Why we should separate growth businesses from SME/SMBs

The majority of entrepreneurs, wherever they are in the world, start businesses to exploit a perceived market opportunity. Although the vast majority of businesses employ less than 10 people, they are not started out of economic necessity. The entrepreneurial spirit is to maximise value from the opportunity. From the statistics below it is obvious that the vast majority of businesses in the UK or US employ less than 10 people (96% in the US and 99% in the UK). They fall within the static small and medium-sized (SME/SMB) definitions when the dynamics, motivations, risk appetite, innovation and growth rates differ significantly within the groupings.


Growth is a better measure as not all business-owners are entrepreneurs and not all business-owners take a risk to grow or scaleup. Scaleup businesses require very different support compared to a business owner with a small-town store or one-person car repair shop with no intentions of growing, innovating or taking on any more risk than they already have paying their business and personal bills.


The SME/SMB business population in the UK/US


In the UK at the start of 2017, there are 5.7 million businesses of which 4.3 million (76%) have one employee – the owner. 1.3 million have 2 -10 employees. Therefore, 93% have 10 employees or less and 99.3% have less than 50 employees. We classify any business with less than 50 employees as ‘small’ (or even ‘micro’ if they employ less than 10 employees) and ‘medium-sized’ businesses have 50 – 250 employees. There are only 7,285 (0.14%) businesses with more than 250 employees.


The US Small Business Administration defines a small business as one with fewer than 500 employees. In 2014 there were 29.7 million businesses in the US of which 23.8 million (80%) were owner-manager run. 4.6 million (15.5%) had 1 – 9 employees; £1.1 million had 10 – 19 employees; 87,563 had 100 – 499 employees and 19,076 (0.1%) had 500 or more employees.

In 2018, the Global Entrepreneurship Monitor (GEM) found that 82.6% of respondents to their research had chosen to start a business to pursue an opportunity as opposed to economic necessity. The number was 75.4% in Europe and 70.9% in Africa. The GEM has highlighted a persistent ambition gap between the US and the UK based on the number of business-owners with growth as an objective. Research by the Enterprise Research Centre (ERC) concluded that entrepreneurs in the UK and US are equally ambitious, but that the UK the gap was a function of more self-employed business-owners with low growth expectations, compared to a growth in the number of business employing people in the US.


Entrepreneurial spirit


These numbers don’t tell the story of entrepreneurship and the associated pursuit of opportunity and growth. Entrepreneurs don’t mortgage their home, leave a well-paid job, risk security and relationships, and run the gauntlet of funding or people trying to talk them out of it to build a ‘small’ or ‘medium-sized’ business’ I don’t recall ever seeing that objective in a business plan. They may not fully understand the size of the opportunity and the potential for complementary products or growth in new markets at the outset, but they will milk every last drop of the economic juice of the opportunity – assuming there is one. They will then look to grow through M&A or new products or new market or sell up and start out again with more experience and less chance of failure.


ScaleUps


The ScaleUp Institute (SUI) has published various reports on UK scaleups and the issues they face to drive policy changes that will support such business and the resulting job creation and economic wealth created. The SUI uses the OECD definition for a scaleup:


“A ‘scaleup’ is an enterprise with average annual growth in employees or turnover greater than 20 per cent per annum over a three year period, and with more than 10 employees at the beginning of the period”.


That doesn’t mean that a company with 8 employees growing at 18% isn’t a scaleup, but analysis requires boundaries for data somewhere. Scaleups need to be identified and supported


Scaleups require support both from change to policy and evidence as well as direct support, which require scaleups and the issues they face to be clearly identified. The SUI has recognised the following gaps:

  • Skills – access to the necessary talent

  • Leadership – development of leaders

  • Markets – access to new customers in home and overseas markets

  • Finance – access to finance

  • Infrastructure

Being a micro, small or medium-sized business is not useful identifiers for firms run by entrepreneurs with growth aspirations. They are stops on the journey, although it can be a long journey. The SUI SME Finance Monitor found that 58% of scaleups have been trading for 2-9 years, compared to 36% of other SMEs. Also, a quarter of scaleups and businesses with aspirations to scaleup have been trading for 15 years or more. It can take some time for personal or market conditions to be right to make scaling up possible.


Research can attempt to extract the data, but what we don’t know is how many SME/SMB owners would go for growth if the skills, markets, finance and infrastructure were available and they knew that - awareness is a big issue.


By shining a light on those that are scaling up, others will be inspired to shake off the SME/SMB shackles, mindset and definition to become a #ScaleUp and create more jobs and wealth, wherever they are in the world.


© Piers Linney 2018


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Piers Linney is an entrepreneur and investor with a professional background in the City in both law and investment banking at Credit Suisse. He is known as a champion of entrepreneurship and SMEs is best known as a former investor on BBC’s Dragons’ Den (Shark Tank in the US). Piers has broad experience of the financial and operational challenges that face SME businesses as a founder, adviser, director and investor. Piers has founded several technology and communication businesses and has won a range of entrepreneurship awards. He sat on the Cabinet Office SME Panel and the Board of TechUK, and is a Trustee of Nesta, the UK’s leading innovation charity. Piers is a Non-Executive Director of the government-owned British Business Bank, which has faciltiated £12 billion of finance to unlock capital for UK gowth businesses, and which also operates StartUp Loans and the British Patient Capital (£2.5 billion).

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