By Simon Porter, above, Investment Director, Pembroke VCT
Although there are economic uncertainties for the year ahead, this is not the first time that the UK’s small businesses have had to weather a tough storm. For businesses with the right solution and mindset, this has the potential to turn into a fruitful opportunity if they find the right ‘gap’ in the market.
The big role of small business
In the last six months we have seen the valuations of global tech giants such as Apple, Amazon and Twitter decline sharply as a result of the first signs of weakening consumer demand affecting subscriptions and spending habits. Just a few years ago, with the pent-up consumer demands and eCommerce habits buoyed by the Covid pandemic, this would have seemed like pure fiction. Too often the valuations of big companies are inflated by market sentiment rather than their financial performance. We need innovative start-ups that are driving strong returns, and more of them.
According to Virgin StartUp, start-ups now contribute around £200bn a year to the UK economy and employ around 12% of the workforce. This economic contribution is nothing short of monumental, and so it is right that the performance of the country’s small businesses is at the heart of economic plans for the years ahead. There is indeed great potential for start-ups to have a bigger impact, but this also means encouraging a culture of entrepreneurialism and looking to new, high-growth industries beyond established technology and financial services.
A journey of discovery
In an age where the ‘job for life’ is dead and the barriers to launching a business are lower than ever, there is now a groundswell of people willing to leave the security of large enterprises to innovate and pursue their ideas, unencumbered by bureaucracy and stagnation. A generation of University leavers raised on Dragon’s Den and start-up success stories are no longer looking to join the corporate rat-race, and increasingly have the confidence to start out on their own.
Anyone can now launch a business if they have a good idea, the right attitude, a laptop and a few pounds to buy a Companies’ House listing. We need a new wave of entrepreneurs to bridge the gap in the market between what incumbents are currently offering consumers and the innovation that is possible. We call this the “Innovation Gap.”
Looking to new shores
In many industries we are even seeing innovative, small start-ups take on much bigger companies and completely disrupt the status quo. These are often traditional consumer industries where large, incumbent players have been too slow to change and adapt to the new opportunities that digital technology offers. One strong example from our own portfolio is a start-up called Popsa which is using technology to disrupt the process of making photo albums – a £5 billion global industry, despite traditionally being a laborious editing task. Their aim is to help customers relive their best moments by making the thousands of photos stored on people’s smartphone more accessible, reducing the time it takes to create a photo album to an average of just eight minutes.
We have also seen other innovative start ups succeed over the last few years, from fitness studios pivoting to renting out exercise bikes to people’s homes during the pandemic, to a founder with a medical condition being inspired to help people conduct simple blood tests at home to monitor and optimise their health. The creativity of small businesses is without question and there is significant potential for them to disrupt a wide range of industries.
The modern consumer is increasingly calling for products and services that many traditional players are failing to supply. Whether this is due to a lack of understanding, supply chain inertia or outright refusal to change, the inaction of larger companies leaves ‘white space’ for new challenger brands to exploit much more quickly and effectively. Large global businesses are recognising the innovation gap and looking to start ups to help them take on industry challenges and develop services for this new wave of increasingly demanding customers. For example, when Adidas wanted to create a running shoe out of 3D printed material, it enlisted the help of academic spinout Carbon to create a range of shoes that can be made more quickly and customized to fit an individual customer.
Change is now the real ‘new normal’
In order to pave the way for the next generation of success stories and power our economy, the UK needs to become a home for disruptive small companies to take root and thrive. A new wave of businesses founded during the pandemic have made disruption part of their culture, embracing a challenger mindset to pivot to new ideas and stay ahead of the competition. We need to continue to encourage this entrepreneurial revolution, not just by funding smart founders, but also by supporting them on their growth journey and helping them run a successful business – whether this be through offering management tips, lending a hand with recruitment or providing sensible council on the board.