Why 90% of Britain's startups fail
In the UK we're great at funding startups, but not the follow-through
In the UK, we’re great at funding startups. Ranked by number of startups launched each year, we’re third in the world. That puts us way ahead of the US and most of Europe, according to the OECD (Organisation for Economic Cooperation and Development) metrics.
When it comes to follow-through though, the picture is less rosy. Our OECD ranking drops to 13th, and the vast majority of our startups fail to progress into “scaleups” – companies with at least three successive years of growth. The stats here should be cause for concern: this August’s governmental report shows that less than 1 in 10 funded startups make it to their fourth round of investment. Our success rate pales in comparison to that of the US, which sees a full quarter of startups receiving later stage funding.
So what’s going wrong? Why are so many of our investor-entrepreneur romances failing to make it past the honeymoon phase? And how do we convert startups into scaleups?
Chasing the dream
The problem here is that British entrepreneurs have a tendency towards short-term thinking about growth. In part, the glamour around the modern-day startup entrepreneur is to blame. Raised on the myth of the visionary tech billionaire and facing a diminished, post-crisis jobs market, former salarymen have flocked to the startup dream as an alternative to traditional working life. In 2016, we reached a fever pitch of 80 startups an hour.
Numbers like these mean fierce competition for investment amongst new businesses, which has triggered an epidemic of short-term planning that rarely looks beyond the first round of funding. And like all relationships born of desperation and/or unrealistic expectations, the British investor-business dynamic quickly turns sour.
John O’Connell, founder and executive chairman of Scaleup Group, an organisation dedicated to helping new businesses grow, has observed that founders are incentivised to ready their companies for sale long before they start generating revenue or work out a long-term, sustainable business model. It’s become fashionable - especially among tech startups - to provide value in the form of quickly-generated customer data, rather than focus on long-term performance. The result? Hosts of “zombie-startups”: companies that persist long after their funding runs out, but who fail to attract attention or investment.
Saving our startups
Luckily, there are organisations there to help. Firms such as Entrepreneurial Spark, Scaleup Group, and a host of mentoring schemes exist to try and give entrepreneurs the skills they need to attract investment. More broadly though, what’s needed is a change of culture. Less fixation on the one-in-a-million companies and a better support for the other 99% would go a long way towards keeping our new businesses from folding.