Dave Heywood, MD & Growth Partner at OX7 Partners (00:00)
Seventy-seven percent of UK SMEs would rather accept slower growth than borrow money to grow faster. that’s from research from the Bank of England. and when I first looked at that figure, I thought that’s bloody high. Why are so many businesses reluctant to borrow money to invest in growth?

I’ve seen and worked with plenty of businesses myself that are reluctant to make those big investments in growth.

but I haven’t worked with many that are reluctant to spend money at all. So what gives? This is Scale, an OX7 Partners podcast, and I’m Dave Heywood.

And this time round I’m gonna be looking at some of those decisions businesses make while investing in growth. Why playing it safe isn’t always as safe as it seems, and a few questions worth asking

Before we open up our wallets.

there’s a bit of an odd thing about spending money in small amounts. It’s a bit like popping into IKEA.

You pick up pieces as you go around. It’s a couple of quid here, a few quid there. None of it on its own feels particularly consequential until you get to the till, and somehow you’ve spent over a hundred quid on stuff you weren’t even planning to

buy.

And a lot of businesses behave in exactly the same way when it comes to funding growth. We’ll try a little bit of LinkedIn, some PPC, give outbound another go, buy some new tools, run a campaign, bring an agency in for a few months.

And you don’t have to go far to see an endless supply of people promising you the next big growth hack.

you’ll see people out there apparently doing really, really well using particular tools and tactics, and quite naturally you want a piece of that.

But what we do sometimes forget in that excitement is that the person telling us how brilliantly it all works

might well be making their money by selling that very advice.

so it’s not necessarily evidence of a successful growth strategy. You might just be their customer.

Now there’s nothing inherently wrong here about making small bets.

In fact, it’s how we learn. We test something on a small scale before committing larger and larger sums of money. That can be an incredibly sensible thing to do. But there’s a bit of a difference here between testing something to learn whether it works and jumping from one tactic or approach to another because the last one didn’t deliver the results that we hoped for.

The former builds a really helpful body of evidence,

And the latter can be quite an expensive way of feeling like we’re continually pushing forward.

and if we look over two, three years or so, those little investments can add up to a pretty substantial sum of money.

We might feel reluctant committing a hundred K to a properly thought out growth initiative. yet we’re equally comfortable spending similar amounts of money in dribs and drabs without ever really deciding what we wanted to achieve.

Now I’m a big fan of Gordon Ramsay’s Kitchen Nightmares. Particularly the bits at the start, where Gordon rocks up at a struggling restaurant, the place is practically empty, and the owners are absolutely adamant that everyone loves their food. All three customers of theirs.

And they’re not necessarily lying. the three or four customers they’ve got might absolutely love it,

But it ain’t gonna sustain an operation. And I think there’s a similar danger here in business as well. We can convince ourselves that we’ve got an absolutely fantastic, world-beating proposition here because the clients that we’ve already got seem pretty happy enough. But what about those who didn’t choose us? Those who might have considered us, went somewhere else, or

those who never even considered us in the first place.

Perhaps we’re not quite as different as we think we are. Perhaps the things that we believe make us special and unique are just what customers expect as standard. Or perhaps we’re just solving a problem here that just isn’t really important enough to entice people.

they’re pretty uncomfortable questions to ask ourselves. It’s a lot easier for us to conclude that LinkedIn doesn’t work or we need a new website or our sales team need to make more outbound calls.

all too often I find that we try to solve fundamental business and strategy problems with another marketing tactic.

So before making significant investments in growth, I like to understand a few things here.

First of all, around our customers, why do they actually choose us? What do they genuinely value here and what’s simply expected as standard? Second, our competition. Who are we really up against? And how can we carve out a position that’s meaningfully distinctive? third, the market itself. What’s driving demand today? And how do we expect that to change and evolve over the next few years?

‘Cause I really don’t have to remind you here that markets are rarely static.

and the last piece, where pertinent, investors. What actually creates value in their eyes?

Because when there’s an investor lens here. Growth isn’t necessarily just about generating more revenue, it can be about improving the quality of that revenue, reducing concentration and risk, building recurring income, or creating a business that’s inherently more scalable.

In short, I just want some proper market orientation here, because the worst thing we can do is go and borrow or invest a whole load of money to accelerate a growth strategy that doesn’t really have any foundations in place.

So, what does more money actually unlock here? So let’s imagine we’ve got a business and we decide we want to invest 250k in growth. And so before we worry about where on earth that money comes from, I’d want to know what what’s exactly going to change here as a consequence of that. And the simplest place to start is often by following your client.

Through the business.

Look at your sales funnel. Where are we losing opportunities? where are people getting frustrated?

And where are things slowing down needlessly? Perhaps we’re generating plenty of new inquiries, but

We’re taking three days to respond to them, in which case, pouring a whole load of cash in to generate more and more inquiries probably isn’t going to be the smartest move here. Perhaps we’ve got loads of sales capacity here, but not enough demand coming through to keep everyone productive. Or perhaps we’re winning plenty of business, but our delivery teams are just really, really stretched to breaking point and quality of service is beginning to suffer.

the temptation is always to invest in the bit of the business that’s the most visible or the bit that someone’s made the most convincing case for. But unless we really forensically understand where growth is actually getting stuck here, we risk making one part of the machine bigger, better and faster, without improving the whole thing.

and it is possible here to find that the answer doesn’t require enormous investment at all. if inquiries aren’t being answered because nobody has responsibility for the inbox, borrowing money to hire more people is going to be pretty spectacular solution to what is a very straightforward workflow problem. So before we start asking how much money we need, ask what constraints we’re trying to remove.

And then ask what removing that would actually unlock.

so let’s wheel back now to that Bank of England stats right at the start.

Seventy seven percent of SMEs would rather accept slower growth than borrow to grow faster.

and I could understand the argument for that. Debt comes with obligations, And the return on whatever you invest that money on, it’s far from guaranteed, no matter what people say.

But it is quite revealing in terms of how we think about risk. So the risks associated with borrowing are pretty bloody visible, right? you know what the loan costs, you know when repayments are due,

And it sits very plainly on your balance sheet.

And those risks associated with not investing, they are much harder to pin down. But I’ve seen what they look like. A business that’s growing on paper, but people inside are increasingly stretched. everyone’s trying to pedal faster, trying to keep up with the work that’s coming in. Quality starts to suffer, there’s less time to develop.

new propositions,

and improve the way things work. And eventually you start to see that pipeline begin to plateau.

and because there’s pretty much no flex in the system, it only takes a couple of external shocks to put the whole thing under more and more and more pressure.

So do ask yourself here, could refusing to borrow money actually make your business riskier?

in some cases your investment might not be about helping you grow faster, but it may well be about making the business more resilient.

At the end of the day, there isn’t more or less risk associated with borrowing or not borrowing. It just means choosing a different set of risks.

in my mind here there is one ultimate question that we need to ask before anything else.

Why do you actually want to grow?

Sounds bizarre, right? But

We’re very good at thinking about growth as an objective in its own right. but what what does that actually get you?

A business that’s twice the size isn’t necessarily twice as good.

It might mean a hell of a lot more complexity, more management layers, and a whole lot more responsibility.

And if you’ve built yourself a profitable, sustainable business that gives everyone the lifestyle freedom and financial security that we want, perhaps growing a little bit more slowly and sustainably is exactly the right decision.

There’s absolutely zero obligation on anyone to turn a 5 million business into 50 million. But if you genuinely do want to grow, then I do think you owe it to yourself to make that decision properly, be super super clear on what you’re trying to achieve, understand your market and why customers choose you, find those things which are actually constraining growth here, and work out what that additional investment.

would enable and what happens if you don’t make it? Then decide how best to fund it.

but any financing should follow the strategy. It should never dictate it.

I hope you found that useful. I’m Dave Heywood. This is Scale, an OX7 Partners podcast, and I’ll see you next time.