What is a scale-up business and what impact do they have on the economy?
Scale-up businesses are some of the most significant contributors to the UK and unlike many start-ups, there is a good chance that you might have heard of them. For this feature, we have attempted to define scale-ups and taken a closer look at their impact on the economy.
What is a scale-up business?
In our article on the challenges currently facing scale-up businesses, we spoke to Josh Robson, the Head of External Affair at The ScaleUp Institute about what defines a scale-up business.
Josh said: “To define whether your company is a scale-up or not, I would say the Organisation for Economic Co-operation and Development (OECD) definition is the best one to use, and this says that a business must have ten or more employees and be growing at 20% more in turnover every year, for three years.
“This is important because it is creating a situation where a company is facing a very particular set of challenges, and in facing those challenges, those companies have much more in common with each other.
“The reason why we use the OECD definition is for international comparability. There are a few other situational definitions that some people look at, usually to do with application or delivery of programmes. But when you stray too far outside of that 20% definition, you find companies with different challenges, which is not to say they’re not important, of course.”
However, we decided to some research of our own and found that there are a range of other indicators that are typical of companies that have reached the scaleup stage. These include:
- £500k revenue
- The company has been through their first through rounds of funding and reached the Series A stage or similar
Therefore, scale-ups are at a stage of growth where they have already had some good success and are looking to move on to the next level.
What is the difference between a scale-up and start-up business?
There are various characteristics that distinguish scale-ups from start-up businesses, and to find some of these out, we spoke to Katka Letzing, co-founder and CEO of Kickstart Innovation.
She commented: “Scaleups can have a lot of meanings. To us, it is companies that are in the growth stage, usually with funding of late-seed, Series A/B. Startups are usually very small and try to validate their idea or technologies. Scaleups do have traction already and usually customers and revenues.”
However, in addition to being at different stages of funding, there are other differences between the two, including:
- Risk mitigation: although this is not always the case, start-ups might be more prone to exploring new methods and taking risks to work out what works best for them. However, scale-ups tend to be able better mitigate risks and have found a business model that works for them.
- Confidence surrounding return on investment (ROI): as scale-ups tend to have reduced the amount of experimentation and found a profitable model to work from, this makes scale-ups much more attractive to potential investors.
- Staff: typically, start-ups will have a limited number of employees, with many of them carrying out several roles. Scale-ups, on the other hand, will have more members of staff and their employees will work in more specialised positions. The hiring process for scale-ups is also likely to be more formal.
Due to their differences, scale-ups and start-ups also tend to face different challenges when attempting to grow in size.
What is the impact of scale-up businesses on the UK economy?
According to the latest data from the Office of National Statistics, which is from 2019, the total number of scale-up business in the UK is 33,445, and together they generate more than £1.1tn to the UK economy.
The International Monetary Fund currently estimates gross domestic product (GDP) in the UK to be worth £2.3tn, meaning that scaleups account for nearly half of the UK’s total GDP.
Clearly, the impact of scale-ups is enormous and without them, the UK economy would not be nearly as large as it is. According to Katka, however, their impact on the economy is more than just financial.
“Scaleups contribute a lot to the economy and not only financially,” continues Katka. “They disrupt the existing ways of doing business as well as scale many industries. In the past 5 years, especially in digitalization as well as health tech, smart city, fintech, and others.”
How can we nurture scale-ups in the UK?
With scaleups generating such a huge amount to the UK economy, this begs important questions as to what is needed to ensure scale-ups receive the necessary support.
According to Irene Graham, CEO of the ScaleUp institute, developing their brand and marketing is essential for scaleups to grow. So, in order to address this, the ScaleUp Institute recently announced a partnership with media investment company GroupM to provide their full range of marketing and advertising services to UK scaleups.
When speaking at the time of the announcement, Irene said: “One of the critical needs of scaleups is for brand development and marketing presence to foster and strengthen their global aspirations. Our partnership with GroupM will enable us to better serve these key requirements. Together we can help scaleups drive further growth domestically and internationally.”
“Through its partnership with the ScaleUp Institute, Group M will gain deeper insights of the UK’s community of over 33,000 scaleups and their specific marketing needs as well as opportunities for greater levels of engagement and connection.”
According to Josh Robson, with lots of funding options being available to business leaders, it can be difficult for scaleups to find what works for them. However, he points out that there are tools available to help leaders to understand how funding can aid their business.
He says: “I think the important thing for a business is to really think carefully about what it is you’re trying to do with the money and what do you need it for. It is said a lot, but it is important to also go out and talk to the funders and the people who can lend you money.
“There are also some great tools that are emerging, like the finance hub by the British Business Bank, which are demystifying the maze and can give you a good understanding of what is available and how it can help your business.”
Firdaus Nagee, CEO of scale-up business FCI London, also believes ensuring scaleups hire the right people is essential for growth, and he offers some advice as to how they can do this:
“You can run strategy days and define your vision and mission, and make a nice infographic and that’s great, but I think actually nailing your culture is about having core values,” says Firdaus. “This can be four or five points that underpin your culture that everybody in the company agrees with, and you can use these for decision making.
“Whenever there is a problem, you can go back to the core values. Whenever you are hiring, you can go back to the core values. It is also important to adopt a policy of hire slow and fire fast too. It’s tough to do it, but if you have people in the business that aren’t aligned with your core values, you can’t be scared to do it.”
Despite their various challenges, the number of scaleups has increased by a third over the past five years. There are also many other growing businesses who are just shy of reaching scaleup status.
This is a good sign that many businesses are getting past the start-up stage, and with the right support, who knows what heights they could reach. One thing is for sure, with the UK economy being hit so hard by the pandemic, the economic impact of UK scaleups in the years to come will be greatly received.