The economy and small businesses

The third business in our week on start-ups is Find Investment Grow (FIG). James King, its founder and CEO, gave his first Felix interview in October 2009, when he had just started his student-focused venture capital firm. In the year and a half since, his family of start-up businesses has grown rapidly to include fifteen members, all of them showing strong results so far, as well as great promise for the future.

In tomorrow’s Felix, James shares the driving factors behind his success, advice for student entrepreneurs, and general business gossip. In this article, the focus will be on James’s views of broader economic issues. As an entrepreneur involved in fifteen businesses in various fields, James offers a unique practical perspective on many of these issues that are often dealt with in more theoretical terms.

There are complaints that regulations prevent small businesses from hiring. Have you found this to be the case?

It is really hard to offer contracts straight up. There are ways around it: expenses-paid internships for a few months, trial probation periods for three months. It depends how far you want to push it, but the bottom line is that it is very hard for companies to commit, which makes it very hard for employees to commit.

If it was a case of, as long as you were reasonable in your actions then it is fine to fire someone after two weeks and pay them two weeks salary, it would be a lot easier. But when you have to shell out for a month or in some cases 6 weeks, or longer, then it is really difficult for a small business.

And all of this means you can pay your staff less. I’ve done this myself. I’ve thought I have X amount to spend, but if I need to fire them that is £4000, and I’ll need to pay a recruiter £2000 to £3000, that is £6000 out of their salary, just gone. If I did not have to worry about maybe having to fire someone, I would be able to offer them £4,000 to £10,000 more, and if I did fire them it would only cost £1,000.

When you set up FIG in 2009, how did you think the ongoing recession would affect the business?

When the recession started, I thought people’s wages were going to drop and it would be a more exciting time to start a business.

Most big banks are useless. The staff who work there say, “Why should I trust you with my money?” I want to grab them and say, “Why should I trust you with my tax money?”

Have wages not gone down at all?

Nowhere near enough to reflect changes in house prices, which I think is partly why house prices have gone back up.

The biggest surprise for me has been software developer salaries. The average freelancer nowadays will charge £300 to £600 per day. It is not worth it. You can outsource to India, spend maybe two thirds of that price, and get more work done.

I do not understand why certain job markets have not corrected themselves. At these salaries, it makes it very difficult to attract the top talent to your business. It still is possible to get people on £60k or £70k and ask them to halve it. You have to give them shares and really sell them on the business, but that becomes more and more difficult as salaries go higher and higher.

When at the top end, the banks are paying more and more, as a start-up you cannot offer infinitely more shares. If you turn around to someone who is 27 or 28 and earning £80k or £90k in a bank, and tell them to come work for your start up and earn £36k, it becomes a much more difficult decision to sell to the top talent.

The Bank of England argues that this problem of wage stickiness is dealt with through the continual inflation of the monetary base. Do you think a decline in the value of Sterling in any way helps small businesses keep wages low?

No because the top end would just increase their salaries, and they can always do that faster than the bottom end.

Would you say that for real businesses on the ground, price instability and inflation really factors in to their business calculations or not?

I would say it factors in. Certainly when you’re starting out, there are so many things to deal with that rising prices do not help. I think for a start-up it is easier to deal with than for 30 person to 250 person businesses.

How can small businesses such as those that your firm funds be encouraged to hire more employees?

I really liked the idea the Tories had to knock national insurance for the first ten employees. If that happened, it would be great. That would be a game changer. It would mean small businesses could compete.

Do you ever look at bank lending as a funding source for any of your businesses?

Yes, we look at it all the time. There is only one bank that I would recommend, that is Metro Bank. The guys who run Metro Bank have really got the right idea.

It is a customer-centric bank, which is what it should be. Most big banks are useless. The staff who work there say, “Why should I trust you with my money?” I want to grab them and say, “Why should I trust you with my tax money?” It is quite shocking how short sighted they are.

I have come across a lot of good guys at NatWest, HSBC, Lloyds, and RBS. But I have come across shockers too. There are these guys who they call business advisors, and I do not understand how they can call them that. They have never run their own businesses. That is another thing I like about Metro, the guy who runs it has run his own businesses. It gives them a good perspective.

Have you any thoughts on the EFG?

The EFG is the Enterprise Finance Guarantee. It is a scheme to help small businesses without assets get access to bank loans through government guarantees. There is a clause that says if the business would not get the loan under ordinary circumstances, they should not be given the loan. So this is their get-out. The banks say, ‘under normal circumstances you would not get a loan because you have no assets.’ But that is the whole point. The scheme is supposed to be for businesses that do not have any assets.

I recently discovered through some investors and some friendly bank managers, that a lot of the loans were given to property companies that the banks had already lent to but were worried about their solvency.

Do you think this will come out as a scandal?

Yes, I think so. If there is another crash in house prices, which may or may not happen, this will come out. Then the government will have to bail them out twice, it will have to bail out the banks and it will have to pay the EFG.

Has there been a recovery?

No. I think economic recovery means increasing liquidity in the stock market. Liquidity has come back because confidence has come back. But in a lot of larger businesses, not a lot has changed in the last couple of years.”

Last year you said that you felt starting up a business in the middle of a recession was an exciting thing to do. After a year and a half, would you still hold to that?

Yes, I’ll stick by that.

Read part two