Why not all start-ups are of equal value
A FEW YEARS AGO I was invited to join a new programme run by the Massachusetts Institute of Technology (MIT). It was called the Regional Entrepreneurship Acceleration Program (REAP) and involved teams from around the world: Finland, Andalusia in Spain, Zhejiang of China, New Zealand and so on. I was part of the Scottish team.
We examined policies and practices around the world and learned from the MIT faculty and other delegates the importance of developing and nurturing an entrepreneurship culture.
One of the key aspects of this was the recognition that not all new companies are created equal. In particular it is essential to distinguish between normal small companies (SMEs) and innovation-driven enterprises (IDEs) (see http://bit.ly/2m3YQCE).
SMEs are a vital part of our society, they create the opportunity for people to work independently and to use their skills, but, by and large, they don’t employ many people or make much of an economic contribution.
IDEs on the other hand seek to address global markets and generally employ highly skilled people. As they develop their products and markets they not only build a substantial workforce but also tend to create many support jobs in the wider community.
We’ve seen the development of a number of very successful IDEs in Scotland in recent years - Skyscanner, FanDuel, Freeagent, Craneware, Iomart etc, each of which employs hundreds of well qualified staff.
I was pondering this while studying the Blow Your Mind report which was recently published by Entrepreneurial Spark (ES). ES has been a dramatic growth story; from the original two ‘hatcheries’ in Ayrshire and Glasgow it has grown to a network of 11 centres across the country, from Brighton to Belfast, mostly in partnership with RBS. It has also attracted significant political support.
It’s not difficult to see the advantage of this arrangement for RBS, whose image among small businesses has been trashed in recent years by the antics of its Global Restructuring Group which has been accused of forcing many small, otherwise sound, businesses into unnecessary bankruptcies.
The Blow Your Mind report is described as an ‘impact report’ rather than any sort of normal annual report but it’s actually just marketing. If you look at the numbers reported you might note that the 1,736 companies supported by ES have created 3,152 jobs: an average of 1.8 jobs per company. The average turnover of these companies is just over £100k and the average amount of investment raised per company is £87k.
This puts businesses going through ES firmly in the SME, rather than the IDE category. The CEO of an IDE company which went through their Brighton hatchery, Ian Pollard of Cyclr, has written that although the experience was very useful in teaching very basic business skills, it didn’t really help with more sophisticated expertise or in sourcing investment funds.
Edinburgh Council in January 2016 disclosed that they had spent £483k with ES over a three-year period which helped 196 businesses to create 528 jobs – that’s 2.7 jobs per company - with an average turnover of £23k and raising on average £22k each. The council is presumably proud of this, but I’m not aware that Edinburgh Council over this period provided any support for CodeBase or Informatics Ventures, both of which have demonstrated a great track record in supporting ambitious high-growth IDE businesses.
You can’t help but reach the conclusion that politicians might look more carefully at the the effectiveness of where they place their interventions.
And note that not all new start-up companies are of equal value. ■
Ian Ritchie chairs the board of Informatics Ventures at the University of Edinburgh