Supporting the growth of next-stage businesses in the UK

Supporting growth of next-stage businesses in the UK

What’s happening to bridge the gap between startups and full scale businesses and what else can be done to encourage startups to scale?

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In my last post, I discussed a critical area that’s shaping the UK’s startup scene: entrepreneurs’ decisions to sell versus scale-up.

The startup ecosystem in the UK is thriving, especially so in recent years. Strong venture capital activity, growing government support and successful accelerators and incubators are all encouraging increased startup activity. But, lacking support to transition from a small startup to a medium-sized business – a transition that, for many UK companies, requires expansion into international markets – many founders are choosing to sell their businesses, often to large international firms, rather than tackle the risks and challenges of further growth.

The choice to sell rather than scale, though understandable, is nonetheless having an impact on attitudes within the startup ecosystem, as well as farther-ranging consequences for the economy.

One medium- or large-sized business has a greater economic impact than hundreds of startups, through revenues, tax contributions and employment. Yet selling rather than scaling is coming to be seen as the expected path for a UK startup. Companies that choose to scale – such as cyber security firm Sophos, whose IPO in 2015 was valued at £1.1 billion – are seen more as an
anomaly than the norm.

This trend has to change. As put succinctly by Sherry Coutu, author of an independent report to the government on this issue, The Scale-Up Report: On UK Economic Growth, “Competitive advantage doesn’t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies.” And here, the UK is falling behind.

What’s happening to bridge this gap and what else can be done to encourage startups to scale?

  1. Targeted growth capital. The Business Growth Fund (BGF), a £2.5 billion fund launched in 2011, is one initiative designed to fund startups making this transition. Backed by five of the UK’s main banking groups, BGF makes investments of up to ten years to help bridge the gap in growth capital. Their portfolio already includes a wide range of businesses across the UK, in sectors including technology, healthcare, consumer goods, retail and more. The venture capital and private equity community also want to get involved with fast-growing, exciting businesses and opportunities for growth funding exist, especially through international partners. Given that international expansion is all but required for a UK startup looking to scale, an international funding partner can also provide needed advice and support that many entrepreneurs need to navigate this journey.
  2. Tax incentives. While there are a number of tax incentives that support entrepreneurs and startup businesses, similar supports to help businesses scale are currently lacking. In fact, with a 10 percent tax on capital gains for entrepreneurs versus higher tax rates for dividends and salaries, entrepreneurs have more personal financial motivation to sell than to scale. An adjustment in available tax incentives may provide the extra boost that some founders need to stay the course, while supporting the growth of the economy.
  3. Adjusting founders’ motivations. In my experience, most founders don’t get paid much before the exit event. Some founders may be encouraged – or feel forced – to sell as this is the only opportunity to reap reward after years of risk, effort and sacrifice. While keeping founders rewards relatively low may keep them keen and hungry, it also makes founders amenable to sale opportunities before a company has reached its true potential. To help stem this effect, we need to be looking at opportunities for more cash (as well as paper) rewards to founders on partial exits.
  4. Addressing the talent gap. Capital and the desire to grow a business isn’t necessarily enough – companies need the right talent to achieve growth targets. The UK currently has a highly competitive market, with a shortage of talent in a number of areas, including skilled technical roles. Whilst the UK education system does a great job, early stage startups need to do more to grow and shape the talent they need internally, supporting skills development for their employees as part of long-term growth planning. While “growing” the right people isn’t a quick fix, it not only ensures a fit with the corporate environment, but also provides an attraction and retention factor above salary and benefits. International recruitment efforts may also bring needed skills and specializations to the local market.

The UK’s strong startup ecosystem is clearly creating and nurturing companies with the potential to be come true international players. Now what we need is the support to help entrepreneurs grow their businesses to reach that potential – without selling out.

 

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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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