Opinion

To what extent does entrepreneurship help to reduce the wealth divide?

6 min read

16 April 2015

Darryl Eales, chairman of entrepreneurial group E2Exchange, discusses what needs to be done to ensure that entrepreneurship helps to ensure a more even distribution of wealth in society.

Nobody doubts the fact that entrepreneurship creates wealth but how much does it contribute to addressing wealth inequality? Although some studies suggest that it is the middle-aged and wealthy who benefit disproportionally from entrepreneurship, recent research show that entrepreneurship’s wealth effect is spreading and more young people and those from less privileged backgrounds are becoming entrepreneurs. 

To help ensure that this trend strengthens, we need to consider a range of measures, including embedding entrepreneurship into the education system, nurturing early-stage companies and encouraging further growth of social enterprise to accelerate this development.

Entrepreneurship in the UK is certainly flourishing. Since 2008, the number of SMEs in the UK has reached a record high, with some 5.2m small businesses in total incorporated, according to Lord Young’s February 2015 report on small firms

Initiatives such as StartUp Britain, a national campaign established by entrepreneurs for entrepreneurs is designed to celebrate, inspire and accelerate enterprise in the UK. Its related think tank, The Centre for Entrepreneurs, calculates that 581,173 businesses were registered with Companies House last year, up 10.4 per cent on 2013. 

Government-backed schemes such as Business in You and Small Business Saturday have all helped to drive national awareness and support of entrepreneurship and SMEs. Policies designed to benefit entrepreneurs and SMEs to help boost their success have been developed by successive governments, including entrepreneurs’ tax relief, the fair payment scheme, the British Investment Bank and the Small Business Charter. 

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Despite the huge growth in entrepreneurship, studies (e.g. Fairlie and Krashinsky, US-based academics) argue that it is the wealthy and middle aged who benefit most from entrepreneurship, as they transition from paid employment to become successful entrepreneurs. Also often the businesses they run are lean, so rather than contributing to wealth distribution they could contribute to wealth inequality.

This perception is reinforced by a recent BNP Paribas study of 2,500 successful entrepreneurs globally, which identified that 60 per cent have a history of business ownership within their family. The study also found that almost 70 per cent of entrepreneur angel investors invested in other businesses, with the overriding aim of generating a return on their investment and further increasing their own wealth – rather than contributing to narrowing wealth inequality. 

However new trends are emerging and according to 2014 data from Experian, more first-time entrepreneurs than ever before are establishing businesses and they tend to come from less affluent backgrounds than previously: a third of these entrepreneurs came from households with income of less than £25,000 and around 8 per cent lived in social housing – more than double the 2009 figure. 

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The average age of an entrepreneur is also falling. ONS figures show that between 2006 and 2013, the number of businesses founded by the under-35s in the UK grew by 70 per cent, the biggest increase amongst all age groups. The rise of tech companies, launching all kinds of apps and web applications, largely the preserve of younger entrepreneurs, is a key driver of this trend. Today’s young entrepreneurs can also more easily access finance from an array of crowdfunding sites such as Seedrs or Kickstarter, which are typically youth-friendly.

To help ensure that these trends strengthen, E2Exchange believes there should be a focus on developing links with local schools and enterprise by ensuring that more entrepreneurs become school governors and hold seats on the governing panels of higher education colleges.

By embedding and fostering the key elements of entrepreneurial behaviour into the education system, young children from all backgrounds will become exposed to entrepreneurial ideas and barriers will start to dissolve.

In terms of funding, it’s positive that there is now a greater variety of sources for young entrepreneurs to approach, but it would also be worth considering setting up dedicated tranches of funds for young entrepreneurs from more disadvantaged backgrounds at institutions such as the Business Growth Fund, the British Business Bank or the Angel Co-Investment Fund.

Encouraging social enterprise, businesses with primarily social or environmental objectives and whose profits are reinvested into the community, is also vital. Much progress has been made in recent years with start-ups in this sector growing at an increasing clip, three times the rate of the SME sector, according to the latest report from Social Enterprise UK. 

Overall it’s encouraging that recent trends support the proposition that entrepreneurship is helping to address wealth inequality, which will be beneficial not only for a healthy economy but also for a healthy society.