Released earlier this month, the Global Entrepreneurship Monitor UK 2017 didn’t hold many surprises. At 8.7% the UK’s total entrepreneurial activity rate remained stable, with Scotland (6.7%), Northern Ireland (6.5%) and Wales (6.3%) all behind England’s 9.1%.
Admittedly, north of the border, we’re doing better than some. But still not as well as we should expect after three decades of policy attention.
From business ownership rates (5.7% vs 6.6%) and new venture start-up activity (6.7% vs 8.7%), to business start-up intentions (7% vs 9.1%) we lag between 15% and 25% behind the UK average.
For many years we were told we had a start-up problem. While London and the South-East pulled away, there just weren’t enough new businesses being formed to replace the loss of jobs in Scotland’s industrial heartlands.
So government duly focused resources on encouraging new venture formations and self-employment.
As evidence began to point to slow growth among Scottish firms, the diagnosis was recast as a scale-up problem. Something which was variously attributed to lack of aspiration, innovation or access to finance and skills.
In the past 18 months, Skyscanner’s sale to Chinese travel giant Ctrip and FanDuel’s private equity-backed relocation to New York – and now sale to Irish rival Paddy Power Betfair – have fuelled speculation our real problem is a sell-out one.
In other words, the tendency for Scottish growth and growth-potential companies – particularly in tech – to be acquired by companies headquartered outside of Scotland, and often outside the UK.
Leading to the progressive loss of HQ functions like strategy, research & development and marketing, as well as technical and managerial talent. In some cases resulting in the closure of the Scottish element entirely.
The argument is that the growth potential of these companies is lost, with any local economic development agency support they’ve received going on to benefit economies other than Scotland’s.
But there are two problems with focusing policy on this perceived challenge. First, prohibiting such acquisitions seem as politically unlikely and difficult to enforce as King Cnut’s attempts to hold back the tide – Brexit or no Brexit. Second, and more saliently, there’s no need.
Arguing the negative impact of company acquisitions doesn’t just reinvoke the 1970s spectre of regional economies overly reliant on branch plants, operated on a grace and favour basis by remote owners. It fails to recognise M&A is a necessary part of the entrepreneurial process.
Being acquired is a logical aspiration for most growth companies. It provides access to investment, markets, skills and expertise in the long term.
It’s much more supportive and sustainable than the quick turnaround economics of venture capital’s ‘buy-build-sell’ model.
It is also less costly than the IPO or market listing route, which can leave businesses open to the vagaries and short-termism of the market and the possibility of hostile takeovers.
Acquisitions are by far the most common way for investors, angel groups and venture capitalists to generate returns. Which in turn increases their resources, time and energy to make new investments. Meanwhile they offer founders an exit, which gives them an opportunity to start new ventures, or mentor and invest in others. All of which adds to the pool of skills, knowledge and talent available in the regional economy.
M&A isn’t the problem in this picture. It is an integral and highly valuable part of the entrepreneurial process, and the only viable basis for economic development in a globalising world.
For the acquiring company, it offers an attractive and strategic alternative to organic growth. While also developing the robust and positive feedback loops entrepreneurial ecosystems rely on.
It is time to stop looking for the next problem. Let’s instead focus on policies which support Scotland’s growth companies to take advantage of what we already know is an answer.
Professor Richard T Harrison is Chair in Entrepreneurship and Innovation at University of Edinburgh Business School.