THE BLOG

High Growth Small Businesses Are Vital to our Economic Growth

28/10/2015 11:37 GMT | Updated 27/10/2016 10:12 BST

The economist Erik Hurst caused shockwaves in the entrepreneurial community when he suggested, back in 2011, that most small businesses "don't grow and don't innovate in any real way".

But let us consider the facts. Most startups fail. The second most likely outcome is that they'll start small and stay small. But a tiny percentage begin small and grow quickly, creating an outsized share of new jobs and making a disproportionate contribution to the economy.

So more than starting up a company, the ability to scale, and quickly, is where the real value lies. It's why governments across the globe still look towards Silicon Valley and wonder when a Google, Facebook or Apple will be created in their own countries. It's why "scale up" has replaced "start up" as the buzzterm du jour. It's also why the serial entrepreneur Sherry Coutu argued last year that closing the "scale up gap" is the single most effective thing that leaders in government, business and academia can do to drive economic growth.

And a fascinating new study, the High Growth Small Business Report 2015, reinforces her analysis. It has identified a vital group of 22,470 businesses, which have an annual turnover between £1m and £20m, and which achieve more than 20 per cent average turnover growth over a three-year period.

Their employment figures alone should be enough to make the government open its eyes: High Growth Small Businesses (HGSBs) last year created one in three new jobs, despite forming less than 1 per cent of the 5.3 million companies in the UK. Almost 20 per cent of economic growth in Britain, measured as an increase in GVA (Gross Value Added), was from goods and services produced by HGSBs.

The trouble is, the HGSB segment comprises businesses spread across a broad range of industries, which doesn't make for a homogeneous group. This - combined with their small size - helps explain why they're easy for policymakers to miss within the wider SME (small and medium-sized enterprises) sector.

But the report has given them a voice and, based on a survey of 500 HGSBs, has identified a number of issues hindering HGSB leaders, including access to finance, digital connectivity, talent, and transport connections.

Of course, these difficulties are not unique to HGSBs: ask any entrepreneur about their biggest challenge to growth and they'll likely say fundraising. Likewise, most entrepreneurs will attribute their success to the talented individuals working beneath them.

But the report also comes up with a suite of robust policy proposals with the aim of both supporting existing HGSBs and of increasing their number by 25 per cent in the next five years. The latter, it is suggested, could lead to the creation of 170,000 new jobs.

The study rightly recommends raising the profile of existing financial initiatives, while using tax incentives to drive money into the HGSB sector. This not only includes promoting Venture Capital Trusts (VCTs) and the much lauded Enterprise Investment Schemes, but also the suggestion that companies investing in VCTs should be able to claim a 30 per cent rebate on the cost of investment.

It recommends developing the Local Enterprise Partnership network to create a dedicated "one-stop shop" service for HGSBs. Entrepreneurs are busy people: a single point of contact for advice and funding is exactly what they need.

It neatly resolves the digital connectivity problem while offering a way for small businesses to have access to government contract opportunities. The government can, it says, open up competition for broadband provision, working with smaller local businesses by expanding the procurement process, and providing incentives for smaller tech companies to tackle specific regional connectivity issues.

And it points out that 60 per cent of HGSBs are based outside London and the South East. If the Chancellor is serious about his Northern Powerhouse, this is where he needs to focus his attention. Geographical inequalities are inevitable - and regional diversity is something to be celebrated. But by narrowing the gaps - creating the right conditions for HGSBs across every region - the government can foster a more balanced and prosperous economy.

Entrepreneurship is often viewed as the quintessential private sector activity. But governments do play an important role - not just on how many businesses are founded each year, but also on the nature of these firms and their ability to grow. If the UK government is serious about making Britain the best place in the world to start and grow a business, it should shift its focus to more support for HGSBs. It should look no further than this report for inspiration.