It’s a question we’ve been pondering due to the fact that so many small innovative companies in the UK struggle to gain acceptance of their products.
In fact, it’s a traditional problem – demonstrated by either the high number of UK patents which are exploited commercially overseas, or the number of small UK companies that are bought by larger overseas acquirers (often the UK founders become tired of the effort required to grow in the UK).
With our venture capital company we have seen numerous instances of good solid British companies whose progress is stifled in the UK. Some of this is caused by cultural issues and some of this is structural.
Let’s take cultural first. Us Brits can be a pessimistic bunch, resistant to change and unwilling to take a risk on a new product supplied by a small company (in case it does not pay off).
This attitude is encapsulated by government procurement rules, which often state that a company must have a minimum turnover of £5m before it can tender for government work. Rules such as this reduce the number of businesses that can possibly supply the government. It’s not as if large companies are risk free. The government managed to waste over £9bn on NPfIT, the IT system for the National Health Service, with a few multi-national organisations being the prime beneficiaries.
But it’s not just the government with this attitude. The old analogy that purchasers know that if they ‘Buy IBM’ they will be beyond criticism, even if IBM does a poor job and costs lots more money, still seems to apply in the private sector.
In the US and the Middle East these cultural issues do not seem to apply to the same extent. We have a portfolio company which, after a number of years of struggling to obtain significant orders within the UK due to an unwillingness of organisations to move away from the ‘way we have always done it', is switching its sales and marketing effort to the Middle East, where it is having significant success. The people who are buying its product in the Middle East are often UK nationals working for Arabian businesses. However they are more adventurous people, the kind that leave their homes to work thousands of miles away, and are excited by a challenge.
Now let’s look at structural. The UK market, for many products, is dominated by a few large businesses. For example, it‘s a brave person that wants to launch a new product to sell to consumers, through retailers, in the UK. The 5 largest retailers have all the power in such a relationship. They control 50% of all retail spending in the UK and if you have a successful product will either copy it (own brand) or negotiate the price down to such a level that you cannot make a good profit.
However in the US there are many more medium sized businesses, which might be strong in a few states, but not necessarily nationally. Many of these businesses feel a strong bond with their local communities, are still owner-managed, and are open to innovation. MVI, a Birmingham company in which we invested, sold production improvement software to manufacturing businesses. Its MD became frustrated with the attitude of UK managing directors, who hardly ever owned the businesses they ran. So he switched his sales resource to the USA, which powered the company’s subsequent growth. Owner managed businesses in the USA take quick decisions, like to innovate and enjoy purchasing from other entrepreneurs.
We therefore encourage many of the companies in our portfolio to export. It is not easy, there are challenges, but often it’s the only way for a small innovative UK company to grow rapidly.
So, in answer to the question, ‘is the UK open to innovation?’ I would say there is a lot of work to do in terms of both influencing traditional attitudes and raising awareness about the possibilities a different approach might bring. I strongly believe the examples outlined above show how, by stepping out of cultural and structural confines, we can be more open to innovation than we currently are.
Tony Stott
