What is stopping UK scale-up businesses?

Economy & Politics | Reports

For the UK economy to thrive, scaleup businesses must thrive. As part of its scaling-up series Business Leader asks – what are the barriers that scaleup businesses are facing? A scaleup business is one that has achieved year-on-year growth of at least 20% for three years and has more than twenty staff.

Mike Dias is the founder of ScaleUp Valley, an influential community that supports businesses in the UK that are looking to scale-up.

On what he feels are the critical ingredients needed for businesses looking to scale, he says: “World class leadership across all layers, radical focus and a bold culture of lifelong learning that inspires execution are key. And the most common barriers to growth are the opposite of these values. They are leadership development, having a complex strategy where you are always chasing the next big thing and a culture of excuses that leads to sloppy execution.”

On what differentiates the winners and losers in the scale-up space, Mike goes on to say: “The teams who win are the ones who don’t get distracted with the next big thing and stay loyal to a clear strategy with radical focus. Look at Zoom. Video-conference solutions were not the next big thing. Yes, but they are on their way to $1bn after IPO this year.”

Access to capital

Christine Hockley, Director of British Patient Capital believes that access to funding is also one of the main reasons that stop businesses from scaling up.

She comments: “Britain has a proud tradition of being among the best places in the world for entrepreneurs and innovators to start their own business. However, once those businesses become established many are unable to fulfil their high growth potential, due to a lack of patient capital.

“They might have an innovative idea they want to prove through investment in R&D, or a new product to bring to market, but struggle to obtain the larger amounts of long-term, venture and growth capital required to scale their businesses. It often means too many high-growth potential businesses are forced to grow at a slower rate or look abroad when they want to
scale-up.

“With £2.5bn of funds to invest into venture and venture growth capital funds over the next decade, we’re working alongside institutional investors with the aim of attracting a further £5bn of patient capital investment, unlocking £7.5bn of finance.”

Mentorship

Rob Perks, who is the CEO of Inspire, agrees that access to capital is a major barrier to growth alongside access to good mentors.

He comments: “In a recent survey conducted across the UK, two of the biggest barriers raised by entrepreneurs for scale-ups to break through nationally are access to capital and access to mentors with practical experience in growing businesses.

“Access to appropriate finance and growth capital is often necessary to scale a business at a pace that can keep you ahead of the competition. When businesses are scaling up, it is often difficult to find funders who understand their challenges and are prepared to come on the journey with them. Often, this stunts their growth and can cause huge frustration.

“Getting the right expertise, help and advice, into a business is also difficult. Where do you find successful businesspeople and entrepreneurs who are willing to devote time to helping you grow? Demand for opportunities to network with peers, to recruit non-executive directors and receive mentoring is high and increasing, particularly the ability to access them easily and locally.”

Looking into the crystal ball

On what the future holds for scale-up companies and what trends we can expect, Christine says: “The UK equity ecosystem has developed over the last decade and is now better able to support companies at all stages of their development. Since 2016, the UK has been ahead of the US in terms of GDP-weighted VC deal numbers, and the UK now has a similar proportion of companies receiving follow on funding at each stage as the US.

“But the amount of capital received at each funding round is larger in the US than in the UK – ranging from 1.5 times at earlier rounds to 2.4 times at the fifth funding round. This means UK companies receive less funding and so are less capitalised compared to their US counterparts.

“Over the next 10 years, it is vital that more institutional capital is brought into the venture and venture growth industry to enable long-term investment in innovative companies across the UK.

“While much of venture capital is still focused on areas like enterprise software and fintech, there are significant market opportunities in areas that tackle global issues like efficient energy, sustainable consumption and health and social care. Not only are there social positives from investing in these types of companies, there are also potentially very large commercial returns for investors.”

Exporting for growth

Rob Perks says that exporting is a trend that is also taking hold amongst scale-up companies.

He comments: “For the first time, all regions of the UK are experiencing a growth rate of greater than one additional scale-up per 100,000 of population, according to the most current data (2017). There are now 36,510 scale-ups – a rise of 34% on the previous year.

“We are entering a time of economic challenge and unpredictability. This is underlined by the overwhelming perception among scale-up leaders that Brexit will have a negative impact on their businesses.

“Scale-up companies are hungry to export and to collaborate with government and large corporates, but 80% tell us that market access – particularly in the UK – is a major issue and rates of collaboration are low.

“The barriers are time-consuming and complex procurement processes, as well as a lack of identifiable opportunities. We need to pull down these barriers.

“Access to talent and skills remains another stubborn barrier to continued growth. It is the factor cited by the greatest number of scale-up leaders when asked to name their top three barriers. Almost seven in ten scale-up leaders say it is important to bring in talent from the EU.”

The business perspective

So what is it like to run a scale-up business and what are the main challenges? Pat Lynes is the CEO and founder of Sullivan & Stanley.

He comments: “In the last year, Sullivan & Stanley has transitioned from a start-up into a scale-up, so I’ve experienced first-hand just how hard it is to cross the desert. One of the biggest barriers I’ve noticed is access to talent – you need A players to grow. This is because people issues hold scale-ups back. While the right people, with the right mindset, drive the organisation forward, as you trust them to make the best decisions.

“I’ve also seen personally, and through the leaders and associates I work with, how the wrong leadership team can be a barrier in itself. As a leader, you can’t do everything – who and what may have worked before, may no longer have a place in this new phase. Too many businesses find it hard to let go. However, bringing in an executive team, with different strengths to navigate this growth is key.

“An ongoing journey up and down the change curve. This is because the culture and essence of the original business changes. The desert is a dry, horrible place between 15 and 50 people. Businesses have the legacy people, who want to try to keep the startup vibe, but with layers of governance and new hires bringing, there is always going to be a shift. The old ways of working are no longer fit for purpose, so change has to be continuous. However, if businesses hold true to their vision, including people honestly and openly on the ride, they’ll come out the other side.”

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