SME: Start-ups are getting support, but it is falling away far too early

Is there a glass ceiling preventing successful small businesses realising their full potential? A report from Barclays Bank and the Business Growth Fund suggests there might be. It warns that while the entrepreneurial spirit is thriving in the UK, with the number of companies up 3.9 per cent during the first six months of the year alone, we are not seeing the same level of growth when it comes to small businesses becoming medium-sized enterprises.

In fact, say Barclays and the BGF, the number of businesses with sales of between £2.5m and £100m a year actually fell 0.3 per cent during the first half of the year. The report describes this as a “marked levelling off”, but in the context of the large increase in the numbers of smaller businesses the statistics feel more serious than that.

These numbers matter. For all the excitement about start-up businesses, the smallest and newest companies by and large make a relatively small contribution to the economy. The record number of new businesses launched over the past year – more than 500,000 at the last count – have mostly yet to start paying much tax or employing large numbers, and with failure rates running at one in two, many never will.

Medium-sized businesses are the real engines of growth in our economy. The Centre for Economics and Business Research estimates that the fastest growing of these companies generated more than a third of all growth last year, despite accounting for only 3.4 per cent of the economy, and created more than two-thirds of new jobs – more than 250,000 in all during 2013.

This isn’t to say we should not encourage start-ups. Far from it – it’s tough to get a brand new business off the ground, and those with the ambition to do it deserve all the support they now get from policymakers. Anyway, without start-ups, we wouldn’t have any medium-sized businesses at all – they represent the next generation of larger enterprises.

Nevertheless, it’s worrying that we’re not seeing more companies move up the enterprise league, particularly since a variety of factors appear to be blocking them.

For some, it’s a lack of funding – not just bank finance, but equity capital too. For others, it’s the lack of experience of the management team – the skills required to manage a larger company are quite different to those needed at the start-up phase and many struggle to make the transition. Another issue for British companies is nervousness about international expansion – we’re still not seeing much positive exports growth.

Some of these issues are being confronted. Agencies such as UK Trade & Industry are working hard to help businesses to break into new export markets, for example. Business Growth Fund itself is investing in minority equity stakes in companies all around the UK.

However, we need to do much more – in many instances, the support on offer for growing businesses falls away far too early in their development. It’s akin to sending children out into the world all alone at the end of primary school.

Today marks the start of Global Entrepreneurship Week, an international campaign to encourage people to start their own businesses, which will see those heading up the UK’s version of the initiative work with more than 600 partner organisations to reach an audience of more than 300,000. It’s a fantastic project – but where is the equivalent support for those touched by such campaigns in the past and who are now ready to take their businesses to the next level?

We can do better than this for our brightest stars. In some ways, the most impressive aspect of the support on offer to start-ups is the way in which an ecosystem encompassing public and private sector organisations has sprung up in recent years.

Now the same is required for companies making it to the next stage.

Amid a dramatic increase in the number of companies listing on the Alternative Investment Market (Aim) this year, there has been concern about the potential for a return to the lower-quality IPOs seen in the junior market’s boom years prior to the financial crisis. The performance of these companies so far suggests otherwise.

Cavendish Asset Management, a fund manager that specialises in smaller companies, says the average company listing on Aim this year saw its stock rise 12 per cent on the first day of trading – and had retained that 12 per cent gain 30 days after listing. Even after the market dip of the past month, new Aim shares remain 5 per cent up over the year, compared to a 16 per cent fall from Aim as a whole.

Cavendish’s analysis is based on the 58 companies that listed on Aim in the first nine months (41 per cent up on 2013). The businesses collectively raised £2bn of funding.

Gatwick-based Strat Aero calls them “unmanned aerial systems” while most of us would use the term drone – but whatever your views on the devices in which this company specialises, this is undoubtedly a high-growth industry. Indeed, the global market is expected to be worth more than $82bn (£52bn) within 10 years.

Investors looking for a slice of the action will from today have the option of buying shares in Strat Aero, which is listing on the Alternative Investment Market – a fundraising of £650,000 values the business at around £6.2m.

The business makes its money from providing services such as consultancy, technology development and pilot training, and already has contracts in place with private-sector aviation businesses, government agencies and universities.

It operates from the UK and the US, where it runs a pilot training centre in Roswell in Texas.

“I don’t think I realised I was an entrepreneur until long after I’d started my business. It grew out of my thesis project at university, which was to design a toy that would help bridge the gap between visually impaired students and their sighted classmates in schools. When I graduated, I wanted to sell the idea to a company, but when I couldn’t find one, I decided to have a go myself.

“We launched last year and we were fortunate in that the first educational authority we sold the toy to agreed to pay upfront – without that, we wouldn’t have been able to get their order manufactured, but the deal enabled us to make enough units to begin selling to others.

“It’s been a steep learning curve – when I began talking to manufacturers about making the toys for me, I expected them to focus on how the toy would work and so on, but what they were really interested in was my business model and whether they’d be getting repeat orders. We continue to exist off pre-sales and grants, and have no outside investors, so we’re trying to grow sales, improve the first toy and develop new products on limited resources.

“The Empathy Toy, as it’s called, has been really successful and it’s rewarding to see how schools are using it in the classroom in all sorts of different ways – it’s a 3D puzzle that you solve while wearing a blindfold, but the point about it is that you can’t do it without working together.”