Xavier Rolet: The ideal backdrop to scale up Britain
This year over 40 companies come from Scotland. Despite the economic uncertainty surrounding Brexit, the average annual growth rate of these companies is a staggering 90 per cent.
• READ MORE: Scots small firms enjoy UK’s fastest rate of growth
Take Bell & Bain, a Glasgow-based printer and bookbinder that has been producing books and journals for almost two centuries. The firm might be one of the older printing companies still in existence in the UK, but it continues to move with the times, with the firm pouring £8 million into the business and growing from 60 employees to 120 in recent years.
Or Spark Energy, which is taking on the UK’s “big six” energy giants as the UK’s only independent energy supplier for the rental sector. The company is currently on track to double in size over the next two years and has recently opened its own training academy to help it develop its workforce.
These businesses are illustrative of the potential of dynamic small companies in Scotland and around the UK – and there are plenty of them. Latest figures show the UK created a record 650,000 plus new companies last year. Today we have twice as many SMEs on average than our European neighbours.
Scotland, already renowned for its inventiveness and entrepreneurship, is challenging London’s dominance as the most entrepreneurial region in the UK. According to ExpertMarket, Edinburgh is now the UK’s most start-up friendly city due to its high quality tech innovation and positive start-up ecosystem. And the future looks bright for SMEs in Scotland. The Scottish Government is making a £500m package of growth funding available for SMEs through the Scottish Growth Scheme.
• READ MORE: Edinburgh ‘best city in the UK to launch a start-up’
So the economic potential of these companies is clear. The question we need to answer is how we realise that potential and take far more of these companies from “start up to stardom”. This is because when it comes to backing companies the cards are sadly stacked in favour of big established companies (who despite their best efforts are not creating jobs).
In the UK, 80 per cent of corporate finance comes in the form of debt, primarily from banks, which is tax deductible. This is fine for larger established companies to manage their obligations but does little to support dynamic companies who need to dedicate all their economic capital to investing, innovating and growing – rather than servicing a repayment plan every 30 days. We must give our fledgling growth companies access to long-term Patient Capital, like equity, where people seek investment to grow their business either through individual investors, on capital markets, or through crowdfunding and peer-to-peer platforms.
In the Prime Minister’s words we need to build an economy that “works for everyone”. Capital needs to flow directly from investors to innovators and small business owners up and down the country, instead of being concentrated through a few big banks to established firms. Because just as the economic potential of these companies is clear so too is the potential of equity finance. When the government previously made shares on the UK’s stock market for high growth companies – Aim – eligible for ISA inclusion, £4 billion extra capital flowed into these companies, practically overnight.
Innovative equity-funded firms can also help us achieve the government’s stated aim of achieving Brexit success through exports: companies quoted on Aim are five times more likely to export than the national average. And because these companies are highly innovative (counting thousands of patents and trademarks between them), the jobs they create tend to be high quality and well paid, helping address Britain’s productivity problem.
No wonder independent studies have a shown just a 1 per cent increase in high growth potential businesses would create 230,000 new jobs and add £38bn to UK GDP. So the Scottish and UK governments’ focus on supporting SMEs is welcome. The Scottish Government is taking decisive action to boost confidence, stimulate economic activity and support business during these times of uncertainty.
The UK government’s Industrial Strategy Green Paper acknowledged that the growing number of start ups will mean more firms will need later stage growth funding and we await the outcome of their Long Term Patent Capital review.
The First Minister is right when she says that Scotland has the people, the natural resources, the research base and the international reputation to achieve greater success.
Businesses in Scotland are doing so much to bolster job creation and foster innovation. The opportunity to put greater access to finance for them front and centre of any strategy cannot be missed.
• Xavier Rolet is chief executive of London Stock Exchange Group