Tris Dyson, MD of Challenge Works, argues that Britain’s medium-sized innovation businesses are being held back from achieving their full potential
The UK economy is at a pivot point. The policy choices made in the next few months will likely define the next decade for innovation businesses, and whether Britain becomes the science superpower or an innovation also-ran.
In response to the last great economic crisis a decade ago, Challenge Works was founded to establish British expertise in designing and delivering challenge prizes that incentivise innovation that does social good. A decade on and a new economic crisis later, we conducted research to quantify the barriers that small businesses and start-ups face right now in turning their bright ideas into reality.
When we set out to understand the barriers facing innovators turning their ideas into real-world successes, we hadn’t anticipated that the data would suggest so strongly an issue at the pivot point from scale-up to big business. Compared to smaller counterparts, medium-sized businesses appear to be having a tougher time.
Many would assume that the journey from start-up to scale-up is the toughest growth stage for innovative businesses, but the data reveals a neglected middle too.
Innovators don’t know where to access funding
Less than half (44%) of innovators know where to look to secure funding to turn their innovative idea into a reality. The data reveals that as a business grows, from a sole trader to a micro business than to small business, awareness among innovators about where to access funding improves at each stage, but takes a U-turn for medium-sized businesses.
Funders aren’t taking chances on untested ideas
The UK government wants to be a technological powerhouse in the digital and net-zero age. That means unleashing public and private capital to make those technologies a reality. We will need to take chances on innovations and technologies that are untested and unproven. It also means taking chances of untested and unproven innovators. But that higher-risk, higher-reward theory, isn’t translating for medium-sized innovation businesses.
More than a third (34%) of innovators in medium-sized businesses have been rejected when trying to secure funding for innovation because it was untested – more than innovators in any other business size.
This is permeating into the bedrock of the innovation ecosystem. 50% of innovators in SMEs are worried that if they tried to access funding, they would be rejected because their idea is untested. 49% of innovators in SMEs worry that if they did try to access funding, they or their idea would be considered too risky to invest in and 57% of innovators in SMEs worry that they would be rejected when accessing funding because of a lack of track record.
Business advice not reaching those who need it
It’s not surprising given the barriers to funding and a lack of risk-appetite among funders that 65% of innovators in medium-sized businesses say they need business mentoring to action their innovation or start-up idea.
A deeper dive into the data also reveals some preconceptions that could be preventing growing innovative businesses from pursuing innovation funding from government – and holding back the development of innovation focused on social good.
54% of innovators in SMEs say that they want to innovate for social good, but believe that there is no funding available to them, with the number climbing to 61% of innovators in large businesses.
Just 31% of innovators in medium-sized businesses think that the government is focused on fixing real-world problems, while 66% worry that they would have to compromise their values in order to secure government innovation funding.
Businesses on a journey of growth – like scale-ups – feel disincentivised from seeking government innovation funding. When it is these businesses who are struggling to find funding in general, most likely to face rejection because their ideas are unknown quantities and need business support more than any other group, solutions are needed to unblock their path to success.
Diversifying and incentivising innovation funding
The traditional model of government-led R&D grant funding in the UK is not delivering what it should. There are promising glimmers on the horizon – like the founding of ARIA. It has been tasked with backing innovation with a higher risk of failure, in the pursuit of higher rewards with a fail-fast, move-on policy.
We should also look at diversifying innovation funding to make more of it available for the start-ups, scale-ups and disruptors with transformative solutions to the challenges we face. The government has cited prizes as a best practice approach in its ARIA policy paper.
Through a decade of honing challenge prizes, we’ve demonstrated their ability to bridge the barriers small- and medium-sized businesses are facing and incentivise the cutting-edge innovations that funders want to unlock. By levelling the playing field for unknown and untested innovators through an open competition that prioritises the quality of ideas over name recognition, and coupling it with seed funding and non-financial business support, challenge prizes unearth multiple innovative businesses with solutions to the great societal challenges we face. They are a proven model for public and private investors.
Meanwhile, mechanisms like the Enterprise Investment Scheme could be reviewed and made even more appealing to drive more VC and private sector funding into innovation businesses. Currently, tax relief on EIS investments means that for every £100 an investor puts in, they can claim £30 of tax relief – effectively 30% off the cost of their investment thanks to government support. An even more generous approach specifically for innovation businesses could be used to direct money to the scale-ups (and the technologies they are delivering) that need it most.
Knock down barriers for our future tech giants
When we face so many challenges that need innovative solutions, and a cost-of-living crisis compounded by a productivity crisis, it calls for new approaches to the way we target innovation funding and business support.
The sustained focus of recent years on supporting small businesses needs to continue, but we must make sure as a nation that we don’t take our eye off the ball once those businesses start their journey of growth. Tackling the barriers medium-sized businesses are facing will unlock a huge part of the economy that is currently being held back.
Between 18th and 25th May 2022, Opinium surveyed 400 workers with a current or previous (last 10 years) responsibility for innovation in their job role. Data based on samples of under 50 responses have been described as ‘indicative’ only.
Micro businesses are defined as having 1-9 employees; small businesses are defined as having 10-49 employees; medium-sized businesses are defined as having 50-249 employees; large businesses are defined as having more than 250 employees.
376 respondents indicated they currently have a responsibility for innovation (of which 182 have some responsibility as part of a wider group, 194 have a large responsibility for innovation).
The data used has been checked and verified by Opinium before distribution to press.