Google debate: challenges for technology SMEs
Thanks to Google for hosting a great debate: “Do we [in the UK] need more dedicated policies to help SMEs or are the challenges they face the same as any small businesses?”
The overwhelming answer, and clearly the debate title leads in this direction, was yes, for a number of reasons, which I’ll come on to.
First off, though, it’s worth mentioning that hosting an event with quality participants in a forum at which all are encouraged to contribute (in this case over dinner with some alcohol to get things going, and under Chatham House Rules) beats the 2-dimensional panel-audience conference environment which plenty of us are familiar with (which conferences, more often than not, you pay lots of money to attend). Hearing a panel of experts marketing their expertise being harangued by audience members whose aim is to be heard asking smart questions doesn’t work. And even the pre-post coffee chat often doesn’t go anywhere. (Un-conferences are far better in my view because they represent an intellectual rather than a paying community. Roll on Cloudcamp.)
The debate scenario, which admittedly is partially controlled by the Chairperson and invited guest speakers (who speak for no more than 5 minutes or so to warm up the debate), draws forth participants’ passionately held views about real problems they, their businesses or the ecosystem in which they operate may be facing. Let’s have more of this type of event please.
Some observations (follow-ons) from the debate are as follows:
The Tier 1 (General) visa application is now closed to applications from abroad (non EU citizens). This means that highly skilled people, previously entitled to apply for work or self-employment opportunities in the UK, can no longer do so. There is of course the option for companies to sponsor skilled employees under Tier 2 (sponsorship fee of £300 for small sponsors or £1000 for large sponsors) if they can prove compliance with the resident labour market test, but the time, effort and required infrastructure it takes to arrange this is a significant obstacle to resource-constrained SMEs. Entrepreneurial early-stage businesses are often flexible and can simply move out of the UK if the operating environment becomes unmanageable. Those businesses that cannot for one reason or another relocate will either have to find the skills they need in the UK or through the sponsorship process (which is not always possible: limitations as to numbers of sponsorship licenses available), outsource (which is not always commercially sensible) or fail. This issue has become another barrier to raising capital for entrepreneurs who are not always British citizens and who must provide comfort to investors that they (and their employees) will be able to stay in the UK.
It’s worth noting that some recent rules, posted on UKBA on 16 March 2011, have come out on entrepreneurs visas stating that though “the standard investment threshold for an entrepreneur to qualify for a Tier 1 visa will remain at £200,000, [...] the government will allow high-potential businesses to come to the UK with £50,000 in funding from a reputable organisation” (at this stage I am not clear what “high potential” means), but perhaps more interestingly a new visa is being created for prospective entrepreneurs who will be allowed to enter the UK, make arrangements and secure funding before transferring to a full Tier 1 (Entrepreneur) visa. An encouraging move; watch this space!
Online infrastructure is poor in London for SMEs: we note this as a SME ourselves. It’s easy for the enterprises which benefit from the scale possibilities of procuring high-end fat pipes to provide connectivity to many employees. For individuals, broadband works just fine. For SMEs (e.g. us) it can take several months to get proper connectivity. For us, moving into new offices, it took around 2 months for our BT EFM connection to become live and in terms of price-performance, the equation doesn’t stack up. Given that our business is run almost entirely using online services (see our blog on Startup Infrastructure), until our connection became stable, it made very little sense coming into the office. We think landlords ought to have some responsibility to provide connectivity as part of a standard services agreement.
Tax: The punitive UK tax environment makes it difficult to incentivise people to work in the UK. It’s not all bad. We approve of Entrepreneurs’ relief, for instance, though the legislation, it appears, could do with some tidying up around who qualifies for this and why.
Education: How to code should be taught in schools instead of (say) F***** or G********. We need to make coding cool and to encourage kids to build technical skills in a hobby environment. Maybe an app to introduce code-building is required; it could be made into a game.
The legislative environment (Digital Economy Act) has sought to protect outdated business models. Powerful lobbying from enterprises used to generating core revenues through selling content has contributed to this. However attitudes are changing with the advent of access-based revenue models which provide streamed content online. The access-based model has been adopted in China and India (where content has always been pirated) and works effectively. In countries where the technology environment is more developed, we need to see a paradigm shift from the sale of content towards providing access to content and generating revenues through this from advertising, subscriptions to online services and selling user data. The DE Act by criminalising file-sharing is pushing against the tide of the consumer market place and hampering collaborative innovation where it is needed i.e. investing in service-based models to enhance user experience. And, of course, all this ties back with the earlier point in relation to online infrastructure – for instance, as the access-based model continues to prevail (which will continue to happen in spite of the DE Act) and video and radio over IP increases in quality and bandwidth, the network will need significant beefing up to cope.
Some feedback from our SME clients
IP law creates a barrier to entry: It’s complex and expensive for SMEs to file patents and the protection they provide is only as useful as a company’s ability to pay its lawyers to protect them. Conversely patents are often used by the enterprise to quash new technologies either through acquisition (big companies buying patents to eliminate disruptive technologies) or through litigation (big companies putting SMEs out of business because they don’t have the cash to fight expensive legal battles).
Contract law versus copyright law: Copyright law is frequently overridden by what’s written in contracts between licensors’ and licensees’ of tech / content / services. I think the SME-related instance of this with which we are all most familiar would be the resale of software licenses, allowed by copyright (and the principal of first sale), but often forbidden by license agreements.
Procurement issues: It’s made difficult for SMEs to win large public or private tenders. Some of the gate-factors to winning such contracts are: “you have no insurance”, “we need 3 years accounts”, and “you might go bust”. I think we need to incentivise the enterprise to open up corporate policies to encourage SMEs to compete for large contracts. After all a disruptive SME has a much greater chance of delivering significantly cheaper services. We should be encouraging this!
Funding environment: British investors’ attitudes to equity-funding start-ups can be circumspect. We have had some great ideas come across our desk for which the UK market appears closed (so we go elsewhere). These are innovative disruptive business models that exhibit stellar growth prospects and with strong management teams. What’s not to love! The truth is pre-revenue has been a hard-sell of late, but we think this is changing.
The regulatory environment needs to be flexible to the global market-place and to encourage early adoption of new technologies. If we want to encourage entrepreneurship in the UK we need to protect SMEs against onslaught from the enterprise and to foster a culture of innovation through our legislative framework, our education system and in our working lives.