Small businesses and productivity Contents


What are Scale-ups and why do they matter?

54.The OECD defines a scale-up as “an enterprise with average annual growth in employees or turnover greater than 20 per cent per annum over a three-year period, and with more than 10 employees at the beginning of the period”.217 They have also been defined as “high impact companies that grow faster, create more jobs, contribute more to society to a greater extent than their peers”,218 that benefit from sustainable growth219 and derive at least at least 20% of their turnover from foreign clients.220 The Scale-up Institute, a private sector, not-for-profit company that supports scale-ups in the UK, has also noted that scale-ups are more productive and innovative, create high quality jobs, span all sectors, tend to be more diverse (47% of all scale-ups have at least one female director) and “good corporate citizens” (74% of all scale-ups offer opportunities to young people through internships or apprenticeships).221

55.In the UK it has been estimated that, although scale-ups amount to only about two to four per cent of SMEs, they are responsible for most of SME growth.222 A report published in November 2014 by Sherry Coutu CBE estimated that even a one per cent increase in the UK’s scale-up population could have driven an additional 238,000 jobs and £38 billion to GVA within three years leading to £96 billion per annum in the medium term.223 The importance of scale-ups to the UK is also highlighted by their key place in the Government’s Industrial Strategy224 and its new export strategy, published in August 2018.225

How is the UK doing in terms of Scale-Ups and where are the Gaps?

56.The most recent figures produced by the Scale-up Institute indicate that the UK is improving its performance. Between 2015 and 2018, the total number of scale-ups in the UK increased from 26,985 to 35,210.226 However, in November 2017, the then Minister for Small Business and Scale-Up Champion, Margot James MP, noted that while the UK was third best in the OECD in terms of small business start-ups, it was 13th for scale-ups.227

57.The Scale-up Institute have identified five key gaps where companies who wanted to scale-up were often struggling to: access the right talent and skills; access the right types of finance to scale up; build leadership and management capacity;228 navigate infrastructure and access a customer base in domestic and international markets.229 Witnesses told us that a lack of skills230 and access to finance,231 poor infrastructure and a lack of commercial property232 were holding back potential scale-ups. Other barriers included a lack of awareness about scale-up support both at a local and national level,233 an inability to absorb assistance when it was required,234 and a paucity of ambition.235

Helping SMEs to scale up

58.The Government’s Industrial Strategy identified a number of specific areas to help scale-ups. This included better use of data to identify potential scale-ups so they could be encouraged and supported, enhancing leadership and management capability and access to talent,236 increasing awareness of equity finance to help scale-ups invest in business growth and improving better access to overseas markets and government procurement.237 The Government has invested specific funds in the British Business Bank to catalyse later stage venture capital investments by the private sector, which it hopes will unlock £1 billion of equity funding in later stage venture capital. The British Business Bank hosts a specific Finance Hub for scale-ups to use and has helped more than 74,000 small businesses that wanted to grow, using angel finance,238 crowdfunding and venture capital.239 Innovate UK offers loans for the development of innovative products, and Catapult Centres across the UK, funded by Innovate UK, provide support for SMEs through funding and collaborations with industry and universities.240 The Government, as noted previously, has produced a series of policies to increase patient capital following its Patient Capital Review, which looked at the wider problem of long-term finance for growing innovative firms looking to scale-up,241 though it is yet to publish its response to the Patient Capital Review Industry Panel.

59.Scale-ups can also benefit from other Government policies discussed in the previous chapters of this report, especially in areas such as innovation and exporting. Companies that wish to scale-up can particularly benefit from intensive coaching and mentoring offered by programmes such as Goldman Sachs 10,000 Small Businesses and others (see Chapter 5) and which are mirrored in the Government’s announcement on funding for its Small Business Leadership Programme. We were told that it was imperative that existing support was packaged together and optimised for companies who wanted to scale-up,242 and that improved scale-up data was used to identify existing and potential scale-ups so that they could be targeted with proactive support.243

60.Witnesses pointed to the key role that local business networks and LEPs and Growth Hubs can play in helping potential scale-ups.244 This included signposting national support programmes,245especially in areas such as exporting, procurement and finance.246 However, to do this effectively LEPs and Growth Hubs need to be properly resourced to provide focused support to scale-ups, especially after EU funding is withdrawn after Brexit.247 The local nexus of LEPs, Growth Hubs, business organisations, education institutions (e.g. universities and business schools) and organic networks are also invaluable in allowing scale-ups to access advice, funding, mentoring and schemes such as the Goldman Sachs programme. We heard that such networks increased ambition and allowed word-of-mouth endorsements for training and investment in specific tools and products (e.g. software) which could help small businesses scale-up.248 The Minister confirmed that the Government was working with the HMRC to use its data to better identify potential scale-ups,249 which the Scale-up Institute and others had stressed was a priority.250 She also told us that the Government was particularly focusing on scale-ups and on issues surrounding their access to finance.251

61.Despite being a very good place to start a business, the UK is lagging behind many of its OECD competitors on scale-ups. We welcome that the Government has made scale-ups a priority and that many aspects of the Industrial Strategy will support scale-ups as will its funding for local business networks and management training. We also welcome the Minister’s commitment to make use of HMRC data to better identify scale-ups. As already recommended in Chapter Three of this report, the Government should publish its response to the Patient Capital Review Industry Panel without delay, so that scale-ups have greater access to finance to grow and innovate. The Government should with some urgency consider how the existing nexus of support can nurture scale-ups particularly in areas such as finance, exports, advice, digital adoption, management skills, infrastructure and issues around late payments and public procurement. This should include looking at how LEPs and Growth Hubs can better accommodate the specific needs of scale-ups, signposting national support and enabling local networking and collaboration. It is essential that the Government ensure that digital platforms and media channels are optimised to promote and facilitate easy navigation of its scale-up offer. We recommend that the Government should move swiftly to use improved data on scale-ups to identify and proactively support scale-ups. This data should also be used to set ambitious targets and measure progress on improving the UK’s scale-up performance. For instance, Sherry Coutu suggested that a 1 per cent increase in scale-ups could make a significant contribution to job creation, GVA and productivity.

62.Several witnesses warned us that concentrating on scale-ups could divert resources from the majority of UK SMEs, many of whom are part of the ‘long tail’ of productivity. For instance, it was suggested that this could divert resources from LEPs and Growth Hubs from the majority of small businesses to the minority that wanted to scale-up.252 Instead, it was suggested that the lessons learnt from scale-ups should be used to help other small businesses improve their productivity,253 and that problems that all small business faced, such as access to premises, skilled workers, good infrastructure and finance, also needed to be addressed.254 It was also suggested that LEPs and Growth Hubs needed to be more adept in ensuring that their support and approach could meet the different needs of various types of SME.255 SMEs might also benefit from online tools which can help them identify their profile (e.g. start-up, scale-up or lifestyle256) and match their specific needs to the support available.

63.We fully support policies aimed at helping small businesses that want to scale up because of their importance to the UK economy. However, it is important that the majority of small businesses are nurtured and that their concerns are also addressed, such as affordable business premises, skills and personnel shortages and the availability of finance. The Government should work with the providers of scale-up programmes and LEPs and Growth Hubs, so that it uses the lessons learnt to support the full range of SMEs by providing cost effective packages, such as online bite-size management training. LEPs and Growth Hubs should be able to differentiate between different types of small business and match available support to their needs and ambitions. The Government should also explore how online support can be optimised so that SMEs can quickly produce a profile that matches their specific needs to the support available.

220 ScaleIT, ScaleIT: Only Backable Scale-ups, (2016).

221 Scale-up Institute, Annual Scaleup Review 2017, (November 2017) p 15. See also: LSE, The Scale-up Manifesto: How Britain is Becoming the Scale-up Nation of the World, (November 2016); OECD, Enabling SMEs to Scale-up: Discussion Paper, (February 2018), p 6. The OECD note that SMEs are more productive when they grow, tend to be more innovative and create more jobs (pp. 7–9).

223 Sherry Coutu CBE, The Scale-up Report on UK Economic Report, (November 2014), p 6.

224 Scale-up Institute, Industrial Strategy White Paper: the scaleup focus, (November 2017).

226 Scale-up Institute, Annual Scale-up Review 2017, (2017), p 23 and Scale-up Institute website.

227 BEIS, Launch of the Scale-Up Institute review 2017, (November 2017). P 11.

228 Innovate UK, Scaling-up: the investor perspective How innovative UK businesses can achieve sustainable growth, (November 2017), p 13. This report noted that management capability was crucial to successful scale-ups.

229 Scale-up Institute, Annual Scale-up Review 2017, (2017), p 12.

230 SBP0023 Buckinghamshire Business First; SBP0012 Octopus; SBP0010 Institute of Directors.

231 SBP0012 Octopus; SBP0005 ICAEW; SP0024 PACT; SBP0010 Institute of Directors.

232 SBP0023 Buckinghamshire Business First.

233 SBP0034 Aldemore; SBP0021 Electrical Contractors’ Association and the Building Engineering Services Association. SBP0012 Octopus; SBP0010 Institute of Directors; SBP0005 ICAEW; Institute of Directors; SPB000* Finance and Leasing Association.

234 SBP0033 Tees Valley Combined Authority.

235 Q181 Professor Tim Vorley (Sheffield University); Q182 Mike Cherry (FSB); Q155 and Q178 Angela Middleton (Middleton Murray).

236 BEIS in its evidence pointed to a series of challenges, including: people management (e.g. recruitment and delegation of key functions); strategy (moving to target opportunities); introduction of formalised systems (such as management information and customer relationship management); developing new products, markets and exports; ability to raise new finance; improving operations (e.g. adopting best practice). SBP0016 BEIS.

237 BEIS, Industrial Strategy: Building a Britain fit for the future, (November 2017), p 173.

238 Angel finance normally involves investment from an individual ‘angel’ or group of ‘angels’ who take an equity stake in a business in return for providing equity funds. Every angel investor has a different appetite for investment, and usually invests between £10,000 – £500,000. Deals of up to £2m are becoming more common, due to syndication. Angel investors seek to have a return on their investment over a period of 3–8 years. See UK Business Angels Association, Introduction to Angel Investment, (accessed 2 November 2018) and The Business Finance Guide, Angel Finance , (accessed 2 November 2018).

239 British Business Bank, Finance Hub, (accessed 5 November 2018).

240 See Chapter 2 of this Report.

241 HM Treasury, Patient Capital Review, (November 2017). Q302 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility

242 Q195 Tim Vorley (Sheffield University).

243 Q188 Irene Graham (Scale-up Institute); Q189 Tim Vorley (Sheffield University).

244 Q65 Charlotte Keenan (Goldman Sachs); Q115 Ruby Peacock (Federation of Small Businesses); Q78 Professor Sarah Underwood (Leeds University); Q83 Ben Wilmott (CIPD); Q145 Andrew Wright (Leeds City Region LEP); Q167 Byron Dixon, OBE (Micro-Fresh); Q199 and Q205 Irene Graham (Scale-Up Institute); Q153 Heather Dean (Buckinghamshire Business First)

245 Q186 Chris Mason (Newable)

246 Q199 Irene Graham (Scale-up Institute).

247 Q171 and Q172 Linda Edworthy (Tees Valley Combined Authority). She was concerned that support for scale-up was merely bolted on to Growth Hubs with no extra funding. She noted that if EU funding was not replaced her Growth Hub would not be able to deliver the services it currently does.

248 Q157 Bryon Dixon (Micro-fresh); Q103 and Q143 Rana Harvey (Monster Group UK).

249 Q299 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.

250 Q189 (Professor Tim Vorley, Sheffield University); Q187 (Irene Graham, Scale-up Institute).

251 Q299 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.

252 SBP0029 Leeds City Region LEP and West Yorkshire Combined Authority.

253 As above.

254 SBP0023 Buckinghamshire Business First; SBP0012 Octopus; SBP0007 Rail Supply Group.

255 Q182 Mike Cherry (FSB). See also Q198 Professor Tim Vorley (Sheffield University).

256 A ‘lifestyle’ business is a business that seeks to create and sustain a particular level of income for the founders or owners. See Funding Sage, What’s the Difference between a Lifestyle Business and a Scalable Company?, (September 2018).

Published: 5 December 2018