Are you a start-up founder or aspiring entrepreneur looking to innovate a product or service? What are the ecological indicators you should consider when deciding where to start your business? How can you measure the likelihood of survival of your start-up?
As new competitors in the business world, start-up founders and aspiring entrepreneurs naturally face a high degree of risk and uncertainty regarding the survival of their businesses. A start-up is an entrepreneurial venture that is in the first stage of its operations with a particular momentum behind it based on perceived demand for its product or service. At this stage of the business life cycle, the entrepreneur moves from the ideas stage to securing funding, establishing the basic structure of the business and initiating operations or trading. Due to the novelty of these ventures (or their non-physical existence in the case of aspiring entrepreneurs), they lack a solid client base, a constant form of revenue as well as a comprehensive financial database to examine years of annual turnover and to review changes in financial performance. This means that in comparison to small, medium and large sized businesses they lack the resources to sufficiently project their long-term business survival.
The UK ranks third in the world when it comes to new company creation according to the OECD (Organisation for Economic Cooperation and Development). However, it ranks a modest 13th in the league table in regard to nurturing scaleups which may explain the high failure rate of UK start-ups. On average, as high as 91% of businesses are still operating after a year of trading. Yet, after five years of trading this figure reduces to 40%. This suggests that understanding the indicators which determine your start-up’s survival is particularly crucial in the UK context.
Ecological Indicators for the Business Health of your Start-Up
Access to Qualified Staff and Students/Recent Graduates
Starting a business in a region with a high presence of qualified staff means that it is easier to find talented recruits to more effectively support your business. Talented recruits are fundamental for productivity and can attract further talent, which helps to promote stability and your firm’s reputation cost-effectively. As start-ups tend to be labour intensive, regions with a high concentration of students and recent graduates are particularly crucial seeing as this group is likely to comprise highly skilled people who lack experience. Students and recent graduates are generally more willing to take on positions of responsibility with little expectation of remuneration – think internships, work shadowing and placements – which in turn reduces the labour costs for your business. In addition, regions with a high concentration of students and recent graduates are likely to be near universities which have increasingly become affiliated with innovation centres that have been designed to provide business support to start-ups. This is particularly the case for the technology and science sector. For instance, Oxford’s burgeoning technology and creative cluster is often attributed to its well-educated talent base, with 72, 500 of the working age population maintaining an NVQ Level 4 (degree level) and above (2015).
Overhead Costs
Overhead costs are the indirect costs or fixed non-labour expenses of operating a business (the costs not directly related to the manufacture of a product or delivery of a service) ranging from rent to administrative and marketing costs. Start-ups are known for having little revenue in the initial stages of the business meaning that a regional base outside London may be preferred. London was ranked the highest living/working cost city in the world by Upmarket property agent Savills with a living/work cost per person per year of $112,800 (£92,923). Further, according to IT company Sungard Availability Services in 2016, office price per square foot in London was £405.3. This is more than double the office price per square foot of other major cities including Leeds, Edinburgh as well as southern and thriving cities such as Cambridge, Oxford and Brighton. Good transportation across the UK also means that business owners looking to establish their businesses outside London can still access consumers from the capital and propose more affordable rates. However, the pros of operating a business in a city such as London include the benefits from the halo effect of being in the vicinity of some of the world’s top companies seeing as many successful start-ups including Asos, Zoopla and Just Eat have their headquarters here, as well as the plethora of networking opportunities. This also means that establishing a good reputation is easier for a business owner who bases their operations in London.
High Concentration of Business Centres, Co-working Spaces and Innovation Centres
An area with a High Concentration of Business Centres, Co-working Spaces and Innovation Centres can provide extensive business support to start-ups and should be a consideration for any aspiring entrepreneur when they are deciding where they should base their operations. These spaces can provide various support services to new founders including low priced/discounted tenancy rates; easy and affordable access to networking opportunities to enable a new firm to access a larger market and expand its clientele; as well as seminars/workshops providing training on business development areas and industry specific sectors. They can also provide law and accountancy surgeries to tenants at a competitive rate. For instance, Impact Hub Westminster (London) members benefit from a 45min free consultation with Pure Business Law’s Legal Director, Eve Jarrett, every month at the Business Law Clinic. Start-ups are very likely to require legal advice in contract drafting, intellectual property protection and advice on the legal structure which best fits their entity in the initial stages of their business cycle. However, lack of capital discourages many new business owners from accessing the pertinent services they need to effectively establish their business. Operating within a business centre which provides fixed fee legal services or legal services at a discounted rate may prove to be a cost-effective solution in the long term. It would certainly reduce the legal costs many start-ups incur when they need to solicit legal advice for reviewing contracts which they had initially downloaded online!
Employment Rates and Average Earnings
A region’s employment rates and average earnings are a crucial indicator of your start-up’s survival as these figures illustrate the amount of disposable income of potential consumers in your market. This is particularly important for start-ups hoping to become locally based businesses as this information will allow them to assess whether they want to focus their services within their local market or expand to other regions as well as whether they want to target their services to meet the specific financial needs of their local consumers. High average earnings are indicative of the quantity of consumers from the top occupational group (those in professional, managerial and associate positions) which is particularly crucial for entrepreneurs who are looking to establish start-ups in the professional services sectors including law, accountancy and consulting. For these sorts of start-ups, the best UK cities/towns to establish your business would be London, Cambridge and Edinburgh which respectively have been ranked as the highest for average salaries according to data from jobs website Adzuna.
Start-up Survival Rates
Start-up Survival Rates show the likelihood a start-up within a particular region will survive based on the percentage of new enterprises started within that region and in a particular period and that are still trading after a certain period. This is a good indication of whether a particular region has a strong business-ecosystem (in the form of reasonable overhead costs, support teams providing social media training, business workshops and networks etc) to support new business owners. Startups.co.uk, an advice platform for business owners, maintains a particularly useful ranking of the best regions in the UK for business survival rates. In this year’s ranking, Cambridge, Aberdeen and Brighton were ranked as the top three regions outside London for business survival. Taking the lead in Startups.co.uk business survival index, Cambridge has a 49% survival rate meaning that 49% of businesses founded in 2010 survived through to 2015.
Although the reasons for start-up success and failure vary according to industry and are complex and non-linear, understanding the entrepreneurial ecosystem in which your business or venture is/or will be operating in can give you a good indication as to whether a particular region is facilitative to your industry and whether it will provide strong business support to maximise the likelihood for your business's survival!
Amandla Uzoka-Jarrett is Pure Business Law’s Policy and Strategy Intern. She holds a BA degree in Social Policy, Politics and Economics from the University of Birmingham and has recently graduated from the London School of Economics with a MSc in Public Policy and Administration. When she is not busy planning the firm’s strategic growth, Amandla enjoys travelling, learning about different cultures and is a gym enthusiast. Amandla will be taking up a new role in the International Strategy team at the Economic and Social Research Council (ESRC) in the New Year.