Fail fast, learn young? Tech business failure in the UK

George Windsor, December 6, 2017 6 min read

This article was originally posted on the Tech City UK website.

We have been exploring the failure of high growth startups across the UK. Companies in London tend to fail fast – over 49% of all high growth startup failures in the UK happen in the capital, and firms with less external investment fail quicker than those who’ve raised.

Failure is a part of life – as individuals we try our hardest to minimise how often, and how hard we fail. Hopefully, most of us learn from our failures – it’s human nature. To take an everyday example, as a child most of us who have learned to ride a bike, or rollerskate have taken a tumble. So next time round we wear pads, revert back to stabilisers, or just avoid that tree. Failure hurts, but we learn from it, and move forward.

But, when it comes to businesses – despite a burgeoning rhetoric on failing fast, bouncing back, learning from mistakes, and starting again stronger – very few do it well.

Here we take a leap into the chasm of failure – starting with the data. Why? We want to help UK tech businesses grow – and we find that one of the best ways to do that is to learn from each other.

What is failure?

Many people talk about failure, but it can mean very different things depending on who, or where you are.

For the purposes of this post, we define failure as the death of a firm. We look into firm deaths since 2012 across the UK, using data from Beauhurst – a data platform featuring rich information on high-growth companies.

We use the Office for National Statistics’ (ONS) definition of firm death: a business that has ceased to trade – identified through de-registration of VAT and Pay As You Earn (PAYE) status. They find that the number of UK business deaths increased from 283,000 to 328,000 between 2015 and 2016, a death rate of 11.6% compared with a rate of 10.5% in 2015. But these topline statistics don’t tell us much on their own – to learn from failure we need a deeper understanding.

Failure in the UK

We’ve been delving into numbers behind failure in the UK tech sector to uncover regional hotspots and characteristics of previously high-growth organisations that have failed.

The fail fast mantra certainly holds true in London, which is crowned the overwhelming hotspot of startup failure. The capital is home to a disproportionate 49% of all high-growth startup failures, but London is home to only 13% of the UK population. There are over 38 startup deaths per million people within the boundaries of the M25. The only other region to have disproportionately high failure is the North of East of England, where 13 companies fail for every 1 million residents.

At the other end of the spectrum, businesses in the East Midlands are least likely to fail relative to the population size. In fact, there is a whole cluster of regions with very small rates of failure amongst high-growth tech firms. The Midlands, Yorkshire & Humberside and Wales all boast less than 4 high-growth startup failures per million people.

Alternatively, company failure rates can be analysed relative to the total number of high-growth tech organisations in a region. Here we see a far different picture. In the North East around 23% of high-growth companies fail – a standout region across the UK.

One of the most common barriers to success cited by founders is access to finance – and would you believe it, failed firms are most likely to have raised very little or no finance. A staggering 82% of companies in this sample raised less than £1 million. Many of them had far less injected. If you compare this to the entire UK high growth tech business market – the mean average investment size is well over £10million.

Failure tends to come sooner rather than later. A large number of companies fail before or in their third year of existence, whilst only a few companies end up in a spectacular fall from grace after existing six years of more.

The above analysis only captures UK “high growth” digital tech firms featured on the Beauhurst platform.

An investor’s perspective….

Looking at the stats is all well and good, but can never be a substitute for experiencing life at the coalface. Here we asked Matthew Mead what is the main reason you have seen for business failure?

Mercia is principally a Seed and Series A investor. Failure at these stages can be for a variety of reasons – at Seed stage it can be technology development delays or a lack of any customer commitment. Post Series A failure is more often caused by a business over extending its cost base ahead of consistent predictable revenue momentum. Series A capital is often used to fund the gap between cost base and revenue growth – however slippage in revenues and continued spend on costs can lead to cashflow difficulties.

Matthew is Chief Investment Officer at Mercia Technologies.

What can businesses do to mitigate against failure?

Though far from being comprehensive, here are some of the things you can do as a founder to tip the balance in your favour to mitigate against failure…

1) Upskill

By developing a range of skills, founders can best position themselves to deal with the challenges that will inevitably face them in their business journey.

Emerging digital technologies have democratised access to the types of platform that have made it cheaper and easier for any aspiring entrepreneur to start a tech business. But similar access to education and training opportunities has not kept pace – unhelpfully limiting some people’s opportunities.

Tech City UK’s Digital Business Academy (DBA) offers 56 expert courses for anyone, and for free, ranging from developing a digital product, to running social media campaigns, to mastering finance for your business. And it works – almost 20% of graduates report that they are starting digital companies after finishing at least one skill with the DBA.

The quality of online courses is fundamental, and essential to meet the needs of a diverse range of users. Courses on the Digital Business Academy are co-constructed by educators and entrepreneurs, meaning that the content is high quality, and in tune with the needs of the sector.

2) Surround yourself with successful failures

Or… learn from those who’ve been there, and done it.

Research, old and new, has found that a strong network enables founders and entrepreneurs to better navigate the new business landscape than going it alone. Fundamentally, peer support increases the likelihood of survival and growth of newly founded businesses. In part, it does this by informing access to resources – like talent and investment, in turn reducing transaction costs and time.

Cohort learning is the driving ethos behind our Upscale, Future Fifty and Founders’ Network programmes at Tech City UK. Each programme caters to a different stage of business, and works slightly differently. Upscale is a 6-month programme of workshops, mentoring sessions and peer-to-peer learning that supports tech businesses to scale. While Future Fifty connects companies to their peers to facilitate learning and build a powerful network. 50% of companies were created by a serial founder – seasoned in the types of challenges that might threaten to upend a business’s prospects. It’s the only programme for late-stage digital tech companies in the UK, and boasts impressive alumni. In the past 5 years Future Fifty companies have raised $5.3BN in investment, employed 27,000 people, and have seen 27 exits.

3) Experiment, pilot, pivot

Stay responsive – sometimes your idea – as good as it seems to you, may not make a viable business. However, that’s not to say that you’re not on the cusp of something great. Tech North’s Founders’ Network – a peer-to-peer network for early to mid-stage Northern tech founders – recently held an event ‘How to know whether you should continue with an idea or not’ – convening a rich discussion around the positives and pitfalls of pursuing a business idea.

Learning from your own mistakes in a de-risked environment means that impact on the business is minimal, but ability to learn is maximised. This mentality has formed the basis of a number of successful interventions in public policy – particularly when it comes to regulation. Take the FCA’s Regulatory Sandbox, for instance, which allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real clients whilst offering consumer protection.

How can founders, or CEOs learn from failure?

Again, Matthew Mead gives his expert opinion:

When our investments fail we do stop to consider the sequence of events, what went wrong and with the benefit of hindsight what would we do differently. I am sure founders do the same. All early-stage businesses are built on a set of assumptions and speculation about how they will grow – go back and look at these and see what did and didn’t come true. It depends on the business model but plan carefully, constantly manage cash and look to bring experience onto your Board.

Data & research, Tech Nation Talks, London