A nation turns its gaze expectantly toward the private sector, willing them to absorb and somehow negate the impact the Government’s austerity measures and a tightening in bank lending is having on the nation’s economic growth and employment prospects. There are tentative signs of emergence from a recent recession but there’s the looming prospect of an estimated 500,000 public sector workers exiting their current employment over the next 4 years as the austerity measures bite, with the “expectation” being that the private sector will cushion this blow through organic yet rapid growth. Where will this growth come from and what can we learn from those who’ve enjoyed success in similarly difficult times? That’s where we hope INSPIRE: Entrepreneurs will provide some food for thought.

1. Looking Inside Scotland’s High Growth Companies Colin Mason *Hunter Centre for Entrepreneurship, University of Strathclyde Presentation to Forth Valley CMI 23rd February 2011 1

2. 1. Context Entrepreneurship drives economic development What can policy-makers do to get more entrepreneurial activity? What kind of entrepreneurship do we want? More people to start businesses? More high growth firms (‘gazelles’) Views have changed over the past 20-30 years 2

3. continued Currently the emphasis is on the need for more HGFs “encouraging more people to become entrepreneurs is bad public policy” (Prof Scott Shane) The small number of HGFs create the majority of jobs Other attributes of HGFs: above average levels of productivity growth; high levels of innovation; strong levels of export-orientation; a high level of internationalisation HGFs also have important spill-over effects that are beneficial to the growth of other firms in the same locality and industrial cluster Pre budget talk is of focus on promoting HGFs through science and technology support 3

4. Recent UK research (NESTA) OECD definition of high growth firms 6.4% of firms were high growth 2002-5; 5.8% in 2005-8 (employment definition) 10,073 HGFs in 2002-5: 2.62m employees (11.4% of private sector workforce 10,304 HGFs in 2005-8: 1.93m employees (8.2%) Regions with highest proportions of HGFs are in the ‘north’ and GL HGFs in all sectors Majority of HGFs are small and young High growth is episodic 4

5. 2. An Overview of HGFs in Scotland Aggregate evidence FAME database - based on Companies House submissions weaknesses At April 2009, there were 825 HGFs in Scotland or roughly 4.0% of Scottish companies employing more than 10 employees 39% not incorporated in the UK This figure had dropped to 594 by April 2010, a fall of 28% Scottish HGFs employ approximately 500,000 employees – not all in Scotland Scottish HGFs tend to be older and larger than HGFs found elsewhere HGFs are very heterogeneous, notably in terms of their age, size, ownership and industry sector International comparisons problematic: but Scotland does not appear to be out of line with Nordic region 5

6. Size of HGFs 6

7. Turnover 7

8. Age 8

9. Sector 9

10. Locations 10

11. 3. Looking inside the HGF What do Scottish HGFs look like? What lies behind their success? What lessons can we draw for policy? 95 companies randomly selected from FAME Extensive desk research Only 53 met criteria (Scottish owned) 6 closed 21 (22) interviews completed (+1) Problem was getting in contact with CEO – only 4 actual refusals Recall that high growth is episodic 11

12. Key features 1. Challenging the ‘gazelles’ myth – not all HGFs are young Age: 1970s (4), 1980s (3), 1990s (5) 2. Where do HGFs come from – only 9 are de novo starts - rest have been ‘pre-incubated’ MBO/MBI Corporate start-up Employee buy-out Family business Growth only occurred when these businesses has become independent: typically this required external funding Prevalence of serial entrepreneurs (5) 3. Diverse Ownership listed (5), family (6), major external shareholder (4), employee-owned (1) 12

13. Growth Sources of Growth Organic growth (15) Acquisitions (5) Both (1) Growth patterns variable – few cases of ‘reverse hockey stick’ growth Variety of growth barriers – no consistent theme Recruitment of staff (skilled and management) was most often cited Finance only cited by 4 firms (but 3 of the 4 technology firms) 13

14. Industries and markets Range of sectors: largely absent from manufacturing (but definitional issues) Just six are technology based (and only 20% in the wider sample) But many more would be described as knowledge-based: at least 14 were innovative Predominantly engaged in B2B (18) Oriented to UK and overseas markets and physical presence beyond Scotland: just 5 based entirely in Scotland Limited Scottish ‘footprint’ 14

15. Business model Critical to their competitiveness Emphasis on ongoing relationships with customers; recurring revenue models – e.g. consulting, design, supply/installation, support and maintenance Focus on ‘solutions’ – blurring the distinction between manufacturing and services Innovation through co-production Emphasis on partnering 15

16. Core competences Varied Quality of staff; innovative products and services; technological knowledge and expertise; close relationships with customers; understanding of their market and customer needs Emphasis on HRM practices 16

17. Management Importance of tapping expertise 12 had NXs on their boards (mostly based in England or overseas) 3 had NX chair of their board 17

18. Financing Growth 11 had raised VC (2 from corporate investors) 4 were for MBO/MBI and 7 were for growth 5 now listed on stock market VC/PE needs an exit – generally prefer a trade sale Implications for ongoing Scottish ownership 2 had to be persuaded to go for an IPO 7 were internally financed – mainly family businesses – desire to retain independence. Two were initially self-funded with the wealth their entrepreneur had made from selling a previous business. 18

19. Embeddedness in Scotland few needed to be in Scotland Located in Scotland because that was where their founders were living Most could be based “anywhere” – but founders wanted to live in Scotland ‘Brand Scotland’ as asset especially in USA; place reputation – Edinburgh (financial services), Aberdeen (oil and gas) also advantage Limited and weak links to Scottish universities 19

20. Embeddedness continued Scottish ‘footprint’ was in many cases quite small and limited to their HQ: majority of jobs elsewhere because of need for proximity to customers acquisitions of companies elsewhere biggest relative Scottish footprint is a manufacturing company Is it inevitable that in small peripheral economies HGFs will have a relatively minor direct economic impact? HQ effect: (i) high quality jobs; (ii) salaries; (supply chain); (iv) source of spin-off companies; (v) positive signal about the Scottish business environment Potential vulnerability of HQ in event of acquisition 20

21. Impacts of Government 15 of 21 had some form of support Often small scale In case of de novo starts was received at an early stage Most valued assistance has been to support overseas market entry by early stage companies Only 11 are account managed – mostly report a positive experience Indirect impacts of government arguably more significant As customer (4); legislation creating/growing the market (3); privatisation/deregulation (2); accreditation (3); partnering with public sector (2) Negative effects (e.g. ‘red tape’) fairly muted 21

22. 4. Conclusions Policy-makers should not prejudge where HGFs will emerge Keep eligibility rules as flexible as possible e.g. “manufacturing” – a meaningful label? Importance of the existing industry base as a source of HGFs MBOs (how many potential HGFs are ‘imprisoned’ within large organisations?) Spin-offs ‘ownership clusters’ individuals Serial entrepreneurs 22

23. Conclusions - continued Are policy-makers over-emphasising the link between “science and technology” and HGFs? Few HGFs are in ‘high’ technology sectors Even fewer are university spin-offs (why?) Imprecise overlap with key sectors Most HGFs are innovative but few of these innovations come out of R&D labs 23

24. Conclusions - continued Acquisition risk High number of HGFs that have been acquired and are now subsidiaries of large, often foreign-owned, businesses Beneficial or not? HQs of HGFs are vulnerable in the event of acquisition PE/VC companies are at risk to being sold Is a Stock Market listing option being promoted sufficiently by financial advisers? Scottish based companies under represented on AIM (2%) 24

25. Link to full report If you want to read the full report …. http://www.scottish-enterprise.com/News/2010/11/High-growth-firms-could-be-key-to-economic-success.aspx 25