The past 30 years has seen a dramatic increase in spinout activities by UK Universities. A recent report by the Russell Group noted that in 2023 UK university spinouts raised £1.66bn in equity funding which is second only to the US in terms of total investment in spinouts and accounts for 9.54% of all equity funding raised by UK companies. And a WSJ article noted that the U.K. currently boasts nine decacorns and over 200 unicorns and soonicorns (valued over $10 billion, $1 billion and $500 million, respectively. In 2023, the combined economic impact of these fast-growth firms was an addition of £50.4 billion to the U.K. economy.
But in contract to these statistics, other data from Warwick Business School show a less rosy picture with just two per cent of surviving start-ups registered in 2020 managing to achieve a £1 million turnover after three years and only 7% of established firms over three years continuing on a growth trajectory to £3 million annual turnover or more. Of 325,811 start-ups registered in 2020, only 47% survived to 2023, and only 2% managed to achieve £1m turnover after three years – a proportion that has remained constant over the UK in the last decade. There are 400 000 more SMEs in the UK than in 2010, but the proportion of them registering any employment growth fell from 20 to 13 per cent between 2020 and 2023.
This reminds me of when I was at secondary school back in the early 1980s. The school I attended had around 200 students in the Upper Sixth form yet seemed to measure its academic output by the 10 or so that gained entry to Oxbridge. A very commendable result for a state school, but a metric that shows no regard for the other 190 leavers. Of course, in any system there will be winners and losers - a sort of natural selection process but a reliance on the few to the detriment of the majority does not feel like the most efficient strategy. A viable industrial strategy needs to support ordinary business as well as the highfliers.
There is now an increasing concern that despite the success of the startup ecosystem and the academic standing of the UK higher education sector, we risk becoming an incubator economy that stands to feed international economic growth to the detriment of our own. Back in the 1990s we used to worry about the brain drain from academia in the UK but now the problem has moved downstream to affect the economic as well as academic outputs of the university sector. It has long been argued that there is a “Valley of Death” for startup companies where they struggle to make progress and become started of critical investment funding and hence struggle to grow and often fail. Recently a lot of attention has been given over to a lack of investment being as key factor in driving UK companies to sell out to move abroad, but the situation is more complex than this and investment is not the only factor that limits company growth and success.
A 10-year global programme led by fellow R&D Society board member, Uday Phadke and Shai Vyakaranam and identified the existence of 3 distinct ‘Chasms’, where growth stalls, along the commercialisation journey and summarised in this blog:
Chasm I involves converting research ideas into validated prototype products and services. This is where the bulk of R&D investment goes, for example the investments in the UK via UKRI (and hence also Innovate UK). Maybe not surprisingly, the research data show that 90% of products and services successfully cross this Chasm.
Chasm II involves validating the product or service with customers and developing viable and scalable business models. This is the most challenging of the Chasms with only a 10% success rate , and what has probably been dismissed as the ‘valley of death’.
Chasm III involves rapid deployment with mainstream customers based on a clear distribution strategy, leading to real Scale-up. 90% of products and services successfully cross this Chasm, provided of course they have successfully navigated Chasm II.
Tackling Chasm II requires a wide range of drivers (referred to as vectors in the Triple Chasm Model) to be addressed, not just technology and funding, encompassing ‘external’ vectors which drive market take-up, ‘internal’ vectors which include technologies, IP and manufacturing, and ‘composite’ or ‘trade-off’ vectors which determine the best balance between ‘pull’ and push’.
The R&D Society along with its partner the Triple Chasm Company argues, that rather than considering a broad range of disparate factors that impact the ability to scale, focus at corporate, regional and national levels should be devoted to addressing the complexity of crossing chasm II. We need to define a framework and a set of suitable metrics that can help monitor and address this particular challenge. We also need to ensure that available funding is targeted at the companies best placed to make this transition and provide the necessary support to others that lack the ability to cross Chasm II so they can address any performance gaps alongside seeking further investment. The Triple Chasm Company is already proving support to individual companies thought the innovation journey. The R&D Society’s focus is more at the meso and macroscopic levels, looking at the effectiveness of geographic and market focused clusters as well as government focused activities such as industrial policy, skills and infrastructure.
We are currently reviewing and developing our response to the recently published government industrial strategy and, recognising the importance of Chasm II in the scale-up journey, we will be looking for evidence that the strategy will adequately address this issue. We will then focus on how we can best play our role to help turn the government’s growth agenda into a reality.
Our initial recommendations are that:
- Commercialisation Readiness Level (CRL) should be a mandatory measurement attribute for all early-stage companies looking for public sector support, compared with NASA’s Technology Readiness Levels (TRLs).
- Public sector organisations providing support and/or funding should clearly state which CRL status companies are appropriate for their programmes.
- The relevant government department(s) should have a Cluster Support function to ensure that regional and sectoral clusters have the infrastructure, facilities, resources and funding to properly support companies at CRLs 5-8. Clusters are the best groupings to provide most of the support needed by companies at these stages.
- The Cluster Support government organisation should run, or outsource to preferred suppliers, a set of ‘Reactors’ focused on crossing Chasm II, vs the current Incubators and Accelerators which focus on crossing Chasm I.
- The Cluster Support government organisation should be measured on the number and proportion of SMEs that cross Chasm II, achieving CRL 8.