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The Entrepreneurial Exchange

'There's Never A Lack Of Opportunities, Just A Lack Of Other People's Money'

WHEN Dan Connolly tasted his first handmade Scottish oatcake he was convinced of its potential, writes William Lyons. Six months later, after an aborted attempt to buy a brand, he went one step further and launched his own.
This week a range of traditional handmade oatcakes from his Fife-based Your Piece Baking Company will hit the shelves of small independent retailers across Scotland. For Connolly, who hopes to sell 15,000 packets by the end of December, it is the beginning of what he hopes will lead to a full nationwide roll-out in 2009, a year that many believe will be the worst for business in a generation.

"If you wait for the perfect opportunity to launch a new product then you will probably be waiting a long time," he says. "I admit it's not the perfect environment to launch a new brand, and there is no getting away from the fact that it will be very difficult. But we will sit down at the end of the year and see where we are. I suspect whatever the outcome we will just plough on."

Connolly is fortunate. Profits from his wine-importing business Adamas have enabled him to inject his own seed capital into the venture. For the many other entrepreneurs trying to launch a business in Scotland the picture isn't as rosy.

While banks are still doing some lending, credit markets remain tight and business angels have witnessed a near 30% fall in clients. Many are now asking whether entrepreneurial Scotland can survive the downturn.

"It is a very bad time to start a business," says one entrepreneurial expert, who asked to remain anonymous due to a conflict of interest. "There is no money out there. The banks have more or less pulled out of the young company market."

Last month research from insurance firm RSA showed that one in 10 small firms has been brought to the brink of collapse by the economic crisis. The report suggests more than 500,000 small businesses could shut down without urgent help.

The CBI expects the pace of job losses to increase, with 23,000 manufacturing jobs lost in the third quarter, rising to 42,000 in the fourth quarter. The Forum of Private Business is gloomier still. In the worst-case scenario, it predicts that 200,000 companies could go under during this recession, many of them because bank financing is not being made available quickly enough.

Scottish Enterprise insists that seed funding for new businesses has never been stronger. According to Neil Ross, head of investments at the development agency, from April this year through to the end of October it invested more than it had in the whole of 2007.

One trend Ross notes is that funding for existing companies is very strong, suggesting that it may impact on other businesses which have not received funding before.

"It's strangely positive," he says. "I keep on expecting the numbers to fall off a cliff but they haven't. Our deal flow remains as strong, if not stronger, than it has ever been. The seed fund, which invests in start-ups, has done more business for the first eight months of this year than the whole of 2007. For the right business there is still cash. Our experience shows that businesses are still getting funded."

Analysts are more sceptical. They argue that the downturn will not really kick in until the first quarter of next year when the banks will start offloading their portfolios. They also pour scorn on claims that credit for entrepreneurs wanting to start new businesses is readily available. Publicly the banks are saying that they are approving 90% of their applications for new business. Analysts say that what the banks describe as an approved application is the formal paperwork which follows a loan discussion. In reality, only about 5% of loan discussions are being approved for applications.

"2009 is going to be a dead boring year," says one analyst. "For an entrepreneur running a small start-up, all discretionary spending will stop. All profit withdrawal will stop, capital expenditure slows down and acquisitions stop. Most businesses will draw in their horns. Business failure will go up from 1% or 2% per year to around 5% a year for a couple of years.

"But on the plus side, recession just means the world gets 1% less busy, 95% of business will carry on as normal. Downturns do not really change the flow of human innovation. There is never a lack of opportunities, just a lack of other people's money."

Carphone Warehouse is a case in point. It was set up in the depths of the last recession with just £6,000 savings. It is now a publicly listed company having made its founder, Charles Dunstone, a billionaire.

John Anderson, chief executive of the Entrepreneurial Exchange, a leading self-help group run by those wanting to grow their own businesses, admits that membership is likely to fall next year. His organisation was set up in 1994 as tycoons such as Tom Hunter, Richard Emanuel and David Sibbald were in the early stages of building businesses that turned them into multi-millionaires.

The Exchange was part of a campaign by entrepreneurs to help change the business climate in Scotland. It will host its annual dinner in Glasgow this week, but Anderson says the mood will be little more than cautious optimism.

"We are obviously concerned," he says. "Funding in particular is very difficult because the banking industry got itself, by its own greed, into a bit of a mess.

"But the consistent message is: collect your cash because cash is king, review your costs and look at your headcount.

"We have a lot of members that have been here before. If they can ride this out, and we always do come out of it, then they will be in great shape to take advantage of the opportunities out there."

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