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Scaling up your business

By Dan Teuton
24 January 2018
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The Business Magazine and several leading southern entrepreneurs were hosted by campaign sponsors Barclays and law firm Osborne Clarke at its Forbury Place offices in Reading for this discussion on scaling up your business.

Journalist John Burbedge reports the highlights

Scale-ups and growth by acquisition: How successful? How difficult?

Successful serial entrepreneur David Sanger admitted scaling-up by acquisition can be “a tough, energy-sapping and long-winded trail”, particularly for small businesses with inexperienced management attempting the acquisitions route.

He cited customers taking flight, cultural differences when bedding-in new teams, the need to make profit to recoup the acquisition investment – but the rewards of success can be very big “for those who become good at it.

“You have to be very focused and really know what you are acquiring and what you are doing. We always did our home-work, went into it with our eyes open, knew what we were trying to achieve, and even then it was hard.”

Graeme Freeman felt that acquisitions often do not achieve their true objectives, even within established companies, yet may be presented as successful. Too many professional reputations and bonuses are involved to allow such projects to be seen as 

failing, he suggested. “The ‘big secret’ is sometimes they are not working.”

Lawyer Sara Valentine said that in her experience the key to scale-up success is where the post-completion integration is  considered in advance of the acquisition deal being signed.

“But, not every company has the luxury of a big team to do that, and so it can be a challenge, particularly for a first scale-up.”

The ambition to grow and run a large business was a key factor, suggested Freeman. Many serial entrepreneurs simply enjoyed the buzz of building and selling a business rather than running one. Some businessmen with lower ambition thresholds don’t necessarily fail to scale-up – “it’s just not what they want to do.”

Mark Evans suggested scale-up challenges tend to occur at similar business-cycle growth stages – 10-12 staff “when the founder needs to begin to delegate”; 30 people “when a management team is needed”; and 70-100 people “when you need two levels of management. “If you can’t make suitable process and management approach changes at those stages you will fail.”

Highlighting the Scale-up Report on UK Economic Growth produced by Sherry Coutu CBE in 2014 (scaleupreport.org) Jurek Sikorski quoted the key scaling challenges:

  • acquiring and maintaining the right skills
  • leadership to align purpose
  • attracting, winning, retaining customers
  • accessing finance of all types
  • managing infrastructure from premises to partnerships.

On the road to success . . . or an ego-trip?

Michael Dunne questioned the underlying assumption that scaling-up was the right option.

The questions should always be asked: Why are we really doing this? Is it right for the business or simply an ego-boosting career milestone for those involved?

Sikorski recounted awareness of “a deal done on a napkin by two CEOs over dinner", which foundered after the boardroom began to ask "Why?".  “If you want to scale-up you have to commit to wanting to do it. And keep all options open for growth – acquisition as well as organic.”

Evans: “It’s easy to pour cold water on M&A and say it doesn’t always add value, but what’s the alternative? CEOs are driven to add revenue, to grow faster than the market, and large companies are often bad at innovation so they go out and buy it.”

Sanger: “If you become good at M&A and really understand it, then buying and selling businesses can be very fruitful and really good fun.”

Some acquisitions simply add sales volume, explained Evans: “The large company buys something you are selling, then simply pumps it through their sales and distribution channel and makes 50 times more revenues than what you were – the gross margin they make within two years exceeds the acquisition price.”

Scale-up deals seeking economies of scale, can struggle suggested Freeman. “The complexity of the new large organisation rapidly overtakes any economies. Surprisingly, smaller businesses can be more cost-efficient.”

Leadership:  Will the chief distraction officer let go?...

Evans itemised aspects that prevent 30-person businesses scaling: “The founding CEO is salesman-in-chief with all the key contacts; too often he won’t ‘let go’ and delegate his work; or product isn’t shrink-wrapped and you can’t sell it through other people.”

Founder entrepreneurs may “become chief distraction officers running around the business, nudging the machinists or designers saying ‘No, no, no, left click.’”

Claire Edmunds: “Everyone does everything when you are a small business, and many people enjoy that generalist approach. But, as businesses get bigger they become more specialised; need better domain experience, and a leader has to recognise and accept that.

“It’s also no use having a leadership that gets 20 different ideas every day, otherwise you end up with organisational whiplash from everyone constantly changing direction.

“The leadership challenge is that what got you to a certain success point is not going to get you to the next.” Reinvention of your existing resources or recruitment of new ones becomes the quandary.

Valentine: “Mindset change for a hands-on CEO can be very difficult – understanding that if you want to scale up that you have to let go of some control, step into another role and let your team take on your day job so that you can lead the acquisition growth. First, that means getting the right team around you.”

Bob Atkinson concurred, but noted that with continued founder input/control, a business could be unsaleable. Passing on their skills or knowledge was vital for succession management and proper future business governance.

Tamsin Napier-Munn: “So, it’s about releasing the entrepreneur to be free to work on the business, not in the business.”

Sikorski: “Control is the enemy of growth. A strong non-exec chairman saying ‘you have to let go, release and free-up the business’ can help resolve the founder’s dilemma.’”

Atkinson suggested the same mindset surrounded gaining scale-up loans. “Founders may reason that they can keep the business going with a bit more sweat equity, and scale-up loans will actually lose some of their financial control.”   

Others don’t know where or how to go about getting scale-up finance, fear its unknown complexities and costs, so settle for their ongoing business status quo.

Edmunds: “As a startup you have nothing to lose. As a 30-person business you’ve got something to lose and responsibilities. If you decide to scale-up you have to put it all on the line again.

“You need bigger infrastructure to get to the next business level, but you can’t afford it so you have to make the inner choice to stay as you are or invest beyond your means.”

Freeman: “In order to be successful you have to be prepared to fail.”

... or buy a Cotswold vicarage?

“Why do US businesses scale-up faster than the UK? Because of the “Cotswold vicarage problem,” stated Evans, “UK entrepreneurs start later, it’s harder to secure equity, businesses grow slower, and when the opportunity to sell comes along, the owners, now in their late-50s, buying a nice Cotswold vicarage is a very attractive ‘job done’ option.”

The US ethos is very different. “It’s a question of different scale, appetite and less risk aversion.”

Mentioning Barclays Entrepreneurs Index (EI) findings, Paul Boswell noted a scale-up success difference between the traditional day-to-day management focus on an existing marketplace as opposed to strategic entrepreneurial leadership looking outside for new market opportunities.

“Sometimes scale-ups ‘fail’ because they don’t have the talent; their product service technology may be fantastic but they don’t have the right mix of people to lead the business forward, gain investment, or bring the right people in.”

How do scale-ups succeed? 

Matt Franklin: “Start with company culture and values. Align people with a clarity of vision, a common belief in your future.” He recommended focusing on developing scale-up ‘cultural fit’, because merging different cultures together can be internally disruptive and distracting to core business objectives.

“On day one of Roc’s recent acquisition (September 29) we got both businesses together and created our five-year plan together, with everyone contributing. We had a 50-metre piece of paper but everyone had bought into it.”

Edmunds: “Within a small or large business, it’s a combination of vision and understanding of how you will get there, plus traction. You need good structure and implementation sitting behind the strategic vision for successful growth to work.”

The potential gains of a strategic acquisition could be wasted if parts the business didn’t understand why the acquisition was being made.

Atkinson agreed that companywide understanding of the strategic vision, focus and an aligned culture were vital. “People need to know as plain as the nose on their face what they are expected to do. People need to be managed, but also to be comfortable being managed.”

De-risking deals was his priority. Even though InCloud is in the dynamic IT sector, Atkinson operates conservatively. “I employ people responsible for nearly 30 families and that’s quite a weight. I don’t want to boom and bust. It wouldn’t just be me affected.”

Valentine: “Whether you are growing organically or by acquisition it’s about having the right teams in place.”

Communication was Sanger’s overarching recommendation. “Good leaders communicate the vision and strategy well, from senior manager to the floor-sweeper. It’s the same in a scale-up; communicate regularly to your whole team. Your people must not be left guessing.”

Sikorski highlighted three keys: 

  • involvement, through good two-way communication
  • respect for the individual by accepting their contribution to the business
  • recognition and reward for their input and productivity.

“When you have engaged employees they are absolutely aligned on their purpose, the road map to success, and what it means to them. Remember, without people you’ve got nothing.”

Retaining customers during scale-up

The right customer-base mix can be crucial but difficult to maintain, noted Boswell. “Winning that big customer might be key to a new marketplace, or a scale-up, but it could be a double-edged sword for your business.

“Really strong scale-ups can go bust because they lose their biggest customer, or don’t focus enough on keeping a diversified customer base.”

Aiming for more customers that suit your business size and culture is a wiser way to grow, suggested Atkinson, thus avoiding ‘having to jump through hoops’ to retain big corporate clients that have the potential to wipe you out if anything untoward was to unfortunately happen. “Be careful who you take on, just because the work is there.”

Dunne agreed that scale-ups could find themselves trying to reverse out of the ‘eggs in one basket’ problem. The problem was that once within the highly-competitive but lucrative corporate supply chain many businesses were reluctant to risk leaving it entirely.

Sanger: “Customer retention is a fundamental pillar of business growth – whether organic or M&A. It’s how you survive or die. Key parts are your ongoing customer relationships, delivery of fantastic service, offering good value, exceeding contractual obligations, and shouting about it all, so that customers are aware of the excellent job you are doing for them.” Beware of competitors causing price erosion, and regularly check customer satisfaction, he added.

Scale-up funding

Boswell: “It’s actually a great time for funding. There are now more routes to scale-up for early stage businesses. We are looking at a very open funding base – high-street banks, crowd-funding, peer-to-peer landing, invoice financing, etc.”

Barclays had recently started a venture debt fund, but he admitted difficulties in finding “the right businesses, in the right place, at the right time.”

Edmunds felt the level of financial knowledge and business awareness within banks provided to small business clients was not good enough. “In the past 12-15 years the quality of advice and support has disappeared from the marketplace. You almost end up coaching them on what they should ask you.”

Banks do need to fully understand customers’ requirements in order to provide adequate finance, Boswell agreed. Bank finance wasn’t always right for an early stage or scale-up business. “There is an education piece needed about today’s funding market and it’s probably incumbent upon professional organisations to say more about what’s out there.”

Evans noted that new financial initiatives are often not adequately supported by investment personnel with knowledge of the business sectors involved. However, he welcomed market interventions such as the Government’s export credit guarantee scheme, and new innovation loans. “I hesitate to say money is easily available. It is always tough.” 

Franklin exampled an alternative funder who provided “a very innovative package that was much better aligned to what we were trying to achieve. Everything was completed within 12 weeks, which was really quite refreshing.”

Atkinson suggested regular research and testing of financial market options, just as businesses would with other service or product providers. “Don’t be scared of trying something different.”

Sanger: “My pet hate is that too many young entrepreneurs see funding as the symbol of success. It isn’t, it’s just the start of a possibly successful journey.”

Don’t try to run before you can walk

Boswell: Cash control can be a major problem for scale-ups. “There have been £5 million turnover scale-ups go out of business for the want of £15,000 cash to pay HMRC.”

Sanger: “Entrepreneurs who tell you that everything they’ve done has been a great success are either one in a billion or liars. My failing was that I wanted to grow too quickly in order to scale-up Rollover to be a £100m turnover plc, far bigger than the branded food wholesaler we were in 1999. I ploughed on relentlessly opening retail kiosks, chasing faster growth, not realising soon enough that opening our own fast food kiosks wasn’t a workable strategy and wasn’t as profitable as expanding our wholesale operation.”

Very few businesses today are unaffected by technology, highlighted Freeman. Technology makes it cost-effective and quicker to scale-up or down. These days IT is the basis of a cost-effective operation and good service. And your customers increasingly expect you to have digital offerings as well.

Atkinson noted that finding appropriate tech skillsets to enable technology to help scale your business was a big challenge.

Evans mentioned the global nature of technology. “It probably doesn’t make sense to scale-up a business without trading internationally.” But many small businesses fail because they underestimate the capital required to scale-up international sales and deployment.

Atkinson: “It’s a schoolboy error really. The whole point of going to get scale-up funding is that it forces you to do a realistic financial proposal about what you actually need to succeed.”

Evans: "Many of our potentially great tech companies try to enter the US market, fail, retrench, get bought by a US corporate and are then plugged into the US sales channel. The Americans are better than us at scaling and until we learn lessons, things won’t change.

“R&D is turning money into know-how; innovation is turning know-how into money.  The UK has a great science base but needs to focus more on commercialisation of our innovation.”

Best scale-up lessons learned

Sanger: “Lead, but take the troops with you. M&A is much quicker but it can be very difficult and also requires capital, whereas organic growth is slower but is probably easier.”

Edmunds: “Don’t get too drawn in. Take enough time out to reflect on what’s actually going on in the business.”

Freeman: “We have fundamentally different businesses around the UK, let alone the world. Here in the Thames Valley is an economic bubble unlike many other parts of the country. Be careful not to generalise.”

Franklin: “If you decide to scale-up, commit to it – there’s no going back.”

Evans: “It’s all about sales. Unless you have the right culture, ability to delegate, authority to make sales decisions, and long-term salesforce investment, then it’s probably not going to work.”

Dunne: “Never assume that funding is available until the credit team has said so.”

Atkinson: “Be realistic with potential sales figures when seeking funding. If you can’t sell enough, the rest of the exercise is a waste of time.”

Sikorski: “Sales are critical, but don’t fear failure. It’s a learning experience, a teacher not an undertaker, a stepping-stone to success. Every successful entrepreneur will have failure stories, so welcome to the club.”

 

New Innovation Catalyst at TVSP

Paul Boswell highlighted that Barclays has been revealed as a major new partner of Innovation Catalyst: a collaboration between VitalSix and Thames Valley Science Park (TVSP) at TVSP’s new flexible workspace facility at its Shinfield Campus, Reading.

The Barclays Eagle Lab will formally launch in March 2018 and in conjunction with Innovation Catalyst will deliver extensive resources including a 60-seat co-working site, a 16-week intensive Accelerator programme designed to shape and scale the next generation of Reading and Thames Valley businesses, in addition to access to expert mentoring.

Participants

Bob Atkinson: MD, In Cloud Solutions

Paul Boswell: Relationship manager, Barclays 

Michael Dunne: Commercial director, Aap3

Claire Edmunds: CEO and founder, Clarify

Mark Evans: CEO and co-founder, Adaptix

Matt Franklin: MD, Roc Technologies

Graeme Freeman: Co-founder, Freeman Clarke

David Sanger: NED and serial entrepreneur

Jurek Sikorski: Executive director, Henley Centre for Entrepreneurship

Sara Valentine: Corporate law partner, Osborne Clarke

Tamsin Napier-Munn: Campaigns manager, The Business Magazine, chaired the discussion


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