Apr 30, 2018 | Techcelerate Ventures |
Rebalancing the economy: Unlocking the potential of the fastest growing smaller companies in the UK HIGH GROWTH SMALL BUSINESS REPORT 2018 Third Edition Follow the conversation: #HighGrowthSmallBiz Disclaimer While every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor the report's authors will be liable for any loss or damages incurred through the use of the report. Authorship and acknowledgements This report has been produced by Cebr, an independent economics and business research consultancy established in 1992. The views expressed herein are those of the authors only and are based upon independent research by them. The report does not necessarily reflect the views of Octopus Investments. London, March 2018 CONTENTS Executive Summary 2 Foreword 4 1 Hidden potential: A snapshot of HGSBs in the UK 5 2 Opportunity everywhere: HGSBs as growth drivers 8 2.1 HGSBs are flourishing right across the UK 11 2.2 HGSBs can help build the UK's Industrial Strategy 12 3 The high growth effect: Employment and skills development 14 3.1 Employment 16 3.2 Training 16 3.3 Skills shortages 17 4 Unlocking HGSBs' potential: Infrastructure 20 4.1 Infrastructure policy in the UK 21 4.2 HGSBs and regional demand for infrastructure 22 4.3 The National Infrastructure Pipeline and HGSBs 24 5 Supporting businesses to start and grow 26 6 Policy Recommendations 35 7 Contact us 44 3 2 This is the third Octopus High Growth Small Business Report. The UK's high growth small businesses (HGSBs) have the power to drive the UK's economy, increase productivity, skills and employment. They make up less than 1% of UK companies, yet in 2016 they accounted for 3% of total UK jobs, creating an average of 3,000 new jobs every week. Three out of five HGSBs are located outside London and the South East and are a vital part of the regional economy wherever they are found. Our findings highlight the need of HGSBs for skilled labour and high-quality infrastructure. No region of the UK can afford to be left behind, and in this report we have outlined the importance of HGSBs in helping to deliver the Government's aims and objectives, as set out in the Industrial Strategy. KEY CONCLUSIONS OF THE REPORT: HGSBs make up only 1% of UK businesses, yet account for 3% of UK total jobs in 2016 (22,074 out of 5.6 million companies). HGSBs created an average of just over 3,030 new jobs every week this represents about 20% of all jobs created. While making up only 3.6% of the UK's Gross Value Added (GVA), HGSBs have made a significant contribution to economic growth. Between 2015 and 2016, the UK's GVA grew by over 41 billion 22% of this growth is estimated to have come from HGSBs. HGSBs can be found spread across all industrial sectors. The Professional, Scientific and Technical Activities sector accounted for 11% of HGSBs, supported almost 95,000 jobs (4% of the sector total) and contributed 7.4 billion to the overall sector's GVA in 2016 (6% of the sector total). Interestingly, fewer than one in ten HGSBs is in the technology sector. Regional diversity Although London is the region with the largest concentration of HGSBs, nearly three in five HGSBs are located outside London and the South East, and more than 50% of HGSBs' GVA comes from other regions. We calculate that a 10% increase in the number of HGSBs in the North East would create more than 2,700 new jobs for the region. In Northern Ireland, the share of GVA growth from HGSBs reaches 51%. Yorkshire and The Humber, and the East of England also have impressive shares of GVA growth from HGSBs, 34% and 28% respectively. 74% of HGSBs surveyed feel more confident or have the same confidence level in the economic prospects over the next 12 months compared to last year. Skills focus 60% of HGSBs surveyed consider finding talent/ skills shortages to be an "important" or "very important" constraint on their business growth. Conversely, 8% of HGSBs consider it not to be at all important. 41% of HGSBs surveyed consider skills shortages to be the policy area where UK Government action could make the biggest difference for their businesses. EXECUTIVE SUMMARY 90% of HGSBs say that they face some form of skills shortages. This is even more remarkable when placed in the context of the UK average of just 17% of companies that say they have a skills gaps or skill shortages vacancies. 84% of HGSBs funded or arranged formal training for at least one member of staff over the past 12 months; this compares to the UK average of 66%. Across all regions, 61% of the HGSBs consider technical or practical knowledge related to the job to be a difficult skill to obtain when hiring staff. Infrastructure One in three HGSBs considers digital infrastructure to be one of the biggest constraints on the growth of their business. 53% of HGSBs in London say poor transport links with other regions is a hindrance to their business and something that the Government could do more to alleviate. 69% of HGSBs consider the UK Government's Digital Communications infrastructure programme (as described in the Industrial Strategy Green Paper) to be "important" or "very important" to their business. Just 3% consider it not to be important at all. 84% of HGSBs funded or arranged formal training for at least one member of staff over the past 12 months. 1 in 3 HGSBs considers digital infrastructure to be one of the biggest constraints on the growth of their business. 20% Between 2015 and 2016, HGSBs created 158,000 new jobs, representing 20% of employment growth in the UK. Out of the 5.6 million companies that exist in the UK, only 22,074 of them are HGSBs. They can be found in every region of the UK. 22,074 3 2 CHRIS HULATT, CO-FOUNDER OCTOPUS GROUP High growth small businesses (HGSBs) are once again leading the way in employment, economic growth and productivity across all regions of the UK. Despite making up less than 1% of UK registered firms, they account for 3% of jobs and have been creating about 3,000 new jobs every week. In this, the third HGSB Report from Octopus, we show the enormous impact that these growing companies are having on the UK economy. The Government's Industrial Strategy has highlighted the importance to UK plc of support for fast-growing businesses and its ambition to become one of the best places in the world not just to start, but also to scale a successful company. We are proud that our previous reports have got people championing HGSBs at both local and national level, and once again we are encouraging MPs to get out there and engage with the HGSBs in their own constituencies. HGSBs may form only a numerically small segment of the new and small business sector, but they are disproportionately important. It is from among their ranks that the future market leaders will emerge, capable of competing globally and significantly adding to the country's future economic prosperity. Such firms need investment and support to help them grow and scale up over the longer term. Our survey of some of the UK's most entrepreneurial companies has a particular focus on skills this year, with 90% of those we spoke to saying they face some form of skills shortage. HGSBs are also leading the way in tackling this, with 84% of them having funded or arranged formal training for staff over the past 12 months, against a national average of 66%. This year's report looks at some of the options open to the Government and other policy makers for tackling what is a growing issue for HGSBs, as Britain looks to a future outside the European Union. Octopus is one of the most active investors in HGSBs in the UK and so we know the economic and social difference that these businesses make, wherever they are found. We are proud to once again highlight some of their great work in this report and call on everyone to get behind the high growth small businesses who are bringing jobs and prosperity to all parts of the country. FOREWORD HIDDEN POTENTIAL: A SNAPSHOT OF HGSBs IN THE UK 1 We define high growth small businesses (HGSBs) as those with more than 20% annual average growth over a three-year period, and an annual turnover of between 1 million and 20 million. 5 4 35% 30% 25% 20% 15% 10% 5% 0% Employment GVA Share of total Share of growth Figure 1: HGSBs' share of total UK employment and employment growth, and HGSBs' share of total GVA and GVA growth, 2016 THEY ARE A SMALL GROUP As well as being small in size, HGSBs are few in number, representing a tiny proportion of all UK businesses. Out of 5.6 million companies in the UK, there were only 22,074 HGSBs in 2016, representing less than 1% of the business population. ...BUT THEY PUNCH WELL ABOVE THEIR WEIGHT HGSBs make a disproportionately large contribution to our economic wellbeing, creating jobs and driving growth at an exceptional rate, as shown in Figure 1 below. Source: FAME, ONS, Cebr analysis EMPLOYMENT One in every five new jobs was created last year by an HGSB. Between 2015 and 2016, HGSBs created 158,000 new jobs, representing 20% of employment growth in that period. This amounts to just over 3,030 new jobs every week. ECONOMIC GROWTH Despite making up only 3.6% of UK's GVA, HGSBs made a disproportionate contribution to economic growth. From 2015 to 2016, UK's GVA grew by over 41 billion 22% of this growth is estimated to have come from HGSBs. Gross value added (GVA) measures the contribution to the economy of each individual producer, industry or sector in the UK. It is used in national income accounts to measure productivity, or the value of goods and services produced by different sectors of the economy. It is calculated as the total value of goods and services produced, less the cost of all materials and other inputs used directly for that production. HGSBS ARE GROWING IN EVERY BUSINESS SECTOR About 67% of HGSBs operate in the service sector. The largest single sector is Construction, with 15% of UK HGSBs, followed closely by Wholesale and Retail trade, which accounts for 14% of all UK HGSBs. Contrary to common perceptions, fewer than one in ten HGSBs is in the Technology sector. Figure 2: Number of HGSBs in the UK by sector, 2016 Source: FAME, ONS, Cebr analysis Construction Wholesale and retail trade Administrative and support service activities Manufacturing Professional, scientific and technical activities Information and communication Financial and insurance activities Real estate activities Transportation and storage Human health and social work activities Accommodation and food service activities Other service activities Education Other Agriculture, forestry and fishing Arts, entertainment and recreation Water supply; sewerage and waste management Electricity, gas, steam and air conditioning supply Mining and quarrying Public administration and defence 3,214 3,145 2,831 2,723 2,450 1,370 1,018 746 630 617 581 500 477 460 442 317 269 183 86 15 AND BRINGING NEW BUSINESS TO EVERY REGION Significantly, HGSBs are found in every part of the UK. In the subsequent sections we explore this regional pattern. BUT THEY STILL STRUGGLE TO BE SEEN AND HEARD The HGSBs segment comprises businesses spread across a broad range of industries, which do not make for a cohesive group. This, and their small size, help explain why they are easy for policymakers to miss within the wider SME (Small and Medium-sized Enterprise) population. 7 6 OPPORTUNITY EVERYWHERE: HGSBS AS GROWTH DRIVERS 2 HGSBs thrive wherever opportunity lies; every region of the UK has a high growth success story to shout about. While this is encouraging, there is a great deal more to be done if the UK is to unlock the full growth benefits HGSBs offer. In the UK, we currently have businesses, people and places whose level of productivity is below what can be achieved, and it is this regional disparity which accounts for much of the UK's inequality. The latest ONS figures show that the US and France are nearly 30% cent more productive than the UK, while Germany outstrips the UK by 35%. HGSBs are more productive than other companies and can play a key role in seeing the UK address its lagging productivity levels. HGSBS ARE MORE PRODUCTIVE THAN THE UK AVERAGE BUSINESS Britain's productivity problem is largely the result of the "long tail" of productivity, which was specifically highlighted as a key concern in the Government's recent Industrial Strategy. While the UK has some of the most productive businesses, people and places in the world it also has a "long tail" of underperformance. If the "long tail" of lower productivity is not dealt with, it will hold back UK growth, wages and living standards. The Government can help to tackle this by promoting HGSBs in all regions. In 2016, excluding businesses operating in the financial and insurance sector1,HGSBs' productivity (measured as GVA divided by the number of employees) was just under 65,000. This figure is significantly above the national average of just under 55,000. Our survey finds that in some sectors, such as retail, HGSBs have three times the average levels of productivity at 118,300 compared to all UK businesses. AND DRIVE PRODUCTIVITY IN EVERY REGION The CBI's 2016 Unlocking Regional Growth Report observed that since the global financial crisis, only in London and the South East is GDP per head above its pre-crisis peak. As a result, the most productive area of the UK is now almost three times more productive than the least.2 If each local area could improve at the same rate as the top-performing HGSBs in their respective region, the increased productivity would lead to more jobs, more exports and higher standards of living across the UK. HGSBs should, therefore, be an important consideration in all future local industrial strategies and City deals. 1. It is difficult to measure GVA for businesses in the financial and insurance sector, and typically requires the use of proxy measures. For the purposes of this productivity comparison, businesses operating in this sector have therefore been excluded. 2. CBI, 2016 Unlocking Regional Growth. This report reinforces that scaling businesses are across all areas and sectors of the UK. They add value and generate jobs across local economies, as well as being highly productive enterprises. Increasing their numbers, and building up local capabilities to support them, is critical for improving UK productivity and national economic growth. This report provides further insights into their key needs across talent, infrastructure and finance. We hope that the recent announcements on the UK's Industrial Strategy, alongside the expanded role of the British Business Bank in relation to Patient Capital, lead to these issues being positively addressed by the public and private sectors working closely together. Irene Graham CEO of the ScaleUp Institute 9 8 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 25 20 15 10 5 0 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 London London London East of England Yorkshire and The Humber Yorkshire and The Humber Yorkshire and The Humber Scotland Scotland Scotland South East South East South East East of England East of England West Midlands West Midlands West Midlands North West North West North West East Midlands East Midlands East Midlands South West South West South West Northern Ireland Northern Ireland Northern Ireland Wales Wales Wales North East North East North East HGSBs 2014 2014 Wales North West UK 2015 2015 2016 2016 West Midlands South West East of England Northern Ireland Yorkshire and The Humber South East London Scotland North East East Midlands Figure 3: HGSBs' and total economy productivity by region (GVA per employee) Figure 5: Number of HGSBs per region4 Figure 6: HGSBs' GVA per region, billion Figure 4: Correlation between HGSBs' location and regional economic performance Source: FAME, ONS, Cebr analysis Source: FAME, ONS, Cebr analysis Source: FAME, Cebr analysis Source: FAME, ONS, Cebr analysis Figure 4 below highlights the number of HGSBs as a share of all businesses in each region, plotted against the level of regional GVA in 2016. This supports the theory that there is a higher likelihood of finding HGSBs in areas performing more strongly economically.3 It also underlines that the places where HGSBs are less common are often the areas that depend most on them, and are likely to benefit more from their growth. Regional GVA per head ()Number of HGSBs as share of total business population by region (%) 0.2% 0.3% 0.4% 0.5% 0.6% 0.3% 0.4% 0.5% 0.6% 0.7% 3. It is important to note that while there is evidence of correlation, it cannot be concluded that HGSBs are a cause of stronger regional performance. However, this correlation identifies the potential of HGSBs to drive regional growth. 4. The total number of HGSBs does not add up to the sum of across regions, because a very small number of HGSBs have been removed since their region was not able to be identified through the data available. 2.1 HGSBS ARE FLOURISHING RIGHT ACROSS THE UK HGSBs are to be found in every part of the UK, and significantly, almost three in every five HGSBs are outside London and the South East. Figure 5 below shows the number of HGSBs located in each UK region. BUT SOME REGIONS ARE LAGGING BEHIND Although HGSBs are succeeding in every region, some parts of the UK have relatively few. Wales, Northern Ireland and the North East have the lowest number of HGSBs, with fewer than 1,000 in each region. All three of these regions fall within the bottom five least productive regions by average GVA. HGSBS IN LONDON AND THE SOUTH EAST ADD THE MOST TO UK ECONOMIC OUTPUT In 2016, HGSBs in London and the South East had a combined GVA of 27 billion, which equates to 44% of the overall GVA contributed by all HGSBs across the UK. 11 10 2.2 HGSBS CAN HELP BUILD THE UK'S INDUSTRIAL STRATEGY The UK has a number of world-leading sectors that boast high productivity, competitive advantages at a global level, and have further growth potential. Sectors such as aerospace, automotive, the life sciences, the creative industries, digital, financial services as well as professional and business services have generated significant growth for the UK in recent years, and some of these have been earmarked for sector deals by the Government. HGSBs can help to accelerate their growth further and enlarge their geographical footprint. HGSBS HAVE AN IMPORTANT IMPACT IN SECTORS SUCH AS MANUFACTURING AND FINANCIAL AND INSURANCE ACTIVITIES In 2016, 12% of HGSBs were in the manufacturing sector and 5% in the financial and insurance sector. Combining the two, HGSBs contributed more than 124,000 jobs to the UK economy and are responsible for generating almost 8 billion in GVA. 4.0% 3.0% 2.0% 1.0% 0% Manufacturing Financial and Insurance Activities GVA Employment HGSBs' GVA share of the wider sector HGSBs' employment share of the wider sector Figure 7: HGSBs' contribution to GVA and employment in the Manufacturing and Financial sectors Source: FAME, ONS, Cebr analysis HGSBS MAKE AN IMPORTANT CONTRIBUTION TO INNOVATION Innovation is a key aspect of the professional, scientific and technical sector and 11% of HGSBs work within this area. HGSBs supported just under 95,000 jobs (3.5% of the sector total) and contributed 7.4 billion to the overall GVA of the sector in 2016 (5.8% of the sector total). HGSBs' GVA and employment figures in this sector also experienced considerable growth in recent years, as shown in Figure 8. 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 100 90 80 70 60 50 40 30 20 10 0 7% 6% 5% 4% 3% 2% 1% 0% 5% 4% 3% 2% 1% 0% 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 GVA ( million) Employment (thousands) Share of UK sector (RHS) Share of UK sector (RHS) Figure 8: HGSBs' GVA and employment contribution to the UK Professional, Scientific and Technical Activities sector Source: FAME, Cebr analysis HGSBS ARE AN IMPORTANT DRIVER OF GROWTH ACROSS THE COUNTRY HGSBs have the potential to play a far greater role in driving growth and increasing productivity in every corner of the UK. In Northern Ireland, the share of GVA net growth coming from HGSBs was 51%. Similarly, Yorkshire and The Humber, and the East of England also have very impressive shares of GVA net growth coming from HGSBs. The low share observed in Wales is somewhat driven by its corresponding low share of HGSBs in its business population. The North East and North West of England both have a below-average share of HGSBs, yet their HGSBs still generated 7 billion in GVA in 2016 which equated to 11% of the total HGSBs contribution to the UK's GVA. 60% 50% 40% 30% 20% 10% 0% Northern Ireland England West Midlands Yorkshire and The Humber East of England East Midlands North East London North West Scotland South East South West Wales 2014 2015 2016 Figure 9: Share of GVA net growth coming from HGSBs by region Source: FAME, ONS, Cebr analysis For the UK to achieve higher levels of prosperity, and for the economy to work for everyone, all parts of the country must be firing on all cylinders. With the right investment and policy intervention, there is considerable potential for regions, cities and towns whose performance has been lagging, to close the gap on other areas. HGSBs are pivotal in accelerating this process. 13 12 THE HIGH GROWTH EFFECT: EMPLOYMENT AND SKILLS DEVELOPMENT 3 HGSBs create growth wherever they are found, but the impact is strongest in exactly the places that most need a boost. The Government recognises that more needs to be done to tackle regional inequality, and HGSBs offer a clear, strong and viable force for rebalancing the economy. Research by the National Institute of Economic and Social Research in 20175 showed that productivity, measured by GVA per head, is 72% higher in London than the national average and is twice as high as in seven of the eleven other regions. In addition, skills shortfalls in some parts of the country contribute to imbalances in productivity in the UK, as shown in a recent CBI report6 highlighting education and skills as the biggest determinants of regional variations in productivity. The Government's Industrial Strategy also highlighted how the UK's poor performance in basic and technical skills is key to its persistently lower levels of productivity, compared with other advanced economies. HGSBs have the power to drive employment growth and upskilling the UK's workforce, not just by creating jobs, but also by providing training to its employees. Our research shows that HGSBs have a disproportionate impact in weaker-performing areas of the UK outside London and the South East, and that HGSBs also invest more time and resources into training their workforce. 5. NIESR, (2017) 'Regional inequality in productivity in the UK: a closer look'. 6. CBI, (2016) 'Unlocking Regional Growth: Understanding the drivers of productivity across the UK's regions and nations'. 15 14 3.1 3.2 3.3 EMPLOYMENT TRAINING SKILLS SHORTAGES HGSBs make up only 1% of UK businesses, yet account for 3% of UK total jobs in 2016 and incredibly, one in every five new jobs was created last year by an HGSB. Between 2015 and 2016, HGSBs created 158,000 new jobs, representing 20% of employment growth in that period, amounting to just over 3,030 new jobs every week. The Government's aim to drive productivity was central to the Industrial Strategy, and it identified 'people' or human capital as one of the five key pillars. "We recognise that people, and the skills they have, are a key driver of productivity. Having the right skills increases people's earning power. Investing in our people across their lifetimes is fundamental to our shared success, from strong foundations for children and young people in schools and relevant, high- quality education and training in our further and higher education systems to career-long learning and enabling employers to invest in their workforce."7 While part of this is achieved via the formal routes of education, businesses raise skills levels by providing training to their employees, and HGSBs not only invest significantly above the national average in their workforce, they also face specific shortfalls. SKILLS SHORTAGES ARE A UK-WIDE PROBLEM AND PRESENT IN EVERY REGION It is widely recognised that the UK needs to tackle skills shortages, but our survey shows that an incredible 90% of HGSBs say that they face some form of skills shortages, and 61% of HGSBs consider it to be a policy area where there is a need for Government intervention. This is even more remarkable when placed in the context of the UK average of 17% of companies that consider they have skills gaps or vacancies due to skills shortages. 7. HM Government (2017). 'Industrial Strategy: Building a Britain fit for the future.' p.93. HGSBS ACROSS THE UK INVEST IN THEIR WORKFORCE 84% of HGSBs funded or arranged formal training for staff over the past 12 months, compared to a UK average of 66%. Over the past 12 months, HGSBs spent, on average, 18,958 per business on training. 36% of HGSBs spent more than 10,000 on staff training/skills development over the past 12 months. This is well above the UK average investment in training, which is just under 8,000. 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 5% 4% 3% 2% 1% 0% London Yorkshire and The Humber Scotland South East North West West Midlands East of England East Midlands South West North East Wales 2014 2015 2016 Share of total employment in 2016 (RHS) Figure 10: Number of people employed by HGSBs by region and share of total regional employment Source: FAME, ONS, Cebr analysis 5% 3% 3% 3% 3% 3% 3% 3% 2% 2% Northern Ireland 2% 2% The Staffline Group has two business divisions: Staffline Recruitment, market leaders in industrial temporary recruitment supplying up to 52,000 workers per day to more than 1,500 clients; and PeoplePlus, a leading provider of skills and apprenticeships which supports tens of thousands of people each year to transform their lives, get into work and progress their careers. In the past five years, Staffline has seen significant and rapid growth, with an underlying operating profit compound annual growth rate of 29% and an increase in turnover of 591 million. Developing our people has been key to this success. Since becoming a listed company in 2004 we have continued to enjoy the support of Octopus Investments, our largest shareholder. 17 16 KNOWLEDGE RELATED TO THE JOB IS A COMMON SKILL SHORTAGE 61% of HGSBs consider "Technical or practical knowledge related to the job" to be a difficult skill to obtain when hiring staff. This is universal across all regions in the UK, and also reaches non-HGSBs. The second most selected skill shortage is "Computer / Software literacy" (25% of HGSBs), with "Knowledge of product(s) or service(s)", coming in third, at 24%. TIME AND FUNDING ARE THE MAIN BARRIERS TO PROVIDING MORE TRAINING When asked about the barriers to providing more training, 55% of HGSBs state that they could not spare more time, 45% mention it was hard to find the time to organise training and 36% mentioned lack of funds for training or that training was expensive. This reflects a general feeling across all companies and regions in the UK. According to the UK Commission for Employment and Skills (UKCESS)survey, these are the top three reasons constraining companies' provision of training. An important difference, however, is that HGSBs in Scotland, Wales, and Northern Ireland seem to face relatively higher barriers to training than England. GOVERNMENT ACTION IS NEEDED The message is clear. While HGSBs are strongly contributing to the UK skills stock, they need more help to both attract those with the specific skills they need when recruiting, as well as train their existing workforce. 72% of HGSBs consider skills shortages to be a common challenge businesses face, and 39% of HGSBs consider developing a skilled workforce to be an area where the Government could provide more assistance. Figure 12: Share of HGSBs that find skill shortages to be common when hiring staff Source: FAME, ONS, Cebr analysis Technical or practical knowledge related to the job Computer/Software literacy Knowledge of product(s) or service(s) provided Administrative/Management Communication Analytical/Numeracy Language skills Writing literacy Creativity 61% 25% 24% 21% 16% 16% 15% 13% 10% Lack of funds for training/training expensive A lack of appropriate training/qualifications in the subject areas we need Difficulty finding training providers who can deliver training where or when we want it Staff now fully proficient/don't need the training Lack of knowledge about training opportunities and/or suitable courses High levels of staff turnover A lack of good local training providers Lack of provision (eg courses are full up) Can't spare more staff time Hard to find the time to organise training Figure 13: HGSBs' barriers to provide more training by region 70% 60% 50% 40% 30% 20% 10% 0 England Scotland, Wales and Northern Ireland Source: ICM, Cebr analysis Figure 11: Share of HGSBs reporting any skills shortage(s) versus share of total companies in the region reporting any skills shortage(s) or vacancies 100% 80% 60% 40% 20% 0 West Midlands East Midlands London South West East of England South East North West Scotland, Wales and Northern Ireland Yorkshire and The Humber North East HGSBs Regional average Source: ICM, UKCESS, Cebr analysis 19 18 UNLOCKING HGSBS' POTENTIAL: INFRASTRUCTURE 4 Wherever they spring up, high growth small businesses encourage energy and confidence in local economies. They bring new activity, commerce and employment; increase demand for services and infrastructure; set off new cycles of innovation and opportunity; and generate or attract other enterprises like them. However, infrastructure is an area where the UK fails to keep pace with its counterparts; with the areas of digital connectivity and transport concerning HGSBs the most, whichever region they are in. 4.1 INFRASTRUCTURE POLICY IN THE UK The Government's Industrial Strategy acknowledges that investment in the UK's infrastructure is crucial in growing regional economies and creating the right environment for businesses to thrive. In pledging to increase the National Productivity Investment Fund to 31 billion and investing over 1 billion in digital infrastructure to include the roll-out of full-fibre networks and 5G the Government knows it has a critical role to play in supporting businesses to grow and prosper. Over the next five years, the Government plans to spend over 239 billion in infrastructure projects across the UK. The quality of infrastructure whether it be transport, communications, energy or water varies by region, in the same way the number of HGSBs varies according to geographical location. Our research shows that HGSBs are concentrated in regions with the best infrastructure, and the regional growth of HGSBs can be fuelled by providing better infrastructure. The results of our survey of HGSBs suggests there is evidence to back these theories, with positive correlation between the regional infrastructure quality and the regional breakdown of HGSBs. If we exclude London, the positive correlation is even stronger.8 8. A likely reason for this outcome is that while most HGSBs are concentrated in London, the majority are located in Central London. The "London" region presented here includes local authority districts outside Central London with a lower infrastructure quality. HGSBS HAVE A CLEAR NEED FOR BETTER INFRASTRUCTURE AND RANK DIGITIAL COMMUNICATIONS HIGHLY Our survey asked businesses to rank which infrastructure programmes they would like to see more investment in. On average, HGSBs ranked digital communications as the most important Government infrastructure programme in relation to their business (4.0), followed by roads (3.6). 30% 25% 20% 15% 10% 5% 0% Wales North West West Midlands South West East of England Northern Ireland Yorkshire and The Humber South East London North East East Midlands Figure 14: Correlation between HGSBs' location and regional economic performance Source: FAME, Cebr analysis Regional allocation of HGSBsInfrastructure quality score 4.20 4.30 4.50 4.70 4.90 4.40 4.60 4.80 5.00 5.10 5.20 Scotland 21 20 Poor digital and transport infrastructure from slow broadband speeds to bottlenecks on key arterial roads inhibits innovation, economic and social growth. Improving these can raise productivity by enabling towns and cities to achieve agglomeration effects, and thus support the rebalancing of the UK's economy. 4.2 HGSBS AND REGIONAL DEMAND FOR INFRASTRUCTURE THE NORTH-SOUTH DIVIDE IS NOT AS EVIDENT IN TERMS OF HGSBS' DEMAND FOR DIGITAL INFRASTRUCTURE IMPROVEMENT The South West has the highest share of HGSBs that consider the quality of digital infrastructure as a "very important" or "important" constraint on growing their business, with the North East having the lowest share. The Government published its Digital Strategy in March 2017 consisting of seven strands, the first being "building world-class digital infrastructure for the UK".9 Significantly, the Strategy signposted independent research that identified that increased broadband speeds alone could add 17 billion to UK output by 2024. In the Autumn Budget 2017, DDCMS announced that as part of the Government's 740 million National Productivity Investment Fund (NPIF), a Local Full Fibre Networks (LFFN) Challenge Fund of 190 million would be available with the aim of helping "locally led projects across the UK leverage local and commercial investment in full fibre".10 A component of the LFFN programme is the Gigabit Voucher Scheme, which will provide vouchers worth up to 3,000 "to support the capital costs of getting new gigabit-capable connections for businesses". The scheme is currently being tested in four areas of the UK: Aberdeen and Aberdeenshire; Bristol, with Bath and North East Somerset; Coventry and Warwickshire (North Warwickshire, Nuneaton and Bedworth, Rugby, Stratford-on-Avon, Warwick); and West Yorkshire and York (Bradford, Calderdale, Kirklees, Leeds, Wakefield and York). When comparing the areas identified by the Government with the areas in Figure 18, we can see that more often than not, the Government's support appears well targeted; at 65% of HGSBs in the South West, the region where HGSBs most needed digital infrastructure, which corresponds with the Government's own decision to trial the scheme in Bristol and Bath. Similarly, the West Midlands (or Coventry and Warwickshire in the Government's assessment) was the region with the third highest proportion of HGSBs which felt that digital infrastructure was important. However, Yorkshire and The Humber featured sixth (out of ten) on ranking the importance of digital infrastructure to HGSBs, with the North West and South East six and five percentage points higher respectively. BUT IT IS CLEAR IN TERMS OF HGSBS' DEMAND FOR BETTER TRANSPORT INFRASTRUCTURE On average, in London only about one in three HGSBs considers transport infrastructure to be a "very important" or "important" constraint on their growth. In the North West, almost two in three HGSBs consider this to be the case. Figure 17: HGSBs' average rank of Government infrastructure programmes' importance to their business (where 1 is "Not important at all" to 5 is "Very important") Source: FAME, ONS, Cebr analysis Digital communications Roads Energy Social infrastructure (eg hospitals, schools and prisons) Airports and ports Housing and regeneration Science and research Rail Water and waste Flood and coastal erosion 4.0 3.6 3.5 3.1 3.0 2.9 2.9 2.8 2.8 2.3% Figure 18: Share of HGSBs that consider digital infrastructure a "very important" or "important" constraint on the growth of their business 80% 60% 40% 20% 0 South West Scotland, Wales and Northern Ireland West Midlands North West South East Yorkshire and The Humber East of England London East Midlands North East Source: ICM, Cebr analysis 9. https://www.gov.uk/government/publications/uk-digital-strategy. 10. https://www.gov.uk/guidance/broadband-delivery-uk#contents Figure 19: Share of HGSBs that consider transport infrastructure a "very important" or "important" constraint on the growth of their business 80% 60% 40% 20% 0 South West Scotland, Wales and Northern Ireland West Midlands North West South East Yorkshire and The Humber East of England London East Midlands North East Source: ICM, Cebr analysis 23 22 4.3 THE NATIONAL INFRASTRUCTURE PIPELINE AND HGSBS The National Infrastructure and Construction Pipeline (NICP) is a comprehensive forward-looking assessment of the planned investment in UK economic infrastructure across both the public and private sectors. Over the next four years, the UK Government plans to spend over 240 billion in infrastructure projects across the UK. The highest share will be allocated to the Energy sector (49%), followed by the Transport sector (37%). HGSBS HAVE DIFFERENT PRIORITIES FROM THE PLANNED NATIONAL INFRASTRUCTURE AND CONSTRUCTION PIPELINE In our survey of HGSBs, business leaders backed the spending on transport and energy, but there was a clear divergence on the communications sector. 69% of HGSBs consider current communications infrastructure to be an important constraint on the growth of their business. However, it is important to recognise that while only 3% of total Government funds in the NICP is allocated to this sector, investment in digital infrastructure has shifted away from the public purse. Therefore the bare figures do not reflect overall investment, or the crucial role Government has in creating the right policy framework to encourage the further private investment needed to meet HGSBs' needs. NICP FUNDING DISCREPANCIES REMAIN AT A REGIONAL LEVEL HGSBs are also concerned that London (11%) and the South East (4%) continue to get the majority of non-national infrastructure spend. While these figures undoubtedly reflect London's role as the UK's financial and business hub, and the capital's numerous ongoing transport infrastructure projects, they will do nothing to assuage concerns about the "London-centric" nature of policymaking and funding decisions. Figure 22: Allocation of NICP funding across regions over the next five years 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% East of England Offshore North West London Yorkshire and The Humber South East West Midlands Scotland North East Wales South West East Midlands Overall, 55% of HGSBs surveyed consider poor transport links with other parts of the UK to be a common challenge facing businesses, with 43% saying the same about within-city transport links. With this view widespread across all regions of the UK, there is clearly work for the Government to do in order to address these issues, and a number of HGSBs would agree, with 42% of HGSBs considering infrastructure to be a policy area where there is still room for Government intervention. Source: ICM, Cebr analysis Figure 20: NIP funding allocation across projects Energy 49% Waste 0% Transport 37% Water 8% Communications 3% Science and research 2% Flood 1% Source: National Infrastructure and Construction Pipeline, Cebr analysis 60% 50% 40% 30% 20% 10% 0% 80% 70% 60% 50% 40% 30% 20% 10% 0% Communications Energy Transport Science and research Water and waste Flood NICP project value share Share of HGSBs that consider the Government infrastructure programme "very important" or "important" to their business Figure 21: NICP funding allocation across sectors, and share of HGSBs that consider the given Government infrastructure programme "very important" or "important" to their business Source: National Infrastructure and Construction Pipeline, ICM, Cebr analysis 25 24 SUPPORTING BUSINESSES TO START AND GROW The UK has one of the world's most successful markets for entrepreneurial small companies, with the UK ranked third in the world as the best place to start up a business according to the Organisation for Economic Co-operation and Development (OECD). However, as the Government's Industrial Strategy recognised, the UK is only in 13th position for scale-ups. Octopus was founded in 2000, and in the last 18 years has scaled up to become the largest venture capital investor in the UK, with 890 million of funds under management, representing a fifth of the UK market. 5 The Octopus High Growth Small Business report has established itself as one of the most important publications for entrepreneurship policy. Once again the report makes a strong case for supporting this dynamic and geographically dispersed collection of companies. Politicians and policymakers across the political spectrum should sit up and take note. Philip Salter, founder of The Entrepreneurs Network 27 26 THE OCTOPUS STORY Scale-up funding provides the visibility that allows entrepreneurs to focus 100% on growing revenue, productivity and jobs, as opposed to focusing on survival and the next round of fundraising. We are proud of our track record in helping many successful start-ups navigate the scale-up process, some of which have become household names, such as Zoopla and Secret Escapes. Unconstrained by short time horizons and holding periods, we can support companies for the long term, helping them to grow. Thirty-three of our 39 AIM listed companies that we have invested in have been part of our portfolios for more than five years, 16 for more than ten years. Secret Escapes is an online travel club and among the fastest growing holiday businesses in Europe. Members are offered options to purchase luxury holidays at significant discounts for a limited period, and these deals are guaranteed to be better than can be found elsewhere. Octopus first invested in Secret Escapes in 2011, when the company had five members of staff. Since then, Secret Escapes has expanded internationally to countries across Europe, the US and the Far East, and now employs over 480 people. Yet it wasn't just financial backing that Octopus provided, and Secret Escapes was able to draw upon the network and expertise of the fund management team at Octopus, so that it could meet the challenges of growing and succeeding in a very competitive market. What Octopus are doing with their support in helping us in Asia is actually operationally helping people explore possibilities and take first steps in probably the toughest market in the world. They are organising the meetings, sorting visa letters, doing the market research to find relevant targets it's several steps on from anything we've seen on this front before. I can't stress enough that I think the difference is that there's a strong element of real work here, actual execution, not just firing off a couple of intro emails. You not only have people with all the contacts but those who will also roll their sleeves up and actually make things happen. Alex Saint CEO and co-founder of Secret Escapes Venture capital investors such as Octopus can provide management expertise, invest in tools, networks and resources to help companies scale and compete globally in new markets and geographies, providing a range of support in areas such as IT, operations, management and financial guidance. Largest venture capital investor in the UK, with 890 million of funds under management, representing 21% of the market 890 million funds under management 7.2 billion 100 million Octopus Ventures invested 100 million in the last year in 8 companies Supported over 450 smaller businesses 45% overall growth in Octopus Ventures portfolio revenues Invested in start-ups such as Zoopla, Secret Escapes and Graze before they became famous Octopus Ventures has 26 companies active in the US 29 28 HELPING COMPANIES TO EXPORT We want to share what we learnt as a business. The Octopus Ventures team recently invested in an office in New York for the sole purpose of helping UK portfolio companies enter the US market, and navigate its complexities, as smoothly as possible. Arranging trips to Silicon Valley for UK entrepreneurs has shown them that there should be no limitations on their ambitions for their businesses. In the US we are focused on helping the entrepreneurs we have backed in Europe to scope, enter and then scale in this market. This often involves both basic operational activities (incorporating a US company, discovering the optimal location to have a base) as well as more strategic decisions (determining who first to hire, which go-to-market strategies to leverage, when and how to fundraise). About 40% of our portfolio has a presence or operational reach in the US. Semafone provides secure voice transactions for call centres, allowing consumers to enter their payment card details and other personally identifiable information (PII) securely via their telephone keypad, while still engaged in a conversation with the call centre agent. Headquartered in the UK with US offices in Boston, Semafone works with more than 80 organisations in 14 countries on five continents. Semafone wanted to establish a second support team location away from the UK, and reached out to Octopus' US team to help assess North America's viability, as part of a global review of possible support locations, which also included Asia and Australia. Semafone chose Australia for its new support team location with greater confidence and expediency, as Octopus' support allowed the company to understand additional risks and challenges in the US before they were material, including talent leaching in certain parts of the country, cost inflation in target regions and recruiting costs, among others. Now, Semafone can deliver unparalleled customer support, 24x7, around the world and is well positioned for its continued global growth. In our search for a new support team location, Octopus provided us with helpful information, answered our most difficult questions, and introduced us to a community of insightful connections to address our challenges. One CEO even offered us additional help setting up and renting office space. Semafone values the Octopus team's time and assistance it was truly enjoyable to work with them on this project. Every communication was full of positivity, encouragement and cheerfulness, which is much appreciated. Christine Redmond Customer Support & Services Manager, Semafone Fluidly is a financial technology company that combines machine learning and AI with financial modelling, which transforms the way businesses manage their cash flows. Octopus provided an initial round of seed funding, allowing the company to grow to 16 staff and kick-start its commercial activity. Along with funding, Octopus' expert team provided invaluable practical and strategic advice, as well as unique access to key industry stakeholders, including a trip to Silicon Valley to meet leading American tech entrepreneurs. With a rapidly expanding customer base, Fluidly is confident it can capitalise on its initial success, and has ambitious plans for major growth over the next few years. As highlighted by the OECD figures, the challenge for UK entrepreneurs is in accessing the long-term finance required to scale up. This can be a particular problem for companies that outgrow the caps on VCT and EIS financing, as their companies grow to over 15 million or have already received 12 million in VCT / EIS money over their lifetime. At this point, the companies are forced to bring in external funders, typically from the US, or even sell out their whole company to a big US corporate buyer which integrates the intellectual property into its core business. In the worst cases, we have seen businesses who have had to slow down their growth trajectory, reducing hiring and even laying off staff until they can secure further capital. With many innovative, highly productive companies, it can often be a race to scale up quicker than the competition or become obsolete. The competition is often based in other countries with deeper pools of scale-up capital, putting our world-leading ideas and scientists at a competitive disadvantage. If the UK were to make available deep pools of capital to support UK firms scaling up, our world-beating universities and entrepreneurs would be able to compete more effectively on the global stage. It would ensure that the FTSE 100 will still host world-leading companies in another 20 years when oil, traditional banking and telecoms will no longer be as relevant to the world we live in. SUPPORTING THE AIM MARKET So much more could be achieved with the right conditions. The Alternative Investment Market (AIM) has provided over 100 billion in growth capital to over 3,700 firms since it was established more than any other stock market in the world and is firmly recognised as one of the most attractive markets for a company to seek capital support once it reaches a sufficient scale. 31 30 Elvie is a British femtech company, with a mission to build extraordinary products that improve the health and lives of women everywhere and at all stages of life. Its first product, Elvie Trainer, is an award-winning pelvic floor trainer backed by over 1,000 health professionals and stocked at major retailers such as John Lewis and Boots. Investment from Octopus has allowed
Rebalancing the economy: Unlocking the potential of the fastest growing smaller companies in the UK
Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.