UK must invest in next generation of entrepreneurs

Posted on 22 October 2008

Category: Attacking the recession

By Jonathan Kestenbaum, Chief Executive, NESTA

This article first appeared in Whitehall and Westminster World, 7 October, London. 

Despite the fear and anxiety being felt over the future of the world's financial markets and its knock-on effects, the outlook is not all doom and gloom. In fact, some of the world's strongest economies established their economic fortunes during their darkest times.

Just two decades ago, the deep recession experienced in Finland, arguably the most severe economic downturn experienced in any OECD country since the Second World War, provided the stimulus for the subsequent turnaround in its fortunes. Finland's recovery was fast and based not just on major industrial restructuring but also on building the attitudes of its citizens in favour of innovation. The result: a country once heavily reliant on resource-intensive industries became one of the world's leading technology specialist economies producing global success stories like Nokia and Linux Operating Systems.

In the late 90s the western world experienced the dot.com boom and shortly after, the crash. It resulted in huge numbers of unemployed ‘technological IT wizards' being given the luxury of time during which they were able to experiment, play, and think without racing for the next deadline. The dot.com collapse saw the beginning of the blogosphere as we know it today and also laid the foundations for hundreds of dynamic start-ups, such as eBay, Craigslist and Skype, which now make up the world of web 2.0.

We can also look to the Japanese experience where, after a period of ‘miracle' growth after the end of the Second World War, it suddenly entered what is known today as the ‘Lost Decade', during which the economy suffered steep decline. But with the country's strong work culture, the focus was placed on improving processes and creating more innovative products. It was this that enabled Japan to become a leading global economy, considered a case study for many world leading nations suffering economic hardship today.

The Finnish, dot.com and Japanese experiences are just a handful of historical examples that show us that despite the unstable economic climate, a potentially healthy environment for innovation can emerge. But the changes that took place were more profound than just providing economic growth. It galvanised a generation of entrepreneurs - people who developed the characteristics associated with an innovation economy - adoption, absorption, flexibility and agility.

With this in mind, it is critical that the UK invests in its greatest resource - its next generation of entrepreneurs. The innovation economy needs two things: people with the entrepreneurial skills and attitudes for the UK to compete with the growing economies of the likes of China and India. And we need to ensure that there is a sufficient flow of capital for start-ups, to help grow new businesses.

NESTA, the National Endowment for Science, Technology and the Arts, has a mission to make the UK more innovative. Our approach is to develop the UK's skills and attitudes so that we produce more entrepreneurial people to help us meet the economic and social challenges we face. We also invest in start-up businesses and provide mentoring and support to help these companies grow.

This comprehensive approach works. Innovation and creativity can drive new ways to improve the social and economic well-being of its people. We need young people with the confidence to challenge received wisdom, the ability to take informed risks, creative problem-solving skills and an aptitude for team working. Educational institutions are at the forefront of this transformation ensuring that our young people are equipped to deal with the constant change we experience, or better still, to become the instigators of it themselves. There has already been significant change - the freeing up of the curriculum has been a major step forward - but more can still be done.

The rules of investing in innovation are also changing. Business models are transforming, new funding opportunities are emerging, and new partnerships are developing.

In a recent report, Shifting Sands, we found that while the UK currently boasts the largest private equity market in Europe, accounting for one in every three investments, there are now deep concerns that the availability of early stage capital is declining - with average individual investments falling from a peak of £1.9 million in 2006 to £865, 000 in 2007. As private venture capital firms move further upstream in search of larger profit margins, the UK's early stage landscape is left exposed and, more worryingly, unable to grow the companies that could become tomorrow's great businesses.

But whilst private investments in start-ups have decreased, public sources of finance increased its share of the early stage investment market. Public finance has a critical role to play - alongside private investors - to help bridge the gap left by the private investment funds.

The current economic climate is forcing us to rethink the way we do things. It will take courage from Government, the public and the private sector to plan for the long term and ensure that we really are encouraging a climate that is enabling innovation to flourish.

The end result may just see our entrepreneurs coming out on top once we get through this turbulence.