Innovation
Startups vs Scaleups: 4% of UK startups have 10+ employees 10 years later
By Michael Hennigan, Finfacts founder and editor
Feb 27, 2015 - 7:56 AM

Scaleup presentation by Sherry Coutu CBE

Startups vs Scaleups: Less than 4% of UK startups have 10 or more employees 10 years after their creation according to a report on scaling-up companies that was commissioned by the British government. However, the fastest growing 6% of businesses between 2002 and 2008 created half the new UK jobs in that period, according to data from Nesta, an innovation think-tank.

There were a record 5.2m UK private sector businesses at the start of 2014, the first time the business population exceeded 5m but most businesses did not have employees.

Sherry  Coutu, an angel investor, commissioned by the Department of Business, Innovation and Skills and working through a partnership with academics and private sector businesses, looked at companies with annual revenue or employee growth of more than 20% for at least three years, and with more than 10 employees at the start of that period.

Finfacts reported last month that almost all the UK employment growth over the past year was in sectors which pay at least 20% below the national average. Meanwhile, more than half the new jobs created since 2010 have been among the self-employed, while the proportion of self-employed people who earn sufficient income to pay tax has fallen from 80% to 65 per since 2008. Wage growth has only risen in real terms in recent times.

Sherry Coutu says in her report, 'The Scale-up Report on UK Economic Growth': "There are a number of interrelated factors at work in the UK economy, including a trend towards smaller businesses and a productivity gap with our international peers. These issues underline the importance of focusing on increasing the number of scaleups rather than startups. The quality of entrepreneurs matters more than the quantity."

The rising number of 1-person operations in the UK inevitably does impact productivity as an individual who has to perform all necessary tasks in a function is constrained. In Ireland there are more self employed without employees (including farmers) at 227,000 compared with CSO business demography data at 185,000 enterprises.

We have in the past reported on the key role of high-growth companies here; the public lecture by Bart Clarysse, professor of entrepreneurship, at Imperial College London Business School, who said in respect of most tech startups: "They don't become the new Microsoft. They just stay micro" and Daniel Isenberg, a former entrepreneur who created the entrepreneurship ecosystem project at Babson Executive Education who replied in The Economist's January 2014 feature on tech startups:

THE distinction between tech and non-tech entrepreneurship is false. Today, every business venture, entrepreneurial or otherwise, requires technology to be competitive, whether it is diamond trading, transportation, construction, or energy. There is nothing intrinsically more technological about Twitter and Facebook, say, than about Harley-Davidson or American Express. In fact, medical devices and alternative energy are arguably more technology-intensive, generically, than any of the report’s wide-eyed examples. Furthermore, for any business, anywhere, ignoring the opportunities and necessities presented by technology is backing light speed into oblivion, and no different than ignoring the existence of electricity or cars. And research is showing that as many, if not more, social and economic benefits of entrepreneurship accrue from non-tech entrepreneurship and that the new public policy focus on startups may be badly misplaced."

Prof Isenberg said that many startups are not entrepreneurial and much entrepreneurship is not about startups and he cited Icelander Robert Wessman who came home from Germany in 1999 to save a small failing generic drugs company named Actavis and in a decade it was transformed from a firm with a payroll of less than 100 to 11,000 while doing little core scientific innovation.

Isenberg says that while there has been a jump in tech startups, it is not clear that the actual speed on the highway to scaling-up has been impacted at all. "In fact, the entire highway just may move more slowly as a result of the startup glut — that is, firms that have the wherewithal to scale into socially and economically valuable ventures, may just be slowed down by the on-ramp traffic build up, the hype, and the valuable resources startups tie up."

Prof Isenberg added:

Scaling up is vastly harder than starting up. What is much more certain is that, as anyone who has tried, as I have, can tell you, starting up a venture is just the first baby step on a long hard trudge to scale up. But without the ability to scale way beyond start, all the blood, sweat and tears (and money) will be flushed right down the drain."

There is evidence of a rise in digital companies in the UK — see here (2015) and here — but reliable financial data is difficult to find.

It's estimated that the digital sector in London employs more than 250,000 people compared with almost 350,000 in financial services in Greater London and in 2014 $1.4bn in venture capital funding was invested in digital ventures in London, while $2.1bn was invested across the UK as a whole. That is was double the level of 2013 — and 20 times higher than five years ago.

About half of UK venture capital funding comes from the US.

There can be confusion in the data between a business for example selling home cleaning services dependent on digital technology and the tech company that supplies it with digital systems.

London's Tech City in the East End  has about 3,200 digital companies.

Europe's first tech cluster in the area around Cambridge University has nearly three times more companies with a turnover above £1m  than Oxford University —701 versus 262 — and five times as many startups per head than Oxford according to The Economist.

Ireland's indigenous software and digital IT sector has over  800 Irish-owned digital technology companies, employing over 10,000 people according to the Irish Software Association. About 230 firms have annual revenues of at least €1m.

While there are more than 2m businesses in the UK with more than one employee the Office for National Statistics data show that there are 8,923 scaleup firms in the UK.

Sherry Coutu says a large number of firms in the UK are either not interested in growing while others that wished to grow are not doing so.

In the US more VC-backed companies fail than succeed and Coutu advocates reallocating 50% of the public money spent on entrepreneurship towards scaleups.

The scaleup report points to a more dynamic US business market where UK data show that  in 2004-2007 stagnant firms were at 30% but only 9% in the US.

The report calls for fast-track visas to enable scaleups hire specialist workers within two weeks; making real-time company data publicly available so scaleups can be identified, and boosting skills of founders and key staff functions.

Sales of Irish tech firms create 300 millionaires in 15 years and no scaleups

Irish patent filings at European Patent Office fell in 2014

Irish R&D Tax Credit: No evidence of rising business innovation; Facts don't matter

Dublin's Silicon Docks: Separating hype and reality

Dublin Web Summit 2014: Separating hype and reality — Paddy Cosgrave, co-founder of the Web Summit commented in a tweet: "Phenomenal level of research + info in this post about Irish tech policy & startups in general"

Israel's Startup Nation not a jobs engine; Nor is Irish high tech