Innovative and high-tech SMEs and the economy by Ilian Iliev, CEO, EcoMachines Incubator on 01-Jul-2014

Why have innovative SMEs and high-tech startups not yet reached their full potential? EcoMachines Incubator's Ilian Iliev reflects on their importance to the economy.

It is widely understood that small and medium sized enterprises (SMEs) are a key driver of economic and employment growth for the UK economy. Smaller companies are providing a myriad services and products to larger enterprises, the government and the wider economy. In recognition of this role successive governments have implemented a raft of support measures, including tax breaks for investment in SMEs (such as Venture Capital Trusts, EIS and SEIS), regional growth funds and increased procurement from SMEs through the SBIR initiative.

But are all startups 'born equal' or have the same potential impact for the economy? The growth in numbers of self-employed or micro-enterprises in the service economy is commendable and shows the British workforce's entrepreneurial response to the economic uncertainties in the post-2007 era. However, most economists recognise that the highest potential for revenue and employment growth is in innovation or high-tech focused startups, which have the potential to disrupt a market's current way of doing business, or to grow into a major exporter. The high-tech startups of today are the economy bolstering enterprises of tomorrow. It is here that we see a paradox. The UK has a world-leading scientific research base (in both Universities and corporate laboratories) and a large number of high-tech startups in advanced engineering, high-value manufacturing, robotics, renewable energy, life sciences and other science-intensive areas. So the UK has an environment highly beneficial to startups, yet few are making it to become the next generation of ARM, Dyson, Cambridge Silicon Radio or Autonomy. In the newer space of digital technology too we are seeing a truly transformational boom in startup and early-stage investment activity. But here too promising high-growth digital technology startups find limits in their growth in the UK – and often take an early exit opportunity.

High-tech economy 'model'

In the UK we have a well-developed venture capital industry, yet not enough at the early-stages of startup development. We also have a strong tradition of family ownership values, but with only a handful of family-owned multinational businesses that survived the restructuring of the economy since the 1980s. London is also one of the world's financial centers, yet unlike with New York or Frankfurt or Shanghai, most of the activities are focused outwards. The result in the last two decades has been that, despite a tremendous potential for growth, with UK science at the forefront of several waves of new technologies, not enough high-tech startups and innovative SMEs found the right environment to become a high-growth international enterprise – whether via the VC and M&A route, or as family-owned businesses.

So, should budding high-tech entrepreneurs despair, throw in the towel and turn to property development, The City, consultancy, or go back into academia? Not at all. I would argue that in recent years we have seen signs of re-alignment in the UK economy that make this the best time in a decade to launch a high-tech startup. For instance, we see the overlap between the UK's robotics startups and the UK's building industry as a particularly promising area for growth and exports.

Increasing role of engineering and high-value manufacturing

The UK's industrial sector – lead by life sciences, transportation and energy – is growing rapidly. An expanding value chain provides UK companies with growing opportunities to 'piggyback' on a UK corporate and grow into major emerging economies. This is combined with the 'smartening up' of the UK's hardware industries through Internet of Things connectivity, providing hardware startups with a world-leading software capability cluster in the form of London's TechCity.

UK leadership in waste industry, renewables, energy systems design and, yes, property, provides advanced engineering startups with plentiful domestic locations for piloting and improving their capabilities. For instance, we see the overlap between the UK's robotics startups and the UK's building industry as a particularly promising area for growth and exports. The combination of high number of new buildings, export of building services by engineering and architecture practices, and the retrofitting of a large number of Victorian buildings provides significant market opportunities for innovations that can make aspects of building quicker, safer and cheaper. The impact these companies can have on the economy is significant, providing an opportunity to grow exports and lead to increased employment and economic growth.

The UK has the ideal environment for startups and SME growth - it just needs to get better at fostering them. There is a highly viable domestic market here in the UK, and high levels of innovation exist. We have large number of academics and scientists, combined with large numbers of serial entrepreneurs and finance available. These critical factors are all available not only in software, but also in robotics, life sciences, transportation and energy and material science. In such an economically interdependent world, innovative SMEs and high-tech startups are bound to be a key part of the UK's repositioning to compete with, and benefit from, high-growth emerging economies and its traditional peers in the industrialised world.

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