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Looking Inside Scotland’s High Growth Companies

Colin Mason*Hunter Centre for Entrepreneurship, University of Strathclyde

Presentation to Forth Valley CMI 23rd February 2011

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1. Context

• Entrepreneurship drives economic development

• What can policy-makers do to get more entrepreneurial activity?

• What kind of entrepreneurship do we want?– More people to start businesses?– More high growth firms (‘gazelles’)

• Views have changed over the past 20-30 years

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continued• Currently the emphasis is on the need for more HGFs

– “encouraging more people to become entrepreneurs is bad public policy” (Prof Scott Shane)

• The small number of HGFs create the majority of jobs• Other attributes of HGFs: • above average levels of productivity growth; high levels of

innovation; strong levels of export-orientation; a high level of internationalisation

• HGFs also have important spill-over effects that are beneficial to the growth of other firms in the same locality and industrial cluster

• Pre budget talk is of focus on promoting HGFs through science and technology support

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Recent UK research (NESTA)

• OECD definition of high growth firms• 6.4% of firms were high growth 2002-5; 5.8% in 2005-8

(employment definition)• 10,073 HGFs in 2002-5: 2.62m employees (11.4% of private

sector workforce• 10,304 HGFs in 2005-8: 1.93m employees (8.2%)• Regions with highest proportions of HGFs are in the ‘north’

and GL• HGFs in all sectors • Majority of HGFs are small and young• High growth is episodic

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2. An Overview of HGFs in Scotland• Aggregate evidence

– FAME database - based on Companies House submissions• weaknesses

• At April 2009, there were 825 HGFs in Scotland or roughly 4.0% of Scottish companies employing more than 10 employees

• 39% not incorporated in the UK• This figure had dropped to 594 by April 2010, a fall of 28% • Scottish HGFs employ approximately 500,000 employees – not all in

Scotland • Scottish HGFs tend to be older and larger than HGFs found elsewhere• HGFs are very heterogeneous, notably in terms of their age, size,

ownership and industry sector• International comparisons problematic: but Scotland does not appear

to be out of line with Nordic region

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Size of HGFs

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Turnover

500K< 1m-500K 1-2m 2-5m 5-10m 10-20m 20-50m 50-100m 100M>0

50

100

150

200

250

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Age

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Sector Scottish High Growth Firms by Sector

0

50

100

150

200

250

300

Servic

es

Fin Ser

vices

Trans

& T

elec

om

Hotel

& Res

Const

ructi

onM

anu

Food

& Drin

k

Oil & G

as

Primar

y

Life

Scienc

esOth

er

Sector

No

of

Co

mp

an

ies

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Locations

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3. Looking inside the HGF

• What do Scottish HGFs look like?• What lies behind their success?• What lessons can we draw for policy?• 95 companies randomly selected from FAME

– Extensive desk research– Only 53 met criteria (Scottish owned)– 6 closed

• 21 (22) interviews completed (+1)– Problem was getting in contact with CEO – only 4 actual refusals

• Recall that high growth is episodic

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Key features1. Challenging the ‘gazelles’ myth – not all HGFs are young

– Age: 1970s (4), 1980s (3), 1990s (5)

2. Where do HGFs come from – only 9 are de novo starts - rest have been ‘pre-incubated’

• MBO/MBI• Corporate start-up• Employee buy-out• Family business

– Growth only occurred when these businesses has become independent: typically this required external funding

– Prevalence of serial entrepreneurs (5)3. Diverse Ownership

• listed (5), family (6), major external shareholder (4), employee-owned (1)

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Growth

• Sources of Growth– Organic growth (15)– Acquisitions (5)– Both (1)

• Growth patterns variable – few cases of ‘reverse hockey stick’ growth

• Variety of growth barriers – no consistent theme– Recruitment of staff (skilled and management) was most

often cited– Finance only cited by 4 firms (but 3 of the 4 technology

firms)

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Industries and markets

• Range of sectors: largely absent from manufacturing (but definitional issues)

• Just six are technology based (and only 20% in the wider sample)

• But many more would be described as knowledge-based: at least 14 were innovative

• Predominantly engaged in B2B (18)– Oriented to UK and overseas markets and physical presence

beyond Scotland: just 5 based entirely in Scotland– Limited Scottish ‘footprint’

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Business model• Critical to their competitiveness• Emphasis on ongoing relationships with

customers; – recurring revenue models – e.g. consulting, design,

supply/installation, support and maintenance• Focus on ‘solutions’ – blurring the distinction

between manufacturing and services• Innovation through co-production• Emphasis on partnering

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Core competences

• Varied– Quality of staff; – innovative products and services; – technological knowledge and expertise; – close relationships with customers; – understanding of their market and customer

needs– Emphasis on HRM practices

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Management

• Importance of tapping expertise– 12 had NXs on their boards (mostly based in

England or overseas)– 3 had NX chair of their board

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Financing Growth

• 11 had raised VC (2 from corporate investors)• 4 were for MBO/MBI and 7 were for growth• 5 now listed on stock market

– VC/PE needs an exit – generally prefer a trade sale• Implications for ongoing Scottish ownership• 2 had to be persuaded to go for an IPO

• 7 were internally financed – – mainly family businesses – desire to retain independence. – Two were initially self-funded with the wealth their

entrepreneur had made from selling a previous business.

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Embeddedness in Scotland

• few needed to be in Scotland• Located in Scotland because that was where their

founders were living• Most could be based “anywhere” – but founders

wanted to live in Scotland• ‘Brand Scotland’ as asset especially in USA; place

reputation – Edinburgh (financial services), Aberdeen (oil and gas) also advantage

• Limited and weak links to Scottish universities

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Embeddedness continued

• Scottish ‘footprint’ was in many cases quite small and limited to their HQ: – majority of jobs elsewhere because of need for proximity to

customers– acquisitions of companies elsewhere– biggest relative Scottish footprint is a manufacturing company

• Is it inevitable that in small peripheral economies HGFs will have a relatively minor direct economic impact?

• HQ effect: (i) high quality jobs; (ii) salaries; (supply chain); (iv) source of spin-off companies; (v) positive signal about the Scottish business environment

• Potential vulnerability of HQ in event of acquisition

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Impacts of Government• 15 of 21 had some form of support

– Often small scale– In case of de novo starts was received at an early stage– Most valued assistance has been to support overseas

market entry by early stage companies– Only 11 are account managed – mostly report a positive

experience• Indirect impacts of government arguably more

significant– As customer (4); legislation creating/growing the market

(3); privatisation/deregulation (2); accreditation (3); partnering with public sector (2)

• Negative effects (e.g. ‘red tape’) fairly muted

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4. Conclusions

• Policy-makers should not prejudge where HGFs will emerge– Keep eligibility rules as flexible as possible– e.g. “manufacturing” – a meaningful label?

• Importance of the existing industry base as a source of HGFs– MBOs (how many potential HGFs are ‘imprisoned’ within

large organisations?)– Spin-offs

• ‘ownership clusters’• individuals

– Serial entrepreneurs

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Conclusions - continued

• Are policy-makers over-emphasising the link between “science and technology” and HGFs?– Few HGFs are in ‘high’ technology sectors– Even fewer are university spin-offs (why?)– Imprecise overlap with key sectors– Most HGFs are innovative but few of these

innovations come out of R&D labs

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Conclusions - continued

• Acquisition risk– High number of HGFs that have been acquired and are

now subsidiaries of large, often foreign-owned, businesses

– Beneficial or not?• HQs of HGFs are vulnerable in the event of

acquisition• PE/VC companies are at risk to being sold• Is a Stock Market listing option being promoted

sufficiently by financial advisers?– Scottish based companies under represented on AIM

(2%)

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Link to full report

• If you want to read the full report ….• http://

www.scottish-enterprise.com/News/2010/11/High-growth-firms-could-be-key-to-economic-success.aspx