Defining the UK’s startups and their potential

With the frequently quoted statistic that 90% of all new startups end up failing, it can be hard when looking at Britain’s youngest companies to separate the wheat from the chaff, and discern which are going to make big contributions to the UK’s economy. Other issues have complicated the matter further, such as the rise of the gig economy. The self-employed nature of this work has led to workers incorporating their own personal companies to receive payments from companies such as Uber or Deliveroo. This massively inflates the stats for the UK’s startups in certain parts of the country.

What is the best way to analyse the UK’s startup sector, then? First, it is probably best to define what makes a startup a startup. The obvious trigger is that the company has to be young, or newly incorporated. It is also important that the company is independent. A subsidiary set up by Coca-Cola, for example, shouldn’t really be classified as a startup in the same way as, say, a smoothie company founded by university students. 

This leads into another assumption – for the vast majority of instances, startups will operate privately for a considerable amount of time (usually, >5 years). IPOs require a fair amount of resources and younger companies usually wait till they are more established to do so (though there have been exceptions).

However, there are plenty of new SMEs around who are independent and privately held. Say, for example, a new PR or architecture firm “starts up” in 2015, but just competes for clients alongside the existing companies. It could do very well and make lots of money. But is it really a startup? 

Eric Ries, the entrepreneur and blogger who wrote “The Lean Startup”, stated that “a startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.” 

You might initially baulk at this – does a startup have to operate under conditions of extreme uncertainty? Yet, if you think about the world’s most famous startups – Facebook, Google, and Amazon, none operated on an existing, well-established business model. They developed or utilised new tech to either create new markets or disrupt old ones. 

The same is true of startups nowadays, too. When Deliveroo started up, CEO Will Shu famously made their first deliveries. Challenger Banks such as Revolut, Monzo and Starling are betting that digital-only banks can work. Energy startup Bulb has to persuade customers to complete a fairly arduous admin process to switch energy providers. 

The same level of uncertainty doesn’t exist for new SMEs operating an established business model. Furthermore, they aren’t providing new products or services. 

These criteria raise other questions. Is Just Eat still a startup after IPOing in 2014? What about Skyscanner, which was acquired in 2016? Once the company has  completed a successful exit, the chances are that they are no longer operating under conditions of extreme uncertainty. Under Ries’ definition, this means they are no longer startups. 

However, most startups fail before completing an exit. As such, we need a way to measure their potential. One good way to look at this is equity funding – the procedure for securing venture capital and angel funding is full of comprehensive due diligence programmes. Whilst investors sometimes control very large funds, they will not part with funding lightly. A startup which secures this funding therefore has something about it, which puts it head and shoulders above the rest of the pack. (The same is true with accelerator programmes, which are highly competitive).

As our recent research shows, startups which secure equity funding have a much lower death rate. Indeed, after 6 years, just 20% of equity-backed British startups have failed. Remarkably, a similar proportion have gone onto to complete a successful exit. These figures are markedly different from the 90% death rate quoted in the media. Only time will tell what happens to the the rest of the UK’s startups in this cohort – both the failure and exit rate could go up. With that being said, we still believe equity funding is a useful tool when judging the quality of British startups.