In 2011, David Cameron officiated at the launch of StartUp Britain, a campaign group for entrepreneurs. The launch followed his own calls for an “enterprise-led” recovery following the Great Recession of 2008–09; the new group was a tangible expression of that priority, since it sought to help budding entrepreneurs make their start.
Yet the UK has already proved itself fertile ground for start-ups – the real problem is what comes next. According to the Organisation for Economic Co-operation and Development, the country ranks third globally for the number of start-ups it generates.
Moreover, few places are better for securing funding. One area that has been growing rapidly is ‘fintech’ – financial technology. In the first nine months of this year, more than $1 billion had already been invested in fintechs – double the previous year1. Likewise, when founders want to sell up, London is chosen more often than the next six European cities combined2.
The faster they rise…
However, while the UK has an exemplary record on generating start-ups, it is apparently less adept when it comes to turning those start-ups into mid-sized businesses: it slips to 13th spot when it comes to scaling up3.
In fact, not even 3% of UK start-ups survive for a full decade and enjoy a single year of high growth, according to a parliamentary report.4 Yet a mere improvement by 1% in expanding small businesses could generate 238,000 jobs within three years and a further £38 billion for the economy4.
Statistics on the durability of UK start-ups are undoubtedly discouraging for small business owners – besides, it is hard enough merely to get a start-up going in the first place. Yet some of the impediments to scaling up in the UK are already well-known – and are not insurmountable.
The Scale-Up Report on UK Economic Growth, an independent study published in 2014, considered the effects of scale-up policies adopted in other countries, in order to make recommendations for the UK5. The report found that, above all, the UK suffers from a lack of data; a shortage of talent; insufficient training among senior leaders; regulatory barriers that prevent rollout of new products; and capital-raising and infrastructure limitations.
While some of these problems need addressing through political and regulatory means, others put the onus on business owners themselves. Thus, it is well worth ensuring that your business does not fall into the traps that catch out so many start-ups.
One particular problem is funding. In part, this is a market issue. The UK has plenty of seed funding available, but far fewer options when it comes to scaling up for the next steps – beginning with what is known as ‘Series A’ funding, the first significant round of venture capital funding. However, business owners are part of the problem too, since understanding of how funding works is limited.
In some ways, ambition is part of the problem. While a start-up may need to be brutal on costs, getting to the next stage requires both a different approach and a deeper understanding of funding options.
A report published by Goldman Sachs6 showed that too many small business owners have been unwilling to embrace further financing, particularly in the wake of the financial crisis. Yet there are two reasons that this conservatism can be a mistake once a start-up is properly established.
First of all, there is plenty of funding available, and it has increased sharply in recent years. Beyond the obvious commercial banks, angel investors, venture capital and private equity companies, there are also smaller providers, debt funds, challenger banks and even crowdfunding platforms to consider.
Secondly, for a business to remain innovative, open offices abroad or recruit good staff, it will probably require funding. Skimping on these areas will ultimately dilute the quality of the business itself – and its potential for expansion.
However, even if you’ve decided to seek out new funding, that doesn’t mean it’s easy to secure. For one thing, it is not enough for a start-up to demonstrate that it is gathering lots of customer data which it one day plans to harvest. To secure funds from an angel investor or venture capital firm, it needs to be able to demonstrate that it is making sales to real customers.
Moreover, since the early months and years of a start-up can be frenzied, it is easy to limit your focus to the next few months or even weeks. Yet upscaling from a start-up to a mid-sized business means taking a longer-term view and setting longer-term goals. After all, that adolescent growth spurt can’t last forever.