- The Convener:
We now have something of a change of tune. We are leaving behind regulatory reform and moving on to the start of our scrutiny of the Scottish Government's draft budget for 2014-15. I formally welcome to the committee Peter Wood, who is our budget adviser.
On our first panel of witnesses we have Belinda Roberts, who is the founder of WeDO Scotland; John Anderson, who is chief executive of the Entrepreneurial Exchange; and Professor Sara Carter, who is head of department at the Hunter centre for entrepreneurship. I appreciate that we are in a bit of an unusual situation because the draft budget has not yet been published and will not be published for another three hours so, rather than talk about what is in the draft budget, you will have to say what you would like to see in it.
We have your written evidence, which is very helpful. Would you each like to say something briefly about your hopes and expectations for the budget?
- Professor Sara Carter (Enterprise Research Centre):
Good morning. I am representing the enterprise research centre, which is a collaborative partnership between the business schools of the University of Warwick, Aston University, Imperial College London and the University of Strathclyde. It is funded by the Economic and Social Research Council, the Technology Strategy Board, the Department for Business, Innovation and Skills and the British Bankers Association to provide an evidence base for enterprise research and policy. What I will draw your attention to is set out at more length in my written evidence but, essentially, comprises five points.
The first point is about growth and the focus on growth-oriented small and medium-sized enterprises, which are important to the economy. Even since the economic decline in 2008, the SME sector has retained a great many jobs, and the number of jobs that SMEs support in the economy has tripled since 1998. The sector is a source of sustained job creation. SMEs and particularly growth-oriented SMEs remain highly important to the Scottish economy.
The second point is that localism is important. By that we mean that there are strong public-supported SME growth programmes, such as Scottish Enterprise’s successful account managed companies, but they touch only the tip of the iceberg in terms of the number of companies that can be supported. There is a great need to augment those national public-supported programmes with local initiatives and to beef up the local ecosystems for business support.
The third point is about diversifying the SME entrepreneurial population and recognising ways of bringing in more women and particularly ethnic minorities to support our entrepreneurial base. Those populations face specific access-to-finance issues. That relates to the fourth point that I draw your attention to. Those populations—women and ethnic minorities—are typically more likely to be discouraged borrowers, and discouragement from borrowing from banks has increased significantly over the past few years.
My final point is that skills and leadership are important. There is a strong link between a leader’s growth ambition and a company’s ability to grow. Small firms face significant resource constraints on investing in management, so that is another area that I would like attention to be paid to.
- John Anderson (Entrepreneurial Exchange):
Members will have seen in our written evidence an absolute focus on growth. The Entrepreneurial Exchange was established as part of the birth-rate strategy in the mid-1990s specifically to help people who wanted to grow businesses—I will come back to that under questioning, no doubt—and to share the generic growing pains. It is a peer-learning organisation, so all our evidence is based on the work that we have done as an organisation since 1995.
My personal and professional experience of working with growth companies, investing in growth companies and sitting on their boards is that they form a small proportion of any economy, not just the Scottish economy. We need to get the number up and we need to raise the levels of aspiration. I am happy to discuss that more.
- Belinda Roberts (WeDO Scotland):
I am the founder of WeDO Scotland, which represents 150 SMEs, most of which are based in and around Edinburgh and all of which are Scottish. The information in my written evidence is based on conversations that I have had with them and on my experience.
I completely agree with the comments that Sara Carter and John Anderson made, but I want to make some other key points. More clarity is needed from the public sector about the available sources of funding, which are not communicated clearly to the SME community. I would love it if a small business adviser were appointed at Government level to support, assist and—more important—engage with the SME community in Scotland. If there were more in-depth analysis of SMEs and what is happening out there, that would be of huge benefit in setting budgets and so on.
I also sit on the board of Young Enterprise Scotland, and I will put that hat on for a second. The modern apprenticeship scheme is extremely positive in itself, but we need to think about the areas that we offer modern apprenticeships in and whether they will provide the skill sets that SMEs require.
My final point is that we need more visibility of SMEs with regard to public sector contracts, and more opportunities for them to bid successfully for those contracts. In 2011-12, only 14 per cent of those contracts were given to SMEs. That was an improvement, but it was only a 0.5 per cent improvement on the year before.
- The Convener:
I remind members that the session is on the Scottish Government’s budget. Our guests have raised a range of issues, some of which are relevant to the budget and some of which are less so. If we can, it would help to stick to issues that are directly relevant to the Scottish Government’s budget.
I imagine that all three witnesses will want to answer every question. If they are to do that and we are to get through a decent number of questions, we will need to keep the questions and answers fairly tight. It would help if everyone could bear that in mind.
I will start off, to warm things up. John Swinney will publish his budget in three hours. What would be a good budget and what would be a disappointing budget? What do you want to see in it?
- Professor Carter:
It is evident from my opening statement that I would like greater support for the SME sector—particularly the parts that have been overlooked. Belinda Roberts made an excellent point about procurement, and anything that we can instigate through the budgetary measures to promote procurement would support SMEs. Another clear issue is access to finance for SMEs. I also want greater support to be given to local and national business-support initiatives to support the SME community.
- John Anderson:
I will build on Sara Carter’s point about the local aspect. On Monday, we had the report from the external review of the Scottish Enterprise account management process. I have seen the changes over the years, and that is a hell of a lot better than it used to be. However, there is definitely still a disconnect between business gateway and Scottish Enterprise. There needs to be a focus on improving on the new shape of business gateway. Some councils have taken the business gateway service in-house, and others are still subcontracting under new contract arrangements.
For me, growth is about choice, as is evident throughout my submission. We have limited resources and we need to focus them on people who can make a five-to-one return, which means investing £1 in an account managed process to get a £5.20 return, or whatever it is. We need to do that, but there is a disconnect. I know from speaking to Hugh Lightbody, for example, that the situation is still patchy.
The first point of contact for anybody who wants to start a business is the most important. We almost need our best people on the front line. I know that a lot of work has gone into reforming the old enterprise trusts under the local enterprise companies. A lot of that can be driven by target setting as part of the budget process.
There is a limited amount of money—we would like to see more, clearly—and its use needs to be focused. A practical measure would be to ensure that the hand-off from business gateway to the Scottish Enterprise account managed process is such that people are either in the growth pipeline or not. We still see too many examples of someone who is in the wrong part of the system. That is, typically, a human resource issue, which is about having someone in there with relevant experience.
11:15
- The Convener:
For your interest, we will debate the enterprise networks in Parliament this afternoon. I think that that will focus on the report on account managed companies that came out on Monday, so all those issues will be discussed.
- Belinda Roberts:
I echo what John Anderson said. From my experience with our members, one of the key issues that they have is being able to identify the myriad sources of funding that are available—the process can involve jumping through 25 hoops. If people succeed in getting through those, that in itself is a bonus.
Another issue that John Anderson raised is the need to look at how relevant the experience of account managers is in the high-growth programme with Scottish Enterprise and to have a better matching process. An account manager might be very good and have an excellent skill set, but if they do not understand the business and do not have relevant experience for that SME, they will be of limited value.
- John Anderson:
I come back to procurement. I know that there has been a lot of Government attention on trying to reform the system. In the past, the criticism was levied that we were just following European rules. That is easy to hide behind, and I know that a lot of work has been done on that. If the culture changes, that will have a massive potential uplift for Scotland-based businesses.
I sat on the Scottish Enterprise Tayside board when the LECs were being changed and, to be honest, I am quite comfortable that they were disbanded. When the metrics were all wrong in the first place, we were never going to get people to change their behaviour.
I know that from the top down the view is that we must do more and that we need to open up procurement—sensitively, because it involves public money—to the SME base in Scotland. That filters down to a level at which someone says, “Actually, I do not get remunerated,” or, “My performance is not measured in that way.” I know that that involves a journey but, with limited resource, it is the only way to get the best out of the process.
- The Convener:
The procurement bill that will come to Parliament this session is intended to build on the principle of community benefit and use that as a mechanism to try to award more local contracts. We look forward to seeing that.
I will pick up on what John Anderson said about the disconnect between Scottish Enterprise and business gateway. Scotland’s seven cities are meeting today to agree a joint prospectus to put to the Scottish Government about them taking on more of the role of Scottish Enterprise. Do you have a view on that? Would that be a positive move?
- John Anderson:
I was involved in the discussions when the minority Government came in about whether we should just get rid of Scottish Enterprise—full stop—and use the money elsewhere, because it is a very big part of the budget. By the end of the discussion with Mr Mather and his mind mapping, we concluded—the people in the room were LEC board members, executives, chief executives, council chief executives and economic development officers—that people worked really well together, so changing things for the sake of it would probably not work.
I was always a fan of the city-region strategy; it just made sense. For me, it was an estuaries thing—we might be in Dundee but have a business over in Tayport that is looked after in Glenrothes, although we can actually see the damn building, so there is an absolute need for reorganisation.
We must bear in mind the strength of the report on the account management process—from experience of sitting on boards around the country, I can say that it is very rare now to come across a poor account manager who does not have relevant experience.
That has taken a lot of change. Maybe I have just been lucky and have just happened to be in the right places but, over 15 or 20-odd years, I have seen some absolutely shocking performance. I am sorry, but just because someone has been on the training course, that does not mean that they are a decent business adviser. The relevance of the experience to the particular type of business is crucial. I see that most clearly in what was the Prince’s Scottish Youth Business Trust and is now the Prince’s Trust Youth Business Scotland, which has a fabulous volunteer base but which needed a different type of experience for the growth businesses that were being funded through the growth fund.
So long as the principle of relevance of experience is applied to whatever the community of businesses is, I do not care what the set-up looks like. It is important to get the right person—all three of us have said exactly the same thing in our evidence.
- Hanzala Malik:
Welcome to the committee. Sara Carter said something very interesting about small and medium-sized companies, in particular in minority communities, and she highlighted the fact that funding is not available to them. When the Green Investment Bank gave evidence to the committee recently, it accepted my suggestion that it was not helping small and medium-sized companies. Should the budget include something to encourage lenders to reach out to small and medium-sized companies and encourage them to borrow money and try to enhance their opportunities?
- Professor Carter:
Yes, very much so. With respect to minority groups in enterprise, we should not consider just ethnic minority businesses. Of course, some ethnic minority populations have a very high participation rate, but that is uneven, and there is certainly the potential to encourage more ethnic minority businesses. Support happens best at the local level and particularly the community level.
There is very strong evidence that such businesses perceive access-to-finance barriers, although the reason for that has not been established. It might just be that their standard risk factors, such as structure, sector, size and business experience, make them a relatively high risk. However, we also know that particular populations are more likely to be discouraged borrowers; in other words, they do not ask banks for business loans or overdrafts because they believe that they will be rejected. Rather than be rejected, they just do not go in the first place. Some ethnic minority business populations have more experience of discouragement than the main stream.
Similar principles operate when we consider many women who start in businesses. They also have high degrees of discouragement and their businesses have a very different funding profile from that of male-owned businesses. For those reasons, initiatives such as the Green Investment Bank, microcredit and more localism in business support and funding would be hugely beneficial to Scotland’s economy.
- Hanzala Malik:
Belinda Roberts mentioned the option of employing an officer or perhaps a manager to advise small and medium-sized companies. We have agencies that have been given responsibility for doing just that—Scottish Enterprise and business gateway are the two that come to mind immediately. At this committee and the European and External Relations Committee, there has been discussion about how we encourage and inform small and medium-sized companies and organisations to tap into European Union funding. How could the budget help in that? Do you expect the budget to direct funding to those organisations to deal with that issue?
- Belinda Roberts:
The issue is all down to communication. If people know what they are looking for and where they are supposed to go on the Scottish Enterprise or business gateway website, they are fine. If they do not, the position can be incredibly confusing. I would like more funds to be allocated in the budget to enable those organisations to communicate better what they are doing.
For example, a lot of people are put off by the information that they read about the high-growth programme on the Scottish Enterprise website, because it looks as if it is extremely limited to specific industry sectors. However, when it is broken down, that is not the case. I would certainly like more funding for communication.
- Hanzala Malik:
I was interested in John Anderson’s comments about how we stimulate industry and how we ought to communicate with people. How could the budget assist that process? Who should we target immediately and how should we build on that if we are successful?
- John Anderson:
My comments might reflect my lack of knowledge of the detail of how things work but, if there is a budget and a certain amount of money to play with, different parties will bid to say, “If you give me that amount of money, I will do this.” One of my big problems with the way in which metrics for delivery are reported is that they are too broad.
My submission mentions that the national indicator to
“Increase the number of businesses”
is too broad. Even the definition of an SME is too broad. That needs to be narrowed down, and it will not be about a small number of potentially high-growth technology businesses. To be frank, there is a bigger opportunity in Scotland to take the existing business base of reasonably established businesses—the businesses with £1 million-plus and 10-plus people, for example—and encourage it to do a bit more.
Behaviour will be changed only if resources to support those businesses are directed through saying, “Here’s the budget that we are giving you and here are the metrics that you will be measured on.” The metrics are currently too broad. We will not get the granularity or focus unless we take the sort of approach that I have outlined—I genuinely do not know how to do it.
My instinct from spending a lot of time at Highlands and Islands Enterprise and Scottish Enterprise is that there is a lot of analysis of the business base, such as what a company does and how many people it employs. Their databases are really detailed, but we do not seem to be able to get that level of detail and make it something meaningful. Doing that would probably be politically challenging. I live in Perthshire, which has a number of growth businesses. However, in comparison with a city such as Dundee, which has a university and a knowledge-based economy, it is difficult to get growth businesses that can scale up.
That said, there are fantastic food companies around. The penny dropped a few years ago that food, drink and tourism are very important to Scotland. They are areas where we can genuinely have a sustainable competitive advantage. We must look at each of those areas, which maybe comes back to the localisation that Sara Carter talked about. We need to have an ecosystem map of businesses in the community, and there will be businesses that want to grow. I made the point in my submission that there are plenty of people who, when they are put together with their peers, learn from them and say, “Well, if you are doing that—”.
Instead of being focused on the big cities, such an approach can be taken in each local business economy around Scotland, but that can be done only if we understand each economy and direct the economic development support, whether down at council level or at Scottish Enterprise level.
- Hanzala Malik:
I am looking for advice from you on the ground floor about what you would like in the budget to encourage stimulation and encourage small and medium-sized companies to grow and perhaps even look outside the box. We have so much potential, particularly for export; the growth area is now perhaps export to Europe as well as some other places. How can the budget support that? What direction would you like the budget to give to agencies such as Scottish Enterprise and business gateway, which have been given responsibility to support industries? I do not think that there will be new money, but we probably need clear guidance. What sort of guidance would be helpful?
11:30
- John Anderson:
I would repeat that the focus is on the outcomes that we expect as a return on investment from the public sector, given the budget. It is probably easier to direct Scottish Enterprise, because it has become very narrowly focused on growth and internationalisation. It knows and understands the business base, which it has segmented. The disconnect is with the local business, which is more likely not to have the same scale or rate of growth.
We have to be honest and recognise that a lot of businesses in Scotland do not want to grow. My overarching point is that we must be honest about the business base. There are 307,770 businesses, depending on the day when they are counted, but the majority are one-person organisations, so we are playing with a relatively small business base. For the non-high-growth businesses at the local level, the question is whether we direct services to them to make them realise that they can grow, because growth is a choice. A lot of entrepreneurs cannot help but grab opportunities.
The bottleneck in Scotland comes from a lot of businesses whose owners went through all the pain a number of years ago of starting a business—those of you who have done that will know how difficult it is—and which have eventually got to the point at which they are stable. The business probably does not have the right experience to take it to the next level, nor does it have a management team. However, the owner might feel that they are doing quite nicely and that they can now have a holiday, because they have not had a holiday for four years.
There is a lot of evidence of families falling apart because of the pressure of starting a business. A lot of business owners take their foot off the gas, for good reasons. There is a group of businesses that are probably readily identifiable, and perhaps directing some services or peer support to those businesspeople will make them realise that they can make a big difference. It is easy to say that we have a big youth unemployment problem and we just need to hire more people. However, the majority of businesses do not want to hire anybody. That is nothing to do with legislation; they just cannot afford to hire anybody.
We should identify a group of businesses that could be encouraged to start taking risks again, without betting the ranch. The question is how we move up a group of steady businesses that are very important to the local economy. From a budgetary perspective, it is probably best for local authorities’ business gateways to identify and focus on particular local businesses. That is happening, but it is patchy. We should say, “Here’s your budget and here are the outcomes,” and we should stop giving broad support to all SMEs.
- Hanzala Malik:
So we basically need more managerial support.
- John Anderson:
Yes. That is about giving direction and understanding businesses. That is where the local bit comes in, because such businesses are important to local communities.
- Hanzala Malik:
So the current advice providers are not giving enough advice, direction and management skills.
- John Anderson:
There is a lot of emphasis on start-up, to the detriment of the existing business community, which could be encouraged. I have seen over the years with the Entrepreneurial Exchange that, when people spend time with their peers, they gain confidence from that. They realise that they are not the only person with such problems. As I said, there is a huge emphasis on start-up, which is misplaced.
- Chic Brodie:
Good morning. I will declare an interest. After having run Compaq joint ventures across Europe, I came back to help start-ups, mentor other businesses and do company turnarounds, so I have a large degree of empathy with what has been said. I say to Belinda Roberts that discussions about the small business envoy started some time ago and are on-going with the Government, so watch this space.
Everything that has been said about business support strikes a chord with me. However, in terms of the budget, over 100 different funding streams are available not just for SMEs but for social enterprises in the third sector. What message would you give to the Government about how it might consolidate that funding? There have been discussions about a social enterprise bank that could draw all the funding sources together to support those businesses. However, the question is also how we decide what businesses qualify not only for access to financial support but for business support, which has been mentioned. My experience out there is that money is just being driven through some small businesses and that it ends up in the pockets of consultants who I would not trust to cross the road.
- Belinda Roberts:
I agree with that. More and more “consultants” are appearing—a lot are from the financial services sector—who have no experience whatsoever of running a business or, indeed, working in an SME. There is a vast difference, obviously, between an SME and corporate life—it is a big differentiator.
On funding sources, one of the ambassadors on my executive team investigated the number of funds available out there and came up with the figure of 335, so it is interesting that Chic Brodie mentioned a figure of 100.
- Chic Brodie:
That is three times the number that I came up with.
- Belinda Roberts:
I keep talking about communication, but I think that it is so important. People are not aware of what is available or of what the criteria are to apply for the funds, which is incredibly frustrating.
John Anderson referred to SMEs, which is such a broad term. We need to break it down and segment it more. I have seen a number of businesses that, frankly, do not have high-growth potential; nor do the founders of the businesses have any desire to grow a business that will have an impact on the Scottish economy.
- Chic Brodie:
I agree. Just on that, I disagree entirely with John Anderson about Scottish Enterprise. I think that, in terms of its focus, it is doing a great job, as is Scottish Development International. I will come back to that point, if I may.
We know the sectors on which we are focusing—they are largely the life sciences, renewables and so on—but I do not see any cohesion in that. I share some of the views that have been expressed about the business gateway, which should be run by people who understand business and not necessarily by local authorities. I am not saying that local authorities do not understand business, but the point was made that business gateway support is patchy. Should we construct something in terms of connection so that the winners fit in with the national economic thrust, which is relatively successful?
- Belinda Roberts:
Scottish Enterprise is engaging, but there should be more engagement. I believe that the Entrepreneurial Exchange has more than 450 members. Is that right, John?
- John Anderson:
We have 400 members.
- Belinda Roberts:
WeDO Scotland has 150 members. From a personal perspective, I have had no contact from anybody at business gateway level. What are those people doing to engage with the SME community? From what I can see, the answer is nothing.
- Professor Carter:
Because the concept of the SME community is so broad, as John Anderson indicated, I think that we are in danger of talking at cross-purposes. What we achieve from encouraging start-ups is immensely important. In fact, very small single-person or family businesses that are not going to grow are a very important part of the Scottish economy. We need to encourage greater diversity and more people constantly coming into the business community and our business base. That is quite a different issue from supporting potentially high-growth businesses. The two issues are completely different, and it is probably helpful to consider them—
- Chic Brodie:
Sorry to interrupt but, with all due respect, the high-growth businesses have to start somewhere.
- Professor Carter:
Yes.
- Chic Brodie:
The question is whether we secure public sector investment through the budget for the potential winners or allow public sector investment to be spread across the ones or twos. I am looking for a structure that will ensure that Scotland is a winner, notwithstanding the constraint that we have because of where our budget currently comes from. I am not denigrating small businesses, but how do we achieve the pipeline and maintain the survival rate and not just the birth rate?
- Professor Carter:
I agree with what you say but, in order to get the pipeline of growth businesses, we must have a strong business base of start-ups in the first place. I agree with you that that is where they come from.
- John Anderson:
Perhaps Chic Brodie and I will have another discussion on the issue on another day. I do not think that the committee is the right place for it.
One of the things that excite me is when people come out of the corporate world with the toolkit to deal with scale businesses. The people who I see really driving that include Colin Robertson at Alexander Dennis and Bob Keiller, formerly of PSN, who now runs the Wood Group. They are some of a bunch of people we have met through the Entrepreneurial Exchange who have a great toolkit. They have had the confidence to come out of corporate, take a business and do something with it. That is the big opportunity. However, I do not know how we direct a budget to do that.
It might help if we knew how many reasonable-sized businesses are not growing because they have chosen not to. We have also seen over the years businesses being propped up that should not be there any more, because they have just not changed. A natural churn in a business population is entirely appropriate. However, I see great local businesses around the place that do not know how to grow. If we put them in a room with other people, they will say that they want to do something, but they do not have the skill set because they do not have the toolkit.
For some of the very successful start-ups coming out of the University of Strathclyde business school, we go out to the alumni base of people who have got great corporate experience, having come out of the business school 20-odd years ago, and put them in as the lead. We match those start-ups with corporate experience and real commercial experience with technology. Such mechanisms are already out there, if we can identify the local bases, which I think is a role for the business gateway.
I agree with Chic Brodie about people being involved with businesses who do not have the necessary relevance. As I said earlier, the first point of contact has to be someone who sees the business’s potential and understands their role as a signposter. That is what an account manager will do, whether the role is called that, a high-growth start-up programme, or whatever. There will be a person who will look after the individual business owner, but if they just want to have a locally based business and not hire or grow and so on, that is fine. However, to take the PSYBT model, there are different groups of advisers or supporters. That role must not be subcontracted to consultants, which is a point that Belinda Roberts made.
I am holding up a 46-page document on sources of finance that the Scotland Office business base Scotland group is looking at. Basically, it is asking what, given that most of the levers are devolved to the Scottish Parliament and Government, the United Kingdom Government could do. There are a staggering number of funding sources, programmes, initiatives, prizes and grants, but they all have to be managed by someone.
- Chic Brodie:
That is very interesting; I have probably got the same 46 pages. The European programme for the competitiveness of enterprises and SMEs—COSME—is going to run until 2020 for small businesses. The funding was supposed to be loans, but it turned out to be guarantees—at least in the most recent programme. That project is worth €2.3 billion, but we cannot get to it because we are not a member state. Have you any idea as to how we might augment the budget by accessing that funding for small businesses?
- John Anderson:
I am not aware of that project, so I cannot comment.
11:45
- Margaret McDougall:
Good morning, panel. Much of what I was going to ask about has already been covered, but what is coming across clearly is that your budget wish list includes better communication about the help that is already available. On access to finance, there should be not just financial support but management advice from, for example, an adviser based in the Government who could pass things on. The business gateway performs that role in some areas, but I understand that it does so better in some areas than in others. Obviously, that needs to be looked at as well.
Belinda Roberts suggested that the modern apprenticeship scheme is not necessarily producing the right skills among students. What could be done in the budget to try to improve that?
- Belinda Roberts:
Having seen the amount of money that has been allocated to trying to reduce the numbers of unemployed young people between the ages of 16 and 24, I know that a substantial amount of money is involved—from memory, I think that it is around £30 million. I have to say that I was slightly surprised to see that some of that budget had been allocated to councils to deal with unemployment. I have no idea how successful that has been but, from the figures that I have seen, that really has not worked in any way whatsoever.
As I said earlier, the modern apprenticeship scheme is a very positive programme and I think that it is great, but it does not address the needs of SMEs. For example, social media is not going away but is becoming an ever more important factor for SMEs. Programmes such as modern apprenticeships should look at the core skills that are required by SMEs in order for them to grow and to achieve their growth potential. As John Anderson rightly said, not all business founders or owners will want to grow their business—that is fine, and I have no issue with that—but schemes such as modern apprenticeships should address the core skills that people need to achieve the potential of their businesses.
- Margaret McDougall:
Have you been approached to see whether you could offer any places through the modern apprenticeship scheme?
- Belinda Roberts:
Interestingly enough, I have had absolutely no contact on that. Again, that comes down to the lack of engagement with the SME community. That applies across the board, regardless of what area you are looking at.
- John Anderson:
I might understand why that is the case for organisations such as WeDO Scotland, the Entrepreneurial Exchange and the organisation that Sara Carter is representing—whatever hat she is wearing today.
I receive a stakeholder update from Scottish Enterprise but only because I pointed out that the 400 or so members of the Entrepreneurial Exchange are an unusual bunch, in that they are all ambitious—although they are making some mistakes—and are growing their businesses very quickly. I was told that larger businesses will be members of CBI Scotland and smaller ones will be members of the Federation of Small Businesses or a local chamber of commerce, but that is not the case.
I was approached by Glasgow City Council about the Commonwealth games apprenticeship scheme. I was told, “Here is the plan. Could you make people aware of it?” My job is a signposting role, so if something interesting comes in that I think could benefit our members, I will push it out to them. That is probably the only time that I have had a direct approach from an agency that is trying to reach our market.
I have a strong dialogue with Scottish Enterprise, given that we should be able to map membership of the Entrepreneurial Exchange with SE’s account-managed firms because we both deal only with growth firms—we should be a perfect match and we are on that journey. However, we are all busy, so we are not going to sit there and try to find out about such schemes. For sourcing information, I hope that the Scottish business portal’s new finance hub—I hope that I have got the terminology right—will act as a magic single source that should allow us to find out everything. However, we will see whether that works in practice. An interesting question is whether the organisations that are promoting modern apprenticeships are talking to the right people.
- Margaret McDougall:
Does Sara Carter have anything to add on that?
- Professor Carter:
We understand that there are benefits not just from providing modern apprenticeships but from encouraging students in further and higher education to engage with small firms. The purpose of that is not just to help the small firm to grow by undertaking projects and adding more capacity to the business but to engage young people so that they know what it is like to run a business. Such placements are almost a training ground for the new entrepreneurs of the future. Any kind of learning that takes place in SMEs, whether through the modern apprenticeship scheme or through further and higher education students engaging in placements and projects in local companies, will also help to strengthen the pipeline for the future.
- Belinda Roberts:
Our company programme, which Young Enterprise Scotland runs in schools throughout Scotland, had its awards dinner in June. Every year without fail, that is a motivational and inspiring event to attend because you see these 16, 17 or 18-year-old kids who have been given the basic training on how to start a business, write a business plan and run the business and then close it down. The young people who come through that are phenomenal. Again, there is not enough communication on that from those who should be talking to organisations such as Young Enterprise Scotland. As a charity, we have limited funding available for going out there and doing the engagement. From all our perspectives, I think that it is fair to say that we are more than happy to engage with anyone but we have limited resources and time, so it would be nice to see a little bit more of that coming from the other side.
- Margaret McDougall:
On communication, what do you suggest that the Government could do to communicate better with SMEs on what support and access to finance are available?
- John Anderson:
The use of role models and case studies—I have been doing role models since the mid-1990s—is the way to do it, so that people have an example. Notwithstanding the move towards social media, the power of the local press in Scotland is immense. For example, a local business might be mentioned in the Perthshire Advertiser if it features in the Perthshire Chamber of Commerce star awards and there is a reasonable amount of activity around it. If you are trying to promote a particular programme of growth, you could illustrate it locally with an example that other businesses will know and recognise, so that there is a peer-group effect—we are into peer-group learning, obviously, but this is a slightly different way of doing that.
Rather than launching another outbound source or initiative, which is typically what has happened over the past umpteen years, we could illustrate an idea with a real local business. We should build up the base so that there are role models for different sizes, sectors, genders and whatever. The use of role models and case studies is a very cost-effective way of doing that.
- Margaret McDougall:
And social media might be used as well.
- John Anderson:
Yes, that will come, although I am too old for that stuff.
- Mark McDonald:
I have a brief supplementary question on what Margaret McDougall asked about—I know that I have my name down for another question, so I am not seeking to queue-jump.
On the issue of modern apprenticeships, obviously the channels of communication need to be two-way. Do you have any indication from the companies that you represent how many of them would be either willing to take on a modern apprentice or interested in doing so? Obviously, that data could then be fed to the Scottish Government to give it an indication of the appetite that exists within the organisations that you represent or deal with on a regular basis?
- Belinda Roberts:
Probably 50-plus per cent of our members would be interested in doing so.
- Mark McDonald:
Have those companies approached you about how to get involved in the scheme?
- Belinda Roberts:
We are similar to the Entrepreneurial Exchange—albeit that we represent the smaller end of the SME community—in that our members are just not approached on things like that. Our events are all about sharing knowledge, ideas and experiences, and that topic comes up a lot. Our members are just not being made aware of those things or being approached about them. They would be very positive and, in saying that, I am genuinely representing all our members.
- Mark McDonald:
Have any of your membership organisations or companies taken on a modern apprentice?
- Belinda Roberts:
No, none.
- John Anderson:
I do not have the data on the number involved—as Belinda Roberts said, the Entrepreneurial Exchange members tend to be at a slightly more advanced stage—but my experience from sitting on boards of companies that are account managed is that the account manager in Scottish Enterprise is doing that signposting. That is a big change, which comes through in the report and will, I guess, be debated this afternoon. Over the past probably five years, the approach has changed from, “Here’s a product that I think you would want,” to, “What are you trying to achieve here? I will be the signposter within the public sector to support economic development and provide support in finding the right things.” It may be that a modern apprenticeship is the right solution for some of our members. I suspect that if we asked our members whether they are interested in the modern apprenticeship scheme, they would probably all be aware of it, but I have not tested that. That would be an interesting project.
- Mark McDonald:
Does Professor Carter have anything to add?
- Professor Carter:
On the budget—this is not about modern apprenticeships—as someone who is significantly involved in undergraduate and graduate populations, I think that one of the most pleasing things that I have seen over the past couple of years is the reinstatement of the graduate placement programme for SMEs. Under that programme, we do much of the training to support those graduates going into SMEs in the Highlands and Islands Enterprise and Scottish Enterprise areas. That has been an important development not just for the graduates but for the businesses because of the capabilities that those graduates can bring. The reinstatement of that programme was important and significant, and I would certainly like to see that continued.
- The Convener:
Four members still want to ask a question. I am conscious of the time, so it would be helpful if people could tighten up a little on questions and on answers. Obviously, if we can retain our focus on the budget, that will also be useful.
- Mike MacKenzie:
In the context of a falling Scottish Government budget, it is highly unlikely that the budget for Scottish Enterprise or the other enterprise agencies will be doubled or quadrupled, although they may be doing much good work. Therefore, if we are to improve matters, we will need to think about doing things differently.
Is there perhaps scope for the enterprise agencies—or the Government itself—to act as a catalyst? The single biggest problem that I get in my inbox from businesses, particularly small businesses, is the availability of finance from traditional high street banks, which are just not interested in talking to businesses. I am talking not about start-ups but about long-in-the-tooth businesses that have survived the recession and now want to move ahead. The issue is not that the banks are analysing business plans and finding them wanting but that they are not even talking to businesses. Businesses cannot get in the door.
However, we are led to believe that big businesses are cash rich and are not spending that money because of lack of demand, while savers are getting 0.5 per cent interest if they are lucky. There seems to me to be a disconnect somewhere. Could we provide a pipeline between the cash resources that are still about and the people who want to use them? Could the Government or the enterprise agencies act as a catalyst? We need to introduce something that is a bit of a game-changer and think outside the box. I would be interested in hearing any ideas that you have along those lines.
12:00
- The Convener:
You were nodding, Professor Carter.
- Professor Carter:
I was just agreeing. I wish that I had some great ideas about this but it seems that the organisations with the most cash are the ones called banks, and they are not doing their job properly with regard to funding and supporting long-established businesses with a good track record. In that respect, I completely sympathise with the disconnect that Mr MacKenzie has identified.
Off the top of my head, I think that it is important to have more partnering and partnership working. There might also be the possibility of a quite radical innovation to guarantee sources of funding and loans. Indeed, we tried that very successfully in the past through the loan guarantee scheme and perhaps we need to introduce a different version of that for these cash-strapped businesses.
- John Anderson:
One of the things that we suffer from today is the enterprise finance guarantee scheme, which killed off an outstandingly good small firms loan guarantee scheme. We understand that the move was politically motivated; there were nice soundbites at the time about the banks not being ready. We know all that detail. However, the problem that does not seem to have grabbed anybody’s attention is the guarantee element. Under the old small firms loan guarantee scheme, you could not grant security against your matrimonial home, but under the EFG that is mandatory. Who thought that up? That is an absolute barrier. The political soundbite from London of, “We’re here to help,” has just not been delivered.
You have two things happening. First, you have banks that have just got a right kicking—in many cases, for good reason—and will never take a risk again and this mechanism has been put in place so that they are seen to be helping. We need some other form of guarantee scheme. Can we not have something in Scotland that is not about throwing money away or going back to easy lending to businesses that do not deserve it? I would support a piece of work around that just to see what such a mechanism might look like.
Secondly—and to go back to Mr MacKenzie’s point—large corporate is sitting on piles of cash. I do not know enough about the detail, but there is a new organisation called, I think, Eureka comprising guys who have come out of the Edinburgh fund management system. I have seen only an overview of their product, but it seems to incentivise large corporate to pay its bills early rather than when they are due or when those companies normally pay. We saw the beginning of this almost five years ago to the day when Tesco, which used to pay its suppliers in 14 days, moved to paying in 75 days. It was a case of, “That is our change of terms—take it or leave it.” If we incentivise the big guys to pay early, it helps to put cash out there, which is the vital thing. If they pay suppliers early, the supply chain benefits. There is a cost to big companies but there must be a business model for the Eureka thing, or the people involved would not have launched it.
We must find a mechanism for releasing the cash that is sitting there and moving it into the supply chain. It is just a very practical way of helping businesses. The fact is that very few businesses have world-class working capital management. As far as financing growth is concerned, unless your working capital is very well organised, every £1 of extra sales will need 50p cash.
The banks are beginning to open up; indeed, we have quite an active partnership with one in particular. It is not like the bad old days, because the bad old days are why we got into the mess that we are in. However, the reality is that this particular mechanism is not there and, as a result, you have to focus on the boring stuff. Entrepreneurs are not very good at focusing on boring stuff like cash management and brilliant working capital management, but that is absolutely part of all this. Releasing cash that is sitting on big companies’ balance sheets would be helpful.
- Mike MacKenzie:
Can I quickly move on to another area that you touched on?
- The Convener:
Before we leave the question of finance, Mike, I would like to ask a quick follow-up. Is the Scottish loan fund underperforming? If so, why?
- John Anderson:
I have been asking that very question. I cannot understand why you have this huge sum of money that is not being spent. I know the business base and the growth areas in Scotland. Is it because the loan fund is the wrong product, or is it because of the provider? It has been subcontracted out to Maven Capital Partners and I do not know how it is being managed. It is very odd to have 10 investments—I think that that is what I quoted, although the website says that there are a few more in the pipeline.
On the other hand, the business growth fund is going like a train and is doing some really interesting stuff. There is a lot of money tied up in the Scottish loan fund, and someone is basically sitting there being paid to look after pots of money and doing nothing with it. I would certainly look at that.
- The Convener:
Thank you.
I am sorry, Mike—please carry on.
- Mike MacKenzie:
The other thing that has been touched on and which I would be interested in hearing a bit more about is the idea of localism or local initiatives. Given that local authorities now run the business gateway, do you feel that they could do more than simply run the bare bones of the business gateway service? Is there more that they could do to assist business more generally?
- Professor Carter:
Yes. The business gateway operates at a local level, but it is not really adapting its product and offering to local services. Instead, it is offering almost a one-size-fits-all approach. That said, the business gateway is, of course, very important, and we are all enormously grateful that we still have it, given the fact that this kind of business support has withered away south of the border. First of all, therefore, we should say that it is doing a good job.
What is more important for localism is that we give space to new initiatives, be they for ethnic minority business owners, young people or community-based organisations, and that we acknowledge the importance of local initiatives that are really at the grass roots and which understand and are part of the local business ecosystem that John Anderson defined earlier. I think that that would be a very important complement to the provision of the business gateway.
- John Anderson:
There are great examples of that in Youth Business Scotland. When Geoff Leask was running the operations of what was then called PSYBT, the regional managers in each of the 18 regions were in many cases physically based in the business gateway. The referrals were first class and the support was brilliant. Each region had its own ecosystem map; I borrowed that concept for an ecosystem map for entrepreneurship in Scotland with the myriad areas of support, funding and all that kind of stuff.
It is quite a complex thing that the Government is working on with the entrepreneurship economic innovation framework. Perhaps the head of economic development, whoever that might be, should take control in each business gateway service and properly map out the ecosystem.
I am seeing a lot more collaborative working. I have just come off the board of Stirling University Innovation Park, which is owned partly by Stirling Council and partly by the university. The partnership working there is absolutely brilliant; in fact, it is now saying, “We have a similar set of buildings over at Stirling enterprise park and a similar thing elsewhere”. Rather than there being lots of things just because they have always been there, there is now a co-ordinated approach and a willingness, driven in the main by the chief executive, to change structures and do things differently.
That said, I would be pushing a bit harder in that respect. If the innovation park mapped out the ecosystem, it would see that certain businesses are looking—rightly—to get the support of a Scottish Enterprise growth programme or an internationalisation programme, but probably the majority are not. Again, this comes back to the issue of limited human resource. A number of programmes are already running, but maybe we should close down the programmes that are just not delivering any more. Of course, that is often quite an unpopular move, because it affects people’s livelihoods.
- Belinda Roberts:
Interestingly, the City of Edinburgh Council approached us two weeks ago to ask whether we would be interested in sponsoring its applications competition, which, as you are probably aware, is for people to develop apps to improve life in the city. I am sure that there will be some very interesting submissions to that. I felt that it was a really positive move, but it was interesting that it came from the council, which runs the business gateway, and that there was no contact from the business gateway itself.
- Joan McAlpine (South Scotland) (SNP):
I will return to Professor Carter’s point about women’s participation. I was struck by the very interesting written evidence from the enterprise research centre and the fact that, if women’s participation in business ownership equalled that of men, there would be a 32 per cent increase in Scotland’s business rate. That is really quite staggering when you think about it.
The submission goes on to suggest reasons for that situation, and indeed I know that Professor Carter has talked about women being discouraged borrowers. Is there evidence that banks are discriminating against women? Given that the banks are publicly owned, what can we do about that?
- Professor Carter:
I appreciate the question, because it is really important that we draw attention to the role of women—who, to a very large degree, are a missing element in Scotland’s entrepreneurial population—and the fact that we are significantly underperforming in this regard relative to our international peers.
I represent the enterprise research centre and was responsible for working with the Scottish Government and chairing a number of workshops, a couple of which were attended by John Swinney, on how to encourage more women into enterprise in Scotland. The first step on that journey is to outline the economic case for women’s participation in enterprise, which is what I have tried to do in my written evidence. It is taken from the draft framework on women in enterprise, which is currently out for consultation, and I sincerely hope that we will see some reference to that in this afternoon’s budget.
As for your direct question, there is no evidence that banks discriminate against women borrowers. Many have looked for it but have failed to find it. There is, however, evidence of debt avoidance by women. When women start in business, they use about one third of the starting capital used by men. That is not just because they operate in different sectors: we see the same bimodal profile of funding when we control for sector, age and location.
There is a significant effect on access to finance for women, but we cannot attribute that to bank discrimination. Indeed, it would be hard to think what banks would get out of that. As a result, I do not believe that this is about bank discrimination but the fact is that there is a large degree of debt avoidance among women. Women are a poorer population and issues of risk and debt affect them at an earlier stage.
As John Anderson has mentioned, there is also an issue of role models and networks and the lack of appropriate female role models of entrepreneurs and business owners in Scotland.
Women who start up in business also need to be trained about the importance of financing their businesses appropriately at the outset, because one key issue is that businesses that are undercapitalised at start-up go on to underperform further down the line. The finance elements are very important and there is a very strong gender dimension but, as I have said, this is not simply about the banks. Women and business support services need to be encouraged to do more training and to be more aware of the importance of initial capitalisation.
- Joan McAlpine:
You have been extensively involved in the question of what works. Are there any past schemes that have worked and which have addressed the psychological barrier to women borrowing the capital they really need to be successful?
- Professor Carter:
Absolutely. Although many women business owners dislike the idea of gender-specific business support, there is certainly evidence to suggest that such business support works if it is available as part of the localism issue that we have already talked about.
In the United States, for example, the Small Business Administration introduced business support agencies for women. These agencies, which have been running for decades, are now in every state and do not simply provide a service for women; in fact, about 20 per cent of their customers are men, simply because they like the kind of support and encouragement they get.
We know that the provision of a particular form of support is helpful for women, but most people would say that, if the current business support from the agencies was good, women would participate as well. There is also evidence of a little more need on the part of women in this respect, especially if our intention is to increase the number of women entrepreneurs and women who start businesses in Scotland.
12:15
- Joan McAlpine:
Lastly, one aspect of the economic strategy that seems to have worked is focusing on growth areas. Are there particular growth areas in which women excel that we should be focusing on?
- Professor Carter:
There are two areas in which there is a great deal of optimism for getting more women involved in business ownership. The first area covers the liberal professions: we are seeing an increase in the number of women who are training in accountancy, law or medicine. In some respects, those professions naturally lead to professional practice, so we are seeing significant growth in women’s participation in the liberal professions, as in private practice. The second area is the growth of personal services, in which there seems to be a very high representation of women-owned businesses. There is cause for optimism, but only if we look after it, nurture it and provide the support that is required.
- Alison Johnstone:
We seem content to give large regional selective assistance grants to companies such as Amazon. However, despite the fact that—as Professor Carter’s paper points out—the majority of jobs in the UK are created by small firms, it seems that there is not the same recognition or the same sort of one-stop shop that is needed.
We are hearing about a disparate collection of entities that can help—but only if people know where to find them. It seems that we are missing a big opportunity. I am also concerned about whether, when a business comes to you, there is the expertise to be able to ascertain immediately whether or not it is a high-growth business. The more lowly businesses seem to be headed towards the business gateway, and the others seem to attract a great deal more support. Perhaps we need to focus generally on whether we are doing enough to help.
Mr Anderson, you argued in your paper that we should just do away with the term “SME” because it is meaningless. Perhaps we should have a small business champion and a medium-sized business champion, and within that a champion for women. We should also look at procurement. There are some simple, obvious steps that we could be taking but are not. I am particularly interested in how start-ups are labelled at the very beginning and perhaps thereby limited in their ability to grow. Is that happening to any extent?
- John Anderson:
I would be surprised if that is not still happening. As I said earlier, we really want to put the best people as the first point of contact: people with the experience to be able to ask the right questions and—depending on the understanding of the sector, the aspiration of the owner and so on—to make the call on where to go next and where to do the hand-off.
The old structure involved a local enterprise trust. Businesses went there if they had fewer than 25 employees—I am going back a long time—and they could just be stuck in the wrong place. It is like being in a bank: someone could start off in retail banking because they open a bank account in their local branch, and then they grow their business and are moved around, and very often they become stuck in the wrong place.
I spend a lot of time with our members who say, “My bank doesn’t understand me.” I say, “Well, it’s just because you’re in the wrong place—you can go up the line, and I’ve got the right contacts to be able to find people who can fix it.”
Alison Johnstone used Amazon as an example of a business that receives regional selective assistance. A fantastic role model is Petra Wetzel—you will probably know her—at WEST brewery in Glasgow. Around £10 million was invested in the new brewery, and it received just short of £2 million of regional selective assistance. That is exactly the type of business that we should be—and clearly are—supporting.
Petra Wetzel is a great role model—a lawyer, interestingly—who, due to circumstances, had an interesting toolkit to enable her to take something and have the aspiration to grow it. That comes back to Sara Carter’s point about role models. The starting point is that someone wants to do something and wants to have the confidence to do it.
We have only to look at the number of women who are coming through the Hunter centre on the BA in business enterprise. They will not all start a business as soon as they leave university—in fact, we would probably argue that they should not, as they would do better to go off and plan their entrepreneurial career. However, if we want to get them even to think about doing that, they have to realise that they can do it. If we put examples and role models in front of them, they think, “Well, if they can do it, I can do it.”
That brings us back to the need to identify role models—Scotland is full of them—at different levels and in different sectors, with variety in gender, stage of growth, rate of growth or whatever it might be. When someone comes in, we can make a judgment about whether they look like one role model or another.
- Alison Johnstone:
Being “stuck in a rut” seems to be a bit of an issue for women. If we look at the top 12 modern apprenticeships, we see that they are severely gender segregated. Women are still drawn towards work that unfortunately seems to pay less in the long term, which has an impact on pensions and so on. We just do not seem to be succeeding at getting the message across, even at apprenticeship level. We now have a new and very exciting field in which young women could get involved, but they seem to be missing out even more. What do you suggest that we do, Professor Carter?
- Professor Carter:
It is a tough nut to crack, and Scotland is by no means the only country in which it is a significant issue. We can see the loss to the economy from women’s lack of participation not only in enterprise but in science, technology and innovation. There is no immediate reply that I can give. However, I believe that women need to have a sense of being included and counted, and we need to ensure that they are economically astute about the choices that they make regarding whether or not to work. I have to say that there is still a very conservative tendency in Scotland that encourages women to underperform, which is a problem not only in entrepreneurship but more widely in other areas.
- Belinda Roberts:
To go back to the business gateway situation, I have an example to give. One of our members is under 35 and has a very young family; her youngest child is only a year old. She launched her new business a year ago yesterday. She went to the business gateway, where she got some assistance, and she now has an e-commerce business. She had projected sales of 300 of her products in the first quarter of trading because she wanted to catch the Christmas market, and she actually sold 3,000 products. Her adviser at the business gateway had said, “Yes, that is quite an interesting little business idea.”
- Mark McDonald:
I am detecting from our discussion that the committee might want to look in future at the role of women in the Scottish economy, as it certainly seems to be a prevalent and very interesting part of the discussion.
I have one question on your evidence, Professor Carter. I am not attempting to underplay the issue in any way, because it is very important, but have you looked behind the numbers to see whether there are any issues? I do not mean that the figures are distorted, but—for example—a family business may be identified as male-run because it was set up in the name of the husband, even though the wife may be very active in that business. Such situations may play a small role in some of the figures that we see, and that should be looked at further.
When we debate the budget this afternoon, we will be looking at the high-level distribution of funding to various agencies and organisations. A lot of the points that are being raised here today relate more to how those organisations distribute the funding, and the ethos with which it is being used.
Does Government need to give a different direction to those organisations, or do they simply need to understand what their role is and what they should be doing with their funding to encourage and help small and medium-sized businesses in Scotland?
- John Anderson:
As I said earlier, there is limited funding, and we will not get a doubling of the budget, so we will just have to do more with less. We could perhaps be more directive, although the roles are already pretty well defined and I do not sense any appetite out there for a wholesale change.
We could highlight the opportunity—let us call it that—to shift the emphasis slightly away from start-up, and focus on local business space by targeting local authorities and the business gateway to come up with a plan to help the local economy.
Having lived through the Stirling experience, I know that there is great analysis of the local business base and a great and detailed understanding of who wants to use those businesses. Local businesses are involved in what would in the past have been an elected board but is now a sort of business panel. I know that Fife is working on that at the moment, because one of my board members is part of that process, and there is a demand for further dialogue. There is a willingness in that regard.
Local government in particular may want to bring in outside help and advice—not paid for, but on a voluntary basis. We are working with a number of the SOLACE chief executives on a couple of projects. It is nothing to do with entrepreneurship and business creation; it is just about bringing in a different mindset that is driven by a chief executive who wants to change the way in which the management team operates, given that they know that their overall budget is coming down and that they have to do more and reorganise. It is about an openness to engage with a different mindset. I do not know how you write that into a budget, of course, but it is powerful.
- Professor Carter:
In response to the question, it is a little bit of both: it is partly about encouraging existing providers to think carefully about how they encourage more people to participate and how they represent themselves and the service that they provide, but it is also about providing an additional local community base, whether that is for women or for particular social areas or whatever. We need a complementary mix of large scale and local.
- Mark McDonald:
You made some points on expansion and growth, which ties into our discussion on some of the legislation that is coming through. You have spoken about the one-person organisations that probably do not want to grow or expand, but some of those organisations will want to. It could be as simple and straightforward as somebody who owns a burger van and wants to have more than one in the area or areas in which they operate.
Do we need to make it easier for those people to get their business to grow, through not only the support that they get but the regulations that apply to businesses—and small businesses in particular—in order to ensure that, when they want to expand, the support is there not only as a cash injection but through the regulatory regime?
- Professor Carter:
Undoubtedly. Many businesses perceive vast barriers because of their lack of understanding and the complexity of the regulatory background, a lot of which concerns employment. Procurement, too, is utterly baffling to many small business owners. A constant alertness to regulatory reform would be helpful for many business owners, as would a simplification.
- Mark McDonald:
We often hear about small and medium-sized businesses in Scotland being taken over. That is sometimes—as you have identified—the aspiration of the person who has established the business, because they would quite like to sell it on and then retire to the golf course and so on.
Is there enough support not only for those companies that are being taken over, often by non-indigenous companies, but for companies that want to grow and expand their business by, for example, taking over other businesses?
12:30
- John Anderson:
That is probably my area. There are a couple of angles on the issue of selling out. One is where a business has no succession planning: it is a traditional business that has been there for a long time and is almost entirely owned by the family; no one wants to come into the business and someone wants to retire so it has to be sold. In fact, it does not have to be sold because employee ownership, which is a fantastic model that we will hear much more about, is a great way of protecting corporate Scotland and the country’s company base. There are some great examples of how people are doing that.
If a business owner has taken in external equity investment from a business angel or a venture capitalist, they know that they are on the journey to sell until their exit or the exit for the investor—they need to understand what the investor’s objectives are when they take money from them. We do not have a great track record in taking companies through to the Intellectual Property Office and floating them on the London stock exchange or AIM. I have just left the board of an AIM company, and I completely understand why no one wants to go on it, but that is another story for another day.
Growth needs finance, and Scotland is blessed with a robust business angel community—in fact, it is far more robust than in probably any other part of the world. It is mature and there are lots of new groups; we have just established a new one at the University of Strathclyde for spin-outs. There is some great stuff, but the venture capital community hates working with business angels.
I have one plea; I have asked Nesta to look at this and I will ask anyone who cares to listen. Is there a mechanism that will enable us to make the transition from the very successful business ownership base of the business angels in Scotland to venture capital? I would like to get a bit of resource to investigate that.
I sat with a guy yesterday who owns a business that has been one of the successes of Intermediary Technology Institutes Scotland, which is interesting, given all the negative coverage. He licensed a piece of technology from ITI, taking money from a very well-known angel group. I warned him that, if he has the opportunity to build a seriously big global business and needs to go for serious money—£5 million to £10 million—to do so, he could find it difficult to negotiate two years down the line.
Is there a vehicle that could help? It could be part of the Scottish Investment Bank, or a fund that tidies up the share register to provide a suitable exit for the business angels at the right time. The business angels are all stuck: they have run out of money, and they need exits to allow them to do more deals and to leverage—one hopes—some degree of success. The problem at the moment is that, when venture capitalists come along, there is no one else who is likely to fund the business and so they have the upper hand in the negotiation. All the business angels are going to do is get hammered, and—guess what?—they are not going to do the deal.
There are a whole bunch of living-dead companies in Scotland. The Scottish Investment Bank has 270 or 280 businesses that are asking what the next step is. If we had someone in the middle cleaning up, and giving a reasonable return to the people who took the big risk at the early stage along with the founders, we could get them out of the way and bring in some venture capital at a sensible rate. At present, unless there is something sitting in the middle, that process could not be negotiated. It does not matter how good a business’s advisory team is; they would not be able to do it.
- Mark McDonald:
You used the term “living-dead companies”, which could be taken out of context. To define that term, it refers to businesses that are at a stage where they either need to be sold on or to develop some sort of employee ownership, but are unable to realise the capital in order to be able to do some of the things that you are describing.
- John Anderson:
Yes, I realise that it is a pejorative term, but it is the term that we use in the community. Those businesses do not have the opportunity to grow because they cannot get access to the next round of finance.
The issue with growth by acquisition is that, in many cases, it comes back to the question of how, if you have a sizeable business that has stopped taking risks, you can get it to grow. There will be no experience on the board or among the management team of making acquisitions or of running a multi-site business: turning one burger van into two burger vans and that type of thing.
I saw that with the Prince’s Scottish Youth Business Trust. If someone had one van and wanted to go to two, or to go to a second unit or a shop or whatever, that required a different type of funding—hence the development of the growth fund—and a different type of adviser who could say, “Well, you can’t be in two places at once.”
Much of the problem relates to the dearth of skills and experience in the growth arena. We are working very hard at the Hunter centre to develop training—continuous professional development, if you want to call it that—for businesses that want to grow. I genuinely believe that, with role models and peer support, people can suddenly realise that they can do something. If we put in place the right mechanism, we can transform the economy.
- The Convener:
We have a final question, and I ask for very short answers—one word might do.
I ask each of you to imagine that you are John Swinney, and you have woken up this morning and found £1 million under the bed that you did not know that you had. What would you spend it on—or which tax would you cut—to maximise economic growth?
- Professor Carter:
Sorry—this is more than one word, but I will be really quick. I would spend it on providing community support for particular groups. We saw the launch in Parliament last week of the African business forum Scotland; women and ethnic minority businesses are a population with real needs.
- John Anderson:
Building on the previous comment, I would spend it on skills for growth, a programme that would not be delivered by consultants who mark up everything at ridiculous rates but which would involve some kind of knowledge transfer. It has to be new: if we put another £1 million into what we are doing at the moment, it will not make any difference.
- Belinda Roberts:
I would go with Alison Johnstone’s earlier suggestion that we break down the SME side of things and put in dedicated resources to support small businesses, medium-sized businesses, women in enterprise and so on.
- The Convener:
Thank you very much—you have been very helpful. I am grateful to you for all your contributions and for answering our questions. We look forward to hearing the budget this afternoon and finding out whether John Swinney has been listening in to our meeting.
12:37
Meeting continued in private until 13:05.