Britain’s boom in start‑ups masks a looming funding cliff for SMEs
The entrepreneurial spirit in the UK has rarely been stronger. New data shows record numbers of people are starting businesses, with early‑stage entrepreneurial activity roughly doubling since the early 2000s. Yet the picture behind the headlines is worrying: innovation and exporting among small and medium‑sized enterprises (SMEs) have slid to multi‑year lows, and a looming funding gap threatens to derail growth just as new firms are forming at scale.
Ambition versus conversion: why start‑up numbers aren’t enough
The latest State of Small Business Britain report from the European Research Council highlights a clear paradox. On the one hand, 36% of working‑age adults say they are running or planning to start a business — the highest level since the survey began. On the other, the share of SMEs reporting product or service innovation has fallen from 30.4% in 2021 to 24.1% in 2024.
That decline matters. Innovation and exporting are key drivers of productivity and scalable growth. Without them, new businesses risk remaining micro‑enterprises with limited scope to scale, employ broadly or lift national productivity. In short, ambition alone does not translate into economic impact unless it is matched by the capacity to innovate, invest and access markets overseas.
Funding uncertainty: the clearest and most immediate threat
A major theme of the report is the deterioration of the ecosystem that supports entrepreneurship. Expert ratings for that ecosystem have slid from “sufficient” to “less than sufficient” since the pandemic. Access to capital — both for start‑up scaling and for sustained innovation — is front and centre.
One specific pressure point is the imminent end of the UK Shared Prosperity Fund (UKSPF) in March. The ERC describes the winding down of that fund as a “severe funding threat” to local business support activities that many SMEs rely on. For firms that benefit from grants, local programmes and business support services funded via UKSPF, the sudden conclusion of that pipeline risks leaving a funding vacuum.
Compounding challenges across the SME landscape
Beyond the funding gap, SMEs face a cascade of problems that together squeeze margins and crowd out investment decisions:
These headwinds are increasingly cited by firms as primary barriers to turnover and investment decisions — effectively undermining entrepreneurs’ ambitions with practical obstacles.
Why exporting and innovation have stalled
The decline in reported innovation and export activity can be traced to several factors. Capital scarcity reduces R&D spending and product development. Uncertainty about long‑term funding and policy direction dampens investment appetite. Post‑Brexit frictions and supply chain reorganisation have also raised transaction costs for international trade. Taken together, these forces make firms more risk‑averse and less likely to invest in new products or overseas expansion.
What SMEs and policymakers need now
Policymakers have options to stabilise the situation and close the gap between entrepreneurial ambition and tangible growth:
Why this matters for the wider economy
Micro and small firms make up the overwhelming majority of employer businesses and employ millions of people. If the UK is to convert high start‑up intent into sustainable jobs and productivity gains, it cannot afford a broken transition from ideation to scale. Without clearer long‑term funding and targeted support, many promising ventures will stall, leaving the economy with lots of firms but limited growth impact.
Signs of resilience — and what to watch next
The report does not paint a wholly bleak picture. The UK’s cultural resilience and appetite for entrepreneurship remain strengths. But converting that cultural capital into measurable productivity gains will require a coordinated policy response to close the funding shortfall and unblock practical constraints.
Key indicators to watch in the coming months include: the government’s plans for replacing or extending UKSPF funding; measures to tackle late payments; the availability of innovation‑focused capital for scaling firms; and trade support initiatives that help smaller exporters overcome post‑border frictions.
