The challenge of scaling up

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Despite the UK seeing a record number of start-ups, too many businesses are going to the wall within the first two years of operation. Nine SME leaders discuss the difficulties of achieving scale and what needs to be done to support companies in this key stage

The panel
Host Alex Mitchell
Chair, IoD 99
Bivek Sharma
Partner and head, KPMG Small Business Accounting

Sean Nicholson
Founder and CEO, Sign Solutions
Alexandra Fagan
Managing director and designer, Beauchamps of London Group

Will Morris
Managing partner, Alchemy Digital
Damian Clarkson
Managing director, The London Kitchen

Andy Wilkinson
Managing director, OWB Creative Communications
Gary Livingstone
Managing director, LG Motion

Marios Poumpouris
Managing director, Chiller Box
Richard Bush
Co-founder, CrowdLords

ALEX MITCHELL Welcome everyone to the IoD and this breakfast roundtable on small-business growth and scale-up. It is a key issue for the government and an important concern for the IoD and our co-hosts today, KPMG Small Business Accounting, which genuinely wants to support individuals.

There has been an attitudinal shift in the UK with people wanting to start their own business – a record 581,000 were launched in 2014 with 2015 set to beat that. However, failure rates within start-up businesses in the first 18-24 months are very high.

I chair IoD 99, a peer-to-peer support network for high-potential young entrepreneurs from sectors across the UK. A survey of IoD 99 members found that motivation for setting up a business wasn’t just to make money or become the next Branson or Gates, it was also about making a positive social impact.

However one of the key issues with scale-up is around governance and team. A start-up focuses on creating an idea, incubators look at whether or not an idea is commercially viable and an accelerator focuses on the team.

When you’re accelerating growth businesses, it is about everyone – you, your team, your customers, your suppliers, your employees are all part of your growth journey. It is crucial that you can have that open dialogue with individuals who are within your supply chain and your support structure to give you advice.

It can be lonely being an entrepreneur and sometimes it’s easy to run before you can walk, which is why it’s important to have a structure, governance, management and processes in place when looking at success rates in the medium to long term. Lots of start-ups fail when they come to their first accountancy period because they haven’t put enough money aside to pay their tax bill.

Worryingly, at a time when more individuals are starting up businesses, the UK has dropped from fourth to ninth in the Global Entrepreneur Index rankings because there’s an issue around creating an ecosystem that can take start-ups forward to turn them into job creators of 10, 20, 30 more people; £2m-£3m companies. That is what the UK economy needs and that is why we all must be there to support each other. And on that point I’d like to hand over to this morning’s co-host, Bivek Sharma of KPMG.

BIVEK SHARMA Firstly, thank you for coming to this roundtable today. This is a really important issue for us at KPMG and I know that some of you around the table are our customers. The more we’ve gone into this market, the more we see some of the problems that some businesses are having.

There’s a huge amount we’ve started to do – talking to government, business modelling, trying to open up financing. Time and again we see customers with brilliant ideas which they should be scaling up but there are all kinds of barriers to getting there – like how do I get my cash, who do I work with in the right places, how do I get PR and marketing?

At KPMG we asked ourselves what could we do in that space to make some change. It will be really interesting today to get your views on what can we do meaningfully to make things better.

MITCHELL Can I start by asking you about the challenges you’ve faced growing your businesses?

GARY LIVINGSTONE I’ve got three engineering firms. We’re relatively small with 34 employees between them. The struggles we’ve had are with structuring our growth pattern and having people in the right places to continue developing the business. I have been frustrated with successive governments disjointing the support networks… it’s so decentralised. For long-term growth I  tend to speak to local business people – they are great support networks. I agree with making sure you get good accountants and good lawyers on board very early on but accountants aren’t necessarily the best people to advise on growth. They tend to be risk-averse, so you need to speak to other business people who have got a similar mindset.

WILL MORRIS We are a digital strategy and design company. We haven’t done any growth strategy work for years. Our strategy is to produce world-class work, and that has typically carried us through every single year and allowed us to grow. We’ve never taken investment, about 90 per cent of our work is referred and we make sure that our clients always come back to us.

ANDY WILKINSON We’re a 15-year-old marketing communications agency based in Birmingham. We completed a management buyout with the senior partner in 2007, which was quite a lumpy process to go through but exciting. One of the best things I’ve done, in terms of helping grow my business and support smaller businesses and smaller clients, is to work as a non-executive director for Business Link West Midlands. We helped about 6,000 start-ups and I believe it’s left a huge hole in the SME business community since moving to only operating online.

RICHARD BUSH A year ago I left a marketing and communications agency and started a crowdfunding platform for property. The challenge we faced during set-up and the early-growth stage period is in the area of legislation, regulation and getting access to professional advice that doesn’t cost the earth. Two-thirds of our investment over the last year has gone into professional, legal and compliance advice.

ALEXANDRA FAGAN I run a product design company. It started off with fashion accessories but has now moved into all kinds of product design, from packaging to high end gifts. I initially stuck to British manufacturing but as the business grew I had to deal with China. At first I didn’t have a clue what I was doing but everyone told me to follow my dream. For me, running a business, it’s knowing who to take on and when to take them on. As a small business everyone says try to do it on the cheap, but you can’t. You actually need nurturing and you need the big jobs and the people who’ve got experience to help you grow, but you don’t have the funding.February-2016-Expert-KPMG-roundtable-4

MORRIS We take a lot of advice from experts, like KPMG, who are our accountants. I thought they would be too big to care but they’ve been amazing and provided us with a level of access to expertise which I never realised we would get. I spend virtually no time looking at my accounting, I’m not worried about my cashflow because I can see it all the time, so for me that has been one of the biggest changes in my business, because I sleep now.

BUSH As an example, we spoke to seven of the high-street banks before one of them would give us a bank account, because we’re in crowdfunding. If it wasn’t for KPMG, we would have struggled on things like tax advice because one of the big challenges is knowing who to go to and them being accessible and open-minded for new business.

DAMIAN CLARKSON I’ve been in the [hospitality] industry 20 years and the traditional business model of ‘grow and hope to sell’ has broken. I made a strategic decision to stay small and privately owned because it makes us much more dexterous in the markets. The only concern as a gently growing business is that I want to be in a position where if an opportunity presents itself we can go for it.

SEAN NICHOLSON I’m a sign-language interpreter and our business provides and trains sign-language interpreters. Getting to the first £1m turnover was quite easy but things started getting difficult… It’s like going from primary school to secondary school and suddenly there’s a load of big boys and some of them are bullies. It’s how to negotiate that situation – pretending to be a big person when you’re not at all. It’s a real struggle.

MARIOS POUMPOURIS I’m a chartered surveyor and project manager by profession. About 13 years ago I wanted a career change. My original plan to launch a premium burger concept didn’t happen but I saw a gap in the market as a catering equipment supplier to would-be restaurateurs. We’ve good people in place but the biggest problem is growing a team.

MITCHELL Is that something others have experienced?

WILKINSON We’ve had fantastic experience of taking on young, keen, bright graduates who want to get into marketing or advertising. They enhance our business every day with fresh, new thinking.

POUMPOURIS We’ve always had good post-grads. One of the difficulties we faced is people don’t grow up dreaming of selling catering equipment, so you have them for a few years before they leave to someone else’s advantage. We try to communicate the vision of our growing business to all our team constantly but being based in the backwaters of Tottenham doesn’t seem to be enough for them to stick around.

CLARKSON I’m a big fan of graduates but retaining people has been difficult. The one thing that’s dropped our turnover this year is losing one member of the team – equivalent to 10 per cent of the workforce.

LIVINGSTONE We’ve always taken on graduates and apprentices. Graduates, after about two or three years, think the grass is greener. They think they’re far more capable than the opportunity you can give them and they go. Strategically, that is just a mindset now: if we keep them for more than two years, great, but we expect to be recruiting constantly.

WILKINSON Do apprentices stay for the long term, Gary?

LIVINGSTONE Apprentices stay longer… But [with] apprentices in engineering, you’re talking really three or four years, before they’re of any use. Even graduates, to be honest, [it’s] a good year before they’re of any real use, so that’s the problem; it’s the constant churn of the youngsters. Because the job market is there, you make them very valuable, we’re aware of that and other people can come in and just trump with more money.

SHARMA We have a client who only trains apprentices from deprived backgrounds who haven’t been to university. An apprentice is a big commitment and we’re about to do a deal to offer all of their apprentices to our customers. We won’t charge them any administration costs around payroll. We found that these super-bright youngsters become quasi-marketing people for the businesses because they know how to use social media and they’re hungry to do stuff.

LIVINGSTONE Years ago employers were happy to send engineers offsite for a year to learn core engineering skills before coming back to the company. That’s gone now because employers aren’t willing to pay that money. Now the training they do get is substandard to what it was 20 to 30 years ago. That’s why we have a shortage.

MITCHELL The coalition [government], towards the end, announced that it would launch tens of thousands of new apprentices but it doesn’t quite work like that. It’s got to be embedded within the education process and with business.

LIVINGSTONE If the government had a longer-term plan to keep the skill level of the country up, they would have kept on investing in training and further education. But with cuts left, right and centre, you’re stopping very good people from progressing. It’s a very short-term view.

CLARKSON In terms of government, everyone wants to say we love small businesses but really they pay more attention to big businesses. We’re in that squeezed area in the middle where it’s very hard to get information and consistency. It’s very frustrating because so much of your time is chasing things that you’re never going to get approval for, or that you need full-time accountants to prepare for.February-2016-Expert-KPMG-roundtable-5

MITCHELL The US has the Small Business Administration – a quarter of government contracts go to small businesses compared with about 10 per cent here. 

WILKINSON One of the things we did, which has paid huge dividends as a creative business, was to go down the route of ISO 9001 and the Investors in People Standard. Now, when we go for OJEC (Official Journal of the European Community) tenders, we almost go straight through the PQQ (pre-qualification questionnaire). It’s a huge investment of time and energy obtaining and maintaining ISO but it’s paid off across our business, processes and people.

MORRIS We can’t afford to be constantly paying recruiters to churn through staff, so I’ve found that [it’s important] investing once they’re in the door. We employ one or two different types of creative technologists: somebody who’s creative and can code, or somebody who can code and is creative. Both need to be pushed and fed with something that gets them out of bed. If you give them a piece of code to write and it takes them six months, they’ve gone. They want to feel hungry. We’re also flexible – sometimes I come in at 11am and the office is empty, and on a Sunday it can be packed.

NICHOLSON One of the difficulties I’ve always found is getting the senior team right. If you want to sleep at night you need to be able to switch off and be confident that things are going to carry on. Is there a magic formula? I guess it’s a lot to do with the people but how do you keep and retain those people or even attract new people into a business at a senior level?

WILKINSON We have a non-exec who is not a shareholder. We have a quarterly review meeting with him and it’s a fantastic opportunity to get good, trusted advice. That’s paid dividends for our business.

BUSH External experts have been expensive. What would be better for us, would be to tap into individuals to support us on a sort of portfolio-working basis; have someone who spent one day a week with us as our CFO, somebody else spending a day a week with us doing our legal. That kind of portfolio network would help a lot of the people around the table, because we can’t afford to employ a full-time finance director or a full-time legal adviser.

MITCHELL It’s almost like a co-operative environment?

BUSH Yes I think that’s the way things are going. Business is more and more complex, whether it’s technology or legal or compliance. Small businesses don’t need those people full time.

MORRIS Even if you can afford them, if you’re small, they get bored. We took a CFO on and he was brilliant, and he was expensive but he left because he was bored.

FAGAN Going to the right people for help at the right time is something I’ve taken on this year, as the business has grown quite considerably. For legal and accounts I’ve found it better to go to the KPMGs, the Taylor Wessings and build that relationship with the right people and tap into them when you need it. Sure, you pay much bigger fees but at least they’ve got the expertise. When your clients start to hear you’re working with the likes of KPMG, they think ‘Oh wow, you must be big fry’.

MITCHELL The government has put a big focus on mentoring, especially for start-ups but what value have you got out of it?

LIVINGSTONE Mentoring and good support networks are key. It’s quite lonely being in charge of a business, so you do need a bit of a pep talk from fellow business owners.

CLARKSON I think one of my most important mentors, 10 years ago, was a recruitment consultant. He put me forward for a job, then pulled me to one side and said, ‘You really don’t want this job, do you?’ He identified that I wanted the salary but I was ready to do my own thing. If you are the most senior member of the company there’s not an equal, or someone comparable to talk to, so you need to put yourself in the situation where you can get a second opinion. And to this day he remains one of my mentors.

MITCHELL We’ve spoken about challenges but what about failure – is there a risk aversion to failure in the UK?

POUMPOURIS Not starting the original [burger] business was a failure and it hurt. But it created another opportunity that has given me a living for the last 11 years, on a very small investment of £2,500, working from my second bedroom using the ironing board as a second desk. There was something to be learnt from that process. I still have that business plan and refer to it on occasions with some fondness.February-2016-Expert-KPMG-roundtable-2

WILKINSON I think there’s a lot less stigma around failure now. The last few years has seen huge global brands fail, countries fail, so there are more people thinking that ‘we might as well have a go’.

CLARKSON The American expression ‘you can’t succeed till you’ve failed’ is pertinent to me. Eleven years ago I started my first company. It was a big success but our biggest client was Lehman Brothers, and we went from £1.5m to £500,000 overnight. We were in freefall; our costs were £2m. We had the option of pre-pack [pre-packaged insolvency] but we chose the hardest option, which was horrific – liquidation. I had to explain to the banks why I hadn’t done a pre-pack. It wasn’t to protect my reputation, it was the best way to end those six years of my life. I went to the pub with the team and clients were phoning, saying, ‘we don’t care what you’re called, we’re going to work with you’, which is amazing. But it does change your view from wanting to grow and be the biggest, to wanting to be safer.

BUSH I wonder if there’s a hair’s difference between difficulty and failure. Sometime you can decide that you have failed, whereas you’re probably just in difficulty. As a small business, when you’re in difficulty, the person that you’re facing is the bank and they’re the people that make the decision whether you’re going to see the end or whether you get the support through that difficulty. I think smaller businesses need someone to go to before they go into the liquidator. A lot of the money that’s going into start-ups could go to help those businesses in difficulty get over that difficulty. It could help them learn and take the business on, as opposed to just folding like many do.

MITCHELL It’s tough at the moment for small businesses, especially in relation to scaling up but thank you all for a brilliant discussion. I’ll hand over to Bivek for his closing words.

For Bivek Sharma’s summing-up (advertorial) click here

About author

Richard Dunnett

Richard Dunnett

Richard Dunnett has been the associate editor of Director magazine since March 2013. He writes about entrepreneurs, SMEs, FTSE 100 corporations, technology, manufacturing, media and sustainability.

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