Making the tricky transition from start-up to scale-up can prove more difficult than getting your business offthe ground in the first place. But why? and what can firms do about it?
You don't have to look too hard to find a start-up these days, whether it"s a new mother coding an app at her kitchen table, or a bunch of beards launching a cafe that sells only breakfast cereal. This actually happened, by the way, when the Cereal Killer Cafe opened in Shoreditch, London - one of 526,000 new businesses launched last year in the UK, according to government statistics.
In the run-up to the general election, every major party lauded this kind of can-do spirit. But even the most pioneering of start-ups will come up against a serious problem soon enough - once the business exists, you generally have to make it bigger. And this is where it gets tricky.
According to the Entrepreneurs Index, published by Barclays and the Business Growth Fund, the number of start-ups in the UK rose by 3.7 per cent in the second half of 2014 - the second highest increase since the index was first published in 2012. But the number of businesses reaching revenues between £2.5 million and £100 million fell to 21 per cent - a 2.2 per cent drop from the same period the previous year. All of which begs a simple question: why is it so difficult to scale a business?
The one issue most commonly discussed when it comes to scale is finance - growth requires capital. And while alternative crowdfunding models like Funding Circle or Crowdcube are becoming increasingly mainstream, they still make up only a tiny fraction of the funding market. The vast majority of businesses still go straight to a high-street bank for their loot, but the terrain in the wake of the economic crisis can make this a frustrating experience.
“Money is surprisingly difficult to get at any decent rate,” says Mark Loane, Founder of Channel Island-based C5 Alliance, which has grown from five people to more than 150 since it launched in 1999. “Banks are simply too risk-averse to give support. When I was about to buy Itex Holdings in 2013, the bank decided it wouldn"t give me the money 48 hours ahead of the deal. Its UK audit group said it was too risky and that I"d need a full audit by PwC, costing £20,000. So I had to borrow money against my personal savings instead.”
Loane points out that this strategy of growth by acquisition (C5 had acquired Cronus the year before) was itself only necessary because of another problem common to many start-ups - a lack of available talent. This issue has had plenty of exposure lately, with the perceived skills gap among school leavers. It becomes even greater in an area with obvious geographical limitations, such as the Channel Islands.
“In 2011 I ran out of people,” says Loane. “Until then I"d grown by finding the right people, but suddenly I couldn"t find the skills. We were growing, thanks to our apprenticeship and graduate scheme, but it was incredibly slow. So I had to change my growth strategy and start making acquisitions.”
CHANGING SHAPE
Like many others before him, Loane wound up taking on a second business bigger than his own, giving him the added challenge of pulling everyone together to form one unified whole. Yet even if they only grow organically and never have to accommodate another company culture, many start-ups find the inevitable presence of new blood challenging. As the company expands to accommodate extra people, the original focus, goals and identity of the business can fade. The result is often conflict - growth requires quick decisions, which can add a lot of pressure when the stakes are so high.
Other businesses may find issues arise not with their culture but with their offering. The entire company may have to shift from its original product idea to something completely different.
“Years ago I worked on a start-up creating a web callback system that would connect people with customer-service reps at the click of a button,” says Eric Van der Kleij, Head of Level39, a business accelerator in London. “We thought we"d soon have thousands of millions of buttons on sites round the world. But there weren"t enough web users then. Plus e-commerce suddenly became about automation, not speaking to anyone, so we had to pivot and developed automated credit card fraud alerts instead.
“This was a huge challenge. We were one type of business, with expertise in e-commerce delivery, and we had to completely change to become a fintech company - which meant learning about banking and compliance, and rehiring an entirely different skill set.”
Of course when a company happens to land on precisely the right product, this may itself necessitate a switch of similar proportions: expansion into overseas markets. Again, this is particularly pertinent to businesses experiencing the Channel Islands" natural limitations. If you"ve saturated the local market, how else could you grow? And guess what: this isn"t easy either.
Expanding overseas requires a leap in legal, tax and regulatory expertise, which can be a huge hurdle - especially in heavily regulated areas like financial services and fintech. For firms that produce products as opposed to existing online or offering professional services, there are all sorts of problems to solve regarding exports, warehousing, delivery and the like.
But this is where things start looking brighter - crack the overseas nut and you"ll find yourself staring at a great opportunity. “Only seven per cent of companies in Europe sell cross-border,” says Van der Kleij. “So there"s a huge potential addressable market if you can overcome those barriers.”
TECH ADVANCES
There"s one other tool these days that can enable vast growth - the internet. Thanks to the online revolution it"s never been easier to build a wider presence, with developments like e-commerce and social media enabling national or international expansion without the need for a vast physical footprint or marketing budget.
“The opportunity is immense,” says Simon Devonshire, scale-up specialist and one of the UK government"s Entrepreneurs-in-Residence, who"s become somewhat of a digital evangelist for scale-ups. “We"ve never had more processing power, or connectivity for virally contagious marketing. Or such availability of open-source code. All this creates huge opportunities for growing businesses.”
This comes with its own problems - companies can get seduced by the ease of testing, launching and marketing a product or service online without factoring in the potentially high cost of, say, customer support once it"s live. But, says, Devonshire, if your business isn"t online you"re missing a trick. If it is online already, then you need to get selling online. If you"re doing all that already? Then make it all look and function better.
Healthy growth could prove crucial not just for the health of theindividual company but for a country"s wider fortunes. Sherry Coutu, author of The Scale-Up Report on UK Economic Growth, writes that: “Competitive advantage doesn"t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies.” According to her report, submitted to the government at the end of 2014, a boost of just one per cent to the UK"s scale-up population could drive an additional 238,000 jobs and add £38bn to GVA within three years.
Indeed, start-ups don"t exist in isolation. Devonshire is keen to point out that just as small companies are struggling to scale, so larger corporations are facing similar issues of their own - take the £6.4bn loss Tesco posted earlier this year. The problem of growth - of access to finance, talent and customers - is just as big a deal at the far end of the spectrum too.
“What"s interesting is that those big and small companies are each other"s antidote,” says Devonshire. “Big businesses can"t get the talent, as young people now want to gamble on their own abilities with an equity stake at a smaller place. But big businesses are the ones with the access to market. If big businesses can find intelligent and effective ways to integrate and collaborate with these smaller, dynamic businesses, it could create a win-win.”