The UK has always been a hotspot for new businesses. With nearly 2,000 new companies being formed every single day, entrepreneurial spirit is certainly never in short supply. But with 1 in 5 businesses failing in their first year, what needs to be done to ensure start-ups make it through the difficult new business hurdles and begin to scale up without selling, relocating or dissolving?
This blog has been written as a precursor to the upcoming CIONet event: ‘Digitising Britain’. This highly anticipated discussion will take place on Wednesday 26th May from 5pm-7pm and features a range of industry experts, including La Fosse founder Simon La Fosse, who will be discussing how Britain can cement its future as a global digital player. Register here today!
When does a start-up become a scale-up?
The most important thing to crack when moving from start-up to scale-up is your product-market fit. In order to become economically stable and correctly allocate funds, there needs to be an appetite and need for your product. If you’re currently in this stage, check out the Lean Startup Product-Market Fit Playbook for more information on how to manage this process.
Coming in at a close second is funding. Generally, in order to reach scale-up status, a start-up would have to secure a second round of funding – in most cases, this relies on them proving that they not only have a solid MVP and market opportunity, but also that they have begun to develop a substantial userbase and are bringing in a steady revenue stream that has the potential to grow exponentially and allow the business to achieve success at a larger scale.
There are also various other business development factors that will allow start-ups to make the leap to scale-up status. These include efficiency measures such as digitising systems and creating onboarding processes, people measures such as creating a defined management hierarchy and narrowing roles through key hires, and becoming more risk-averse.
It’s important to consider that scaling is not the same thing as growth. Whereas growth is simply an increase in revenue, scaling refers to a company’s ability to increase revenue at a faster rate than they incur new costs (such as added resources, employees, systems etc.). In many cases, it’s the difference between working harder and working smarter, implementing solutions that enable the business to service an exponential number of customers while minimising costs to the business.
Why do start-ups fail?
According to a CBInsights survey, the primary reason that start-ups fail is because there’s no market need for their services or products. It’s relatively easy to start a business, but without an innovative idea or approach, building a captive audience within an already saturated market is extremely difficult.
Another crucial barrier to start-up growth is funding – of the companies surveyed, almost 30% failed because they ran out of cash. On average, it costs £5,000 to launch a start-up, and most will find themselves spending £22,756 in their first year. Concept, pre-seed and seed funding will in most cases come from the founder’s own pocket – and/or family, friends, and potentially angel investors – but in order to secure the VC funding that will propel them to scale-up level, businesses will need to prove that to an investor that they have the potential for continued growth. Not only could this take years to get to this stage, securing VC funding is also a highly competitive and selective process.
CBInsights also identified a number of other reasons for failure in their report, including:
not having the right team
pricing and cost issues
poor product offering
lack of business model
ignoring customer needs
What other factors impact the number of scale-ups in the UK?
While there are numerous government funds such as Innovate UK (which has pledged to invest £40 million) and loans such as Future Fund (a COVID response which has helped thousands of businesses survive the economic dip) to help start-ups get off the ground, there is still a huge gap between the high number of start-ups and large corporations – it’s the ‘thin middle’ where scale-ups should sit that we’re missing, and this could seriously impact the economy as we move into a digital age.
There are various reasons that start-ups don’t transition into UK-based scale-ups, including:
Although relocating overseas involves many challenges around cost and operations, and can be highly time-consuming, the UK is seeing lots of high-growth start-ups moving their operations abroad which negatively impacts the economy. This could be the case because the start-up culture within the UK is thriving, however as we’ve seen, the potential to scale up is often constrained by the saturated market and access to funding.
Businesses may choose to move abroad for multiple reasons, most of which are attractive cost-savers for start-ups. These include lower taxes as lower labour costs, as well as the increased revenue opportunity afforded by expanding into different markets and regions.
From an employee perspective, it’s undeniable that Brexit has resulted in a veritable talent drain – a recent report found that migration from the UK to EU countries has increased by about 30% compared to pre-Brexit numbers. As such, many companies believe that to find the best talent, they need to look beyond their doorstep – along with the above pull factors, it’s understandable that growing businesses may feel they will have more opportunity abroad.
There are various reasons why a start-up might sell instead of scaling, but these can generally be boiled down to:
Running out of cash – if the business is at risk of failing and cannot secure further funding, a buy-out may be a founder’s only option to realise their vision
Pressure from investors – VC/PE backers are often keen to secure a timely return on their investment
Growth – some founders may want to stick to the entrepreneurial mindset and prefer to start and grow new businesses rather than pivot to a business mindset and manage the company as it grows. First-time founders especially may have identified future growth opportunity but are unsure of where to go next, so putting the company in the safe hands of an already successful larger business can maximise potential.
Getting a great deal – sometimes the business may be doing really well, but the deal on the table is too good to refuse!
Although the UK is perceived as a thriving hub for new business, it is let down by the economic weight held by legacy companies – in sectors like mining, energy, banking and property – that have suffered from a chronic lack of growth and productivity. As a country, we are facing stiff competition from the US, China, and other digital players, and it is our duty to participate in the digital revolution and become a global force of nature.
Achieving this will not be easy, but the potential economic rewards are huge. This transformation starts with leaders across the UK supporting tech-led start-ups, lobbying for more financial aid, resources and policies, and most importantly, creating a national digital infrastructure to foster at-home development and growth.
If you’d like to learn more from prestigious digital leaders about where and how Britain can plant its flag on the global stage, don't miss CIONet’s summary of their recent event, 'Digital Britain’!
How can I grow my business from start-up to scale-up?
To summarise, if you’re a founder looking to make the jump to scale-up, you’ll need to consider the following questions:
Have I fully defined my target audience?
Have I created, tested, developed and determined my MVP?
Is there a genuine, proven need for my product?
Does the company have the ability to scale its audience and sales?
How does my business/product stand out from its competitors?
Where am I in the funding cycle?
What type of funding is right for my business?
What specific areas of the business do I need funding for?
Have I got sufficient data to prove existing success and growth potential?
Have I calculated risk levels?
Does the company have well-defined teams and functions?
Are my current business leaders the right people to manage the business as it grows?
Have I hired the right specialists to achieve effective growth?
Are my employees motivated and supported?
Are my current systems and processes able to sustain growth?
What new systems or processes will need to be put into place as we scale?
What does the future of the company look like?
What goals does the business have for the next 5/10 years and how will they be achieved?
Does my business have clear values in place – and how will I maintain them?
What barriers to growth can be identified and how will we overcome them?
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