COVID-19 – Scotland’s Entrepreneurial Response

CONTEXT

The response to Covid-19 from the Scottish Government and the private sector will define Scotland’s economic future for generations to come.

Globally according to the International Labour Organisation, 1.6 billion people are “in immediate danger of having their livelihoods destroyed”.

McKinsey note the following;

“Our analysis, based on occupation-level data, estimates that the COVID-19 crisis could leave up to 59 million jobs at risk¹ in Europe—a staggering 26 percent of total employment in the 27 member countries of the European Union (EU-27), plus the United Kingdom (EU-28).

The sharp rise in benefit filings might just be the tip of the iceberg. We estimate that up to nearly 59 million jobs (26 percent of total employment) across Europe are potentially at risk of reductions in hours or pay, temporary furloughs, or permanent layoffs.”

Importantly they note that of the jobs most at risk (hospitality, food services and non-food retail) 40% of that demographic are aged under 25 and 80% of those jobs are in low paid employment – in other words the existing, and now, poor and the younger generation will be most impacted, dramatically increasing inequality.

Moreover unemployment is directly correlated to increases in mental health issues and crime – a 1% increase in unemployment yields 14.3 more instances of violent crime per 100 000 people. This is as much about saving lives as it is about saving jobs; the two are fundamentally linked.

More or less every business barring obvious winners in this face two brutal realities: increased operating costs and massively reduced markets. On the former witness Amazon’s increased operating costs due to reconfiguring its workforce to accommodate distancing.

In the medium term clearly this will enable real market opportunities to be capitalised upon and Scotland needs to look to that future, but first deal with the realities of today.

The public and private sectors must collaborate.

There are as we see it three critical stepping stones in rebuilding Scotland’s economy:

1. Restarting industry, sector by sector in a safe and a consumer confidence boosting manner. Each sector will require its own approach; blanket intervention would be both less cost-effective and very inefficient. Sequencing and timing will be critical.
2. Sustainability – how do we sustain viable businesses, and encourage new businesses, when in general operating costs will be up and income dramatically down. By way of example one restaurant chain estimates breakeven after every cut possible at 60% with line of sight with social distancing on income at circa 30%.
3. Growth – how do we accelerate growth in our scale-up businesses and leverage in new businesses looking to a recalibrated business world.

Clearly we need to engage sector by sector expertise to re-open – this expertise does not rest with Government but with the entrepreneurs and business leaders who know how to open with the absolute safety of their employees and customers core to opening and to enabling consumer confidence to return.

Looking at international examples New York – with a similar GDP to the UK – has established the ‘Restart Group’ broadly populated by entrepreneurs and businessmen with academic and economist support reporting to the Governor. Sector by sector they are reviewing each and every sector, how and when to open the sector and the implications therein while modelling on 50%+ reduction in tourism. For example how does a 5000 person office now operate? California similarly has adopted this approach.

With consumer confidence in mind and psychological impacts, New York has already restarted the construction industry, an industry used to the rigours of Health and Safety. They have done so in a safe manner and with urgency to protect as many jobs and projects as possible as well as providing the psychological boost to New Yorkers seeing the economy restart, but restart safely!

WHERE TO BEGIN?

There are numerous macro-economic levers that should be considered as a starting point, some sector specific, other interventions general:

• Temporarily reduce or scrap VAT for the hardest hit sectors or extend VAT deferrals
• Provide additional mortgage, rent and rate deferrals against some form of ‘pay it back’ process or equity stub (for tenants and landlords alike)
• Extend the Furloughing programme, perhaps at reduced rates, in specific sectors conditional upon ‘furloughees’ volunteering for social, health or charitable purposes or repurpose furloughing to subsidise high growth businesses employment costs to drive productivity gains and product/service development
• Implement a fast track planning permission process to drive construction employment and investment
• Dramatically increase investment in social housing construction in all Local Authorities funded via pension funds
• Address the timescales and delays on all public sector decision making – processes, bureaucracy and delays are costing jobs (and were before this): risk profiles require ammendment

THREE MOST IMPACTED SECTORS:

Excluding air travel the three key sectors most impacted unsurprisingly are hospitality, restaurants and non-food retail. All three generally offer lower paid employment and are of a younger demographic.

By way of perspectives – firstly Edinburgh Airport is modelling on a drop from 16m passengers PA to 6m; New York’s taskforce on hospitality are driving forward with a staycation strategy for two years; Scotland must do similar as our international inward bound tourism sector will be devastated.

Secondly a mid-market restaurant chain across Scotland estimates a drop in revenues to 30% of pre-Covid levels assuming social distancing is in place with a cost base sitting at around 60%. Another large event and restaurant business employing over 300 have worked through the economics and concluded they will close until such time as a vaccine is available and ‘normal’ operations are possible.

The risk of massive unemployment, reduced consumer spending and serious societal issues are extraordinarily high unless we react effectively, quickly and decisively to preserve and protect jobs over the next 6 months to a year. Crucially its important that funding support offered is not a one way street and repayment over time or equity is returned in support of the long-term sustainability of Scotland’s economy. Conventional capitalism is gone and public-private sector partnership is the only way forward.

To be clear there is no returning to ‘normal’.

Similar to the US Airline industry where they are developing an APP to rapidly redeploy redundant staff into businesses that need staff in logistics, warehousing and online we should and have access to an APP already developed that could be repurposed.

University of Edinburgh Business School found that COVID-19 has caused significant losses for more than half of the country’s most growth-orientated companies.

The survey analysed responses from 565 entrepreneurial businesses representing 6% of all UK businesses but playing a greater role in the UK’s economic growth. They create 50% of all new jobs and a high proportion of the country’s export and productivity growth.

The Business School’s research revealed that 68% of these entrepreneurs have cashflow concerns, up from 25% before the COVID-19 crisis.

Employment

One size does not fit all ergo match support to sectoral needs for example consideration should be given to:

• Pubs, restaurants, hotels – scheme to support 50% reduction in rates and rent-mortgages aligned to similar support for landlords in the chain – loan or equity swap for support (or as an alternate an extended furlough but those furloughed must support social sector-charities whilst off)
• Deploy APP to redeploy redundant staff into growth businesses rapidly

Support for Start-Up’s and Scale-Up Businesses

We have consulted with over 50 scale-up businesses and 300+ potential high growth businesses through our various programmes alongside the entrepreneurial community in general. We will have more feedback next week from intermediaries supporting thousands of businesses.

In essence the message is investment has fallen off a cliff; the Angel market has all but disappeared and the VC’s are largely acting in an entirely predatory manner; growth funding is more or less impossible.

Over and above providing, by sector, a process by which to open up safely the SME sector – where the majority of jobs and economic growth reside – there is need for the following interventions both immediately and going forward:

• An alternative to the UK Future Fund enabling EIS backed businesses to gain the matched funding
• Enabling the SNIB or in the interim, Scottish Co-investment Fund to drop the need for co-investment and also to appoint a Scottish based manager urgently to fast track support
• Take the Scale-Up Scotland model of support and digitise it and enable via that platform far more peer-to-peer and mentor support alongside critical growth advice from entrepreneurs to entrepreneurs scaling (estimated cost £175K; 8 week turn around – THF willing to invest in this) * Importance of peer to peer support note below full paper available
• Dramatically increase the availability of loans perhaps on a sliding scale:
• Up to £100k – interest free loan with x months grace before repayments commence – business commits to give back £?k once loan is fully repaid
• £100-£250k – same as above but with convertible note
• £250k + – equity exchange
• Identify via networks and existing Accelerators across Scotland high growth, high employment prospects and add additional support to accelerate growth
• Quadruple Scottish Edge and enable growth companies access to capital on the loan-grant ratio as exists 70-30 – may tie in to loans as above
• Restart export grant support (or loans – we cannot develop a dependency culture in Scotland)
• Digital development loans are taking 3months to process – key now; must be accelerated
• Accelerate deployment of R & D support to qualifying companies
• Rapidly increase public sector decision making: for example here is one entrepreneurs actuality: “We won and have been through Scot Gov ‘Civtech’ process over 4months, since and during covid it’s taken 6 weeks to get a pre commercial contract drafted (for a 20 person pilot that lasts for 12 weeks) before they make the call that we’re fit for purpose and get rolled out to help Gov digitally onboard new staff. The Gov teams really don’t understand commercial realities of timing and opportunity cost.”
• To that point risk analysis needs to be recalibrated on investment
• Consider creating Scottish Equity Partners2.0 – success has been incredible
• Productivity/development grants as an alternate to Furloughing
• Make Scotland the preferred location to scale your technology business:Technology sector is growing 6 times faster than the Scottish Economy: to do so:

• Focus financial support on technology based innovation
• Shift funding for innovation to Scaling companies with the support of academia rather than pass it straight to academia
• Provide subsidised “founder friendly” support/consultancy
• Provide campus style locations for scaling companies
• Provide incentives for investors to invest in Scottish based scale ups (we need to boost Series A funding in Scotland)

Lastly:

Introduce the national training academy.  Leavers would sign up to skills development programmes which would focus on the needs of real jobs in industry growth sectors or the gaps in public sector provision. The private sector and Govt would partner the academy to ensure that eight months out of the 12 month programme would be spent in paid employment gaining experience in post. The structure of the 12 months would be tailored to the needs of each job type and would be delivered in partnership with the college sector. Govt grants would support the young person whilst in classroom training and employers would pay the national living wage during the working period. The FE element of the programme gives each sector better trained employees for their talent pipelines and could also kickstart progression to further professional training In yr 2 of employment. It will also help young people decide whether full time FE may be an option for them.

*Peer-to-Peer Support: In successive surveys, thousands of scale-up business leaders’ year on year has consistently cited peer to peer networks as their most valued support. In 2017, 2018 and 2019, 1,500 scale up businesses surveyed by the Scale Up Institute, stated that access to peer networks was seen as vital to their growth, with around 50% wanting to see better access to these at a local level. [graphs can be provided if required]

This evidence is consistently supported in other areas of the economy for example:

• Building Resilience in under represented entrepreneurs (2020);
• Unlocking UK Productivity and Internationalisation (2015)

In addition, from 2013 to 2017, participants on entrepreneurship programmes sponsored by Enterprise Ireland were asked about their opinions of existing peer support schemes. 109 qualified entrepreneurs who took part in the programmes were surveyed during the four years.

86% of respondents deemed peer support to be either very or extremely important to their business, and 83% said the sharing of knowledge, information and resources was the most valuable aspect of peer support. Study participants also said peer support helped quell their feelings of loneliness and motivated them to strive for loftier targets.

Furthermore, the membership of the YPO (Young Presidents Organisation- largest organisation representing entrepreneurs in the world) consisting of 29,000 CEO’s in 130+ countries, consistently identify peer to peer exchange as the most valued part of their experience. Mentors are a key factor in the benefits of peer-to-peer support, with 81% of respondents saying they were pivotal to the process.