Why the next biggest challenge for the UK is the scale-up gap

"It may take seven to 15 years to create a sustainable business," says Mercia Technologies' CEO Dr Mark Payton. Are UK's scale-ups primed for funding?

The scale-up gap is alive and well, according to research from multiple sources, which could hinder the UK’s economic outlook if left unaddressed.

Rather than starting up, scaling up is now the biggest challenge for technology businesses in the UK, according to Mercia Technologies CEO, Dr Mark Payton.

Speaking to an audience of more than 200 tech companies, investors and advisors at Manchester Town Hall, Dr Mark Payton said that the UK was one of the most successful in the world at creating start-ups, but ranked only 13th in its ability to scale them. He said part of the problem was the lack of ‘patient capital’, especially for businesses based in the regions.

“Scaling up is the real struggle,” he said. “Rather than holding businesses back, we need to work with the owners to build value over time. That doesn’t mean five years, it may take seven to 15 years to create a sustainable business.”

A December 2016 study from the ScaleUp Institute revealed opportunities for growth companies are rife, despite political uncertainty. The UK is currently on track to become a ‘scale-up nation,’ according to the institute’s review, as eight in ten CEOs of growth businesses expect their growth to continue despite the uncertainties created by Brexit. It also found two in three survey respondents are already exporters; primarily in Europe and North America, and to a lesser extent, Asia. These developments are encouraging, however, leaders still cite key barriers to growth in relation to developing leadership capacity, access to corporate buyers at home and abroad and access to the right talent and skills for their scaling businesses.

“High-calibre managers used to shy away from early-stage businesses but that has changed, as experience from our own portfolio shows. We are now building some very impressive management team and boards on our portfolio companies,” Dr Payton said.

According to Sherry Coutu, CBE, chair of the ScaleUp Institute and author of the 2014 ScaleUp Report, there has been an increasing proportion of scale-up companies per capita in most communities across a variety of sectors in the UK, which helps in driving local jobs and opportunities. “However, as the review highlights, we have found regional disparity in the number and density of scale-ups per capita on a community-by-community basis across the UK. In some communities there has been a widening of the scale-up gap, while others enjoyed decreases in the scale-up gap. To make Britain work for all, we must close the scale-up gap throughout the country in coming years.”

On a similar vein, Mercia’s Dr Payton highlighted that the issue is not simply with funding at different stages, but that tech business located outside of London face funding related challenges of their own. “Around £3 billion of investment capital is deployed in London and the South East but as you go further and further towards the North, the amount decreases dramatically. This isn’t a reflection of the quality of ideas, but the lazy way in which capital is deployed,” he explained.

Mercia focuses on investing in tech businesses in the Midlands, North of England and Scotland and its investment model allows it to provide funding at every stage of development. Dr Payton said Mercia’s activities corresponded to five of the ten pillars in the government’s new Industrial Strategy announced this week, including investing in innovation, supporting growth across the country and developing world-leading businesses. Following its acquisition of Enterprise Ventures last year, Mercia now has six offices and 63 staff across the UK regions and Scotland.

While more capital is now available for early-stage businesses, Mercia’s Dr Payton believes finding scale-up funding is still very difficult. He said that one of the biggest changes within the UK technology sector was the quality of people it was now attracting.

88 per cent of scale-up CEOs in the ScaleUp Institute review believe they would be able to grow their business faster if it were easier to develop the leadership talent at the firm. Scale-up leaders also place great importance on local support: more than seven out of ten said they would be able to grow faster if were easier to find ​ effective mentoring and professional support  schemes near them. The survey also showed a growing desire to see local universities and business schools develop executive education programmes tailored for scale-ups and their teams.

Two months ago, Barclays Entrepreneurs revealed that Britain enjoyed a five-year high in opportunities for entrepreneurs leading up to the EU referendum. However a lack of new scale up businesses, and current market uncertainty could harm growth in 2017.

There was a slight rise in the percentage of high-growth companies within the UK’s SME population, growing by 0.7 per cent, according to the index, which suggests moderate recovery when compared to the dramatic fall of 21 per cent seen last year. One positive indicator is a rise in the number of companies receiving expansion investment from venture capital, which increased by 6 per cent. 

The trend for high growth companies also suggested scattered regional success, with a 2.7 per cent boost in scale-ups in the West Midlands and a 1.5 per cent increase in scale-ups in Yorkshire and Humber. The number of growth businesses in Scotland and Wales fell by 2.9 per cent and 2.2 per cent respectively over the past year, which again highlights regional disparities.

The pre-Brexit government rallied around building up north of England’s economy with the Northern Powerhouse; an area that is already home to more than one million private sector businesses. The region’s economy generates 19 per cent of UK’s GDP, yet struggles with productivity levels below the national average. With 21 per cent of the UK’s high growth businesses based up North, 2017 may see greater focus beyond London.

The formal launch of a regional growth fund suggests this may already be on the horizon this year. The Northern Powerhouse Investment Fund (NPIF) is a £400 million growth fund as the result of close collaboration between the British Business Bank and the ten Local Enterprise Partnerships in the North West, Yorkshire and the Humber, and the Tees Valley.

According to small business minister, Margot James, the fund will narrow the historic North-South funding gap for growing businesses. “There are a record number of businesses in the UK, and the Northern Powerhouse is home to more than one million of them,” she said. “The British Business Bank has made a significant impact over the last two years and this report highlights how it has been helping businesses start-up, scaleup and then stay ahead. Next year the bank will support the delivery of the £400 million Northern Powerhouse Investment Fund, unlocking the growth potential in the North of England, creating secure jobs and powering local economies as part of our Industrial Strategy.”

Adding another feather in her cap, Margot James has also been appointed scale-up champion, as of the 23rd of January, a role that suggests a greater governmental focus on cultivating a new tranche of businesses on the growth path.

London’s start-ups nudged onto the fast-track

Tech city UK’s six-month scale-up programme is a recent example of a natural shift in the general funding and business support ecosystem in the capital.  The Upscale programme identified 33 companies this year that are on the verge of entering a new phase in their growth journey.

Under the mentorship of some of the UK’s most successful tech entrepreneurs including: Candy Crush umbrella group, King.com’s Riccardo Zacconi, Lastminute.com founders Martha Lane Fox and Brent Hoberman, FanDuel’s Lesley Eccles, and Just Eat’s David Buttress.

According to Upscale programme lead Jos Smart, almost a third of this year’s cohort are based outside London, for example Cambridge Intelligence (Cambridge), Cronofy (Nottingham), LivingLens (Liverpool) and DueCourse (Manchester).

This year’s cohort includes companies in e-commerce, fintech, data analytics and more.

  1. App & Software Development: CurveGoodlord
  2. FinTech: Trussle, DueCourse, Monzo, Pockit, Moneyfarm
  3. Data & Analytics: Streetbees, Signal Media, LivingLens, Cambridge Intelligence
  4. Digital Advertising & Marketing: StoryStream
  5. Digital Entertainment: Mixcloud, Boiler Room
  6. eCommerce & Marketplace: Wolf & Badger, Paddle, Urban Massage, Trouva
  7. EdTech: Firefly Learning, Mastered, pi-top
  8. Enterprise Software & Cloud Computing: Cronofy, GeoSpock, Grabyo, everyLIFE Technologies
  9. Internet of Things & Connected Devices: ChargifiElvie, Bulb
  10. HealthTech & biology: Echo, Live Better With
  11. SaaS: Poq, CharlieHR
  12. Hardware & Devices: Blaze

A profile of a scale-up

The average scale-up company in the programme is 4 years old, hires 31 employees, and has raised $4.1 million in funding.

These businesses on average have secured over $1 million per year and are mostly business to business (42 per cent).

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.