Running a business operating at the sharp edge of the innovation pipeline gives us a lot of insight into our customers' challenges and strengths, but how does our reality "on the ground" compare to Innovate UK's State of Innovation 2024 report?
Embedism supports micro and small businesses and intuitively you would think that these businesses face a different set of challenges to larger companies. Let's dig in and take look at the data!
Group investment decision or policy
No surprises here, small and micro businesses don't often report this as a barrier, likely because there is a small number of decision makers and the company structure is comparatively flat.
Our experience of this supports the results in the report. I've lost count of the times a client has made a unilateral decision, live, on a call, and changed the course of a project based on our engineer's feedback or advice. More often than not, this ability for small businesses to make quick decisions has proved hugely beneficial during the fast-paced innovation and discovery stages at the start of a project.
A win for small businesses!
Technology risk
Big businesses reports technology risk as more of a barrier to innovation than small businesses.
The reasons for this could be two-fold:
Larger businesses are less inclined to take risks on new technologies beyond dedicated R&D budgets. This is also echoes the investment decision results above.
Small companies and start-ups may be founded on the basis of a new technology. Sometimes the inventor of that technology might be part of the company - giving high confidence.
Technology risk in consumer product development takes a different form though. Products often utilise existing technologies but in a new combination, or they push an existing technology beyond what it was originally designed for (something we are often asked to do with BLE and other RF technologies).
For small businesses to innovate using new technology, for example low-power IoT radio technologies, there needs to be a larger business behind the tech in order to fund the core development. Big business is well suited to this as the capital required is huge. Small businesses can then utilise these technologies to create innovative new products much quicker than their larger counterparts.
Lack of Skills or qualified personal
This is one of the more interesting results. Micro businesses (5-9 employees) underreport compared to small businesses (10-49 employees) by around 10%, quite a difference.
Micro businesses make up the majority of our clients, and consistently all of the employees are highly capable individuals with the ability to support the business across multiple disciplines. Often these employees have an equity stake in the business, and are also a co-founder or very early, key employee.
As a business grows, hiring becomes necessary and, having been through this myself, it can be difficult to find the time/energy/resources to find staff who will fit in to what is usually a very tight-knit team. Making the jump from micro to small can be terrifying, so I am not surprised that small businesses report this as far more challenging that other business sizes.
The staff type that is most reported as being difficult to hire is technicians. From our experience with clients and their challenges, this is particularly acute for small businesses although usually we see highly qualified engineers and designers carrying out technician work - and then discovering that "technician" is not a subset of engineer!
From a regional perspective, this difficulty in finding the right staff is most acutely felt in Scotland and the South West and to a lesser extent the East Midlands and Northern Ireland.
Regulations or legislation
In much the same vein as finding the right skills for a business, complying with (or even being concerned by) regulations or legislation becomes more of a concern as you grow.
Would a small business hiring staff be more concerned about employment law than a micro business made up of a founding team? Of course! Should the micro business be more concerned? Probably, but that isn't the reality that we see on the ground.
Usually for a start-up micro business it is product and innovation above all else. In the product design world the regulatory and conformity requirements of products is often poorly understood by the founders. This has some upsides - rapid innovation, move fast and break things etc, but some potentially costly downsides - non-compliant devices that take months to test or certify, killing time-to-market.
Luckily there are plenty of great product design consultancies out there that use their retained knowledge to avoid common pitfalls.
Legislation presents an opportunity for entrepreneurs who are willing to move fast, especially in the environmental sector. Innovations that assist individuals or businesses to comply with new legislation without having to fully understand it present fantastic problems that are ripe to solve!
Lack of finance
Access to finance can be essential for many small businesses. For our customers the second largest need for finance usually comes around the time of manufacture, often to purchase components and secure stock. This can be a huge issue, but we have seen that client's investors usually step up and provide some much needed cash as usually the demand for a product has been validated by this point (see below), we rarely see our clients accessing other types of finance.
Of course, there is the initial phase of product development which can be extremely costly, especially if a lot of R&D is involved. My read of the report's data is that larger companies may have the resources internally to undertake speculative innovation projects, whereas smaller businesses will have to look to external finance sources for this.
The other sources of finance available beyond equity based and bank loans are of course grants and tax credits. In my view, grant applications favour larger organisations (such as universities) and businesses due to the huge amount of time required to complete grant applications. More on this in the "government support section".
R&D tax credits are a great way for relieving the financial pressure of innovation, almost all of our clients take advantage of this scheme, as does Embedism for internal projects.
Lack of government support
Direct government support can be very useful in de-risking innovation activities. Often this support takes the form of grants.
Embedism has taken part in numerous grant applications as both a subcontractor and co-applicant and the paperwork requirement is, rightly, quite high. The area where larger organisations have the advantage is in their deep knowledge of the process and awareness of what the grant assessors are "looking for". This leads to small businesses needing the assistance of a grant writer which, ultimately, reduces the amount of funds available to complete a project.
Less direct government support, such as apprenticeship schemes (essential for our business),
Cost of doing business
Yorkshire and the Humber is a clear outlier in this category. This is likely due to the type of businesses in this region. With a strong industrial base, the energy cost crisis will be massively impacting businesses operating in this area.
Most of our clients don't focus on heavy industrial activities so there's no particular insight we have here. However across the board the cost of doing business has gone up for all of our clients, particularly those who have high space requirements for the products they are developing.
Summary
Broadly the experiences of our clients align with the report's findings. There is a lot that can be done to remove some of the barriers to innovation in the small business sector, mostly by increasing government incentives and improving the investment landscape for physical products. More ruminations on that to follow in a separate article.
As always, if you want to discuss a new innovation that you are working on, reach out to us on hello@embedism.com