So the recovery seems well underway and we’re all feeling rather happier than before. Our jobs seem safer, the value of our houses is higher, but what’s been really driving it all?
Well, “lots of things” is the somewhat unscientific-sounding answer. But one of them is a little sub-section of the business community that’s been beavering away in the background. Immensely hard-working, self-reliant and somewhat stressed. Albion Ventures has called these the “threshold companies”.
These are firms with sales of between £500,000 and £1m, they’re just on the cusp of blossoming from little more than sole traders to fully-fledged companies, and they’re showing all the growth pains, as well as the unbounded energy, of adolescence. The role of SMEs in driving the UK economy is not in doubt, but threshold businesses in particular have the potential to make a significant difference.
As the din from the forthcoming general election grows ever louder it’s vital that the potential offered by threshold businesses is not ignored. It is these companies, which are on the cusp of a breakthrough in growth, that have the greatest potential to drive the UK’s economy in the years ahead.
We first spotted the emergence of threshold companies through our second annual Albion Growth Report. This report polls the views of 450 UK SMEs in order to shed light on the factors that both create and impede growth. It’s a fascinating exercise and we end up with about 27,000 different data points. When we were going through these numbers, again and again we’d see this particular sub-section as being an outlier in the results - the data was showing how all the pressures created by growth are magnified and thrown into stark relief by companies moving through this crucial transitional stage.
More than three-quarters (78%) of threshold businesses are anticipating growth over the next two years – significantly higher than the average figure of 62%. But this level of ambition can come at a cost as they are also more exposed to particular challenges and headwinds.
They are far more committed to growing their headcount (55% compared to the average of 33%) but also find it more difficult to source skilled staff, who in many cases may be more attracted by larger and more established employers, despite their greater willingness to train skilled staff compared to other sizes of SME.
For them, cash is tight. Threshold businesses are twice as likely (19% versus 10%) to seek finance but they’re far more likely to use the extra capital to grow rather than just survive. Encouragingly, though, threshold firms have a better success rate at securing finance and they’re also far more willing to give up equity in their business in return for hands-on support and mentoring (22% versus just 6% on average) from investors such as venture capitalists and business angels.
Threshold businesses are more likely to target new markets, including those where public procurement could help, but they don’t report high levels of success. The majority admits to a lack of expertise in marketing, technology and sales. Like many SMEs, they also feel a little overwhelmed by red tape.
The picture that emerges is of a category of companies that are desperate to move to the next stage of growth. They recognise that they need investment, expertise and skilled staff to achieve this. Above all, they’re stressed, they need to be recognised and they need a helping hand. So if I had a plea, it would be for the formulators of public policy, from all parties, to recognise these companies. They need mentoring and they need the sort of help that can be provided by enlightened public procurement policies.
Patrick Reeve is the managing partner at Albion Ventures
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