#Scaleups are the new #startups
Written by Jonathan Hollis, Manager in the Digital Private Business team at PwC
It’s about time we started paying more attention to scaleups.
Quick recap. The UK has become a hotspot for startups. Over the last 5 years, 2.8 million companies have been incorporated. This has led to a thriving ecosystem geared to supporting early stage businesses. Most notably, the rapid expansion of incubators and accelerators has been a catalyst for change – a recent Nesta report identified 368 currently active.It’s about time we started paying more attention to scaleups.
The idea of running a formal fixed-term programme to assist entrepreneurs to grow their businesses was first conceived in 2005, when Y Combinator was founded in the US. Europe quickly followed suit with Seedcamp launching in 2007, followed by Startupbootcamp in 2010. These programmes typically run for three months and offer entrepreneurs funding in return for an equity stake, office space, mentorship and an opportunity to pitch their products and services to a room of experts. Over the period of the programmes, founders are given the opportunity to develop their proposition, refine their business model and obtain some validation of the scalability and commercialisation of their offering.
In parallel, government support initiatives, the falling costs of technology and the boom in mentoring caters well for entrepreneurs starting their new ventures.
So what happens next?
In the last 5 years, 1.8 million companies have ceased trading across the U.K. This article will not dwell on the already well documented reasons why a company might fail, save to say that one key reason is that companies are not being provided with the necessary support they require to achieve their potential as they grow, and inevitably, run out of cash. People are now waking up to the idea that later stage companies need guidance on how to scale as they progress – as many of these skills are different to those needed at the start of their journey.
Few formal definitions of ‘scaleups’ exist, but the OECD defines them as enterprises with at least 10 employees, growing by more than 20% over three consecutive years, measured by employees or turnover.
Though this definition is a little dated (2007) and some software companies manage high levels of growth with fewer employees, it encapsulates the idea that rapid growth together with ongoing value creation, is a key differentiator between a startup and a scaleup.
This article contends that three key ingredients are required to scale successfully:
- access to cash through new/repeat customers and adequate funding;
- operational systems and processes that are fit for purpose; and
- a strong leadership team, able to hire talented people.
Although simple to articulate, in practice, few startups are moving to the next stage in their growth cycle, and therefore are not getting this right. According to the Cambridge and Oxford Business Schools, who published their “Scale-up UK: Growing Business, Growing our Economy” report in April 2016 in partnership with Barclays, scaleups are a rather rare species, amounting to less than 4% of the SME population. Similarly, the latest report by the ScaleUp Institute on SME finance published just last month found that companies that met the 20% growth criteria accounted for 5% of all SMEs. Naturally, some startups may decide not to scale. We focus here on those that are willing, but lack the expertise to scale.
Sherry Coutu was one of the first to formally highlight this gap in her Scale-Up Report, published in 2014. The paper outlined the need for a greater focus on scaleups due to their impact on the economy, as well as the broader competitive advantage of the UK.
Over the last two years, some support for scaleups has appeared in the U.K.: the ScaleUp Institute has continued to build on the recommendations of its 2014 report, and a number of programmes aimed at helping later stage businesses scale have emerged:
- LSE’s 18 month Elite programme;
- Tech City’s 6 month Upscale programme and its Future Fifty network;
- SwiftScale’s programme and;
- last but certainly not least, PwC’s Scale programmes (further details below).
This suggests that the scaleup ecosystem is showing some signs of developing, though we are nowhere near the level of support needed for startups to become scaleups. Cambridge and Oxford’s 2016 report also identified that much more work was still required to bridge this gap, and many companies are ill-equipped to deal with the challenges ahead.
All is not lost…
There’s a plentiful supply of accelerator programme graduates, many of whom have been part of more than one cohort, and have built up a strong network of mentors.
Many of those companies have the potential to become scaleups; they have received significant funding and have been able to validate their products or services in the market.
Many entrepreneurs with scale-potential businesses are looking for an exit within the next five years, and so are incentivised to maximise their chances to be ‘talent spotted’ by a potential buyer. This tends to occur following a period of rapid growth.
As well as the supply of ready-to-scale companies, demand is also being driven by corporates, end-users and investors who, respectively:
- are increasingly becoming more interested in companies which are ready to plug and play into their organisations;
- expect nothing but the best customer experience;
- and are constantly looking out for only the companies with the fastest growth potential, investing £1.6 bn in scaleups in 2016.
For the UK economy, it’s not startups that matter, it’s growth. The real economic value doesn’t come from company incorporation, but from job creation, which follows growth hand in hand. An oft-quoted figure suggests that closing the scaleup gap could create an additional 238,000 jobs and £38 billion additional turnover in the UK within three years.
The government is also on board: The Department for Business, Energy & Industrial Strategy (BEIS) launched an inquiry in March 2017 to investigate the challenges facing startups in overcoming the scaleup hurdle (following the general election, this was put on hold). Margot James MP is now championing scaleups and has chaired the first meeting of the newly created Scale-Up Taskforce to help assess the barriers to growth facing UK businesses. Anna Soubry, the previous Small Business Minister, announced the creation of 39 growth hubs in May 2016, to boost business support across the country.
Regardless of who provides the support, there’s a clear need to package a suite of services to support scaleups in reducing the barriers to achieving their growth potential.
The UK is already a startup nation, it’s time it became a scaleup nation.
Last year, PwC’s Digital Private Business team decided to play its part. Over the last 18 months, we’ve teamed up with a bunch of delivery partners, including SwiftScale, Up Ventures, CodeBase and AngelsCube to run a number of 12-week programmes, supporting over 60 scaleups through workshops, and connecting them to
- corporates looking for innovative enterprise solutions to introduce into their organisations;
- investors searching for the highest ROI;
- PwC partners and directors across the UK looking to support growing companies; and
- industry experts sharing their experience on topics including B2B partnerships, the corporate procurement processes and sales and marketing masterclasses.
Although the structure of the programme mirrored that of a typical startup accelerator, the value proposition and outcomes differ significantly. Firstly, we work with much later stage, revenue-generating companies and secondly, the programme addresses the scaleup’s immediate needs described above; access to cash, repeat customers and ensuring they are fit for purpose.
As well as providing the right support to scaleups, these programmes also bring innovative enterprise solutions to our existing client base who are on the lookout for enabling technologies.
About Jonathan Hollis
Jonathan Hollis is a Manager in the Digital Private Business team at PwC. He is responsible for developing PwC’s Scale programmes in London and across the U.K. He has worked with over 40 fast growing companies and looks forward to advising many more. Having set up his own B2B company whilst studying Economics at the University of Cambridge, he subsequently qualified as a chartered accountant with PwC, before moving to his present role. He currently manages PwC’s entrepreneurs’ network in the UK and is a startup mentor on a number of early stage accelerator programmes.