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Venture Views: ScaleUp Capital - Bridging the gap

Talya Misiri 5 May 2021

There is a “tremendously large funding gap” between venture capital and private equity, ScaleUp Capital chief executive officer Simon Philips says. Indeed, as the VC and PE markets become even more densely populated, businesses that fall between are missing out on funding opportunities.

“There are an awful lot of companies that are falling into this gap and not getting funding and therefore, not living up to their full potential and moving up to scale,” Philips says. “If I had to characterise that gap, it would be what we call the scale-up phase.”

Philips notes that these are the businesses that aren’t yet mature and profitable enough to attract PE, who even at the lowest end are usually looking for £2-3m Ebitda, to be able to faciliate debt and give them the returns they’re looking for. At the same time, VCs who focus on this earlier stage have over the years become incredibly focused on hyper-growth companies and are not interested in anything that’s not of that ilk.

The funding gap

It is firms like ScaleUp Capital that are working to bridge the gap between VC and PE and assist growing businesses to scale. This type of investor is benefitting both the economy and the growing number of scaling SMEs, as well as their investors. The scale-up phase can be a considerably difficult one, Philips says, as these businesses are racing to mature and grow.

“These businesses are transitioning from a founder-led business, to a full management team, professionalising and automating processes and often going from loss-making to profitable. That adolescent phase is tremendously difficult and the stats show that so many companies plateauing out along the way,” Philips notes.

For businesses of this size and scale, there tends to be a skills gap, as well as a funding gap, which, if not backed by a specialist scale-up investor, could lead to them plateauing at some point in the £1-£10m revenue range.

“At some point in that revenue range, [they] will plateau and probably turn into lifestyle businesses, rather than scaling up to what they could be, with revenues of £10-£50m, where PE companies will then come in and invest,” Philips explains.

To bridge this gap and prevent businesses plateauing, therefore, this new breed of investor is coming to the fore. Philips explains:“What is happening, therefore, is the emergence of a new breed of investor. It is scale-up investing, which involves firms that specialise in that particular phase, that transitionary period and the key thing is that you’ve got to bring more than money. These companies also have a big skills gap, and without filling that, just giving them money won’t solve the problem.”

Doing more

Where the types of businesses that Philips and his team at ScaleUp Capital are targeting differ from PE and VC assets, is that they require greater levels of on-the-ground assistance.

“PE and VC have become very successful models, but they are easier in the sense that they have to be great investors. They are lighter touch than what we are doing,” Philips says. “I don’t mean to belittle what they’re doing, but I think what we do is harder work on the ground. You’ve got to be good at a lot of different things, not just investing, but also helping to improve operations and you become a hybrid of an operating or consulting business with an investment business.”

While there is a line between the investors and management teams for some PE and VC assets, scale-up investors take a much more active role, the CEO notes.

“They [PE and VC] are, at their core, passive models when it comes to transforming the businesses they invest in...They will give lots of advice and lots of ideas, and they will put in place good governance. But, actually getting on the ground as a working partner with the business and taking them through a scale-up process is a much more active process and it’s not one that the traditional PE or VC industry is set up to do.”

Indeed, ScaleUp Capital’s investment methodology sees the firm actively partnering with its portfolio companies in a very hands-on way to develop them to the next level.

ScaleUp Capital’s Scalr Programme is the methodology behind the firm’s growth and value creation work. Philips explains that the firm is split into five teams from varying backgrounds that are brought together in its accelerator programme. The five teams consist of a: strategy team, who work on a business’ product market fit and go to market strategy; a change management team, who work on-the-ground, overseeing the business process reengineering and the systems implementation; a talent team, who populate the C-suite and then work with the business on all other key hires; an investment team comprising classic PE professionals, corporate financiers and accountants and finally, the finance team who work on reporting and KPI tracking.

The work and effort put into growing these businesses certainly pays off. ScaleUp Capital invests between £2-£10m into businesses that are usually valued at less than £20m. Then, at exit, the business’ are usually worth c.£50-£100m and tend to return between 1x and 10x, Philips says. “Mainstream PE is so competitive now that it can be hard to generate strong returns. Whereas in the scale-up space, you really need to do a lot of work on the ground, but the returns are very good,” he adds.

Teeing up assets

It’s clear that scale up investors are bridging the funding gap for these worthy businesses. And, what these investors are also doing is preparing assets for later PE investment. “Our typical success story would be taking a company (depending on the business type) to a value of £50-£100m at exit, so revenues are between £10m and £50m. At that point, there should be a range of exit opportunities - to trade, PE or IPO. So, we are absolutely a feeder for the PE sector.

“For them, they would look to consider whether they can take the business that is worth £100m and make it worth £200m. Taking it to that next level again,” Philips says.

Where the market has become increasingly competitive for PE investors, scale-up assets may be the additional avenue they need to originate profitable businesses.

“I think we are a positive force for the PE sector as we will tee up more and more businesses for them, that otherwise would never have got there in terms of scale and profitability… Overall, I think it’s really worthwhile for the economy. If we can have a bigger industry of scale-up investors who are putting a lot more money to work and a lot more expertise into that funding gap, we will have thousands of more businesses come through,” Philips concludes.

Firms like ScaleUp Capital and some of its peers in Europe and the US have certainly identified and honed in on a promising gap in the market. With consistent returns, a pipeline into PE and a host of founder-led businesses keen to take the next step, it seems that scale up investing is here to stay. 

Categories: Insights Expert Commentaries Venture Views

TAGS: Investments Organic Growth Scaleup Capital Value Creation Venture Capital

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