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Page 1: SCALING FROM STARTUP TO SME - iotuk.org.uk · 4 SCALING FROM STARTUP TO SME l KEY CHALLENGES Growing a business presents a host of challenges from regulatory red-tape to making sure

SCALING FROM STARTUP TO SME

Overcoming key challenges

MARCH 2017

Produced by

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SCALING FROM STARTUP TO SME l KEY CHALLENGES2

Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Key messages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Key challenges in scaling your business from startup to SME . . .4

The transition from startup to SME can be a painful and

disruptive experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Managing culture and people . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Scaling up the core “admin” of the business . . . . . . . . . . . . . . . . .6

Developing a professional sales and marketing capability . . . . . 7

Taking product development from Art to Engineering . . . . . . . . . . 7

Financial control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Many of the most difficult issues relate to the way you

manage your growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The UK government has a strong interest in helping

SMEs grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

There are multiple dimensions to scaling, and you need

to get all of them right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Managing your growth must be a key part of your strategy . . . .8

Cash and Capital both have to be managed carefully . . . . . . . . .8

Partnerships are a key lever to support your growth . . . . . . . . . . .9

Get access to coaching, mentoring, and advice . . . . . . . . . . . . . .9

Look beyond local markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Sources of advice and support . . . . . . . . . . . . . . . . . . . . . . . . . 10

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SCALING FROM STARTUP TO SME l KEY CHALLENGES

Small and medium sized businesses play a fundamental part in the UK economy. The UK’s Department for Business, Innovation, and Skills reports that small businesses accounted for 99.3% of all private sector businesses at the beginning of 2016, and they employed close to 16 million people, representing 60% of the private sector workforce.

The UK technology sector represents a rich source of innovation and potential, which if effectively nurtured could help to drive growth in the UK economy. In recognition of the importance of startups to the UK economy, in his 2016 autumn statement the UK’s Chancellor of the Exchequer Philip Hammond announced that he would give £400m to venture capital funds specifically to invest in supporting startup companies. This commitment builds on the investment the UK government has made in Innovate UK, and the Digital Catapult program.

These programs, coupled with initiatives from organisations like the FSB (formerly the Federation for Small Businesses), are all designed to promote innovative young businesses by providing them with support and advice as they grow from idea to startup and then to small business and beyond.

However, starting a business remains a challenging undertaking. Nearly half of all small businesses fail within their first five years, and for many it is the transition from startup to SME that creates the greatest challenge.

In this report, we look at the range of issues that startups need to address to make their first leap in scale, and advise them on how they should prepare for this phase in their lifecycle, and how they should position themselves for future growth. In the domain of the IoT, these challenges combine with a complex ecosystem in which partnership and collaboration also form a key ingredient in delivering sustainable growth.

1 .1 . Key messages

●● The transition from startup to SME can be a painful and disruptive experience.

●● Many of the most difficult issues relate to the way you manage your growth.

●● The UK government has a strong interest in helping SMEs grow.

1 .2 . Key Recommendations

●● There are multiple dimensions to scaling, and they are all important.

●● Managing your growth must be a key part of your strategy.

●● Cash and Capital both have to be managed carefully.

●● Partnerships are a key lever to support your growth.

●● Get access to coaching, mentoring, and advice.

●● Look beyond local markets.

Letting your startup fly

BY FACING THE KEY CHALLENGES

3

Summary

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SCALING FROM STARTUP TO SME l KEY CHALLENGES4

Growing a business presents a host of challenges from regulatory red-tape to making sure that the core processes that drive the business can keep pace as the business scales . As your business grows it will go through many different phases, and while the first transition from startup to SME may feel like the most daunting, you need to be ready to manage change through many different stages .

Interviewed in Forbes magazine in 2015, serial entrepreneur Erik Fairbairn said:

“EACH TIME YOUR BUSINESS DOUBLES EVERYTHING SEEMS TO BREAK; YOUR SALES PROCESS, FINANCE PROCESSES, MANAGEMENT INFORMATION FLOW, SO EVERY TIME YOUR COMPANY DOUBLES IN SIZE, YOU END UP RE-DESIGNING EVERY PROCESS YOU HAVE.”

Much of the advice in this report, though targeted specifically at the first phase in your company’s evolution, will provide a useful guide as your business continues to grow .

Key challenges in scaling your business from startup to SME

The transition from startup to SME can be a painful and disruptive experience

Across the UK technology sector, hundreds of startup companies are operating out of spare rooms, garden offices, and temporarily rented workspaces . Typically with around five employees these companies are focused, passionate, and made up of people who share common values, possess complementary skills, and believe in what they are doing .

In many cases the founders take a minimal salary and put in hours that would mystify a regular salaried employee . As these startups begin to achieve growth in sales, however, things begin to change .

We have divided the challenges faced in scaling from startup to SME into five distinct categories;

●● CULTURE AND PEOPLE – The values and ethos of the organization, and the recruitment of new people.

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SCALING FROM STARTUP TO SME l KEY CHALLENGES 5

●● BUSINESS ADMINISTRATION – The underlying

processes that make the organization function.

●● SALES AND MARKETING – The process of finding

potential customers, engaging with them, and

successfully doing business with them.

●● PRODUCT DEVELOPMENT – The process

of creating the product or service that the

organization sells.

●● FINANCIAL CONTROL – The processes that are

applied to the day to day management of cashflow,

and the long-term management of capital .

As the business evolves, the way in which each of

these things is managed is bound to change . This is

a key source of disruption . As her business grows,

whereas the founder used to spend most of her time co-working with the team, she now finds herself spending more and more time on admin, process, and management . One of the most common remarks we hear about this phase in a company’s development is that the founder started the business in order to get away from the bureaucracy and process associated with working for a large firm and focus on doing the thing they love, only to discover than as the business grows they find themselves back in the mire of process and admin; with the added burden that they are now responsible for the financial security of the enterprise and its employees .

In order to manage this evolution, startups have to plan to scale from the outset . The figure below provides an overview of the core challenge of scaling:

CULTURE

BUSINESS ADMINISTRATION

SALES

PRODUCT DEVELOPMENT

FINANCIAL CONTROL

IMPLICIT

STARTUP

INFORMAL

FROM THE NETWORK

ART

SCRAP OF PAPER

EXPLICIT

SMALL ENTERPRISE

ADHOC

REFERRAL AND SPECULATIVE

CRAFT

EXCEL

FORMALISED

MEDIUM SIZED ENTERPRISE

STRUCTURES

SYSTEMATIC

ENGINEERING

ACCOUNTING PACKAGE

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SCALING FROM STARTUP TO SME l KEY CHALLENGES6

Managing culture and peopleTypically, startups are made up of a small group of highly dedicated people who share a common goal, and bring a common set of values to the team . While the best teams contain a diversity of skills, they are bound together by these shared values . These values will inform everything the business makes; One founder told us “In the early days there was no need to define what an ‘appropriate’ expense was – None of us would have dreamt of buying a business class ticket, there was no need to write down a policy, we simply trusted each other to do what was best for all of us” . In this startup phase the culture of the organization is implicit – It doesn’t need to be stated or described .

The implicit nature of culture comes under stress as soon as you begin recruiting staff . The impact of hiring new people into the company is often at or near the top of the list of early-stage challenges; firstly it is extremely difficult to recruit the right people in the first place, and secondly the introduction of new personalities to a small team will place pressure on the culture and values of the original founders .

Recruiting technical people with experience in IoT will continue to be a challenge for some time, and the nature of IoT solutions means that the breadth and depth of technical expertise you need is greater than in other domains; IoT start-ups need people with skills in hardware design, firmware development, the application of communications protocols, data analytics, event management, and user interface design . All of these skills are in high demand .

The recruitment of people with the right technical skills

is only one part of the challenge, however, technology

startups often begin with an extremely strong core of

technical expertise, but often manage to go through

the first phase of their evolution without a formal, or

professional, approach to sales and marketing . Many

small businesses cite the recruitment of their first

dedicated salesperson as a pivotal moment in the

company’s history; but even this can be a complicated

and challenging process . According to one CEO,

his organization hired and subsequently fired three

sales people in a row before finding someone who

represented the right fit for their organization .

Scaling up the core “admin” of the businessStartups can achieve a good deal of early success

without having any formal processes at all, orders can

be accepted, and managed, via Gmail, the accounts

kept in a notebook (or in the case of one start up) a

cardboard box labelled “Finance Department”), and the

service can effectively be hand delivered . Plainly, this

ad hoc approach to process is unlikely to scale beyond

a few customers or a few orders per day, and at some

point the process will have to be formalised . As your

business grows you will be more likely to be subject to

regulation whether it relates to VAT accounting, your

payroll, or your compliance with employment law .

Does this mean that one of the founders should

take a step back from product development to focus

more time on administration? Or should the business

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SCALING FROM STARTUP TO SME l KEY CHALLENGES

consider hiring someone to do the admin and set up the basic systems that the company needs? The startup has a choice at this point, one of the founders can take on the task, the company could hire an experienced (and costly) COO, recruit a capable clerk to put some basic processes in place to help the organization through the next phase in its development, or buy in support as a service by engaging with accounting and HR service providers . There is no single solution to this problem – the approach you take will be a function of the composition of the founding team, your growth trajectory, and your funding .

Developing a professional sales and marketing capabilityIn the early days, most of a startup’s sales will come from the network that the founders already have access to, but inevitably there comes a time when the business needs to start actively looking for leads, and handling inbound enquiries . For some startup organization the hiring of their first sales person can be an almost traumatic experience . Salespeople are not like software engineers, they are motivated in different ways, and by different things . A secondary challenge is that the introduction of a sales force (even if it’s a salesforce of one in the early stages) places a layer between the founders and the customer which can cause friction when it comes to translating customer requirements into tangible products and services that the company should offer .

Taking product development from Art to EngineeringStartups in the technology sector are typically built around a specific product, whether that is a physical object or software that is delivered as a service . More often than not, the core team comprises at least one technology ‘artisan’, in the form of a highly talented and expert developer or designer .

As the business grows it is inevitable that it will be necessary to accelerate your product development capability, so now the original developer will have to give up a degree of control over the product and its creation, as the development process transitions from being ‘art’ into the ‘craft’ phase where specific activities are partitioned and people begin to specialize .

As the team grows, the need to communicate rises, and the requirement for more formal processes

increases . This is the reason why agile methodologies

recommend a team size of between five and seven

people, because this team size supports a degree

of specialization but still makes it possible for every

member to communicate effectively . As you move

beyond this scale you enter the domain of ‘engineering’

where the addition of process is essential in order to

co-ordinate the efforts of multiple teams .

Financial controlIn our surveys, we have found that it is not uncommon

for a sole trader to use a pair of jeans as their financial

system; sales notes go in the left pocket, and receipts in

the right . While the company is in its early stages, this

rather unstructured approach to record keeping may

be adequate, but if the business is successful, the need

for a more mature finance system will increase rapidly .

When a business registers for VAT, for example, the

requirements for formal record keeping are mandated,

and when your business starts using a professional

accounting service the introduction of formal, reliable,

auditable, processes will be unavoidable .

Many of the most difficult issues relate to the way you manage your growth

All of the challenges we have described are significant,

but they can be addressed by investing time in planning

and managing the growth of the business . While it

7

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SCALING FROM STARTUP TO SME l KEY CHALLENGES8

makes little sense to implement the kind of HR, finance,

and product management systems that are used by a

100,000 employee multinational, it is important to plan

for the way in which all of these systems will be scaled

as your business grows .

IoT startups need to plan ahead, and take advice from

the relevant sources; for example they should consult

their Accountant when it comes to choosing the most

appropriate book-keeping package (many accountants

have a preferred product) .

It is also important to be ready to explore different

business models and partnership strategies; it is not

uncommon for a startup to begin with one sales/

business model and then adopt a completely different

one as they grow . In one case, a small IOT project

began by selling technology that could be retrofitted

onto medical instrument cleaning machines, but

then opted to sign an exclusive deal with a single

manufacturer that was able to use the new functionality

as a competitive differentiator, and was then able to

drive more sales as a result .

The UK government has a strong interest in helping SMEs grow

The role that startups and SMEs play in the UK

technology sector is a significant one, and the UK

government has a track record of investing in the

UK’s technology ecosystem through organisations like

Innovate UK and the Digital Catapults . The government

has a mandate to support and promote British

innovation and entrepreneurship and does so in a

variety of ways:

●● Providing grants and investment funds

●● Supporting exports and overseas trade

●● Funding supporting organisations that provide

access to funds, mentoring, and partnership

opportunities

These initiatives are well publicised, and aim to be

easy to access; but the onus is on your organization

to engage with them in order to reap the benefits that

they offer . The Digital Catapult’s IoTUK programme has

a strong mandate to support SMEs in the IoT space,

and we provide more information below in section 4 of

this report .

Recommendations

There are multiple dimensions to scaling, and you need to get all of them right

There is no single thing that needs to be addressed in

order to successfully make the transition; you need to

consider all five of the domains that need to be scaled

as your business grows .

There is little point in building a highly effective lead-

generation process if you production processes wouldn’t

be able to fulfil a significant growth in orders . At the

same time, you should not over-invest in scaling up

either . The mantra that one of our clients applies is “plan

for the long term, implement for the medium term”; so

while it is important to think two or three years ahead in

terms of what you need to do, you should be acting to

prepare yourself for the next 12 months of growth .

Managing your growth must be a key part of your strategy

Your medium and long term strategy should explicitly

address the five domains we have listed, while your

immediate focus is likely (and rightly so) to be on how

you reach your next milestone whether that is in terms

of product development or sales, investing time early

on in considering how you intend to manage your

future growth will make your transition from startup to

SME smoother, less chaotic, and less likely to produce

nasty surprises .

Cash and Capital both have to be managed carefully

The first challenge faced by startups in the IoT space

is the need to raise capital . The IoT value proposition

combines elements of software, hardware, networking,

and industrial design . Some investors will prefer to

invest in solutions that seem less complex, and have a

more direct route to revenue .

In its report UK IoT Investment by VCs, Angels, and the

Crowd (see https://iotuk .org .uk/uk-iot-investment/) IoT

UK looked at the different potential sources of funding

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SCALING FROM STARTUP TO SME l KEY CHALLENGES10

Sources of advice and support

DIGITAL CATAPULT: Digital Catapult works with SMEs in a range of technology layers including IoT, data security, and AI to help them scale and grow faster . It provides programs and collaboration to open up new market opportunities for UK digital companies . digitalcatapultcentre .org .uk

IOTUK: Hosted by Digital Catapult and Future Cities Catapult, IoTUK is a national program to accelerate UK’s IoT development and part of the government IoT investment . IoTUK enables entrepreneurship advances in IoT capabilities . iotuk .org .uk

THE FEDERATION OF SMALL BUSINESSES: A leading business campaigner and a non-profit business service . FSB provides the latest opportunity profiles, factsheets, legal documents, networking opportunities, financial and legal advice, events, and policy issues, among additional resources . www .fsb .org .uk

THE PRINCE’S TRUST: The UK charity supports younger entrepreneurs with support, training, mentoring founding and resources . www .princes-trust .org .uk

UK TRADE AND INVESTMENT: UKTI assess a company’s readiness and assists in international trade capacity .

UKTI provides SMEs with training, planning and ongoing

support to succeed overseas . www .gov .uk

SMART, TECHNOLOGY STRATEGY BOARD: Innovation

grants for SMEs, offering founding opportunities in R&D

in science, engineering and technology . www .gov .uk

NEW ENTREPRENEURS FOUNDATION: NEF builds an

active community of young entrepreneurs through

work placement, business mentoring, networking and

coaching . newentrepreneursfoundation .com

STARTUP FOUNDATION: A networking online

community, connecting entrepreneurs with other

startup founders, investors, press and talent .

startupfoundation .co

STARTUP BRITAIN: A national campaign run by the

Centre for Entrepreneurs think tank which points

entrepreneurs to support and online resources .

startupbritain .org

NATIONAL ENTERPRISE NETWORK: The NEN provides

localized contact details for organizations that offer

star-up advice, mentoring, and support .

www .nationalenterprisenetwork .org

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Digital Catapult, 101 Euston Road, London, NW1 2RA

IoTUK .org .uk • info@IoTUK .org .uk

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