The Branson effect: Will the billionaire solve Liverpool’s deprivation?

The ‘Global Entrepreneurship Congress’ is in in Liverpool this week. Five thousand entrepreneurs, nascent and incumbent, striving and successful, will gather for a multi-day programme of evangelising and eulogising the process of creating, shaping and sustaining ‘the firm’. I’m finding it hard to get excited by it.

The right to host the congress no doubt cost a small fortune and Liverpool has also allegedly paid a sum in excess of £200,000 to have Richard Branson attend as entrepreneur-in-chief. In return he paid the city a compliment by calling it the ‘global capital for enterprise’. For several weeks Branson’s perma-smile has beamed from banners on lamp-posts across parts of the city encouraging Liverpool to choose the path of the entrepreneur. He did and he’s ‘loving it!’ I bet he is!

In hosting the Global Entrepreneurship Congress Liverpool will benefit from the visitor spend and it may receive a temporary boost to its ‘city brand’ – an attempt at ‘guilt by association’. City leaders would probably dismiss my charge, arguing that I’m missing the point – the reality is ‘guilt by aspiration’. But that doesn’t change the facts.

The back story to Liverpool’s ambition to increase entrepreneurship is that the economy has a long-run failure to create sufficient jobs for its population. Official figures show more than 30% of Liverpool households are without work. Young people without work is at an all time high, and in some neighbourhoods youth unemployment is greater than 50%.

Entrepreneurship is seen as a way of creating jobs from additional economic activity but also as a substitute for employment. However, as a publication from the New Economics Foundation ‘Filling the Jobs Gap’ demonstrated, increasing the start-up rate of firms simply increases the exit rates – there is a very small gain from a high-birth rate strategy.

Liverpool has fewer than half the number of enterprises per capita than cities in the south such as Brighton or Reading. The Centre for Cities found in its 2012 Cities Outlook report that out of 64 cities in the UK, Liverpool came 59th for enterprise density. The average firm in Liverpool has less than 5 employees, as far from the Branson model as you could imagine. In the latest official data available for the year to April 2010, Liverpool lost 2.75 firms for every one lost in the UK. The prospects for start-up are not attractive.

Professor David Storey, one of the UK’s most influential academics in the field of entrepreneurship, put the proverbial cat among the pigeons last year when he introduced his thoughts on the randomness of entrepreneurial success in a paper entitled ‘Optimism and Chance: The elephants in the entrepreneurship room‘. Storey suggests starting a business is like the ‘gambler’s ruin’ – the nascent entrepreneur starts out full of optimism and bets carefully, but as time at the table increases so does the chance of losing the shirt.

The paper is critical of entrepreneurship experts for focusing narrowly on firms that grow when the reality for most new firms is a short life of struggle followed by closure. Most firms don’t survive for very long; the majority close between 12 and 18 months after start-up. Then, by the fourth year of trading, more than half of all firms have closed. For those firms that do continue, contraction is more likely to be on the agenda than growth as the firm grapples with survival.

I don’t want to pretend there are easy answers to this conundrum, as there are not. But viewing enterprise development through the prism of the successful growth firms will not lead to growth in deprived areas. It’s a gamble, one that is not stacked in the city’s favour.

New firm growth cannot be delivered by aspiration alone. New firms are sprung to seize opportunity, which appears where demand is in existence. The entrepreneur must be connected to the network of opportunity to know it exists. This is why we have an enterprise gap – growth, demand and opportunity are out of balance in the UK. Adding more firms will not create demand or opportunity, but it might make things worse by encouraging uncreative destruction.

I’ve nothing against entrepreneurship. I’m a serial entrepreneur with a long record of failure at the start-up game interspersed with the occasional success. What I worry about is that policymakers continue to believe the hype and expect that aspirational entrepreneurs will solve economic problems and inequality with it. The current winner-takes-all model of enterprise leaves much to be desired in this regard. Branson is not a role model for solving the accumulated problems of Liverpool’s deprivation, he is the epitome of the culture that created it. So this week, as one of Britain’s wealthiest entrepreneurs gives us his self-help message – a peculiarly ironic statement in England’s most deprived city -, I’ll be taking it with a large pinch of salt.