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David O’Meara: Small firms riskier in early stages

June 23rd, 2014

Smaller firms are most at risk during their formative years. Now leading entrepreneur and former boss of Havok David O’Meara warns that red tape could strangle our start-ups

IF YOU live long enough, you may discover a simple truth – business can sometimes be unfair. It’s a fact that established companies have more resources, more experience and more understanding from officials.

Large organisations are better able to navigate the considerable demands the State imposes via legislation. But big business and large public bodies, particularly those in dominate positions relative to the customer, can have enormous inefficiencies, poor service and high costs.

Start-ups are in the best position to address these inefficiencies, spot gaps in the market and make major breakthroughs. They are unencumbered by traditional thinking and are the major creators of wealth, employment and innovative products during their initial 10 years. A start-up culture is essential to the well-being of society over a sustainable period.

According to the latest annual World Bank Report, the number of start-up companies in Ireland is 50 per cent below the level in both the UK and the US. Richard Bruton has said that “19,000 people started new businesses in Ireland in 2012″.

The actual number of new companies is considerably lower at about 8000 per annum or 150 per week because on average there are 2.3 people involved in each start-up.

So while 19,000 is a significant number, the equivalent numbers in the UK and US adjusted for population would be more than 38,000.

New products and services for customers as well as many new additional jobs are created by the 19,000 who started new businesses in 2012. More than half of these start-ups fail during their fragile formative years. In time, a small number will have major impact and change everything, as did Ryanair here in Ireland after its early struggles.

Apple, GoogleFacebook and Amazon are amongst those who hit the big time in the US and then had a major impact here. Some 20 per cent may not reach the dizzy heights but will do reasonably well and create substantial wealth for society including the taxpayer via the payment of taxes. Apart from trying to increase the number of start-ups closer to the level pertaining elsewhere what can be done to increase the chances of success for those start-ups that we actually have. We hear a lot about access to finance and the weaknesses of the banking system. But there are important challenges that do not require money.

Start-ups require leaders with passion, drive, belief, focus, resilience and a can-do attitude. Total focus on the customer and the product is critical. Available resources and management time must be concentrated on the market during the critical formative years. Diversion of attention and loss of focus increases the chance of failure. The most important reason (42 per cent) cited for closing a start-up is a lack of profitability.

Loss of focus and diversion of attention lies behind many of these failures. Laws and State practices that divert management time, money and efforts from the market while the start-up is vulnerable and fragile are damaging and counterproductive.

It is said that all start-ups are just one phone call away from failure during their first five years. It is a major step on the road to maturity when that increases to being two phone calls away.

Yet even in their fragile situation, the State through its laws and institutions imposes virtually the same demands on the start-up as it does on multinationals or large public sector bodies with their myriads of lawyers, accountants and HR personnel devoted to ensuring compliance with laws that are in truth styled for large organisations.

Complying with these laws is not overly onerous on large organisations with the luxury of being able to afford the overhead to ensure their compliance. Start-ups do not have such luxuries or the money to pay for such overheads. Available funds must go to sales and product development and 100 per cent of the focus must be devoted to the market.

The founders of start-ups are often young, unencumbered by fear of failure and without the experience of navigating complex State laws. An ‘On Ramp to Viability’ should be provided by the State and its institutions in recognition of the special challenges faced by start-ups.

That can be achieved by radically changing the State’s demands on a start-up during its first fragile five years. At the end of this time, the company matures and should play by the same rules as every one else. If by that stage it cannot afford to pay for lawyers and HR time then tough luck and maybe the company will never make it.

There are numerous examples where demands could be lessened on a start-up. In employment law alone there are more than 15 pieces of legislation to navigate and comply with before the company is allowed to think about its product or its customers. Make no mistake, these laws are onerous. Many start-ups do not have the funds or option of complying if they are to survive. The Employment Appeals Tribunal (EAT) sees itself as providing an informal and inexpensive way to obtain redress for infringements. The truth, however, is that informal and inexpensive depends on where you are coming from. What is inexpensive to a large organisation can be the difference between life and death for a start-up when you takes account of scarce management time and funds. Read the newspaper and see the cases the State and its organisations have the discretion to deal with once an allegation of discrimination is made even if spurious.

What is classified by some as unfair employment practices is often the order of the day in many start-ups. There are very long hours, no overtime, cramped working conditions, passionate and heated debate (not for the fainthearted), cancelled and abandoned annual leave etc. Options are limited in the battle for survival.

At the same time there are people who crave this environment for its innovation, dynamism, stimulation and growth. Why not allow them choose this option without the risk that the State can put them out of business through its laws and via penalties imposed by its institutions? The obstacles are not confined to Employment Law. The most committed company founders live on planes and in hotels chasing prospective customers and controlling the purse strings to protect investor funds by signing off on all payments.

However, the company can be fined while the founder is outside the country for being late in paying Revenue because it cannot afford the overhead of having a a finance department to deal with these matters while the founder is away selling. Revenue is only complying with the laws as they stand.

How could we have arrived at a position which is overly onerous on start-ups? In other areas, inexperience and vulnerability is recognised. A person at the beginning of their career in a large organisation is not expected to have the same level of accountability as someone with more experience.

In law, the State attempts to protect children until they reach 18. The child’s vulnerable status is recognised and an ‘On Ramp to Adulthood’ is provided.

The real work of creating laws and policies takes place in Brussels and in Ireland within the permanent government often in consultation with trade unions and representatives of organisations such as Congress, Ibec and the various Chambers of Commerce. The people involved understand large organisations and have little practical real life experience of the challenges facing a start-up or of the personal or professional challenges facing those involved. The result is law the imposes substantially the same requirements on a start-up with 10 employees as it does for large multinationals such as Apple and State bodies such as Electric Ireland or the HSE.

Until we recognise this we will not develop the entrepreneurial culture that John Moran wishes we had. Hopefully, John’s views will infiltrate the upper echelons of other departments. Laws that are substantially less onerous on the start up in its initial five years are the key. To make this leap requires winning the argument against vested interests and against ideologies that portray any leeway as an infringement of long fought for rights as part of a struggle for equality. Who can argue against equality? It is one of those words that you have to be on the right side of. In a TV debate during the recent election counts, Cllr Eoin O Broin of Sinn Fein seemed to confound representatives of the other parties with his strident statement that France had imposed wealth taxes with no consequential capital flight. The definitive nature of his statement went unchallenged. The facts, of course, tell a different story. The taxes raised in France are only 50 per cent of what was predicted because there is capital flight from France and not just from the wealthy but also from middle-class retirees who are moving in numbers to lower tax European countries where the red carpet is being rolled out.

France is recognised as an unattractive country to start a business because of employment law and also because of high taxes. France is in relative structural economic decline which has been exacerbated under current policies. How many made in France products or services do you actually buy compared to 10 years ago?

It is not a good example of where to look for guidance. Better to look next door to the UK (including Northern Ireland) where Angel Investors who hold their shares in high-risk start-up enterprises for three years incur no capital gains tax liability. The result has an 87pc increase in angel funding overnight and over twice the number of start-ups per head of population with less dependency on FDI.

In terms of laws and taxation, the UK has become a significantly more attractive location for a start-up than the Republic and the gap is widening. If one believes the argument that tangible benefits flow from a dynamic entrepreneurial economy in terms of growth, employment creation, competitiveness and innovation then let’s look at how the State interacts via laws and institutions with start-up companies during their initial five years.

David O’Meara is the former CEO of Havok and Postgem in Ireland and former CEO of Chicago-based Commerx

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