Don't Just Startup. Scaleup

Updated: Oct 9, 2018




Startup


Everyone has a business in them. Everyone should startup at least once, even if it is to supplement employed income and provide a safer space to spread those entrepreneurial wings. We are all becoming our own units of production that corporations will want to hire for discreet projects or finite amounts of time. The gig economy is coming for all employment so why not take control of your own destiny and start your own business? Yes, it involves risk, uncertainty, hard work and expense, and the first one (or two) may not even work out, but you will learn.


It is now reasonably straight-forward to start a business and technology exists to simplify administration, accounting, communication and payments. You can have your product stored and shipped by global fulfilment partners. You can ship products directly from overseas manufacturers to your customers with no inventory risk. In the near future, your customers will be able to digitally print physical product at home or pick it up from a local bureau.


Entrepreneurship is the future of almost all employment and the barriers to entry are falling with each passing year. Starting a business is now a viable career option. So why wouldn’t you startup?


Scaleup


Turning a startup into an employer with a strategy to grow from a turnover of £100,000 to £1 million, or from £1 million to £10 million, or even £10 million to £50 million requires a very different set of skills, investment, finance and support. The UK is #3 in the OECD rankings for new business creation but is languishing down at #13 concerning scaleups. Research in 2009 by Nesta, where I am a Trustee, highlighted that a small number of high-growth businesses are key to employment and economic success and that the just 6% of UK businesses with the highest growth generated half of the new jobs over the preceding six years. The ScaleUp Institute uses the OECD definition of a scaleup, which is, broadly, a business with over ten employees growing at 20% pa. My own definition is broader as above; a scaleup is an employer with growth ambitions. Using the OECD definition, in its ‘ScaleUp Report’ (2014), The ScaleUp Institute estimated that:


“…one per cent to our scale-up population should drive an additional 238,000 jobs and £38 billion to GVA within three years. In the medium-term, assuming we address the skills-gap, we stand to benefit by £96 billion per annum and in the long-run, if we close the scale-up gap, then we stand to gain 150,000 net jobs and £225 billion additional GVA by 2034.”


This impact is even more significant if my definition is applied.


I have smashed together some thoughts, research and statistics to provide some context and explain why the provision of the necessary support and incentives for scaleups is key to the success of the UK.


The UK Business Landscape


Some context is required to understand the dynamics of the UK business population. The number of startups is gathering pace with annual growth at over 3%, although it hit 7% between 2013 and 2014. Although it could be a sign of startup seeds being sown for a healthy crop of future scaleups, the UK business population is tending towards micro businesses. In the UK, there are almost twice as many businesses with one owner-manager employee as in the early 2000’s, while in the US the number has halved. Further, the number of UK businesses employing someone has fallen from 32% in 2000 to 24% in 2017.

At the beginning of 2017, there were 5.7 million private sector businesses in the UK, an increase of 196,000 since 2016 and over 2.2 million since 2000 (+64%). 5.0 million (88%) are headquartered in England, and 35% are concentrated in London and the South East.


What many find surprising is that 4.3 million businesses employ only the owner (76%) and 1.4 million have more than one employee (24%). There were 33,855 (0.6%) medium-sized businesses with 50-249 employees and 7,285 (0.1%) large businesses with over 250 or more employees. There were just under 250,000 businesses with over ten employees. That means that 99.3% of UK businesses are small and 99.9% are small or medium-sized. Small and medium-sized businesses employ 16.1 million people (60% of private sector employment) and generate £1.9 trillion (51%) of private sector turnover.


Although companies now account for a one-third of businesses there are three main forms - 3.4 million (60%) sole traders, 1.9 million (33%) active companies and 0.4 million partnerships. Only 21% of businesses are led by women.


Service industries accounted for 74% of businesses, 79% of employment and 71% of turnover whereas the manufacturing sector accounted for just 5% of businesses, 10% of employment and 15% of turnover.


From Startup to Scaleup


Startups are fragile, and they fail for a wide range of reasons, but it is important that the cultural shift towards entrepreneurship, the necessary ambition and willingness to try (and fail) is encouraged and supported. In 2016 there were 414,355 business births and 327,775 business deaths resulting in net growth of 86,580. The statistics measuring the fate of startups vary depending on how births and deaths are measured – not all startups are incorporated. The estimate that less than half make it to their fifth anniversary seems to recur.


I am convinced that more startups would survive if they had access to more practical support, but attrition is expected and necessary to weed out the viable businesses that are fit to absorb more resource and grow.


In the UK, there is then a tangible chasm that our established businesses with products, customers and profits are unable, or too afraid, to cross. The reasons include a lack of ambition or a culture of risk adversity, skills gaps, funding gaps and support. A lack of available financing is now less of an issue, although there are differences to the US market. The average UK venture capital fund is £118 million, which is one-third smaller than funds in the US, where the average is £180 million. Also, the average number of rounds of UK venture capital-backed business raises before exit is 1.9 rounds compared to 2.7 rounds in the US.


Research by British Business Bank, where I am a Non-Executive Director, has shown that 30% of businesses are unsure about how to fund growth. In its 2017 'Business Finance Survey (SMEs),' conducted by Ipsos MORI on over 2,000 SMEs, British Business Bank found that over half of UK SMEs expected to grow, but less than 30% sought advice when raising finance and 36% just approached their main bank for finance. 57% didn't think their ownership structure was suitable for an equity investment and 44% were not confident that equity investors would be interested. This may be a function of aspiration as equity follows deliverable growth plans. There is a great deal of capital available; what appears to be the issue is a lack of understanding about how to plan for, fund and execute growth. The research indicates that negative attitudes towards external financing are changing, especially amongst scaleups which tend to be the most likely to seek finance.


The government has recognised the need to support scaleups, and there are signs that the recommendations of the ScaleUp Report are impacting policy. Separately, British Business Bank has recently focused on supporting growth businesses to understand what the financing options are with its #GoodtoGrow campaign, in which I have been involved .


Scaleups need advice and support so that they can reduce operational friction and execute like they have done it before and pursue their growth ambitions. We need to instil ambition and provide the additional ingredients that growth requires. I have been there myself and reached out for support to put governance in place, recruit the right talent, raise finance and improve operational effectiveness. Scaleups have survived the fires of the startup phase and are the businesses that will create wealth and employment and ensure that the UK remains relevant and competitive.


I intend to support entrepreneurs across the business life-cycle, but especially those with ambitions to #ScaleUp.



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