Scale up vs. sell out: Decisions shaping UK’s startup scene

Decisions shaping UK’s startup scene

The time has come to understand and address the root causes of why are entrepreneurs in the UK selling out rather than scaling up?

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Over the past five years or so, the UK’s startup ecosystem has thrived. A growing entrepreneurial spirit, combined with government support, accelerators and incubators, and strong venture capital investment, have encouraged startup activity across multiple sectors, especially in Technology.

Yet, despite early stage growth, not enough small startups are making the transition to medium or large-sized businesses. Instead, many founders are choosing to sell their companies, often to large international firms. Despite the positive aspects of this strong acquisition activity, concerns are now being raised about the impact of this trend on the economy, the leak of UK talent to international firms and the number of firms that are being sold too early before reaching their full potential.

Within the UK market, there are plenty of support structures in place to encourage entrepreneurialism. From a favourable tax regime to a strong local startup community, the UK is well known as a great place to start a business. However, when it comes to the next stage of growth and assisting smaller businesses to scale up and flourish, support is still sadly lacking.

While a healthy startup community is critical to the economy, so too is the next stage of corporate growth. The time has come to understand and address the root causes of this issue: why are entrepreneurs in the UK selling out rather than scaling up?

  1. When growth equals starting again. To grow an idea into a viable business worth £10-30 million, founders have taken a significant journey rife with risk and challenge. Yet there is no opportunity to rest: growing that business to the next level of scale requires making new investments, acquiring new talent and new skills and facing a considerable change in corporate culture. Many entrepreneurs feel that these challenges are akin to starting again, while the level of risk incurred in the growth process – and the effort and stamina required for success – make a sale an attractive alternative.
  2. Challenge of international expansion. A startup in the United States has access to a massive market that they can tackle to gain size and momentum before needing to move to international markets. The same cannot be said for startups in the UK. Though the UK is a large and stable market, its size nonetheless inherently restricts growth. To reach the next level, a home-grown business must become international much earlier than an American company of a similar size. From issues of language and localization, to the wide variance in regulations and tax codes across Europe, international growth presents UK’s entrepreneurs with a wide variety of challenges and associated risks.
  3. Reward following risk. Entrepreneurs invest considerable time and effort into their startups, often at great risk and for little financial reward. Often founders do not get paid much until the exit and valuations for good-quality, fast-growing businesses are currently very high. When the opportunity to sell arises, this chance to move on – and reap the accompanying financial reward – can be too appealing for many entrepreneurs to turn down.
  4. The tried and tested route. While perhaps less impactful when it comes to individual motivation, one should not underestimate the impact of “the road most travelled.” Fact is, in the UK we have not had many businesses that have gone for scale, instead seeing the majority of our successful startups selling to multinational corporations or investors. Growing and becoming acquired has thus become seen as the expected path, with some founders anticipating their eventual exit from the business even in the early stages of the company’s growth.

Progress is already being made to address some of these issues. For example, the government, backed by five of the UK’s main banking groups, launched the £2.5 billion Business Growth Fund in 2011 to make investments of up to ten years to help bridge the gap in growth capital. International venture capital and private equity funders are always interested in supporting exciting, high-growth businesses and may be able to provide targeted support to address the challenges of international expansion. Efforts, too, are being made to shift the way that founders think about the long-term trajectory of their businesses and their role in those businesses’ future.

Beyond availability of growth capital, progress is also being made to upskill startups to tackle the challenges of scale up with the Mayor of London recently announcing the launch of the International Business Programme providing high growth companies with a peer-to-peer mentoring and support network.

But more needs to be done. The UK has built a thriving startup scene, yet it’s multinational corporations who currently are seeing the biggest long-term results from our homegrown ingenuity. By addressing these issue head-on and helping entrepreneurs effectively scale their businesses, the UK will realize impressive positive impacts on our employment rates, tax revenues and economy for years to come.

 

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About the author

Barry Carter has been a Partner in the UK for the last 15 years. He has over twenty years’ experience of transaction related work with particular focus on Technology businesses. He heads the Technology sector team for EMA within Transaction Services and has significant cross border deal experience. He also acts as lead relationship partner to a number of Technology businesses, particularly innovative and fast growing businesses with ambitious plans, where he acts as a sounding board to stakeholders on strategy and takes overall responsibility for co-ordinating KPMG services. Barry has extensive capital market experience and has worked alongside corporates to achieve listings and fund raising on UK, German and US public markets.

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