EY Fast Growth Tracker 2017 A survey of UK entrepreneurs November
55% of entrepreneurs expect to grow their revenue by half or more in the coming year Another one in five 20% expect growth of over Almost a quarter will increase their staff in the coming year by 20 71% of entrepreneurs aim to seek funding in the next 12 months
Executive summary Entrepreneurs are vital to the future success of the UK. Indeed, they can help define what that future will be. The businesses they create provide the growth, employment and products that power the economy and shape lives. But before they can do any of that, they have to first succeed. The EY Fast Growth Tracker surveys the UK s fastest growing businesses and clearly indicates that the UK s entrepreneurial future is bright. The majority of participating companies are small most have a turnover under 5mn but they have significant ambition: 55% expect to grow their revenue by half or more in the coming year Another one in five expect growth of over 20% Almost a quarter will add 20 or more to their headcount in the coming year And 71% aim to seek funding in the next 12 months The survey also finds that high growth businesses are found throughout the UK; 72% of businesses in London expect to see their turnover grow by more than half in the coming year, but so do 76% in the East of England and 67% of businesses in Wales. The UK is developing an entrepreneurial culture nationwide. Their ambitions are eminently achievable: those businesses expecting the highest levels of growth have a proven business model and sales track record. The majority now face the challenge of scaling. To do that they must overcome a number of hurdles, with the survey highlighting two challenges that are particularly prevalent: 1. The biggest challenge for 50% of those surveyed is securing funding 2. Second is finding the right people, with the war for talent the critical factor for 41% of respondents On the one hand, entrepreneurs in the UK have a conducive environment in which to flourish, with a proliferation of funding sources and types: 61% in the survey have completed a fundraising round in the last 12 months. On the other, they face undoubted challenges; three in ten say the Brexit vote has already hurt their business, for instance, and 43% expect leaving the EU to have a detrimental effect on trading at least in the short term. Longer term, the majority of business owners have a five-year exit plan and the majority (60%) envisage selling to an international corporate, compared to just 15% considering floating on a stock exchange. The EY Fast Growth Tracker is designed to provide the UK s entrepreneurs with a collective voice, bringing together their views on exit strategies and the issues impacting growth. The 371 participants in our survey are a strong representation of the fast growth community across the UK. We re excited to share the analysis and insight from the survey and believe this report will serve as vital benchmark for entrepreneurs and investors working with the country s fastest growing businesses. EY Fast Growth Tracker 2017 A survey of UK entrepreneurs 1
2 EY Fast Growth Tracker 2017 A survey of UK entrepreneurs
Introduction Last year saw a record number of start-ups founded in the UK, with 650,000 new businesses launched. 1 That beat the previous highest annual total set the year before by more than 40,000. A number of these companies will become the innovators that shape the future of the UK economy. Many will flourish, creating jobs and developing new technologies that disrupt the current business landscape. However founding a company is inherently risky and entrepreneurs face a number of high profile challenges to growing their business. It was to them we turned, therefore, for more insight into the plans, priorities and problems facing some of the UK s most ambitious small businesses. The EY Fast Growth Tracker in connection with the EY Fast Growth Platform and the EY Entrepreneur Of The Year surveyed 371 UK business owners and provides a unique insight into their thinking. Most of these businesses are young 61% are under five years old and 91% employ fewer than 250 people. However, within this cohort there are undoubtedly companies that will go on to shape the future of the UK business landscape in the years to come. 1 https://centreforentrepreneurs.org/cfe-releases/2016-breaks-business-formation-records/?mc_ cid=cd53b7970a&mc_eid=0804ec0dee 3
Growth prospects Britain s young businesses are bullish and with good reason. Most of those in the survey are small (70% had a revenue below 5mn in the last 12 months), but they re growing fast. They expect that growth to accelerate in the future. When asked how much they think their revenue will grow in the coming year, 55% said they expected it to increase by half or more; another one in five (19%) hoped for turnover increase of between 20% and 50%. Chart 1: What revenue growth do you expect this year? 50%+ 20% 50% 10% 20% <10% 11% 19% 15% 55% Most of that growth is going to be organic, but a third of businesses (34%) say they ll be pursuing M&A in the coming year. Scaling up While they may be bullish, these businesses ambitions do not seem unrealistic. In fact, the most confident businesses those predicting the highest level of growth were those who had already raised between 10mn and 20mn. These are firms that have proved their business model. The challenge is now executing making sure that they hire the right people, set up international offices, and broaden the customer base for their product. Perhaps not surprisingly, these ambitious businesses included many technology companies: Two thirds of technology businesses (65%) in the survey expected to grow revenues by another half or more in the next year. Again, the evidence suggests that confidence isn t misplaced. The technology sector is growing strongly; EY s European Investment Monitor UK Tech Report shows the total number of foreign direct investment (FDI) projects into the sector reached a ten-year high in 2016. Perhaps more surprisingly, fast growing businesses can be found everywhere. London remains a hotspot, but the proportion expecting revenue to grow by more than half (72%) was easily matched and even surpassed elsewhere. In the East of England, more than three quarters (76%) expected the same level of growth. In Wales, it was 67% of businesses. Our findings show that growth is not exclusive to London and that most companies across the UK are expecting to grow by 20% or more in the coming year. This reflects the efforts of regional councils to support budding entrepreneurs and high growth business. Moreover, it helps support the idea that entrepreneurship and the conditions required for growth are not confined to the capital. 4 EY Fast Growth Tracker 2017 A survey of UK entrepreneurs
Chart 2: What revenue growth do you expect this year? East of England 7% 10% 7% 76% London 3% 8% 16% 72% Wales 8% 25% 67% South East 6% 6% 26% 62% South West 7% 21% 14% 57% Scotland 17% 17% 11% 56% North West 21% 7% 21% 50% Midlands 7% 29% 21% 43% North East 17% 33% 17% 33% Northern Ireland 29% 43% 29% <10% 10% 20% 20% 50% 50%+ Looking abroad Chart 3: Companies growing >50% When it comes to the growth prospects for their businesses internationally, 71% said these are improving. And internationally is where many high growth businesses see their future. Two thirds of businesses (66%) say they will expand operations in the UK, but almost as many said they would expand in North America (60%) and in Europe (58%). A significant proportion (43%) also intend to expand in Asia-Pacific, with retailers particularly likely to do so (51%) attracted, no doubt, by the world s fastest growing consumer market in China. 2 Technology Business & Professional Services Media Personal Services Leisure & Entertainment Other 5% 5% 4% 4% 27% 49% Industrials 3% Retail 2% 0% 10% 20% 30% 40% 50% 60% 70% 2 https://blogs.imf.org/2013/12/02/china-fastest-growing-consumer-market-in-the-world/ EY Fast Growth Tracker 2017 A survey of UK entrepreneurs 5
Funding and exits Most UK entrepreneurs have recent experience with the fundraising process, with three quarters having completed their last round in the last 12 or 24 months. The process is not necessarily an easy one. A quarter (24%) of business owners say it took between six months and a year (with 4% taking even longer), and many struggled with the distraction that raising a funding round caused for their team (40%). Finding suitable investors was also a major issue for 39% of respondents. Nevertheless, 71% say they intend to raise funds again in the next 12 months, and the evidence suggests that this will have a marked impact on growth: two thirds of those who have already raised in the last 12 months (66%) were the most likely to predict more than 50% growth in this financial year. Sources and sizes In most cases, the businesses surveyed are looking to raise small rounds consistent with their size. More than one in five (22%) are seeking less than 1mn, and another half (50%) between 1mn and 5mn. Unsurprisingly, that varies by geography, with businesses based in London more likely to be looking for larger sums. It also varies by sector. Fintech businesses were the most ambitious in the survey in terms of their funding, with over a third (34%) looking for more than 5mn, accounting for 24% of the total business owners questioned. This is, in part, due to the fact that there is a large concentration of fintech companies based in London. Indeed, EY s UK FinTech Census showed that London was the location for the UK head office of 80% of domestic fintech firms, and 98% of internationally headquartered ones. 3 The capital provides a steady supply of funding the financial services community provides significant levels of seed investment before entrepreneurs even have to consider traditional venture capital 4 (and global VC funding for fintech set a quarterly record in Q2 this year) as well as an obvious opportunity: the publicity around disruption in financial services has been striking, with fintech seen as a leader in the Fourth Industrial Revolution. 5 Funding remains the biggest hurdle for Britain s high growth businesses. Half say it s a constraint. A promising environment It is difficult to think of a recent time when the funding environment has been so good for fast growing businesses. The last decade has seen a proliferation of venture capital firms being set up, exited entrepreneurs funding start-ups, and new types of funding, such as venture debt and mezzanine finance. Even the banks are becoming more flexible in the types of finance they offer. Today there are more than 20 VC firms based in the UK 6. A decade ago there were only a handful. 3 http://www.ey.com/publication/vwluassets/ey-uk-fintech-census-2017/$file/ey-uk-fintech-census-2017.pdf 4 And global VC funding for fintech set a quarterly record in Q2 this year: http://uk.businessinsider.com/global-fintech-funding-rebounds-2017-7 5 Including by the UK s Chancellor of Exchequer: https://www.gov.uk/government/speeches/fintech-will-transform-the-way-we-live-and-do-businesssays-the-chancellor 6 https://www.techworld.com/picture-gallery/startups/who-are-uks-22-venture-capital-firms-3642920/ 6 EY Fast Growth Tracker 2017 A survey of UK entrepreneurs
Nor are early stage businesses restricted to the UK; 62% in our survey said they were targeting overseas investors. Funding may still be a constraint on business growth, but the shortage, if any, is the result of booming demand, rather than tight supply. There are still regional variations, too. There is notably more appetite for capital in the North East and Scotland, where all businesses were expecting to raise in the next 12 months. This is notably higher than London (81%). This is likely to be the result of more capital being accessible in London, with businesses being able to be patient and selective when choosing their source of funding. Chart 4: How are you planning to exit? Sale to private equity 89% 11% Start-up funding remains London-centric; the UK has yet to develop the multiple big VC hubs that are present in the US. Nevertheless, things are improving, and investment outside London and the South East now makes up over half (52%) of the total by members of The British Private Equity & Venture Capital Association. 7 In this way, too, we see an entrepreneurial culture making itself felt across the country. 40% Sale to an international corporate 60% Listing on a stock exchange 85% 15% Not sticking around For most business owners, however, it s a question of when, not if, they exit. Relatively few (18%) think it is a favourable time to exit right now, but the day is coming for most. A majority expect to exit within five years (64%), with about half of those (30% overall) saying they ll be gone in three. Only about one in five (22%) have no plans to exit. Sale to a domestic corporate 86% 14% It is striking, too, how owners plan to exit: over half (60%) envisage a sale to an international corporate, compared to just 15% considering an IPO. Less than one in ten business owners (11%) are considering selling to private equity. 7 https://www.bvca.co.uk/research/industry-activity EY Fast Growth Tracker 2017 A survey of UK entrepreneurs 7
The challenges ahead Not surprisingly, given the focus of many on international investors and consumers, Brexit continues to be a worry. Three in ten (30%) say the vote to exit the EU has already hurt their business, and 43% expect leaving the EU to have a detrimental effect on their business in the short term. Despite talk of the opportunities of a global Britain to trade with the world, only 5% say Brexit looks positive for their business. In the long-term, though, there is a little more optimism: a third say the impact will be negative, but 15% say it will be positive and a similar proportion (13%) that it will have no impact. Another third say it s impossible to tell at this stage. Chart 5: When Britain formally leaves the EU, what do you think the impact on your business will be in the long-term? 40% 35% 30% 25% 20% 15% 10% 5% 0% 15% 33% 33% Beneficial Detrimental Impossible to tell until we leave 13% No impact 6% Not sure To realise their ambitious plans, British growth businesses will face a number of hurdles in the coming years, quite apart from finding investors. The war for talent Much, of course, will depend on the key elements of any deal, and principal among business owners concerns here is access to labour: Four in ten (39%) said this was the most important element of any Brexit agreement, ahead of even access to the single market (30%) or a key concern for financial services organisations maintaining passporting rights (10%) that allow them to sell their products across the EU. This is not surprising. As businesses grow they need more people: Only 16% in our survey currently employ more than 100 people and 58% employ fewer than 25, yet close to a quarter (22%) were intending to add 20 or more to their headcount in the coming 12 months, and 44% were going to take on more than ten. Some of these gaps can be filled with freelancers and more than half (53%) of the businesses questioned already use them. The challenge of finding good staff remains, however, and four out of ten (41%) say it is the biggest constraint on growth second only to the availability of funding. 8 EY Fast Growth Tracker 2017 A survey of UK entrepreneurs
A demand for diversity Research shows that just 9% of start-up funding in the UK goes to women-run businesses. Male entrepreneurs are 86% more likely to be VC funded and 56% more likely to secure angel investment than their female counterparts. 8 Our survey suggests a correlation between funding and growth, and therefore it is not surprising that the lack of available capital has also led to female-led businesses growing slower than their male counterparts, in many cases never exceeding 5mn in revenue. 9 The reasons behind this are complex: a lack of relevant role models, lack of access to funding (given that most angels and VC leaders are men), and the need to achieve a work life balance are all contributing factors. Conclusion Our survey shows that high growth businesses can be found in every industry and in every part of the UK. The entrepreneurs at the helm of these companies provide a vital contribution the economy. However, in order to deliver on the rapid growth forecast there are a number of structural challenges to be overcome, not least the ability to identify and access the right pools of capital. In today s fast moving business environment it is not surprising to find that most entrepreneurs have already started planning for the exit. For the majority a sale to an international corporate is the most attractive option, with just 15% considering an IPO. Maintaining the UK s status as an attractive investment market for global companies will be of vital importance in order for this entrepreneurial community to thrive. The Fast Growth Tracker is a survey of the UK s fastest growing businesses. To register your interest in participating in next year s survey email fastgrowthtracker@uk.ey.com 8 tenentrepreneurs.org/wp-content/uploads/2017/03/ UntappedUnicornsFinal-1.pdf 9 https://techcrunch.com/2016/04/19/the-first-comprehensive-study-onwomen-in-venture-capital/ Key contacts Richard Goold Partner Fast Growth Platform +44 20 7951 0603 rgoold@uk.ey.com Joanna Santinon Partner Entrepreneur Of The Year +44 20 7951 5510 jsantinon@uk.ey.com Simon Pearson Partner TMT Corporate Finance +44 20 7951 0418 spearson@uk.ey.com Anna Faelten Director TMT Corporate Finance +44 20 7951 3063 afaelten@uk.ey.com Alastair Jamieson Director TMT Corporate Finance +44 20 7951 6774 ajamieson@uk.ey.com EY Fast Growth Tracker 2017 A survey of UK entrepreneurs 9
Contributors The EY Fast Growth Platform The EY Fast Growth Platform is a new suite of services and support for fast-growing tech companies. For more information, visit www.ey.com/uk/ FastGrowthPlatform EY Entrepreneur Of The Year Now in its 20th year in the UK, EY s Entrepreneur Of The Year programme celebrates entrepreneurs who are building and leading successful, growing and dynamic businesses. For more information and to enter next year s competition, visit www.eoy.co.uk Beauhurst Beauhurst provides research and insight on the UK s highgrowth companies. The data platform allows professionals to discover and track Britain s most ambitious businesses in unrivalled detail. For more information, visit www.beauhurst.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. 2017 Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None EY-000044448.indd (UK) 11/17. Artwork by Creative Services Group London. In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk