YOUR MONEY
New business start-ups must dig deep in order to remain afloat
The frequency of business start-ups is one of the critical measures of economic health and confidence. You could fairly argue that no measure contrived by the Happiness School of Economics is complete without it.
And few have championed such aspirations with more passion and consistency than Jim Duffy, head of Entrepreneurial Spark which aims to encourage business growth and enterprise. Speaking in Glasgow last month, he hailed what he described as ‘an entrepreneurial revival’.
But is he right? Is such a thing happening today? And what are the problems faced by the current generation of Scots entrepreneurs?
New business formation is one of the key motors of economic growth. A high business birth rate drives up levels of innovation, competitiveness and productivity. It is fundamental to a revival of our ailing towns and communities. And it helps to replenish the business stock as older, more mature companies disappear through merger and acquisition, retirement and liquidation.
But there is another reason why smallbusiness growth matters in Scotland. Nearly 329,000 small firms in Scotland provide 42 per cent of private-sector jobs. And in rural areas this employment support is critical. Small businesses account for a larger share of privatesector employment in rural local authority areas, compared to urban ones. In Orkney, for example, small firms account for almost 72 per cent of private-sector employment.
On start-up, Scotland looks to be doing well. Recent Scottish government figures show the number of new businesses in the country rose by 24 per cent in 2013 compared with the previous year – and there has been a remarkable rise of
almost 50 per cent since 2009. The total number of business start-ups in Scotland between 2012 and 2013 came to 21,540 – the highest level since 2004.
Edinburgh and Glasgow lay claim to being the start-up hotspots, but large areas of the Borders and Highlands depend on a thriving small-business sector. The Scottish Highlands now claims to have significantly higher numbers of businesses and business start-ups per 10,000 adults than the Scottish average, and with a higher share of employment by industry in agriculture, forestry and fishing, construction, and accommodation and food services than the Scottish average.
The number of registered Highland firms in the energy sector rose by almost a third (32 per cent) between 2012 and 2013, similar to the increase in the Highlands and Islands (33.3 per cent) and higher than in Scotland generally (22.4 per cent).
So much for the good news. But there are worrying features, too, in this picture. In 2013 – the latest year for which figures are available – Scotland had 49 new business registrations per 10,000 of the adult population, which is a new high but a figure that still lags behind the UK figure of 67. Even excluding London, we would still be lagging the rUK figure of 58 per 10,000 resident adults.
Equally daunting is the modest net addition to Scotland’s business stock. The taps may be gushing new water into the bathtub, but the level is not rising in line with this surging inflow. In all, the total number of registered businesses in Scotland has grown by a modest 4 per cent over the latest year and by 10 per cent since 2007.
Now there is nothing unusual about this ceaseless arrival and exodus of business firms. The pool is never static but is constantly changing with exodus and new arrival. ‘Shell’ companies come and go. Many businesses are temporary in nature and are not intended to survive more than a year or two. Businesses also mutate – through voluntary mergers or by falling victim to hostile takeovers. There are business failures and companies cease trading or go into liquidation for all manner of reasons.
According to business advisers BDO, about 1,000 Scottish companies will go bust in 2015 and 12,000 Scots will be made bankrupt. BDO cites cooling consumer demand, geopolitical and financial uncertainty and potential interestrate rises as causes for concern.
Bryan Jackson, business restructuring partner with BDO, says that for many companies and individuals ‘there is the prospect of another year of standing still as profits remain flat and incomes are static’. He adds: ‘The slightest change in any circumstances could have serious consequences. Many of these businesses may only be shell companies but it is of concern that even six years after the start of the recession there are still so many firms going bust.’
This focuses attention again on where our problem really lies – less in the business birth rate than in the building and sustaining of small firms to replenish a woefully thin medium-sized-business sector. This requires determination, resilience and the helping hands of skills and experience to assist companies to successfully expand.
The business start-up rate may be creating a false sense of optimism. Encouraging though the numbers are, the birth rate should arguably be much higher, given the way in which advances
‘ High business birth rate is fundamental to the revival of our towns ...but there are worrying features ’
‘If we are to replenish a depleted stock of thriving mid-size firms we have a very long way still to go’
in information technology and wifi have made it much easier – and cheaper – for people to start businesses and reach a substantial customer base through online trading. Companies are no longer so geographically limited as they once were. The old model of building a local base and building up slowly through contiguous expansion has given way to nationwide retailing online from the start – and the ability to reach out to customers overseas.
Helping businesses to persevere and grow after the initial flush of launch enthusiasm needs more policy thought and address. However, there are helping hands. Small-business growth is being boosted through joint work between the Scottish government and local government, with claims of up to 4,300 jobs created, turnover boosted by £86 million and 800 companies supported.
Business Gateway, managed by local authorities across Scotland, is the national business advice service helping thousands of existing and new-start companies. Additional help was given back in 2013 to enhance services that Business Gateway delivers, enabling it to support businesses to grow and recruit. But the quality of advice and service can vary considerably between one local authority and another. Some Business Gateway operations are well rated, others less so – and it is not entirely clear how best practice is spread and shared across the patchwork of these local authority organisations.
Important work to encourage new business growth in Scotland is being undertaken by organisations such as WeDoScotland, We Are the Future and, most notably, Entrepreneurial Spark. ESpark is the world’s largest free business accelerator for early-stage and growing ventures. It welcomes applicants from businesses in the idea and early stages and those who have been trading for up to four years and/or have a £1million turnover.
ESpark provides help through business enablement and support with a pool of over 50 specialised mentors, networking opportunities, workshops, pitch practice and more. Says Jim Duffy: ‘Since 2012 our three Scottish business accelerators have supported 350 fledging entrepreneurs and over 1,000 employees. We are breaking down the barriers for new start-ups and I’m excited to help shape a brighter future for entrepreneurship.
‘Our accelerator hubs in Glasgow, Edinburgh and Ayrshire are highly successful and we are expanding this hatchery model across the UK, having already launched in Birmingham. There is a real and tangible desire for start-ups to succeed and we are on the frontline helping to inspire a country full of exciting new businesses.’
This year has also seen the launch of the new Growth Advantage Programme at the Hunter Centre for Entrepreneurship at Strathclyde University Business School – the first core growth programme for ambitious growthoriented entrepreneurs from a Scottish business school.
Encouraging though the start-up figures are, this is not the end of business support but the means by which we replenish a depleted stock of thriving mid-size firms. And here we have a long way still to go.