Multiple barriers to growth turning Britain’s innovative medium-sized enterprises into a neglected middle

New research among UK innovators conducted by Challenge Works (the new name for Nesta Challenges) reveals that the journey of scaling to become large business is being made harder for medium-size businesses (of 50-249 employees) thanks to multiple barriers. These include access to funding and inherent bias in favour of established brand names.

At a time when significant public and private support is targeted at small businesses to kick-start a post-covid recovery, the research suggests that the way innovation funding is directed in the UK could be stalling the journeys of Britain’s most promising innovators. As much focus is needed on helping innovative medium-sized scaling businesses make the leap to become large companies, as is needed to support small-businesses to begin the journey of growth.

A worrying majority of almost two-thirds (64%) of innovators in medium-sized businesses say funders, such as government funders, investors and philanthropic grant makers, favour investing in known companies^[1] .

When it comes to government innovation funding in particular, three-quarters of innovators (75%) in medium-sized businesses say that the government favours well-known companies^[2]. Meanwhile, 68% of innovators in medium-sized businesses agree that public sector organisations are reluctant to work with and fund innovators in the private sector, compared to 53% of innovators in smaller businesses.

As productivity in the UK continues its more than decade-long slump behind comparable OECD countries, held back by weak patenting output^[3], the data demonstrates that risk aversion among innovation funders is holding back a squeezed middle who want to make a difference.

Analysing the results of the findings, Managing Director of Challenge Works, Tris Dyson, explained: “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 this data reveals something else – a neglected middle.

“When we face so many challenges that need innovation 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, sustaining the great focus on small business growth, but not taking our eye of the ball once those businesses start their journey of scaling.”

Entrepreneur, investor and former Dragon’s Den dragon, Piers Linney said: “The UK is missing out on innovative medium-sized business achieving escape velocity to become big success stories. If the UK wants to shift the dial on poor productivity, it needs to up its innovation game quickly. We cannot simply rely on funding a few well-known companies. We are way behind the US and European competitors when it comes to patent registrations. We need to transform the way we support our innovators and democratise access to capital.”

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 then to small business, awareness among innovators about where to access funding peaks at 52%, then goes into decline among innovators in medium sized businesses (48%).

FUNDERS AREN’T TAKING CHANCES ON UNTESTED IDEAS

When asked whether they have been rejected when trying to secure funding for an innovation because it was untested, the data reveals a similar trend impacting innovators in medium sized businesses (34%) more than any other.

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% innovators in SMEs worry that they would be rejected when accessing funding because of a lack of track record.

BUSINESS ADVICE NOT REACHING WHO NEEDS IT

65% of innovators in medium-sized businesses say they need business mentoring to action their innovation or start-up idea. This compares to an indicative 38% of innovator sole traders, 45% of innovators in micro businesses and 57% of innovators in small businesses. For innovators in large businesses, the number drop back down to 52%.

Innovators in Small and Medium businesses are confident in their capabilities to deliver on their innovation – 70% say they have the skills and know-how to action their innovation and start-up idea. This suggests the barrier to these businesses becoming large-scale innovation success stories lies with funding and a lack of relevant business support.

ECONOMY AND SOCIETY MISSING OUT ON INNOVATION BENEFITS

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.

While 42% of innovators in Micro and Small Businesses agree that the government is focused on fixing real-world problems, for innovators in medium sized businesses the number drops to just 31%. Among innovators in large businesses, that number drops further still to 29%.

Half of innovators (50%) in the UK worry that they would have to compromise their values in order to secure government innovation funding. The number is particularly high among innovators in medium sized businesses at 66% suggesting that businesses on a journey of growth – like scale ups – feel disincentivised from seeking government innovation funding.

A DECADE OF REWARDING INNOVATION THROUGH CHALLENGE PRIZES

The new research coincides with Nesta Challenges becoming Challenge Works to mark its 10^th anniversary. Founded in 2012 by Nesta and the UK Government as a small-scale experiment to re-establish British expertise in the design and delivery of challenge prizes, over the course of a decade it has grown to become a world-leader in challenge prizes, and now a fully-fledged self-sustaining social enterprise.

Since 2012, Challenge Works has run more than 80 prizes, to unearth unknown and untested innovators in the fields of global health, climate change and pollution, consumer services and frontier technologies. To date, it has distributed £84 million in funding and engaged with 12,000 innovators.

Reflecting on the role challenge prizes can play in levelling the playing field for small-businesses to scale and become medium-sized businesses with the capabilities to make the leap to large success, Tris Dyson said:

“Diversifying innovation funding, and relying less heavily on traditional R&D grants, can make a real difference to the UK’s innovation and productivity ambitions. 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.

“Challenge prizes incentivise the development of breakthrough technologies from innovative businesses to solve some of the most intractable problems of our time. 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.”