Young, scrappy and hungry
Young, scrappy and hungry
How to design a startup-friendly immigration system
This is the second post in our three-part deep dive into our latest report, Job Creators 2024 – in which we revealed that 39% of Britain’s 100 fastest-growing companies have a foreign-born founder.
You can read the first post here – in which we explain how immigration reform can be a ‘no-regrets’ approach to industrial strategy – and if you aren’t already, be sure to subscribe to have the third one in your inbox as soon as it’s out.
It’ll come as a surprise to nobody that here at The Entrepreneurs Network we believe entrepreneurs, and the companies they create, are special. If you’re reading this, there’s a good chance you already think so too. But for those who require more persuasion for why the entrepreneurial community is deserving of extra attention from policymakers, here’s a quick pitch:
Startups are engines of new job creation. Research from the Ewing Marion Kauffman Foundation has consistently shown the important role which young firms play in generating employment. Between 2001 and 2020, firms aged 0-1 years old created about five jobs per 1,000 people per year, whereas those aged 11+ years actually destroyed more jobs than they created over half the time.
Startups push forward the frontiers of innovation. If a new business is to break into an industry and challenge the incumbents, it needs to bring something original to the table. Startups play a crucial role in diffusing scientific breakthroughs across the economy, and ultimately sparking the process of creative destruction. For example, MIT researchers note that “startup inventions are more original by approximately half a standard deviation relative to incumbent innovations, and more general by approximately one-third of a standard deviation for both five- and ten-year forward citation horizons.” Meanwhile, a 2024 paper looking into photovoltaic cell patents describes how “startups’ inventions spur more subsequent inventions by other firms, even when compared to established firms’ inventions with similar attributes.”
Startups boost labour productivity – the root cause of wage growth. Innovation directly increases labour productivity by enabling workers to produce more with the same resources. Again, evidence suggests that startups are particularly adept at instigating productivity boosts. As researchers from the University of Maryland put it: “at least half of within industry labor productivity growth for continuing firms is attributable to employment being reallocated from less productive to more productive firms within the industry. Young firms contribute disproportionately to this contribution from reallocation.” (Emphasis added.)
This gives us confidence that advocates for the startup economy have strong grounds to stand on. The social returns of young firms are evident, and while overt favouritism towards them might be a step too far, it’s not unreasonable to give careful thought to how we can enable more startups to, well, start up.
Just because startups present so many advantages for the economy doesn’t mean they face a clear pathway to success. Quite the opposite. As many founders will attest, startups are often up against it from the beginning, as they jostle with big behemoths in their respective industries.
They may have fewer resources at their disposal to navigate regulation – for instance not having a big HR department to call upon to handle compliance or other bureaucratic processes. One late invoice could send finances into a tailspin, whereas a more established player could shoulder the loss. And a startup’s fast growth trajectory or single-mission purpose may be a blessing in disguise if it makes delays all the more frustrating.
Just about every founder we’ve spoken to while undertaking our work on immigration lamented the often glacial nature of the visa process. Innovative startups, especially in specialised fields like life sciences or software, need scarce skills often requiring bringing in talent from abroad. That process needs to be as swift as possible, but so much of the immigration architecture is geared around the needs of more ‘conventional’ companies. This is understandable – after all, truly fast-growing startups will only ever be a small slice of the business population – but that doesn’t make it any less irritating to those it impacts.
Therefore, we believe Britain needs to adopt a more startup-friendly approach to visas – and propose a couple of ideas for how.
The first is to do with compensation. In order to qualify for a Skilled Worker visa – one of the most popular visas used by people coming to work in the UK – applicants must meet a minimum earnings threshold. After being jacked up massively last year by the Conservative Government, this currently stands at £38,700, and the new Labour Government has vowed to keep it at this level.
But don’t think for a second things are as straightforward as simply clearing that test. If the ‘going rate’ for the job in question is higher than £38,700, that then becomes the new threshold. So, viewed in one light, it’s actually harder for the most skilled people (as defined by the value they create in pounds and pence) to come into the country than it is for those with lower skills.
Fortunately, some common sense does prevail. Discounts to the salary requirements are available for jobs on the ‘immigration salary list’, or if applicants are aged under 26, studying or in professional training, or a graduate. STEM PhD holders can secure an 80% salary discount, and non-STEM PhDs even 90%, though there are numerous caveats. (Those who are really interested to dig deeper can do so here.)
As we note in Job Creators 2024, while “the new salary threshold may not be an insurmountable hurdle for experienced professionals working for bigger companies [...] it will be much harder for startups to pay these salaries and for foreign students of the UK’s leading universities to surpass these thresholds upon graduation. Young people will increasingly find they will need to work for established corporations instead of innovative challengers.”
To remedy this situation, graduates should be able to make use of ‘New Entrant Rules’ for a longer period of time. These currently enable new entrants to the labour market to be paid a reduced salary for a maximum of four years if they meet certain defined criteria. But this includes any time spent on the Graduate visa, and so may not cover the entire period (three or five years) for which a Skilled Worker visa can be secured. This means individuals may face unattainable jumps in salary requirements after a relatively short time on a Skilled Worker visa, and certainly before they reach the point (after five years) of being eligible to apply for Indefinite Leave to Remain.
Reforming rules like this ought to make it easier for startups to hire the talent from abroad that they need. But it still keeps the immigration system somewhat blind to how startups actually ‘work’. In early-stage companies, salaries are not the only way employees are remunerated – offering equity, for example, is a perfectly common arrangement. Here, employees will still receive a salary each month, but on the face of things it will be lower than the case would be otherwise. To make up for that, they receive a small stake in the company they’re working for, which also acts as a nice incentive to grow the business into something bigger. This approach is especially valuable for startups as it means they have lower month-to-month expenses, which can be particularly helpful if cash flow is tight.
And yet, the UK’s visa earnings thresholds cannot take this into consideration. If a startup wanted to hire a worker from abroad, they’d have to instead offer a higher upfront salary in lieu of not being able to grant equity to meet the minimum earnings threshold. This too should change – as we and others have been calling for for a while now.
Lastly, we need to grapple with Britain’s staggering visa costs. The graph below shows just how out of kilter we are with much of the rest of the developed world when it comes to visa fees.
And it’s painfully clear where the majority of this additional expense comes from – the Immigration Health Surcharge (IHS). Now at an eye-watering £1,035 per year (following a 66% jump last year), it acts as a serious impediment to people wanting to move to Britain – in some cases amounting to weeks of wages. Despite also paying National Insurance, immigrants face this hefty fee designed to offset their potential burden on the NHS, effectively a double tax that penalises the very talent we aim to attract. As a first step, it should be scrapped for workers (there is, admittedly, an argument for maintaining it for non-working dependants) and we should then also consider reducing the burden for those less able to afford it upfront.
The tendency in British politics to favour special groups and craft policies designed just for them is seldom a good thing (and there’s a whole post in its own right to be written for why that is). Yet, for startups, a ‘twin-speed’ approach is compelling. Early-stage companies are simply too much of a different beast, and frameworks which might work fine for the majority of businesses instead cause endless headaches for founders striving to build the next big thing. Minor tweaks here and there which enable startups to access the skills they need will be imperceptible in the round, but could make all the difference to our country’s trailblazers.
Thanks for reading! If you’d like to check out our immigration research in full, you can find it on our website here, and stay tuned for the next post in this series, which will look at how we can improve our immigrant architecture for the world’s next generation of founders.