.

It looks like a pretty long list but the underlying themes are pretty clear:

• Investments in infrastructure are needed (better broadband, better IT setups).
• Support for small local businesses as they transition to the new more remote world is needed.
• Managers need help to adapt to remote work. The book Remote is a great place to start for organisations trying to figure out how to adapt to a remote world.
• A face-to-face element is still needed, whether through shared working spaces or other ways of getting people together every now and again.

Anyone who makes broad-brush statements that “you can’t collaborate in remote work” or “you can’t work efficiently remotely” is telling you about their difficulty in adapting to this new reality. Not about the nature of remote work. Plenty of people are making great strides in making the most of the opportunities of remote work while addressing the downsides. With the right level of will and vision we can adapt to increasingly remote work and, indeed, thrive in it.

Oh and a couple of final requests. Please can people start saying:

Working remotely instead of Working from home

and

Going to an office instead of Going to work

Remote isn’t going away

Rishi Sunak’s recent urging to get people into the office isn’t going to be enough to reverse the trend to a hybrid work environment.

My (small) workplace did a staff survey last year to get some feedback on whether/how much people wanted to be in the office in the future. The general consensus was for some hybrid with a couple of days a week in the office. Similar patterns seem to be playing out in many other companies.

In general, we saw that younger staff wanted more time in the office and older staff wanted less. Simple explanation: If you’ve got a young family and moved out of town somewhere with a longer commute but more space then you’ll be perfectly happy spending more time at home. If you’re quarantining in a small flatshare with little outside space and not much chance to meet other people then you will crave time away from home.

As many industries move towards a more hybrid onsite/remote working pattern, how big of a problem is this for younger employees? Do older staff have a moral duty to be in the office to help develop younger staff?

I fully understand that people of a certain age have fond memories of chatting to someone far more senior in the smoking room and that people of certain industry backgrounds will have fond memories of working long days in the office and then going out all night with their co-workers.

But even in the office a lot has changed over the last 20 years. There was a time when people would be regularly talking to each other, either face to face or on the phone. Now it’s common for people sitting next to each other to message each other. I have to keep reminding myself that when someone says “I spoke to X”, they usually mean “I sent X an email”. Not to mention how many kids are comfortable building relationships with each other over Discord rather than meeting face to face.

Even before the 2020 lockdowns began, people were relying on virtual forms of communication more and more. The lockdowns accelerated and broadened a trend that was already happening.

Insisting that people go back to the old ways of working simply because people in authority have fond memories of the past is not going to cut it. While there is obviously value in physically meeting face to face, there is also value in working remotely. The world has moved on and managers need to adjust to handling hybrid/remote teams.

Management and product development lessons from the 1950’s

In 1955, Elihu Katz and Paul Lazarsfeld published “Personal Influence“. This studied how small-group dynamics moderate or influence mass media messaging. For example how people decide who to vote for, which brand of lipstick to use, or which movie to go and watch.

Reading this in 2018 it’s striking to see how much is still valid. I’m not posting this to provide tremendous new insights. Any insights here are over 60 years old. Apparently, human behaviour doesn’t change very much over the generations.

How people choose their leaders

In order to become a leader, one must share prevailing opinions and attitudes. (p52)

They cite a 1952 study on children in a day nursery in which kids with “leadership qualities” were separated from the other children who were then placed into groups of 3-6. These new groups created their own “traditions” (e.g. who sits where, group jargon, division of who plays with what objects). The original leaders were then re-introduced:

In every case, when an old leader attempted to assert authority which went contrary to a newly established “tradition” of the group, the group did not respond. Some of the leaders, as a matter of fact, never returned to power. Others, who were successful, did achieve leadership once more but only after they had completely identified with the new “tradition” and participated in it themselves. (p52)

Or another 1952 study amongst a religious interest group, a political group, a medical fraternity and a medical sorority:

[T]hose who had been chosen as leaders were much more accurate in judging group opinion … But this was so only on the matters which were relevant to the group’s interest – medicine for the medical group, politics for the political group, etc. It seems reasonable to conclude … that leaders of groups like this are chosen, in part at least, because of recognized qualities of ‘sensitivity’ to other members of the group. (p102)

A succinct argument as to why people who want to become leaders need to first spend time listening.

Group participation improves take-up

Here’s are some more 1952 studies that the authors cite:

1. A study in a maternity hospital in which “some mothers were given individual instruction .. and others were formed into groups of six and guided in a discussion which culminated in a [group] ‘decision’ [to follow the instruction.” The participants in the group dicussion adhered “much more closely” to the child-care programme. (pp74-75).
2. A study comparing a lecture approach vs a group discussion on “the nutritional and patriotic justifications for the wartime food campaign to buy and serve ‘unpopular’ cuts of meat. 3% of those involved in the lecture followed the desired course of action, vs 32% of those in the group discussion.

Worth bearing in mind in the next meeting you host, or the next corporate communication you send out.

How small groups construct their reality

So many things in the world are inaccessible to direct empirical observation that individuals must continually rely on each other for making sense out of things. (p55)

Apparently 1952 was a bumper year for social sciences. Here is another 1952 study in which individuals were asked to decide how far and in which direction a point of light was moving. The catch was that the point of light was static. The study found that:

1. When people were shown the light individually, they would make their own judgment of how it was moving. When they were later put into small groups of 2 or 3, “[e]ach of the subjects based his first few estimates on his previously established standard, but confronted, this time, with the dissenting judgments of the others each gave way somewhat until a new, group standard became established.”
2. If a group session came first, the group would achieve a consensus of how the light was moving, and each individual would adopt the group’s consensus as their own position.

The way reality is generated by social groups is something to bear in mind during user research activities.

How the make-up of a group affects quality of communication

You guessed it, it’s another 1952 study that found that:

1. Rank in the group affects how people communicate. Specifically: “[P]-erson-to-person messaged are directed at the more popular group members and thus may be said to move upward in the hierarchy, while communication from one person to several others tends to flow down” (p89).
2. As groups get larger (from 3 to 8) “more and more communication is directed to one member of the group, thus reducing the relative amount of interchange among all members with each other. At the same time the recipient of this increased attention begins to direct more and more of his remarks to the group as a whole, and proportionately less to specific individuals.” (pp89-90)

I’m sure these two findings will ring very true of many meetings you’ve been in. I suspect that the person who becomes the centralising leader in these communications might not even realise the role they are playing. Reading this makes me more keen to try out the kind of silent meetings approach they use at Square.

 

 

That’s not a business, it’s a hustle

“That’s not a business, it’s a hustle.”

I’m paraphrasing Dan Lyons speaking at a recent Chew The Fat event. He was talking about his time at HubSpot and wondering how a loss-making company could grow so fast, list, and make a lot of investors a lot of money. In his view its business model is fundamentally flawed: he describes it as buying dollar bills at face value and selling them at 75 cents each. That sort of model may well get you hyper-growth but it’s a hustle, not a business.

The image of the hustling, zillionaire tech entrepreneur who has never made worried about profits has become dangerously deeply ingrained. I recently got talking to a graduate – evidently a bright individual – who ran a business idea past me. It was to do with optimising a retail shopping experience. Quite a neat idea so I asked the obvious question: where would the revenue come from? The consumers or the retailers?

He didn’t have an answer.

He assumed that all he’d have to do is somehow get some VC money, spend it on scaling a platform with loads of users, then sell out and walk off into the distance with $50 million in his pocket. Now that’s a hustle, not a business. There are cases where this has happened. But there are also plenty of cases of people winning the lottery and I suspect that on a risk-weighted basis, winning the lottery is more likely than being a part of the next Whatsapp.

Please, if you want to become an entrepreneur, bear these two things in mind:

1. You stand a better chance of making a successful business if you have intimate knowledge of the problem you are trying to solve. If you’re targeting students then, fine, as a recent student you might have more than enough knowledge to build a viable business. But if you’re not then probably you would need to work somewhere for a few years to get that deep understanding first (“domain knowledge”, in the jargon)
2. You will stand a better chance of success if you can create something that makes revenue, profit and cash. All those things are different so make sure you have a clear idea of how they will interplay in your business. In fact, you might even end up with more money in your pocket if you build a niche, profitable, growing business than if you go chasing unicorns.

This doesn’t mean you need a detailed business plan. You just need to be articulate those two points in as straightforward a fashion as possible. Here’s a classic DHH talk to hopefully get you thinking along the right lines . Incredibly it is still as valid today as it was in 2008.

Startup Lessons from the English East India Company

The Company of Merchants of London trading into the East Indies was founded in 1600 as a scrappy startup trying to disrupt a spice trade dominated by the Dutch. Over the next two centuries it evolved into a solid financial performer, a regulated monopoly and then into a branch of government.

Please put aside for the rest of this post any concerns about the various and many reprehensible things done by, or in the name of, this company. Just look at it from the perspective of what it can tell us about growing and evolving a business.

Turns out that plus ca change. Much of what we obsess about in the world of startups today would be very recognisable to an observer in the 1600’s. In the 21st Century how companies get created and develop is not all that different to 400+ years ago. Shouldn’t be surprising as ultimately we are still people and people haven’t changed all that much over the centuries.

The quotes below are from John Keay’s The Honourable Company.

On being an early stage investor

The first voyage didn’t live up to founder or investor expectations but it was a pretty impressive feat nonetheless. Now there’s a sentence that could easily apply to every MVP I’ve seen. It set out in 1601 in search of the spice islands and their cloves. Didn’t quite make it but managed to return in 1603 with plenty of pepper.

[T]he 218 petitioners who in 1600 had become the Company of Merchants of London trading into the East Indies had subscribed for only one voyage. The majority now wanted their money back; they were not amused when instead they were told that for every £250 they had subscribed, £200 must be reinvested in a second voyage. (p25)

Same lesson applies today to any early seed investor. Make sure you’ve kept enough money aside for a top-up later on. Whatever you put in now won’t be enough.

On the importance of dog-fooding

England had one huge commodity at the time: wool. The Company was desperate to find a market for wool and thought that Japan might be a good bet. Unfortunately not so. Keay quotes John Saris, leader of this expedition who in 1613 wrote that:

The natives were now more backward to buy than before because they saw that we ourselves were no forwarder in wearing the thing that we recommended to them. ‘For’, said they, ‘you commend your cloth [wool] unto us but you yourselves wear least thereof, the better sort of you wearing silken garments, the meaner fustians [made from cotton] (p58).

Product Managers take note: use your product and be seen to use it 🙂

On the roller-coaster of investing in a growth stock

“£100 of stock purchased … in 1657 had slumped to £70 by 1665 but thereafter appreciated dramatically. By 1677 it was valued at £245 and by 1683 was selling at anything between £360 and £500.” (p170)

Now look at the stock price chart of Facebook 2013 vs Facebook 2016.

On becoming a solid financial performer

If the 17th Century was about a scrappy startup trying to figure out its business model, in the 18th Century the bean counters took over.

By 1710 it was regularly sending to the East ten to fifteen ships a year, each of around 300 tons… Thirty years later the number of sailings had risen steadily … to around twenty, each ship being usually of 490 tons. (Over 500 tons and the ship’s company had to include a chaplain.) … Naturally prices and profits fluctuated but there was none of the erratic boom and bust so typical of the previous century. Shareholders came to expect their annual 8 percent dividend and when in 1732 it was proposed to reduce it to 6 per cent there was such an outcry that the directors had to think again. India stock had become the eighteenth-century equivalent of a gilt-edged security, much sought after by trustees, charities and foreign investors. (p220)

Interesting to see the emphasis move from capital appreciation to income generation.

On dealing with the haters

Naturally success breeds detractors and the Company had plenty of those. From a 21st Century perspective it’s really interesting to see 17th Century people struggling with trying to make sense of international trade. When the first voyage returned in 1603 it faced some hostility back home: “Already there were those who failed to see how exchanging precious bullion for an inessential condiment like pepper could possibly be in the national interest.”(p24).

One recurrent criticism … was that the Company must be impoverishing the nation since it exported treasures and imported only luxury items. In the case of Indian cottons these were manufactured goods which must be killing off English manufactures… But in 1620 Thomas Mun, a director of the Company, met … objections in his Discourse of Trade unto the East Indies. Mun argued convincingly that there was nothing inherently wrong with exporting precious metals provided that values of such exports was less than the value of the imported goods. ‘For let noe man doubt that money doth attend merchandise, for money is the price of wares and wares are the proper use of money, so that coherence is inseperable.’ (p119)

We may not be so worried about exporting gold any more. But there are plenty of similar debates about trade vs. protectionism still going on.

On the role of telling a good story to the financial markets (and of investing in yourself)

Robert Clive, already a powerful presence in the Company, was sent from England to run their interests in India in 1764. He was so excited at the opportunities he found that he “gave instructions for ‘whatever money I may have in public funds or anywhere else and as much as can be borrowed in my name’ to be invested in Company stock.” (p376)

Clive was massively over-optimistic about what he could deliver. The huge annual surplus he foresaw was “sweet music to the ears of the directors” and when news of these predictions reached London in 1766 they had a profound effect on Company stock.

[T]he Company’s stock, a normally unexciting performer on the financial markets, suddenly began to climb. It added …. about five percent in a single day and it went on climbing, nearly doubling its value over the next eight months. Clive’s friends …. bought heavily; but as word of his optimistic calculations … leaked out, outside investors also leapt on the bandwagon. On the Amsterdam and Paris markets the bubble went on growing and as the wilder speculators moved in, the greater became the pressure to keep the bubble from bursting.

An obvious way of preventing such a catastrophe was by boosting confidence still further with a hefty increase in the annual dividend … Accordingly, in September 1766, the General Court of Proprietors moved from an increase from six to ten percent… As a result, stock values continued to climb. (p378)

Turns out he had been massively over-confident and the stock price crashed later on. But just goes to show much people have always been driven by story telling and their animal spirits.

And finally, on how to eventually turn philanthropist

Of those who remained in the Company’s service the American-born Yale brothers proved the shrewdest operators. In the late 1680s Thomas Yale handled their affairs in Siam while Elihu Yale maximised their profits as Governor of Madras. Eventually both attracted the Company’s censure and were dismissed for abusing their positions. Elihu was not, however, disgraced and … he was able to retain his Indian fortune. Part was donated to his old school, then known as His Majesty’s College of Connecticut. In 1718 the grateful trustees renamed it ‘Yale College’ in his honour. (pp199-200)

 

Valuing Sweat Equity, 1100 AD

Find a valuation for a startup is a thorny and emotive subject. How much is the idea worth? How much is the founder(s) working for many months without any income worth? How much is your advisory board worth?

So I enjoyed coming across this keep it simple approach from Genoa around 1100AD

From David Abulafia, The Great Sea, p277

Often … merchants engaged in what they simply called a societas, or ‘partnership’, where a sleeping partner would invest three-quarters of the total and his (or her) colleague would invest one quarter, while also agreeing to travel to whichever destination had been agreed, and to trade there. On his return, the profits would be divided in half … [A]nother arrangement became even more common: the commenda, where the travelling partner invested nothing more than his skills and services, and received a quarter of the profits.

Using this model you come out with the “sweat” part of the valuation being worth between 25% and 33% and the “investment” part representing the rest. Of course this doesn’t take into account that in 1100 being the travelling partner put you at risk of serious bodily damage rather than just a few all-nighters and stressful pitches. Nor does it take into account the fact that there are bound to be differences between fitting out a ship and cargo for a sea voyage in 1100 and turning a software MVP into a self-sustaining business.

But (coincidentally?) the relative weights between cash and sweat do feel about right.

Unlimited Paid Vacation Time For Buyers

From http://www.bnet.com/2403-13059_23-237128.html?promo=713&tag=nl.e713

“In a Results-Only Work Environment, people can do whatever they want, whenever they want, as long as the work gets done.” This is not simply company-sanctioned flextime. A true ROWE has unlimited paid vacation time, no schedules, no mandatory meetings, and no judgments from co-workers and bosses about how employees spend their days. In other words, managers trust employees to get their work done and do not mandate — or even comment on — when, where, or how it happens. Because everyone is evaluated based on what they accomplish, as opposed to how much time they spend looking busy at their desks, it becomes clear very quickly who is actually getting work done and who isn’t.

And an example

For example, after migrating to a ROWE, Best Buy’s strategic sourcing and procurement team boosted employee retention by 27 percent and shed 10 low-performing employees. But the real proof was the huge uptick in performance: The department, which buys materials for the corporate environment, saw a 50 percent increase in cost reductions over two years.

Now I suspect that there is a bit more here than meets the eye but nevertheless it’s a story worth keeping in mind for buyers.

Yawntastic delays at NHS mega project

Not sure whether the appropriate word is “still” or “again” but here and here is another piece of news of failures to deliver technology systems in the UK public sector.

While I’m on the subject here are a couple of other items that popped up today. IT failure ’causes £130m arrears’  courtesy of Phynbarr. And Moody’s to investigate staff over rating bug (that “incorrectly rated about $1bn of complex debt securities”)  from the FT (free registration required).
And yet organisations keep going over the same ground with the same approaches. And wonder why they continue to fail. Perhaps Michael Krigsman should become part of the standard training for all people involved in software projects. In particular for the sponsors and managers who are (in theory) accountable for the project.