Lost generation of entrepreneurs: if not the EU - then who?

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Francois Badenhorst
Deputy editor
BusinessZone and UK Business Forums
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It was in the dizzying wake of the Brexit referendum that the Cornish council issued a plea for protection from Westminster.

The rural county had substantially benefitted from EU subsidies but had now, like many areas of the country voted overwhelmingly to Leave. Facing a funding black hole of €600m, Cornwall hoped the gap would be filled by the British government’s beneficence.

The story is indicative of the funding conundrum that the UK at large has entered into. Through decades of European integration, The UK had become enmeshed in the EU’s array of funding programmes - many of which are specifically aimed at SMEs. Logic would dictate leaving the union would change this rather dramatically.

The Leave campaign’s argument around EU funding was perhaps best captured by their bright red ‘Battle Bus’. The decal on its side boldly proclaimed - The National Statistics Authority would say falsely - that the UK would recoup the £350m a week it sends to The EU.

The story is indicative of the funding conundrum that the UK at large has entered into.

The money, Leave said, would be spent on British endeavours by British people. That claim has gone quiet after the referendum, raising even more questions than answers. Leave’s logic would say that the money we sent to Brussels, is now coming home.

That logic is problematic, though. There’s an inherent flaw with saying that taking money away from something you don't think is worthwhile will be neatly redirected to other endeavours.

Sophistry aside, even if we did now, as Nigel Farage claimed, have  a “£34 million a day feather bed”, how much of that will go to support Britain’s vibrant startup culture? What will happen to schemes like Horizon 2020, which funnelled over a billion into making the country’s businesses competitive?

EU funding

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The phrase ‘EU funding’ is frequently deployed but to many it remains poorly understood. The EU operates a parade of programmes and loan facilities, many aimed at developing businesses. So, from a British business perspective, what are the important ones?

There are three that are the most important in the British context: The European Regional Development Fund (ERDF), the Programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) and the framework programme for Research and Innovation (known as Horizon 2020).

The ERDF concentrates on “correcting imbalances between the different regions of the EU”. So this money went to regions that would be considered previously disadvantaged (rural areas like Cornwall). COSME offers substantial loan guarantee facilities, allowing local lenders to extend credit to SMEs. And from Horizon 2020, the UK raked in £1.2 billion in 2015 alone - more than any other nation in the Union for research innovation.

If the UK ends up leaving the Union, it doesn’t require a statistician to see that it’s a big hole to fill.

Horizon 2020 funding

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Let’s take a closer look at Horizon 2020. The programme is a broadchurch, so it doesn’t all strictly go to startups. But there’s a big tranche that does, which is administered by EASME (the EU’s executive agency for SMEs). Under EASME’s scheme, an SME can receive up to €2.5m and specialised coaching.

The EU defines SMEs as any business below 250 staff and €50m turnover. Since the programme was implemented, 230 British SMEs have received backing from the European Commission. Horizon 2020’s support is apportioned according to four categories (referred to as ‘thematic concentrations’): SME support, environment, maritime and energy.

Horizon 2020 has supported everything from innovative cage fishing projects in Aberdeen, to a bleeding edge Bristol tech startup called Ultrahaptics that develops ultrasound technologies to provide haptic (or touch) feedback in free space (things like turning something off by pressing a virtual on-off button).

Horizon 2020’s geographic dispersal

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In October 2015, Ultrahaptics was awarded €1.496 million for a specific engineering project.

“Horizon 2020 helped the business at a crucial time,” explains Ultrahaptics CEO Steve Cliffe. “We had just launched our evaluation program, which saw our technology in the hands of customers, allowing them to experiment with touchless haptics for the first time.

Horizon 2020 helped the business at a crucial time.

“The program was oversubscribed within two weeks. We knew it would be popular, but the demand from multiple market was just phenomenal.” Confronted with unprecedented demand, Ultrahaptics realised it needed to develop a solution to support “not just tens, but hundreds of customers”. “And we needed to do it quickly,” said Cliffe.

“We looked at our roadmap and realised that Horizon 2020 funding would strip months off it, dramatically reducing our time to revenue. Having funding, some of which was upfront, allowed us to hire, buy equipment and dedicate time to developing a product that could support the ever increasing customer demand.”

A silver lining?

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The dust from the referendum had barely settled when the investment fund Coast to Capital sent out an email warning of a funding freeze. The organisation allocates some EU funding to companies on South-East coast of England.

It does seem now, however, that The Treasury has gone out of its way to placate organisations like Coast to Capital. Samantha Philpott from Coast to Capital told BusinessZone that The Treasury has promised to honour “all European Structural and Investment Funds (ESIF) projects with signed contracts or funding agreement in place prior to the Autumn Statement will be fully funded, even if these projects continue beyond the UK’s departure from the EU”.

The treasury is also assessing whether  “to guarantee funding for specific ESIF projects that might be signed after the Autumn Statement but whilst the UK remains a member of the EU”.

The fate of funding post-Brexit remains unclear, however.

The fate of funding post-Brexit remains unclear, however. When asked about local investment projects in Post-Brexit Britain, Coast to Capital were unwilling to comment until after the Autumn Statement.

But all this supposes that Brexit will definitely happen. As Morgan Stanley’s chief UK economist Jacob Nell noted: chances are it’s just too damn difficult for Britain to leave the EU.

Namely, Nell points out, the EU “will not give the UK a deal in which Britain gets access to the single market but opts out of the freedom of movement”. The British government bureaucracy has been gearing up for negotiations, with new departments being set up within Whitehall to handle negotiations.

But early indications aren’t looking good. With the EU set to play hard ball, a Whitehall insider recently admitted to The Sunday Times: “They say they don’t even know the right questions to ask when they finally begin bargaining with Europe.”

The Autumn Statement promises the most clarity, with the government  expected to make moves to shore up business confidence.

One sector expected to benefit is R&D tax relief.

One sector expected to benefit is R&D tax relief. “I do believe they will increase R&D tax relief in the Autumn Statement,” predicts Brian Williamson, managing director of R&D tax advisory Jumpstart. “At worst it’s a way for them to siphon into companies that generate the most value to the economy and the R&D tax relief programme is a great way to do it.”

According to Williamson, these uncertain times offer a funding opportunity for SMEs. “Horizon 2020 for instance, is still open to everyone and goes on for a number of years and if you’re thinking of doing it, I’d encourage you to,” says Williamson. “If you combine these funds with an increase in R&D tax relief, it could be lucrative.”

Who will replace the EU?

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The key question is this: what will change once Theresa May’s government takes sole control of the EU funding mantle after the nation leaves the union? The obvious candidate is the newly minted department for Business, Energy and Industrial Strategy (BEIS).

Keen to place her stamp on government, the new prime minister merged the department for Business Innovation & Skills (BIS) - already roiled by budget cuts and retrenchments - with the Department of Energy & Climate Change. The new department falls under the custodianship of Greg Clark, replacing Sajid Javid.

Like the rest of Theresa May’s government, BEIS has struck a sanguine tone post-referendum. A BEIS spokesperson told BusinessZone that the department wants businesses to benefit from “the opportunities presented by leaving the EU”. The department’s spokesperson, understandably, was unable to confirm that EU funding would be exactly replaced.

When pressed, the spokesperson noted that: “The impacts on leaving will depend on a number of factors including the timing of the UK’s exit and the details of our future relationship with the EU, but we are clear that no immediate change is necessary. While we remain a member, the UK continues to pay into the EU and continues to receive funds.”

But it doesn’t take much analysis to realise that startups dealing with May, an MP that has generally sided with the concerns of big business on climate change measures, will be playing a different game compared to any potential benefactors from Brussels. The EU’s thematic concentrations (SME support, environment, maritime and energy) are startup led.

What now?

“The phasing out of European funding,” Williamson notes as we end our conversation, “ will only be dramatic if perceptions are dramatic. Although, sometimes perceptions drive a market rather than reality”.

Sometimes perceptions drive a market rather than reality.

It seems rather appropriate that perception would have such cachet in post-referendum Britain. Both the Leave and Remain campaigns deployed tactics that aimed to destabilize voters’ perception; either their perception of the EU, the economy or one another.

The fact remains, though, that there are some entrepreneurs who have been stung by the referendum result. As Lorne Blyth, founder of Flavours Holidays, recently told BusinessZone: “There’s a lot of debate about the EU strangling small businesses, but that’s just not been my experience. We’ve had nothing but help and support”.

The only thing that seems clear in all of this is that Theresa May and BEIS have a lot of work on their hands.

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Replies

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23rd Sep 2016 11:56

Francois, great article, being in the Coast to Capital LEP region, I was certainly aware of some anecdotal evidence concerning the delay in approval of funding. Brexit does cause many problems and the question of where funding would come from was one of the key questions raised by Universities and business alike prior to the referendum but was completely lost in the arguments from both sides.

Whilst I respect Brian and Jumpstart greatly, and I hasten to add, I hope he is right with bells on, I am slightly concerned that there might be a different funding mechanism for R&D than improved R&D Tax Relief, especially when in her speech in front of Downing Street following her ascension to PM, Theresa May said something along the lines of "we need to find a better way of encouraging businesses to innovate".

The biggest problem for everyone, whether you are a politician, a businessman, an advisor or just an employee is the uncertainty that surrounds a post Brexit Britain and EU.

For the time being I think the answer is "make hay while the sun shines" and exploit as much funding as you can get, but remember your scouting days and "be prepared" because you never know what might happen later.

Thanks (2)
to CoodenConsults
23rd Sep 2016 15:13

Hi there, thank you, glad you enjoyed the piece!

You're absolutely right - the practical arguments got completely overshadowed by the more glamorous, eye catching arguments. I understand why they did it, but it doesn't make it any less disconcerting.

The government has a [***] of a task on its hands. Uncertainty isn't exactly conducive to business success.

Thanks (0)
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25th Sep 2016 11:05

What a load of hot air nonsense from another whinge!

Firstly the EU grants are not EU grants it's British Tax Payers money returned to the UK and only a fraction of it.

Secondly - What's happening since? Not sure where you've been other than cloud cuckoo land, but there has been no change since the 23rd June. We're still in the EU, we're still paying into the EU and plans are ongoing. UNTIL those plans are actioned and we leave only then will you and everyone else know.

This is the biggest opportunity this country has had in two generations. Far from the misery and [***] you seem to think will ensue it will take this county forward. Your fiction is quite frankly an insult to the nation.

I suggest your not fit to be the Deputy Editor of UK Business Forums and should resign.

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to Jon_Sharp
26th Sep 2016 09:51

Hi Jon,

Thanks for reading the piece. Of course, I expected this article might inspire some dissent. It's very welcomed. You may have misunderstood my intentions: I'm legitimately curious as to what happens after we leave the EU (especially, since we've been repeatedly assured, "brexit means brexit").

The indication is that any funding attained now will be honoured. That's fine. But when we trigger the exit, the funding dries up.

Now, okay, you might say that we can continue funding with the funds we save from the EU, but is that really the case?

BEIS has had its budget brutally cut and to call the current government parsimonious would be an understatement. So it doesn't follow that 'oh, we'll just recoup our contribution to the EU and channel it elsewhere'. We might get that money back, but there's zero guarantee that the EU's generous entrepreneur and SME funding will be replaced, like-for-like. (It's at this point where I'd like to raise the deafening silence around the NHS pledge post-referendum).

Also, what will be the geographic dispersal? The EU, say what you will, has displayed an intricate awareness of less developed regions. I wonder (and hope) whether the May government will display the same awareness.

What do you think?

And thank you again for commenting. Believe it or not, I don't just write to inspire agreement.

Best,
Francois

Thanks (1)
09th Nov 2016 19:08

I agree with the points made below. I am an appraiser for Heart of Wessex LEADER grants, and their approach has been to try to get as many through before the Autumn Statement. It's hard to see how the UK Government could stop EU grant funding before we leave the EU (personally, I don't think there is any doubt about whether we will or not), but making hay, and being prepared 'just in case', is not a bad strategy at this time.

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