Ian Ritchie Business HQ / The Herald December 21st 2023
It's one of the biggest challenges for the Scottish economy: where do business leaders gain skills to make them capable of driving ambitious growth companies?
Today’s modelling of Scotland’s business base is like the humps of a camel, with a distinct dip in the middle. We have a decent population of small SMEs and start-up businesses, and we have a range of large businesses, but we have a dearth of medium-sized ones between, the so-called ‘scale-ups’.
Our – mostly non-Scottish – large businesses, representing 4% of the total number of companies provides 45% of employment and 60% of turnover. But in the last thirty years Scotland has largely emptied out the cupboard of our locally owned decent sized corporations.
We no longer have our three giant retail banks, Royal Bank of Scotland, Bank of Scotland, and Clydesdale (now Virgin Money), all of which are now headquartered in England.
Scottish Power is now part of Iberdrola of Bilboa, Scottish and Newcastle brewery was sold to Heineken in Amsterdam, Menzies Aviation is now owned by Agility Logistics of Kuwait.
We used to dominate the European market in giant savings and life businesses, but he former operations of Standard Life, General Accident, Scottish Widows, Dunfermline Building Society, Scottish Equitable, Scottish Amicable and others are now all ultimately run from elsewhere.
We have become, even more than before, a branch factory economy. Our young graduates are in demand for their skills, but one of the skills that they are not developing here in Scotland is the various management skills of growing and developing a large complex business, the skills that drive and develop companies of ambition.
And although it seems at first glance that we have a thriving population of small start-up businesses, even there we are running behind the rest of the UK. There are 32 businesses for every 1,000 people in Scotland compared to 40 in the rest of the UK.
We would have to create 25% more start-ups to match the rest of Britain, and the start-up gap between Scotland and the rest of the UK is widening not shrinking. The Global Enterprise Monitor, which measures such things, reports that Scotland has a lower proportion of people interested in starting a business.
And it’s not just our volume of start-ups that are underperforming, our early-stage high-growth companies – these scale-ups are also lagging the rest of the country.
According to a 2022 report by Sandy Kennedy and Tom Inns for ‘Scotland Can Do’, UK scale-ups are vital to the economy; they represent £1.1trn of turnover, 50% of the SME total turnover, innovate at twice the rate of large firms, and generate £338k turnover per employee, more than double the national average. Clearly, here in Scotland, we need more companies like this.
However, the ‘2021 Scaleup Institute Report’ showed that Scotland is stuck in the bottom quartile of UK regions with 40.2 scale-ups per 100,000 population, half the London performance of 81.3.
Part of the problem is undoubtedly the availability of risk capital. The Scottish angel community can and does provide start-up funding (up to £2m) and is well supported by early-stage support and co-investment schemes run by Scottish Enterprise and many others. A recent directory listed about 300 sources of early-stage support schemes in Scotland, the vast majority aimed at young entrepreneurs wishing to start a new enterprise. But there is then a severe shortage of sources of ‘Series A’ (£5m+) and later stages of funding for businesses who want to grow.
But the largest gap is the lack of ambition and management skills among our business leaders. Many of these young entrepreneurs can’t be expected to naturally have the skills to start and grow dynamic firms.
Learning how to run a company for the first time ever is a bit like learning to fly a plane or conduct complex surgery by trial and error. Nobody would contemplate undertaking such risky tasks without some training and experience, but we still expect our young entrepreneurs to do it.
A 2018 study from Harvard Business School demonstrated that the most successful founders of new companies are between the age of 35 and 45 years old, contradicting a popular perception that entrepreneurial success is primarily driven by young founders in their twenties.
They give some examples of companies as diverse as Salesforce, Boeing, Proctor & Gamble, Linkedin, Sony and Intel, all of which were founded by individuals in their 30s. In fact, the evidence shows that start-ups founded by people in their 30s and 40s are at least three times more likely to be successful than those started by those in their 20s – indeed I myself started a successful company at the age of 34 after a decade of learning management skills whilst working in a large corporation.
This really shouldn’t be a surprise.
After all, any established company that finds itself in a situation where its chief executive is leaving or retiring will undoubtedly want to undertake a search for a new candidate.
In discussions with their recruitment agency, they will certainly not be specifying an energetic bright young person looking for their first job, instead they will be looking for a candidate who has already run a sizable business and demonstrated competence in the complexity of defining and implementing a strategy and exhibit skills in building and delegating to a senior management team.
Even though the established company will already have a customer base and supply chain in place, and a management team with individuals in charge of key functions such as sales and marketing, research and development, finance, and human resources.
Unlike the new chief executive of an existing company, our new start-up entrepreneur must build all these from scratch, will have to hire the right individuals who understand finance, HR, marketing and product management. Somehow, we expect someone like an engineering graduate to pick up all these skills while growing an innovative company and turning their complex technology into a saleable product.
Before the pandemic, there were some specific skills development programmes for young entrepreneurs. Highland and Island Enterprise sent key individuals to the Sloan School’s Enterprise Development Program at MIT and the Royal Society of Edinburgh’s Enterprise Fellowship scheme provided mentorship and a year’s worth of management training.
The Saltire Fellowship signed up experienced individuals, mostly in their early 30s and sent them on an intensive course at Babson College in Boston followed by a period of internship in the USA and a second internship back in Scotland.
This programme was designed to create tomorrow’s Scottish business leaders, and previous Saltire Fellows went on to set up and built exciting businesses such as Talking Medicines, Flavourly, PurposeHR, Phlo, Celtic Renewables, Money Dashboard, Cyacomb and others.
Unfortunately, none of these training and development programmes survived the Covid19 pandemic and so we are back where we started – throwing our young entrepreneurs into the deep end and expecting them to swim well.
Unless we can find fresh solutions to developing ambitious management skills among our business leaders, we will not cure the long established Scottish sluggish growth performance, and we will all be the poorer.