By Simon Philips, CEO, ScaleUp Capital

Small businesses are vital to the UK economy. They create jobs, drive innovation and attract talent. The UK is a great place to start a business. We rank 3rd in the world for start-ups behind the US and China and in 2020, UK tech companies attracted a record $15 billion in venture capital investment according to a Tech Nation report. The problem is that most start-ups just don’t make it. Just 4% are sold for more than $50 million; an even smaller percentage (1%) become unicorns, but 7 out of 10 fail.  Many start-ups are unable to successfully make the transition to a mature business, meaning the UK drops to just 13th in the world for scale-ups according to the OECD. This failure to scale more companies means we are missing out on all the benefits they bring. If the UK was able to rise to 3rd on the global ranking of scale-ups, the economic impact would be huge and more worthwhile businesses would fulfil their potential. So how do we better support small businesses so that they can reach that next stage of growth?

There are two key challenges facing businesses in the scale-up phase – funding and skills. Great small businesses often struggle to attract funding because they don’t fit the criteria for either venture capital (VC) or private equity (PE) investment. Private equity investors look for more mature and profitable businesses that can be acquired with leverage, while venture capital investors are looking for big hits and hypergrowth moonshots. The result is that an emerging business with revenues of £1-£10 million that is growing steadily (but not explosively) and reinvesting all its profits to fund its growth will struggle to raise money from either the PE or VC community. Specialist scale-up investors like ScaleUp Capital focus precisely on funding the many small businesses that fall into this funding gap.

But small businesses at the start of their scale-up phase require more than just funding. They need expertise, skills and a methodology. Research by Crunchbase shows that 83% of founders are doing it for the first time. Most founders are subject matter experts who know their product, market and customer inside-out but have never been anywhere near the challenges of scaling a business before. Founders who have done it three or four times before are twice to four times more likely to succeed. This skills gap is another reason why many small businesses at the beginning of the scale-up phase end up failing or simply fizzle out.  

The scale-up phase is a tough challenge. These are the tricky adolescent years in the life of a business where it will undergo more change than during any other period. Founders need to shift from pulling all the levers to being run by a well-rounded and experienced management team.  Processes need to be professionalised, systems need to be installed, and the product or service often needs to be refined to make it robust and scalable. Scale-ups need an injection of methodology, governance and expertise from external scaling experts to ensure they avoid the common mistakes that can be the difference between a business failing or scaling and succeeding. 

Accountants and advisors are often the first to spot when a business is entering its scale-up phase and facing new big challenges. There are three areas in particular where they can help: 

Find the product-market fit – emerging businesses are often solving too many different problems for too many different types of customers. The trick is to focus on the best user cases where you are solving big and painful problems that deliver outcomes for the customers that are far more valuable than the cost. Choose a market that isn’t overcrowded with competitors or at least ensure your product or service is better than most alternatives on offer.  That’s the sweet spot to laser in on.

Unit economics – don’t invest in scaling the sales and marketing until the unit economics are strong enough. It is key to optimise and fine-tune the engine before you scale to avoid wasted time and money. Strengthen the customer acquisition so the Customer Acquisition Cost (CAC) is low enough and keep working on Average Order Value (AOV) and retention until the Lifetime Value (LTV) is high enough. Once the ratio of LTV/CAC is strong, then go for it and scale up.

TAM and scalability – make sure the prize is big enough. Work out the Total Addressable Market (TAM) – ask yourself what problem are we solving for what user case, how many companies have this exact user case and problem, and what will each pay to solve it. This will ensure the selling and implementation processes are ready to operate at scale.     

Increasing the success rate of scale-ups is critical. Not only is it a significant waste of time, money and energy for the business owners itself, but it’s a missed opportunity for the investment community and the economy as a whole. Some of these businesses have the potential to be worth £50 – £100 million; a few may even make it to unicorn status given the right funding and support. The government has thankfully recognised the importance of supporting scale-ups. It has implemented some worthwhile schemes such as the Help-to-Grow training scheme for small businesses, and the Future Fund business loans. But the investment community needs to step up too by plugging the funding gap and offering the scaling expertise and experience that many small businesses are missing. The impact on the economy if we get this right cannot be underestimated.