How do you scale-up the scale-ups?

Growth | Reports

Traditionally forgotten, companies that are defined as ‘scale-up’ are now at the heart of the conversation in the UK – with government and industry trying to create an infrastructure that supports their growth.

As part of Business Leader’s scale-up series, this feature will look at how we can continue to support these businesses in the UK to help them grow even faster.

Marion Bernard, who is a board member at Funding London, says that the challenges scale-up businesses face are unique: “Scale-ups are usually looking to plan their expansion over the medium to longer term, and the single most important aspect of this is access to finance, and specifically finance that can be both patient and able to adapt to the inevitable changes to the plan that will occur over time.

“Fortunately, there are wide-ranging sources of capital available, and scale-ups should be able to identify a funding provider that matches their specific needs. The other main challenge is recruiting the right people to drive the growth of the business. It can be very useful for scale-ups to have access to the networks and expertise that some finance providers can unlock.”

Henry Whorwood, Head of Research and Consultancy at Beauhurst agrees that accessing finance is a key barrier that scale-up companies come up against.

He says: “The SME Finance Monitor has found that nearly half of all SMEs and scale-ups are “permanent non-borrowers”. That is, they aren’t and don’t plan to use finance to fuel their growth. This aversion to funding is reflected in the data on funding levels.

“But initiatives such as the British Business Bank’s Finance Hub are starting to make an impact – it will be vital to continue these campaigns. Educational initiatives like these take a long time to move the needle.”

Equity investment into scale-ups

Regarding levels of equity investment into scale-up businesses, Henry also says that the picture isn’t as rosy as it could be.

He says: “Put bluntly, equity investment into the UK’s visible scaleups is not increasing. £3.6bn was invested into visible scaleups in 2017, which fell to £1.7bn in 2018. This is partly due to quite a few megadeals (or even gigadeals, if you like) in 2017.

“But it also reflects a decline seen at investment across all stages. The good news is that there’s been a bit of a bounce-back in 2019, which could end up being a record year.

“The top investor (since 2011) into visible scale-ups is BGF. Followed by Draper Esprit, Index Ventures, Accel and (perhaps inauspiciously at the moment) Woodford.”

So, with access to finance being a top barrier to growth for scale-ups and funding levels not increasing – this could represent the emergence of a challenging chasm for UK businesses.

On the wider issue of what else can be done to support scale-up companies, Marion says: “Scale-ups are already well-established businesses who continue to need support from leaders, the business community and government. A typical scale-up is looking to grow rapidly and there is an element of risk when this happens, so all leaders can play their part in reducing that risk by providing an environment that allows scale-ups to plan with confidence.

“The greater the certainty, the more likely it is that the scale-up will be able to complete its growth plan successfully. From a commercial perspective this means agreeing long-term relationships and avoiding unnecessary short-term shocks. Government can help by adopting policies that allow scale-ups to plan with confidence and by resisting the temptation for sudden legislative or fiscal change.”

Marion continues: “Scale-ups are also usually looking to plan their expansion over the medium to longer term, and the single most important aspect of this is access to finance, and specifically finance that can be both patient and able to adapt to the inevitable changes to the plan that will occur over time.

“Fortunately, there are wide-ranging sources of capital available, and scale-ups should be able to identify a funding provider that matches their specific needs. The other main challenge is recruiting the right people to drive the growth of the business. It can be very useful for scale-ups to have access to the networks and expertise that some finance providers can unlock.”

People problems

Rob Perks, who is CEO at business support organisations Inspire, echoes Marion and Henry in respect to the challenges that scale-up firms face, but also believes that people are at the forefront.

He comments: “Is it property, raising finance, skills? Finance and skills remain the top two barriers we encounter. Banks are still reluctant to lend to these high growth businesses unless they have an established track record in the market. By their nature these are often innovative businesses coming up with new products or services and so do not have three year track records of success to point to.

“Access to relevant skills is also still very difficult and the more that could be put into understanding the needs of scale-ups and joining that up with Universities or HE Colleges, so that courses are promoted and designed with these needs in mind.”

DR Gordon Fletcher, who works at Salford Business School, agrees with Rob that ‘people’ are one of the main challenges scale-ups face.

He says: “Our research constantly points to the challenge of finding and retaining the “right” people within scale-ups. It is not just the right set of skills but having an affinity and compatibility with the organisation itself.

“Scale-ups have already set out on a strategic direction of travel and this journey to resonate with those already in the business as well as those essential new appointments that support continued growth. Alongside the culture issues, the challenge of getting the right fit in terms of skills also presents some challenges for recruitment.

“The challenge of bringing onboard the right talent is also felt at the leadership level. Rapid growth generally requires new management appointments including Non Executive Directors (NEDS) and finding people who can bring the right mix of knowledge and cautious innovation that aligns with a scale-up’s own pace is another prized skill-set.”

Can government do more?

With the challenges clear, what more can government and other agencies do to provide an environment where scale-ups can flourish?

Rob says that connectivity is key. He says: “Central marketing of all the endorsed scale-up programmes relevant to the area in which the business is based. Currently, each programme has to try to locate and engage with the business which means many are not identified or found. This could be done through the LEP or Growth Hub networks.

“More needs to be done to identify and refer on to scale up programmes. Programmes are not sufficiently joined up and the growth hubs are the obvious mechanism for this. Central marketing through the national helpline at the Business Energy and Industrial Strategy Dept could also refer to local programmes of support.”

Dr Fletcher says that formal recognition from government could make a positive difference. He comments: “As with many business classifications there is a need for a formal recognition of scale-up status. This would support the businesses on this trajectory in a number of ways.

“A formal classification enables government policy (including policy making at the levels of devolved and combined authorities) to be made that supports this category favourable and for formal reporting of the impact made by scale-ups in the overall economy. Formal recognition would also better support raising finances for scale-ups from traditional banks and venture capital as well as other sources of funding.”

Comparison with overseas

With a movement and eco-system clearly developing around scale-ups in the UK, it’s interesting to consider how the scale-up economy here compares with the rest of the world.

Gordon says: “It does depend on how you measure success but the majority of measures the UK is the best in Europe for scale-ups. Along with France, Germany and Sweden there is evidence for real capability in achieving high year-on-year growth. Perhaps not surprisingly London, Paris, Berlin and Stockholm are the key scale-up hubs in Europe.

“The UK compares favourably on the world stage too with only the USA, China and India having greater scale-up investment. Given the differences in the size of the economies between these four countries, the UK is really a global hub for scale-up (and an even stronger argument for supporting their formal recognition). Technology and scale-up go hand in hand in the UK. A third of Europe’s technology unicorn companies were created in the UK and 80% of the UK’s £6bn technology investment was acquired through scale-ups.”

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