Catalysts of growth: the power and potential of SMEs

Why collaboration is the key to innovation, progress and economic growth.

Britain is fuelled by small businesses — all 5.6 million of them. SMEs make up 99% of businesses in the UK and are the backbone of our economy, driving growth, innovation, productivity and the creation of jobs.

They employ 61% of the private sector workforce (16.7m jobs) and earn 53% of UK plc’s turnover (£2.4tn), across multiple sectors including construction, tech, transport, communications, agriculture, entertainment, manufacturing, hospitality and many more. And yes, we’re still a nation of shopkeepers, with half a million wholesale and retail traders.

It’s clear we need our SMEs to survive, thrive and meet their full potential. But the turbulent economy, changing consumer habits, high energy bills and the uncertainty of an approaching general election are challenges for SMEs.

However, if big businesses and government entities can collaborate with SMEs and harness their power, there are many mutual benefits. Large organisations can learn about innovation from small businesses, and it can make them more innovative. SMEs bring new ideas, fresh thinking, creativity and agility. They are also often more acutely focused on doing good, for consumers and for the planet — purpose driven towards creating a better future.

Opportunities and optimism

While we are in a challenging landscape, there are also opportunities and optimism. In late 2023, we surveyed 300 business leaders and found that their biggest priority is growth and innovation. This ranks it above staffing, managing costs and cyber-security.

Globally, 70% of corporates who invested in 2022 did so again in 2023. In the UK, although corporate investment in startups declined by 10% in 2022–23, this decrease was small compared with the US, China and India.

Simply Business (one of the UK’s largest providers of business insurance to SMEs) has seen an encouraging trend in its data: side hustles, such as food vans, floristry and crafts, continued to increase in 2022–2023 — and 40% of established businesses began as side hustles.

Building collaborations across SMEs, large businesses and the public sector has a vital role in innovation and progress, bringing opportunities to all parties and contributing to employment and the UK’s economic growth and resilience.

This could be through financial investment, strategic partnerships or procuring goods and services.

Investment by a corporation could be financial (to give an attractive ROI) or strategic — increasing sales or profits of their own business by identifying and capitalising on the synergies between the two businesses. For the SME, investment can give them credibility, industry endorsement and attention, which can be leveraged to attract both talent and customers.

In partnerships, larger organisations have a myriad of benefits, capabilities and scale to contribute, such as manufacturing capacity, sector expertise, connections, talent or customers. It could be tech infrastructure, supply chain or distribution channels, where SMEs might need their capacity, support and reach. It could be product integration and other support to accelerate product development and market penetration.

The smaller company might contribute its disruptive technology, help the bigger one towards its sustainability goals, expose it to a new customer base or bring an injection of fresh, innovative thinking and new processes.

For the small business, you could be building a relationship with a potential acquirer and laying the groundwork for an acquisition. If you can find your big brother, and add their muscle to your ideas and agility, you have a stronger chance of success.

One such example is clean energy startup Xlinks, which last year won investment including £5m from Octopus Energy Group for its first-of-its-kind, cross-border Morocco-UK Power Project. This will bring solar- and wind-powered electricity to Britain through 3,800km of sub-sea cables, connecting to the national grid in Devon. It’s also supported by the government: the Department for Energy Security and Net Zero has established a dedicated team to work with Xlinks.

Morocco’s ample supply of sun and wind will provide a consistent, flexible source of low-cost, clean power to seven million British homes, create jobs here and in Morocco and, by the end of the decade, be capable of supplying 8% of our electricity needs.

“Small businesses are agile, creative and entrepreneurial. They’re innovative and talented. They’re risk takers and employ half of the UK’s workforce. These are the people who help medium sized and large businesses hone their competitive edge and flourish. If you aren’t procuring goods and services from this powerhouse, you’re missing out on opportunities to boost your local economies and communities.”

– Liz Barclay, Small Business Commissioner

Government partnerships

The government has said it is committed to enhancing the UKs reputation as the best place in the world to start and grow a business. It has created an SME Action Plan 2022–25 to help government departments become a customer of choice for SMEs and reduce the barriers to being part of its supply chain, giving all potential suppliers the same opportunities and being transparent in its procurements.

The Procurement Act 2023, which comes into effect this year, will make it easier for SMEs to access public contracts and identify potential opportunities, with a more transparent process around tendering. It also introduces a duty for contracting authorities to consider the barriers SMEs might face in procurement and consider how they can reduce or remove these.

There are two-way benefits. As well as opportunities for small businesses to win contracts, the authority granting it gets access to new, competitive, agile and innovative suppliers. More of these partnerships can open up new opportunities and new markets.

Design for Growth

Since July 2021, Magnetic has been partnering with Innovate UK EDGE, part of the Department for Science, Innovation and Tech (DSIT), to develop and run a national design coaching initiative, Design for Growth.

We’ve supported more than 300 high-growth, innovation-driven SMEs with expert coaching, in groups and one-to-one, in areas including branding, product design and customer insight. They learn strategies and techniques that they can embed across the business and apply to specific challenges.

Many are now getting their first products on the shelves or growing their business, with more valuable products and services or by entering new markets.

One example is workplace wellbeing provider Ripple & Co in Manchester. They didn’t have any UX and UI design skills but had developed an MVP that they were eager to get to a developer. We helped them take a step back and first understand what their core users and stakeholders need.

With a clearer picture of what problem they were solving, they used design research to reframe the service, and restarted the tech development from a much stronger foundation.

Another is Known Source, a circular fashion collective of second-hand dealers. After initial success, the founders faced challenges growing the business and were getting caught up in details. Our design coaches helped them take a strategic approach, refocusing on their core proposition, enhancing the online offering, and refining the pitch for their first physical space.

They finished Design for Growth with a win that will transform their business: a year rent-free in Westfield, with money for the store’s design, installation and media promotion.

“The judges loved our pitch, saying we ticked every box! We’re still slightly in shock, as the opportunity is going to revolutionise Known Source. It is so rewarding to see our hard work and vision being appreciated by retail, sustainability and fashion experts. To finish the programme with such a monumental win is testament to how successful the coaching sessions were!”

– Theo and Henry, founders, Known Source

The combined GVA (contribution to the economy) of our Design for Growth cohorts was £1.49m by September 2022 and will be an estimated £116m by 2031.

This programme is an example of the power of SMEs in action, when they’re supported with funding and upskilling, to bring new products to market, create jobs and contribute to the economy.

Interested in hearing more? Reserve your (free) space now for our next Exchange discussion, Catalysts of Growth, on Wednesday 6th March, 8.45–10.30am, at our London studio.

Our panel will share their experiences and strategies for establishing relationships between SMEs, entrepreneurs, major corporations and the public sector. Featuring Beatriz Montoya, COO at Simply Business, Charlotte Schofield, Venture Director at Reckitt Benckiser, and other industry leaders.

Further reading

BEIS SME action plan — policy paper (BEIS, Jan 2023)

SME action plan — guidance (FCDO update, May 2023)

Making Sense of Corporate Venture Capital (HBR, 2020)

Is the fall in corporate venture spending slowing down? (GCV, 2023)

UK small business statistics, UK and regions (FSB, 2023)

This Spring Magnetic are helping businesses supercharge their teams and accelerate growth with the Innovation Festival 2024. Throughout March, we’re hosting a variety of free events. Join our innovation network: get inspired to take action and be part of creating the change you want to see.