An interesting article describing the advantage that coming from affluence can have for aspiring entrepreneurs. Well heeled young entrepreneurs have access to secondary sources of finance (family) which often allows them to preserve equity and secure more desirable financing deals. They also have the non-monetary benefit of access – access to executives, to legal professionals, and to major players in the industry they are entering.

None of this is necessarily a bad thing, but it does highlight the role that government can play in entrepreneurship: as a provider of grants, access, and education.

When 28-year old Cam Worth had the idea for his agency SharpEnd three years ago, he knew he would struggle to get it off the ground. Investors weren’t interested in a company specialising in advising businesses about the internet of things in 2014 and, although he was working full time, he had no money, assets or savings to back it himself.

“One of the things that I’ve always had from my upbringing was lack of cash in the bank,” Worth, who grew up in London, says. “There’s always points in life where you feel like you’re less advantaged because you’re less privileged – I haven’t had a university education because we couldn’t afford it, for example. But I also think it teaches you resilience.”

Worth pitched his business idea to a client who he believed would benefit from what he wanted to offer. Happily, they agreed he was on to a good thing and offered him £10,000 to cover the launch costs, which SharpEnd repaid in services once the company was operational. “It’s been really great to see the initial belief that the client had with us pay off,” he adds.

Finding an outside funder was vital for Worth, but this is not a common route among budding business owners. Recent research commissioned by equity crowdfunding platform Crowdfinders found that 35% of aspiring entrepreneurs would use personal savings to launch their business, and 15% would use cash from friends and family.

But what happens when those funds aren’t available? According to a review by entrepreneur Michelle Mone into the enterprise landscape in deprived UK communities, the national average rate for self-employment is 10%. However, in the country’s most deprived communities, the average shrinks to around 5%.

“For a lot of people, [being self-employed] is precarious, particularly at the start of a business,” says Ben Dellot, associate director of the economy, enterprise and manufacturing department of the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA). “Earnings are very low. That means it can lock out people from less privileged backgrounds [who don’t have savings or family money to fall back on].”

Dellot led the RSA’s research into self-employment in Britain in 2015, which found that those who owned homes were more likely to start up on their own, and 30% more likely than renters to see their company’s third anniversary. “We tend to think of entrepreneurship as this rags to riches story, but actually [having] money plays a huge factor, and people don’t talk about it,” Dellot says. “It’s one of those things where you need money to make money.”

Former Dragons’ Den panellist Hilary Devey thinks the playing field is “no longer level” and most businesses need an initial cash injection. “To get [freight exporting company] Pall-Ex off the ground, I ended up selling my house and car. But how many young, aspiring entrepreneurs today even have their own house or car to sell? Launching a new business shouldn’t be a privilege to those born with a silver spoon in their mouth,” she says.

Limited support for growth

Support does exist for those in the most financially challenged circumstances hoping to create their own employment opportunities, but it’s limited. The New Enterprise Allowance (NEA), for example, is designed to support those on benefits to start their own venture with mentoring, advice and a small amount of financial help (up to £65 per week). According to Mone’s review, the scheme has helped more than 70,000 small businesses and sole traders to get started.

FacebookTwitterPinterest

Likewise, aspiring business owners can look to public sector schemes, non-government organisations such as the Prince’s Trust, universities and bank-backed enterprise hubs for support to get going. However, Mone notes, the “enterprise support landscape is cluttered and can be difficult to navigate”.

Jess Elliott won London Metropolitan University’s business plan competition in 2009 for her London-based dance school, J’s Dance Factory, which she launched aged 20, while still at university. She printed flyers “and literally posted them through every door and went to every local school in the area handing them out. I had eight kids in the first week, and within about three weeks I had about 70 kids coming to my dance class.” She taught in a small church hall, which she hired out for each class.

Elliott grew up in Newham, east London, where she lived with her mum. She didn’t have any friends or family she could ask to back her venture. The competition prize included free desk space at the university’s Shoreditch accelerator and £5,000 cash. That money meant she was able to focus on the business full-time after university and could expand her offering into after-school dance activities and before-school clubs. Today, J’s Dance School has two franchise sites, a talent agency that books dance students into West End shows and TV commercials, and Elliott plans to launch a theatre school this year.

Winning the money was a real turning point for her business but she says growth since has been very organic, particularly as she needs to take a wage as well as paying a full-time staff member and freelancers. Although public schemes and NGOs can offer small pots of money to get aspiring entrepreneurs off the ground, they are rarely enough to scale a business. That kind of money tends to come from the private sector.

“Maybe by now I could have more [franchises] if the money was there to put into it. But, having said that, I’m still happy with the way things are going,” Elliott says. “There’s something quite satisfying about knowing you’ve done it yourself.”

Turning to the crowd

Scott Woodley and his co-founder Mark Hughes, of private tutoring website Tutora, didn’t want to ask their parents or friends for money. Instead, in April 2016, they decided to use equity crowdfunding to raise the £150,000 funding they needed to roll Tutora out nationally.

“I want to keep those two sets of people as separate as possible, and Mark’s of the same opinion,” Woodley says. After leaving their full-time jobs – Woodley as a personal tutor and Hughes as a technology analyst – in spring 2015, the pair lived off their own savings. They pushed the money that Tutora made when it went live in August 2015 straight back into the business to help it grow.

“Alternative finance, and specifically equity crowdfunding, is meant to be a return to democratic finance,” says Luke Davis, co-founder of equity crowdfunded Crowdfinders. But, he says, founders are now often expected to have a wealthy personal network dripping funds into the campaign, to create an illusion of investor confidence. Woodley and Hughes managed to raise around £90,000 of the £150,000 total from angel investors before the campaign launched and managed to reach their target in four days.

In February 2017, Tutora launched its second crowdfunding round, seeking £350,000. This time, they had £100,000 lined up before launch. “We’ve always been focused on scaling, and I think now we just need that additional investment to enable us to do the things that will get us to the number one [tuition business in the UK]. We had a great experience – our 75 initial investors were all keen to reinvest,” he says.

The challenges of trying to launch a business from a less affluent background aren’t just financial. “It’s really multidimensional, this relationship between affluence and entrepreneurship,” says Dellot. The social connections that often come with affluence can help fledgling business owners win suppliers and clients quickly, he explains. “If you’re well connected, you’ve got a stepping stone; you don’t have to go through five or 10 years of building those connections from the bottom up.”

He adds that the forthcoming introduction of universal credit (due to be fully implemented by 2019), with a minimum income floor for the self-employed, which is taken into account after 12 months of a business being operational, is likely to have a negative impact. This means, effectively, that the benefits that a self-employed person is eligible for will be calculated based on an assumed level of earnings, rather than what they actually earn in the early stages of their business.

“From what we can tell, you’re going to have potentially viable businesses that could, in time, stand on their own two feet being sunk by universal credit,” Dellot says. “What we find is that if you manage to stay in self-employment for three years, you start to earn twice as much as you did in your first year. So there is an increasing level of earnings, but what it relies on is the government support system that enables people to reach that point.”

Worth, for his part, believes his background has made him a better entrepreneur. “If you’ve grown up without money, you understand how to live without it,” he says. “I think it teaches you how to be smart about financial management, and it keeps you a little bit closer to the ground than perhaps other people who haven’t really felt too much [financial] pain before.”