There is growing recognition that scale-ups are likely to have a bigger impact than start-ups on the UK’s future economic prospects.
In 2014, Sherry Coutu, chair of the ScaleUp Institute and serial entrepreneur, authored The Scale-Up Report on UK Economic Growth. She found that, in proportion to the size of the economy, there were fewer scale-ups in the UK compared to the US and other leading economies, and that many were struggling to grow.
She argued that if the UK focused more on company growth than company creation, it would boost jobs, productivity and economic prosperity. Her report was backed up by a Deloitte study (The Scale-up Challenge, November 2014) that showed scale-up companies had the potential to add 150,000 jobs and £225bn to UK GDP (just under 10%) within 20 years.
Embracing the scale-up challenge
Four years later, it’s probably still too early to declare a major turnaround in UK scale-up capability, but progress has certainly been made.
The ScaleUp Institute reports that the total number of scale-ups in the UK – using the OECD definition of companies with more than 10 employees and growing by more than 20% per year over a three-year period – has risen from around 27,000 in 2013 (Annual ScaleUp Review 2017) to 35,000 today (ScaleUp Institute website, September 2018).
And the Beauhurst Scaleup Index 2017 found that the total equity investment into a cohort of nearly 4,000 scale-ups it studied1, had jumped from an average annual investment of £750m over the 2011-2013 period, to £1.2bn over the 2014-2017 period.
Nor are scale-ups just young, tech companies. The Beauhurst analysis shows that most of them are actually in the business and professional services sector, followed by the industrial, built environment and infrastructure, and retail sectors. Technology and IP related businesses rank only fifth.
Furthermore, almost 70% of scale-ups are more than 10 years old. Only 7% are less than five years old. This dispels the notion that rapid growth is the exclusive domain of early-stage businesses, and also indicates that it often takes time to lay the foundations for a scalable business.
Increase your scalability
For Colin Granger, Partner at YFM Equity Partners – which has a portfolio of over 30 UK growth businesses and invests up to £10m per company – a strong management team, and not being over-reliant on one or two founders, is the ’platform’ for growth.
He says: “The team doesn’t have to be perfect on day one, but we look for a recognition from founders that a senior team will need to be put in place. We come across a lot of small businesses which get up to 10 or 20 people but where one of the founders is the CEO and at the same time runs sales, marketing and finance functions. That’s not going to work when the business starts to scale.”
Granger recommends two actions for entrepreneurs embarking on a scale-up journey, which are all too often delayed: appoint a proper finance director early on, and invest in quality management information systems.
“Founders often see these as a cost rather than an investment. But a good finance director should save you money in the short and long run. They will help to manage financial growing pains such as cash control, and contribute to the commercial side of the business in areas such as contract negotiations.
“Investing in systems can have a longer payback period, but it’s critical to both management and investors,” continues Granger. “Both need a detailed understanding of profitability – per contract, product, customer or geography. The very worst thing for an investor is not having confidence in the numbers.”
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
1 Companies with more than 10 employees and growing by more than 20% per year over a 3-year period, and which file full accounts with Companies House. UK companies are only required to disclose their turnover if two of the following are true: 1) annual turnover exceeds £10.2m, 2) assets exceed £5.1m, 3) more than 50 employees.