There is great excitement across Australia about start-ups. There is much to be applauded about the job creation impact – and other economic benefits – of building successful Australian-based startup companies.
The rapidly growing Australian ‘startup economy’ can be likened to a flywheel that both creatively disrupts & supports growth in other industries.
These aggregate economic effect of a successful startup enterprise-creating industry is huge. It is important for the transformation and future success of the Australian economy.
We must encourage existing Australian businesses to innovate by leveraging their intellectual, financial and operation assets to create new business opportunity. This means applying their sales, marketing & distribution resources to partner with startup creators, entrepreneurs, funders, technologists and innovators.
But the relatively sudden excitement about the startup sector, will not on its own deliver the outcomes Australia needs. Startups alone do not go far enough.
Startups sectors are abundant in many countries across Asia, Europe and, of course, the US. Creating and investing in startups is only the beginning.
Australia, we also need to turn our attention to ‘Scale-ups’.
A scale-up is an enterprise with ten or more people and average annualised growth in employees (or in turnover) greater than 20 per cent a year over a continuous three-year period.
What’s truly staggering about the last five years is the rapidly accelerating speed of growth of businesses that scale very quickly to produce billion dollar plus value companies.
Every C-level manager, investor and aspiring entrepreneur that talks about disruption should be aware of the impact scale-ups have on reshaping industries.
Targeting scale-ups can have a dramatic impact on economic growth. The US invests around 0.2 per cent of national output annually in high-growth companies which, in turn, now have revenues that account for some 21 per cent of US national output.
A single high-growth UK SME creates around 83 jobs (& US SME s create around 200 jobs) or significantly more than 100 new microbusinesses.
In the US, government departments are required to report on the growth rate of the companies from which they procure services. This has helped incentivise departments and agencies to buy more from innovative, ‘scale-up’ companies rather than from the large incumbent firms with which governments typically do business.
What makes a startup become a scale-up?
Reid Hoffman is the founder of Linkedin. He is a business founder, an entrepreneur, an investor and is now a teacher. He teaches ‘Blitzscaling’ at Stanford’s Graduate Business School.
In his course, Reid unpacks the mechanism and process that makes companies grow at staggeringly fast speed – an essential part of the US economy’s success. Simply put he said …
“First mover advantage doesn’t go to the first company that launches, it goes to the first company that scales.” – Reid Hoffman, founder, LinkedIn
Silicon Valley is renowned as the world’s centre of startup value creation and exits. Over 47 per cent of the value of the entire world’s startup “exits” in 2013/14 took place there. But what makes it really effective as the engine room of growth is that it is the world’s best at “scale-ups” – growing businesses from small to very large, very fast.
The greatest asset of “the Valley” is not just the massive aggregation of money, talent and drive, it is the intensity of it’s people network. Silicon Valley operates like a network. ‘Scale-ups’ depend on networks of people, capital, services, board members and governance specialists that exist outside the startup itself.
This is what one ‘scale-up’ looks like.
Are scale-ups a US-only phenomena?
Growing scale-ups is a priority across many countries. The US and China lead but they are not on their own.
While the number of UK startups is at an all-time high and their government has focused much support on new businesses through initiatives such as Tech City in London and support of campaign group StartUp Britain, now the UK government is looking at what it takes to move beyond startups and has turned increasing policy attention to assisting ‘scale-ups’ – to make sure that a larger proportion of its firms grow to the next level.
In a recent report to the UK Government by Sherry Coutu, (Angel Investor, Entrepreneur, Non-Exec Director and Advisor & a non-executive member of Zoopla plc, the London Stock Exchange Group plc, Cambridge University (Finance Board), and others), says not enough UK startups are scaling into large companies.
“Competitive advantage doesn’t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies.” – Sherry Coutu
In this report she further points out that countries that want to encourage healthy business growth eco-systems should encourage ‘scale-ups’. These require mechanisms to help businesses;
1. Find employees to hire who have the skills they need
2. Build their leadership capability
3. Access customers in other markets / home market
4. Access the right combination of growth finance
5. Navigate infrastructure
Her analysis of 20 countries that have focused on developing their ecosystems to foster ‘scale-ups’ shows these five barriers can only be overcome through coordinated efforts between stakeholders at a local level.
In 2009 NESTA (nesta.org.uk) of the UK published a report called “the Vital 6%” showing that bulk of economic growth in the UK has been driven by a small number of high-growth companies. They go further by saying;
‘UK Policy makers believe a dangerous myth. They think that start-up companies are a magic bullet that will transform depressed economic regions, generate innovation, create jobs, and conduct all sorts of other economic wizardry” (Scott Shane 2009) p 141
“that support for start-ups and fostering high growth entrepreneurship should not be seen as mutually exclusive policy objectives and much greater attention needs to be given towards developing more effective ways of creating and supporting High Growth Firms”. (Brown and Mason, 2012; Mason and Brown, 2013).
The UK Scale-up report made 12 recommendations:
1. National data on ‘scale-ups’ should be made available by central government to enable support to be better targeted
2. Public bodies should be evaluated on how well they are helping “scale-ups”
3. Public funding programs should be further geared towards “scale-ups”
4. A government minister supported by an industry task-force should be made responsible for reversing the ‘Scale-up gap’ that the UK currently faces and report to the prime minister annually
5. The Department for Education and Local Enterprise Partnerships should assist in connecting “Scale-up” businesses with students as potential employees
6. Local governments, colleges and universities should assist “scale-up” companies in developing and acquiring the talent they need
7. Companies should be able to apply to the UK Home Office for a newly-created ‘scale-up visa’ that allows them to bring in specific personnel from overseas with the skills to help them deliver on immediate business needs, for fixed periods
8. Public learning syllabuses/initiatives should ensure effective understanding of what it takes to scale-up and help prepare future “Scale-up” leaders
9. Government should use its convening power to help raise the profile of “scale-ups” and their leaders, and establish them as role models
10. The UK Listing Authority, HMRC and the UK Border Authority should report on their regulatory efficiency broken down by Local Enterprise Partnership, and in relation to regulatory peers in other countries, to keep reducing any drag or delaying effect of regulation
11. Government and industry must continue to work together to close the finance gap for fast-growth companies
12. Government and industry must work together to give access to infrastructure on a flexible and timely basis
The startup world is characterised by simultaneously fierce competition and a shared sense of purpose. It’s the glorious mission of doing something bold and maybe changing the world. But we need to go further.
Is Australia sufficiently prioritising building ‘scale-ups’ as a priority for our innovation policy agenda?
Australia should seize the opportunity that the UK and many other countries have identified, being a focus on and its funding of scale-up activity.
Tony Surtees is an entrepreneur, investor and advisor to government. His most recent company is a co-founder at Australian presentation engagement specialist Zeetings. Tony is also VP of the local Stanford alumni association, Stanford Australia and is on the global advisory board of Advance, the professional network for Australian expatriates.