A report published this week by researchers from the University of St Andrews and the London School of Economics, calls into question UK and Scottish government approaches to small business growth – – policy has been led by the assumption that high-growth startups are struggling to secure investment from risk-averse banks and venture capitalists.
As a result, policy initiatives have focused on increasing the supply of funding within the economy with micro tech firms that do not grow getting funding while high-growth UK startups are ‘debt-shy’ because of a distrust of banks and a reluctance to lose control.
The study, funded by the Institute of Chartered Accountants Scotland (ICAS) and based on analysis of the small business survey, reveals three surprising findings that question this approach:
Rather than young technology startups driving economic growth; it is in fact a diverse group of high-growth firms, across a number of traditional sectors, that have the greatest potential to impact the national economy and create jobs.
A report published in 2012 by the Kaufmann Foundation, America’s leading entrepreneurship think-tank, said that state economic development programs, which traditionally target high-tech firms, may be missing 75% of high-growth companies.
“Our analysis of these fast-growing firms shows us that high-growth company founders can come from anywhere,” said Dane Stangler, director of Research and Policy at the Kauffman Foundation. “Their firms can be found throughout the country and, rather than following the conventional expectation that high-growth companies are grouped into a narrow technology category, they represent exceptionally diverse industry segments. These findings offer important lessons for economic development leaders, such as to target firms that are high-growth rather than high-tech.”
- High growth firms are reluctant to seek the external finance they need to grow, because they’d don’t want to lose equity or autonomy;
- Demand for external funding, rather than supply, needs to be stimulated.
Although high growth SMEs are 9% more likely to seek external funding than other SMEs, the researchers found that high growth firms are more likely to use internal finance and the proceeds of growth to meet their investment needs. Despite growing rapidly many seem ‘reluctant’ to borrow to expand further. These ‘reluctant’ borrowers risk holding back growth potential – – and the economy with it. The researchers recommend government policy initiatives need to be better targeted to the needs of this small but vital group.
