It’s about time someone stood up and recognised the contribution made by high growth small businesses (HGSBs). A subset of UK small and medium-sized enterprises, this niche segment of the market might only represent 3.4% of the UK economy, but in terms of sheer economic impact, it features companies that are punching well above their weight.

HGSBs are companies with average annual growth of more than 20% (over a three year period), and with a turnover value between £1 million and £20 million. As a proportion of the UK economy, such companies are still few and far between. There are approximately 30,000 HGSBs currently operating throughout the UK, many of which are unquoted while some can also be found on the Alternative Investment Market (AIM). But the number is growing. In fact, HGSBs increased by 18% between 2011 and 2013. Last year, these companies accounted for 36.2% of UK economic growth and boosted employment by an estimated 256,000, accounting for more than two thirds of the UK’s total annual job creation.

These were the findings of the Octopus High Growth Small Business Report 2014, which was published today (6 Nov). Produced for us by the Centre for Economics and Business Research (Cebr), we believe this is one of the first pieces of research to reveal the true contribution of the UK’s HGSBs.

What do these businesses have in common?

Regardless of the industry or sector in which they operate, HGSBs all share the desire and ability to do things differently. Many are created out of a frustration at the way things are done, which is then reinforced by the vision to see a better way forward. This could begin with improving the design of a product, adding value or simply doing business in a way that leaves customers feeling appreciated. It’s usually the little things - overlooked or considered trivial by larger firms - that help smaller companies grow their customer base. It’s no surprise that more than 60% of the UK’s HGSBs belong in the services sector (wholesale and retail trade). If the services you provide are leaving competitors in the shade, then your growth is going to accelerate.

Regional analysis confirms a north south divide

The results suggest a strong regional bias at work, with the best-performing regions having more HGSBs. More than one third are gathered in just two of the UK’s regions: London and the South East. Wales, Northern Ireland and the North East have the fewest HGSBs, with less than 1,000 located in each of these regions. What’s more, regions with more high growth small businesses tend to create more jobs. Not surprisingly, London boasts the highest absolute number of HGSB-created jobs of any region. Almost one in 25 workers in the capital (3.5%) is employed by HGSBs. In Wales, this figure drops to just one in 80 (1.3%).

Unlocking the investment potential

But what about the investment opportunity, I hear you ask. Well not only are smaller companies vital to the economy, but they are an asset class that is under-researched and relatively unsupported by an investment community which continues to take a ‘bigger is better’ approach. We think that HSGBs have been neglected for far too long. They may not gather the headlines of a FTSE 100-listed company, but I would argue they merit a place in investor portfolios simply for the diversification benefits and growth potential they offer. If would-be investors require further convincing, they should take note that the government has pledged significant support for this area of the market, by offering significant tax breaks to investors looking to invest in such companies through initiatives such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). In the 2013/14 tax year the VCT industry reported its highest inflows from investors in eight years, according HMRC. With pension legislation changes and the restrictions on the lifetime (and annual) allowance starting to pinch, people are increasingly looking at tax-efficient investment into smaller companies as part of their retirement planning.

Giving HGSBs a voice

Up to now, it has been hard to put a value on the positive benefits of HGSBs, the way they benefit local economies and communities, or how they reward investors. The results of the research told us that - despite contributing more than their fair share - many of these companies are still facing significant obstacles to success. Now is the time to start getting behind HSGBs, giving them the recognition and the funding they deserve which will enable them to continue their enormous contribution to the UK’s economic prosperity.

Simon Rogerson

chief executive officer, Octopus Investments

Unless otherwise stated, all the figures in this article can be found in the Octopus High Growth Small Business Report 2014. You can find out more about how Octopus supports UK smaller companies at octopusinvestments.com. To down-load an electronic version of the report visit highgrowthsmallbusiness.co.uk.