UK startups need to get big enough to fail

August 22, 2013

–Amanda Jobbins is Group Chief Marketing Officer of The Sage Group. The opinions expressed are her own.–

Start-ups are hot on the business news agenda. Their importance to the UK, and the economic recovery, has been emphasised by the vocal support David Cameron’s government has repeatedly voiced for start-up initiatives. The decision to employ Facebook’s former Vice President Joanna Shields as CEO of Tech City is a clear demonstration of the government’s investment, while the Conservative Party launched its own ‘Start Up Hub’ competition in Manchester earlier this year, which provides entrepreneurs with an opportunity to showcase their ideas.

Although such political support is useful, entrepreneurs need to be provided with access to the finance, expertise, and backing to see their ideas realised. And the reality is that start-ups often go nowhere. This is the case for UK businesses in particular, with funding unsurprisingly being a decisive factor.

A recent study by DFJ Esprit and Go4Venture Advisers highlights the struggles European, and in particular British, entrepreneurs are currently facing, particularly when attempting to transition their company from start-up to mid-market. The report found that, while seed funding of early-stage European start-ups is relatively healthy, there is a scarcity of follow-on capital for later-stage businesses.

Not only does it show that European start-ups are under-funded in comparison to their US counterparts, it also suggests that the UK regulatory regime is not incentivising investors to extend their support beyond the initial stage. France now leads the way in terms of large follow-on funding deals, with Germany closing the gap. Without sustained funding, many start-ups eventually fail, typically because they don’t have the capital to keep going if the business model doesn’t work initially.

In the current economy, supporting and nurturing young business talent becomes of paramount importance. But the issues facing British and European start-ups are cultural as well as financial. I see risk as a major issue holding European start-ups back.

In comparison to the US, we have a more conservative approach in Europe that is preventing entrepreneurs from taking their ideas forward. This is driven by a fear of failure and is an issue that Alan Heureux, President of IAB Europe, has recently raised. This, in turn, means that venture capitalists are unwilling to provide the third party support that is crucial to starting a business.

Meanwhile research highlighted by the European Commission found that 48% of Europeans agree that you shouldn’t start a business if there is a chance it will fail, compared to just 19% in the US, further emphasising the fundamental difference in attitudes.

Let’s be clear here: we should not be advocating a gung-ho approach to business; but neither should we shy away from encouraging young business minds to take chances.

The key to Silicon Valley’s success lies not only in the scale of ambition and access to finance, but also in its attitude to risk and failure. Risk is perceived as an integral factor to business success. The best entrepreneurs and business people take risks – but risks based on insight and sound business fundamentals. We need to educate British business talent about a better approach to risk.

Young business talent needs to be guided and nurtured, and learning about how to manage risk effectively is one area in which the right mentoring can be invaluable. What we should be trying to replicate in business is the support networks we already have in our personal lives, a trusted group of people that you can call on for support and advice. If we want to ensure the success of young businesses and spur the economic growth and innovation that Britain needs, this qualitative support is vital. In today’s social world, every entrepreneur needs a ‘personal board’ that can provide them with the skills, advice and support they need to tackle the challenges of today’s fast moving and open world.

Big ideas need mentors at an early stage if we want them to make a big difference. And there is evidence that this approach can, and does, work – 70% of small businesses that receive mentoring survive for five years or more. That is double the rate of those who don’t. That alone is a compelling reason for business leaders, governments, and financial institutions to band together in providing entrepreneurs with the support they need.

That is why I applaud the Tech City initiative, and the likes of Joanna Shields and Eric van der Kleij before her, in trying to create the opportunities for young business talent to succeed. Budding entrepreneurs and start-ups will serve as the catalyst for economic recovery. If we fail to support them, we are failing ourselves. 

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