After such a challenging 2020, we are all looking for the green shoots of recovery.
That was the focus of the government’s Build Back Better Business Council, which held its first meeting last month.
We think there are signs of hope and the venture capital industry needs to play its part in this journey of rebuild and recover, and we’d like to set out how.
It goes without saying that the situation remains extremely difficult.
It is galling to remind ourselves that going back to the first lockdown starting last March, the economy contracted 20.4 per cent in the second quarter of 2020.
If employment is the bellwether of the health of the economy, the situation is not rosy. 800,000 people have already lost their jobs and this will only increase, as the furlough scheme, currently protecting almost 10 million employees, runs down.
We need our leaders to think more like our founder-led businesses. We should explore different initiatives to reignite the economy, acknowledging that some will work and some will not.
Obviously those that work, repeat; those that don’t, cease.
Government response
There is no one-size-fits-all model that works for locking down our country as this terrible disease affects different groups so disproportionately.
Both society and the economy have to adjust to the new reality presented to us since 2020. While our government still responds to the challenging circumstances presented by Covid-19, it is clear we need to have new routes to opening up the economy.
We need our leaders to think more like our founder-led businesses.Young people and those who are not medically vulnerable need to be able to get back to work.
Furthermore, some household savings have risen significantly since the start of the pandemic.
Consumer spending bounce back
There has been a substantial rise in the amount saved by middle and higher-income households, as well as retirees.
The household savings ratio (which measures savings as a proportion of household income) increased from 9.6 per cent to 29.1 per cent in the first two quarters of last year (this is at record levels since this measure was first taken in 1987).
Hence, according to the Bank of England’s Chief Economist Andy Haldane, well over £100bn was saved between April and June 2020.
Many households have only spent on essentials such as food, children’s clothing and loungewear and have saved money on commuting, holidays and not buying other luxuries.
Just as the government has had to declare a physical lockdown, consumer spending has also been in lockdown, but this can’t continue forever.
There is the prospect of a release of these savings as lockdown is eased; at that point, people will be able to socialise, shop and spend again.
A bounce back of consumer spending has been the pattern after previous national crises.
An increase in spending precipitated the recoveries after both the First and Second World Wars.
Young people and those who are not medically vulnerable need to be able to get back to work. The end of the Great War heralded the “roaring twenties”, a period of unprecedented prosperity, sparked by people spending more on consumer goods - Henry Ford’s production of an affordable automobile was emblematic of this.
While not everyone will have extra money to spend, there is certainly the potential for the economy to benefit from the knock-on effects of this.
This consumer spending will trickle through the economy and have a knock-on effect.
We at Pembroke have stakes in almost forty businesses in a range of sectors. It has been interesting to observe what has been happening with our investments in hospitality and leisure.
Start-up opportunities
Last year, doom and gloom merchants sounded the death knell for restaurants and gyms. But when restaurants reopened in early July people flooded back. When gyms re-opened in August, people returned to the Covid-compliant buildings for exercise.
While things are tough for these sectors, we believe that these “animal spirits” of the economy will return.
Innovative businesses with premium brands and strong management teams can and will flourish – even in the most challenging times.
An example of this was the sale of one of our investments, Pasta Evangelists - which delivers boxes of fresh pasta direct to consumers across the UK - to Barilla Group, a 133-year-old Italian pasta and bakery enterprise.
Just as the government has had to declare a physical lockdown, consumer spending has also been in lockdown, but this can’t continue forever.Furthermore, as another example, our fashion companies have also grown online over lockdown, meeting the enormous demand people have for loungewear and sportswear.
Those brands meeting the needs of consumers have flourished. By pivoting their model, they have found new ways to do business and acquired new customers over lockdown.
Despite the challenging landscape, early-stage businesses are now starting to be viewed as important providers of innovation and solutions. For example, Credentially, a software platform to speed up the process for registering healthcare workers.
The NHS was given free access to the software at the beginning of the pandemic and saw the number of candidates verified per week increase twenty-fold.
VCT funding
The UK has a dynamic start-up culture, with well over 700,000 new businesses created every year.
Innovative businesses with premium brands and strong management teams can and will flourish – even in the most challenging times.These companies need access to funding to get off the ground, which government sponsored schemes, such as venture capital trusts (VCTs) and enterprise investment schemes (EIS) help them to do.
The VCT industry started in the UK in 1995, when the government offered tax breaks to promote investment in private businesses and have played an important role in the economy ever since.
VCTs have an important role to play in funding these new enterprises. This will be a much-needed feature in our roadmap to recovery as post-Brexit Britain finds its feet again in the aftermath of the pandemic.
Unlocking consumer spending will create new opportunities for businesses to grow and prosper, and this needs to be accompanied by a positive mindset.
Andrew Wolfson is chief executive of Pembroke VCT
