Family, friendships, work. Technology courses through the veins of modern life. We know and accept this, within reason.
But we are letting the greatest benefits of technology slip through our fingers – innovation, jobs and some of our finest brains.
Let’s look at the journey of UK start-ups. The UK ranks third place in the world for start-ups behind the US and India which are huge domestic markets. Overall, the UK had more than 650,000 start-ups in 2019. Research by SHL suggests this number increased by as much as 85,000 in 2020 as Covid-driven redundancies prompted many people to set up their own business.
We have the ideas and people to get companies started, and we have great successes.
The problem is this. Start-ups struggle to scale up – or, in other words – reach critical mass and endure.
Four in ten start-ups fail, and 2 per cent make it to more than £1m revenue, according to analysis from Enterprise Research looking at a three-year period. Many viable and worthwhile businesses are not fulfilling their full potential. This means that the UK drops to thirteenth place in the world for scale-ups according to the OECD.
I see three fundamental issues standing in the way of getting the full benefits from our technology innovation: a funding gap, a skills gap and a culture gap. At ScaleUp Capital, we look to ensure companies can overcome all three, not only through our investment but our Scaler Programme and Academy, which provide a methodology, expertise and the support required for emerging businesses to succeed through their scale-up phase.
The ‘funding gap’ has been failing emerging technology companies for as long as I can remember. Companies with revenues of up to £20m and good (but not explosive) growth are, in many cases, simply not given the time of day.
Private equity and venture capital works very well for businesses who fit their mould. Profitable companies that are ‘oven ready’, cash generative and can service debt suit private equity. Companies with hyper-growth potential suit the venture capital model.
Tech Nation’s 2021 report celebrated record VC investment in UK tech of $15bn in 2020. But here’s the issue: most early-stage tech companies are not hyper-growth, so venture capital is not right for them. Only a tiny percentage of VC-backed start-ups make it, looking at data from CB Insights: 4 per cent are sold for more than $50m, 1 per cent make it to unicorn status, and seven in ten fail. This is a cruel end for people who have lived and breathed their business for years.
The same companies typically miss out on private equity funding because they have not yet reached critical mass and profitability, often because they re-invest revenues to drive growth, and cannot support debt.
Thankfully, there are an increasing number of specialist scale-up investors who want to plug this funding gap. But small businesses at the start of their scale-up phase require more than just funding.
Obstacle number two for small companies who want to scale up is the skills gap. Helping a small business achieve critical mass is hard. These are the difficult ‘teenage years’ where a business will undergo more change than at any other stage of their life.
Founders are typically subject matter experts who know their product and market inside out but have never scaled a business before. Research by Crunchbase shows that 83 per cent of founders are doing it for the first time. They don’t have the experience, method, and skills to add the systems, processes and governance they need to change gear. The business needs to shift from the founder pulling all the levers to being run by a well-rounded management team.
The most acute skills gap lies in sales and marketing. Customer acquisition and retention is a science, but often this is where smaller businesses fail. It is one thing for a founder or CEO to drive sales through passion. It is quite another thing for an experienced sales team to drive scale.
Obstacle number three is the culture gap. The UK is held back by a fear of failure. Scaling up a company is not as risky as starting a company outright, but there are risks. Too many of our best minds settle for lower risk jobs in professional services industries, when they should be succeeding (and occasionally failing) to drive growth and innovation.
Making technology work harder
So start-ups are struggling to grow, but what can we do about it?
The Government has a role to play. It needs to help technology companies on tax, training and the skills they need to manage and scale small businesses. The Help to Grow scheme, announced in the March Budget, will offer MBA-style management training to the leaders of up to 130,000 small and medium-sized enterprises. This is a welcome first step.
Rishi Sunak was also right to point out that ‘as well as support for innovation and access to talent, high growth firms need access to capital… to fill the scale-up funding gap’. The Government’s Future Fund Breakthrough will go some way towards meeting this need, but the investment industry has a big role to play here too.
There is a funding gap between venture capital and private equity that is starving many emerging technology companies of the money they need to grow. Money is vital during this difficult transition but is not enough.
Growing companies from small to mature is a skill, like anything else. There is a science to it, and a lot of the expertise that define success for small businesses can be taught. If funders are not supporting skills, they are failing the next generation of emerging technology companies.
I don’t have all the answers. But I know there is more to do to help these emerging technology companies scale up and achieve critical mass. The benefits are too important to let go. Small businesses are the backbone of our economy.
They provide innovation, jobs, growth and diversity. They are also the most vulnerable to deterioration in every sector and have fewer resources to draw on. Now more than ever, supporting small businesses will be critical as the country looks to boost growth and productivity post-pandemic. It would be a mistake to surround ourselves by technology in our daily lives but miss out on the fruits of this revolution.
Simon Philips is the CEO of ScaleUp Capital.