There seems to be this special bond between growth and mid-sized organisations, or M organisations as I like to call them. Talk to most leaders of M businesses and they will tell you that they expect to grow at around 20% per annum for the next three years or so. What’s so remarkable about that anyway? After all, most small and start-up businesses probably expect to grow at around 200% per annum. Why should we care about the twenty percenters?
We should, for a number of reasons.
One, for every small business that grows at 200% per annum, there will be another six that just survive, and another eight or so that die that same year. No, these numbers are not scientifically calculated, but you get my drift. Very few little businesses actually achieve anything. In an environment, where government policy-makers have set themselves goals for the number of new start-ups seen this year, that’s pretty worrying because, as my colleague Paul Druckman points out, it means they are not interested in the net number of new start-ups, only the gross number. It also begs the question whether we can invite people to start up their own businesses (presumably by leaving employment) when so many are doomed to failure.
Two, the twenty percenters are expecting growth on top of what are already reasonable businesses, producing annual revenues in excess of £5m, some in excess of £50m. This is not pie-in-the-sky thinking – it is the considered judgment of someone who has already built and led a good quality business.
Three, past performance is no indicator of future performance. The honest truth about many M businesses is that they expect to grow even if they bumped along in a trough for the past three years. The difference between them and their smaller brethren is that they might actually put in some strategies to achieve that growth, or invest in technologies that enable their business processes to scale up.
Why do M business leaders worry so much about growth? For most of them, if the organisation is not growing, it is probably dying. It is a pretty fine line between progress and survival.
In an ongoing study I am involved in with M Institute, a major factor affecting growth has been found to be access to capital. Growing a business needs capital. Not every medium organisation has difficulty in raising capital, particularly when the capital is needed for buildings and capital equipment. But capital is difficult to obtain when the driver for finance is growth. It is even more difficult when the track record of the organisation does not demonstrate a steep upward year-on-year growth curve. Yet it is these organisations that are delivering the most consistent growth performance in the UK economy.
Why is it hard to raise such growth finance?
UK banks have a short-term view on lending which does not support the longer-term growth finance requirements of medium business. UK banks seem to have a shorter horizon than European banks in this regard. It is also true that UK banks measure their performance on transactions – the more, the better. They reward their staff, and make more money, if they can make two five year loans, than one ten year loan. The fact that the second loan is simply taken to finance the repayment of the first loan is ignored.
Venture capitalists have gradually moved up-market so that their need for a return is such that companies have either to deliver a spectacular growth performance or give the investors a higher share of the business than they would like to. This is self-defeating for M leaders – why should they work their socks off only to hand over the bulk of the wealth benefit to somebody else?
Government schemes for finance are aimed at start-up businesses and are irrelevant to medium business. In any case, very few M organisations would expect, or even want, government funding.
But there is one thing government can do. It can reduce, if not remove, the problem of imperfect knowledge. The credit rating for most large organisations is public knowledge. The credit rating of most M organisations is completely unknown. As a financier, whether bank of VC, you could be talking to a fantastic prospect or a total dud, but without undergoing extensive (read expensive) due diligence, you probably would not know the difference. Getting the conversation started is very expensive.
Why can’t we have a credit rating scheme for M organisations? This is the view of Richard Gough, a former venture capitalist and now responsible for the finances of one of Britain’s largest charities. For credit ratings to work, somebody needs to do proper investigative work. This costs money. Given that only six major credit rating organisations dominate the enterprise end of the market, there must be an issue of scale involved. It may not be worthwhile for any one of the commercial organisations to push-start a scheme for M organisations.
But this could be an interesting opportunity for government to do something that supports growth but does not tamper with the resource allocations made by a free market economy. In effect, it would be dealing with the market imperfection so that the market itself could act more effectively.
Isn’t that exactly what we want from our government? Let’s face it. Getting credit ratings will not solve our growth challenges. They will not even take away the need for due diligence on the part of the financier. But having a credit rating could mean that the conversation could happen at all. Any opportunity to remove the barriers to growth are worth exploring – and to me, this is one where not a lot of effort could really transform the market.
Nice one, Richard.
Comments