UK: A LITTLE HELP FROM "FRIENDS".

UK: A LITTLE HELP FROM "FRIENDS". - Unlike Italians, British entrepreneurs are blinded by short-termism.

by
Last Updated: 31 Aug 2010

Unlike Italians, British entrepreneurs are blinded by short-termism.

In the old days, an entrepreneur might stroll into his local high street bank, spend an hour talking business with the manager and, if he was lucky, come away with an overdraft facility if not a term loan. Not any more. These days the figures do the talking. The bank manager will want to see the last several years' accounts, or even, if it's a significant investment, a full blown business plan. That's a step in the right direction anyway, which can only be good for the survival rate of small businesses.

But is it, necessarily? In former times the bank manager would quite likely have known the entrepreneur personally. If his business was in textiles (up in t'north) or machinery (in the Midlands), or housebuilding or agricultural equipment almost anywhere in the country, the bank manager would also have had a good feel for the market and could be fairly confident in his judgment. That is more or less the way things still work in southern Europe today.

'For Italians, a business is only part of an entire network of social relations, and these include our relations with our bankers,' explains Luigi Forlai, a professor of management at the MIT-STOA business school in Naples. So when an Italian entrepreneur goes in search of bank financing he is likely to seek out a friend, a friend of a friend, or a relation. 'That banker is more likely to understand the real prospects of a company in a given network, and he can provide support more readily than would a UK banker looking only at company results.' Most people would naturally assume that the stricter financial practices of the UK were the surer route to corporate survival. Yet last year, points out Silvano Bertini, a researcher with the Bologna-based consulting firm Nomisma, Italy boasted about 300,000 start-ups and more than three-quarters of these, he predicts, will survive. The survival rate of UK start-ups is normally between 30% and 50%. 'Because of cultural differences, those (start-ups) in southern Europe usually do better,' agrees Neil Cross, international director of the venture capital firm 3i.

Networking is key to survival in Italy, since any new corporate entity is very likely to be part of a chain of local enterprises. 'New businesses are most often started as a function of the needs of a certain network,' says Bertini. 'They begin as subcontractors or representatives for other firms.' But there could be another explanation too. In the more relaxing financial climate of southern Europe, both entrepreneurs and investors take a less stern view of what an investment must achieve.

According to a recent survey of 550 SMEs published by 3i's European Enterprise Centre, UK entrepreneurs are not only more likely than other nationals to use some formal appraisal method (83% use payback, most Europeans don't employ any formal method of appraisal at all); the British also set the stiffest investment criteria. On average, UK entrepreneurs look for payback in 27 months, against 30 months across western Europe as a whole. Of those who use payback, 60% of the Brits expect to get their investment back in two years, compared with a European average of 52%. Only 33% of the Germans expected to get their money back in so short a time.

On one interpretation, British entrepreneurs today are among the most methodical, professional and ambitious in Europe. On another, they are the least realistic - and the most inclined to shackle themselves with rigid and out-of-date conventions. On the subject of the higher rates of return demanded in the UK, Cross observes that 'This may not only be uneconomic for the individual firm but, in a wider context, poses problems for the growth of the UK economy'.

The 3i report strongly suggests that Britain's SMEs have not yet adjusted to lower inflation - or they don't believe that it will last.

Find this article useful?

Get more great articles like this in your inbox every lunchtime