All aboard the high growth bandwagon?

High growth is the catch phrase of the moment.  Government and businesses are constantly talking about the need for economic growth.   What better way for this to be encouraged than for the UK to become a hotbed of innovation which encourages potentially high growth businesses to locate here and, I guess, grow fast?

David Cameron: “We are firmly on the side of the high-growth, highly innovative companies of the future. Don’t doubt our ambition.”

Doug Richards, in a recent Financial Times article: “It is not small business that supports economic growth, but young businesses that grow fast.”

 In addition to the rhetoric there have been specific measures to back this up:  

• the Start up Britain website and initiative
• turning the Olympic Park into a Tech City
• 2011 budget increases entrepreneurial tax reliefs
• dedicated training  for companies deepened capable of high growth
• some regions and sub-regions have had targeted funding, e.g. Shoreditch in London
• new visa rules to lure investors and entrepreneurs to the UK.

The logic is sound

In addition to the inherent logic of supporting high growth businesses at a time when economic growth is essential, research (NESTA research summary: Vital Growth) shows that companies which grow fast bring other benefits. These businesses:

• account for “a disproportionate share of job creation”
• are more likely to grow in recessionary times
•  are less likely to go bust.

But…. slower growing businesses are as or maybe even more important

The NESTA research shows that of the 221,731 businesses founded in 1998 over two thirds had vanished by 2008 and of the survivors only:

 10% employed more than 10 people in 2008 (this is better than average: 95% of all businesses employ less than 10 people)
7% achieved one year of high growth (termed as an increase of employment of 20% or more).  

The desirability of promoting and encouraging high growth businesses may be clear but that shouldn’t overshadow the fact that the vast majority of businesses will never be high growth businesses.  Nor should it be an excuse for government or others to neglect or overlook other businesses: a business which never achieves high growth but provides sustainable employment and income is a good thing.

 As Corporate Finance North West put it in their excellent Guide to earlier stage corporate finance “An important lesson is that there is a grave danger that the unsung hero of economic stability – sustainable local businesses – may be overlooked in favour of the high growth obsession”.

Does anyone know what a high growth business of tomorrow looks like or where it might be located?

In addition to the dangers of focusing on high growth businesses to the detriment of other businesses, there is a fundamental difficulty with this focus: it is not easy to pick which businesses might be capable of growing fast:

• the NESTA research shows that high growth businesses can be found in pretty much any sector.  It’s not just about technology and the internet
•  high growth businesses may initially be low growth businesses
•  funding and resource is directed by government and investors into “hot sectors” which are deemed capable of spawning high growth businesses.  This is an inefficient way of allocating resources: bubbles develop (dotcom boom, the new generation of property entrepreneurs, the innovation in financial services anyone?) …….. and then burst
•  if you study economic and industrial history of the last few centuries, as opposed to the last few decades, it’s pretty clear that innovation has come from places other than just Silicon Valley (or Shoreditch for that matter). 

We were recently introduced to a family business which had been around for over 20 years and had grown steadily not spectacularly over that period: no external investment, no bank debt, been nowhere near a business incubator or high growth business coach, no fancy intellectual property, no clever technology, may have a website, lots of loyal and hard-working employees.  It delivers around £5million of profit each year.  The next google?  No, but a wonderful thing. 

 A broader approach  

It should be recognised that a narrow focus on supporting businesses, sectors or regions deemed to be capable of high growth is potentially dangerous:

• it diverts resources away from the majority of businesses
•  potentially it undervalues or, worse still, devalues the contribution made by the majority of businesses to the economy and society
•  it fails to recognise that established businesses may turn into high growth businesses
•  it creates greater regional bias.

Although it is accepted wisdom that governments aren’t good at picking individual winners, there should be more debate about whether government is any better at picking which sectors, regions or types of businesses are more likely to spawn the high growth businesses of the future.