In March, technology company DocuSign asked a thousand small and medium-sized enterprises about the barriers they faced when seeking to grow. They discovered that finance, lack of experience and red tape were the pressing issues holding businesses back – only 22% said they planned to expand outside the UK in the next five years.1
“More small firms fail when growing than at any other time,” explains Professor Alistair Anderson, Distinguished Professor of Entrepreneurship at Lancaster University Management School. “That’s usually due to lack of financial planning and cashflow problems rather than lack of profit. So, getting your financial planning for growth right before you start is critical.”
There are many different paths to financing. These include external investment in the form of a venture capitalist, private investors, friends and family. Alternatively, business angel consortiums can provide expertise, experience and support as well as cash in return for a role in running the company, while there are also bank loans, government grants and other public funding to consider.
“Whichever avenue you pursue, you have to ask yourself why somebody would want to lend you money?” says Alistair. “To persuade investors you have to tell them a convincing, supportable story about what you intend to do and how you’ll do it – that’s your value proposition. You also have to persuade them that you can repay, so first you need to explain that to yourself.”
Nelson Phillips, Professor of Strategy and Innovation at London’s Imperial College Business School, agrees. “People invest in small firms for their potential not their history. They may want a bit of a track record, but to expand you must be crystal clear about why your business is an investment opportunity.”
He says it’s vital that entrepreneurs ‘get out there’, armed with a business plan, to sell their business to potential investors to secure funding. “Investors want to talk with the CEO, but people are so busy running their businesses they struggle to find time to do this. You have to be strategic and build up a management team you can trust to run the business while you’re raising money.
“Many entrepreneurs don’t realise how much their role will change. Be realistic about how much time you’re going to spend on raising money, how it’s going to work and be prepared to move away from day-to-day firefighting.”
Lack of experience of growth should not hold you back, with both experts agreeing a sound way to counteract that deficit is to learn directly from other businesses and entrepreneurs.
Alistair says: “We call it ‘practise wisdom’, which basically means networking with and talking to other businesses in the same sector who’ve already expanded – not direct competitors, obviously – to find out what they did and discover common solutions to common problems.
“Local authorities also have many groups dedicated to helping growth while Chambers of Commerce can introduce you to many new business people.”
Nelson adds: “Traditionally UK governments have focused more on helping people to start up businesses, but now recognise the benefits of putting additional resources into helping people to grow because they get more ‘bang for their buck’.”
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When it comes to handling the mountains of red tape that impacts every expanding business there’s no magic wand. Alistair explains. “Every company struggles with it but trying to take shortcuts or ignoring it will land you in trouble – but there are steps you can take to make life easier.
“It pays to hire human resources, legal and other specialist external support at a fairly early stage to help with essential but time-consuming red tape, such as employment contracts, VAT returns, equal opportunities and health and safety compliance.”
Alistair also recommends considering having a non-executive director to help spread workload during growth.
He says: “Red tape is even more daunting if you’re expanding overseas, so talk to other SMEs who are successfully exporting to the country you want to reach… and learn. The Government’s Exporting is Great website is also a useful resource full of practical information.
Tackling these three barriers to growth will put you in a strong position to expand your business to reach its full potential.
This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.
1 DocuSign website, May 2019