Fast futures
Levelling up
The concept of “levelling up” means different things to different people. To the Government - who can take credit for popularising the term - levelling up is “about growing the economic pie, everywhere and for everyone, not re-slicing it.” But the Government also calls it a “contemporary Medici model, our twenty-first century recipe for a new Industrial Revolution” - an unlikely reference redolent of the minister who oversaw the whitepaper.
But the levelling up agenda has resonance outside of Government too. It’s not just that levelling up presents direct opportunities for private companies (contracts, delivery partnerships), but because the idea also appeals to companies and business leaders in a broader sense. As businesses become more aware of their ability -and responsibility - to be agents for good, one way in which they can seek to exercise that ability is by ensuring that regional inequalities in the UK decrease rather than increase.
Sometimes private companies’ contributions to levelling up don’t even need to be that altruistic. Hiring outside of London can be better value. Taking on office space outside of London can be better value. Setting up business infrastructure outside of London can be better value.
It is pleasing then to see that this year’s Fast 50 cohort is the first to see a falling proportion of companies headquartered in London since 2016. And indeed many of the London-based companies in this year’s Fast 50 (and in previous years) have offices outside London as well. Perhaps most impressively, this year six of the top 10 companies are headquartered outside of London.
A big part of the levelling up agenda - at least as articulated by the Government - is about jobs and opportunities. As the whitepaper puts it: [it’s] “critical that we improve productivity, boost economic growth, encourage innovation, [and] create good jobs.” But it also adds that “Levelling up skills, health, education and wellbeing would deliver similarly-sized benefits.”
What’s striking about this year’s Fast 50 is not only that those headquartered or with offices outside of London will be directly economically contributing to the levelling up cause, but that many of the companies (regardless of location) are creating and developing products and services that help the cause too.
The numerous biotech and healthcare companies on the list are helping to improve lifespans, which in turn helps levelling up. Educational and edtech businesses on the list are helping to improve skills, which in turn help levelling up. The fintech companies on the list are helping to improve access to financial services, which in turn helps levelling up.
As political support for levelling up can wax and wane, it’s brightening to think that some of its goals may still be achieved through the hard work and ingenuity of the UK’s entrepreneurs.
“Time is of the essence with technology. If you are slow to market, you may find someone else has got there first.”
Three characteristics of a successful growth journey in technology
Andy Gregory
CEO, BGF
Of all the sectors BGF invests in, technology accounts for the largest single share - well over 100 out of a total of more than 500 companies backed. These tech businesses are a diverse group, solving a variety of problems. In my time overseeing investments at BGF, there have been a few clear themes among those that have navigated a successful growth journey.
The first is that they are alive to the transformative potential of equity funding. We’ve seen numerous good companies set up and built using a classic bootstrapping model, i.e. they use savings and loans from friends and grow organically while keeping costs to a minimum. What turns them into great companies is that they seek out investment to accelerate that growth. One example out of many would be cloud services provider HeleCloud, which we backed from 2018 until its exit last year to Swiss multinational SoftwareONE. Founder Dob Todorov says he achieved in four years what it would have taken 15 years to do without our support.
That’s a story that has been repeated time and again across our portfolio. And I would argue it’s a story that is particularly pertinent to technology entrepreneurs, who operate in such a fast-moving sector. Time is of the essence with technology. If you are slow to market, you may find someone else has got there first.
A second quality that successful technology leaders share is a willingness to take advice. Even the most plugged-in technology entrepreneur will admit it’s hard to stay on top of every new trend. Yet it’s crucial for a growing business to understand its place in the market, its competitors and the needs of its customers. We find that this kind of objective view or sounding board is often well delivered by a non-executive, ideally someone with extensive relevant experience who can share the fruits of this experience with the management team.
Introducing experienced non-execs to portfolio businesses is a key part of what we do at BGF. Over 400 appointments have been made to company boards with our help. I could point to many in the technology sector, but one example would be Irish cybersecurity business Edgescan, which appointed former senior IBM executive Bernie Waldron as non-executive chair, bringing a wealth of industry experience to help guide the company’s strategy.
Finally, I would say that a successful growth journey depends on ambition. The kinds of businesses we work with - and which are successful in securing funding from us - have big ambitions (backed up with evidence and credentials). How that ambition manifests itself varies, but one example is growth by acquisition. Technology companies are often well positioned to grow rapidly by acquiring other companies in their sector. One example is Miss Group, a web hosting provider that we began supporting in 2018. The company made seven acquisitions while we were a shareholder. Indeed, it grew so fast that in this instance we exited our investment about 18 months after signing the initial cheque, at a 100% internal rate of return. BGF is a long-term investor, meaning we can partner with companies over many years, but when I talk about equity investment accelerating growth, this is the kind of speed that is possible.
As I mentioned, the technology companies in our portfolio are a diverse group. They include app developers such as Dundee-based Waracle, autonomous vehicle businesses such as Oxford-based Oxbotica, and payment infrastructure businesses such as London-based Paddle, which recently achieved ‘unicorn’ status with a valuation of over $1b. Technology remains an incredibly exciting sector and we look forward to backing many more innovative tech businesses in the years ahead.
The importance of differentiation in tough times
Chris Graves
Partner, FA - Advisory Corporate Finance, Deloitte
With European venture capital investment down >30% in Q3 2022 and the Bank of England noting that it believes the UK is already in recession, it is more important than ever for fast-growing companies to present investors with clear differentiation, evidence of downturn resilience and clear unit economics and a route to profitability.
However, funds have significant amounts of dry powder to invest and with an increase in SEIS limits being one of the few policies announced in the “mini” budget to survive, companies who can show a balance between high growth potential and realism around economic headwinds will continue to be able to access capital. Sector focus will be important for investors, with a clear shift away from consumer already in evidence and software continuing to account for a large proportion of funds raised. But each downturn is different and there are already signs that traditionally cyclical segments such as media and marketing technology may prove resilient in 2022-3, fuelled by the ongoing pandemic bounceback in entertainment, a boom in content and learnings from 2020 where budgets were cut too far too fast.
Investment in high-growth tech companies in the UK continues to be underpinned by a robust exit environment, with the UK and Ireland accounting for 50% of exits by value in Q3. The weakness of sterling will continue to make UK assets good value for international acquirers, while the country’s strength in the active software and biotech verticals will also underpin a steady volume of exits. Companies with very clear competitive positioning in structurally fast-growing and resilient markets will be most attractive to trade or PE acquirers amidst economic turbulence, with disruptive business models well placed to grow regardless of macro conditions.
“Scaling a business internationally can be just as difficult as launching and comes down to more than just having a great idea, product, or service. ”
Tech infrastructure for growth
Nicky Tozer
SVP Oracle NetSuite EMEA
Growing a company in today’s economic turmoil is no small achievement. Entrepreneurs often believe they’re ready to scale internationally as soon as they’ve established a business model at home - however this is often the time when operational challenges become more apparent.
Scaling a business internationally can be just as difficult as launching and comes down to more than just having a great idea, product, or service. It’s essential to understand the challenges of managing a global business and the role of technology in helping to operate and scale. Businesses with a real-time, single view of a global business can make better investments, meet compliance requirements, drive strategic decisions, spot opportunities, and act, evolve, or diversify with confidence.
Preparing for growth
To grow, companies must be able to adapt to different business rules, regulations, and cultural expectations if expanding into new markets. The most effective way is to a) centralise, and b) automate some processes. One solution to do a lot of the heavy lifting is an enterprise resource management platform (ERP), which will enable a business to manage multinational and multi-subsidiary operations. Efficiency gains can be seen quickly through the delivery of real-time operational visibility and consolidation.
So, in which business areas can ERP technology make the most impact?
- Complex business structures
Although more complex, the subsidiary structure has its advantages over opening a branch office, including protecting the parent company from liability. However, it also makes processes more complicated.
As a separate business, the subsidiary needs to follow local accounting rules and generate its own financial statements. Those results must then roll up to the parent company, where different accounting standards may apply.
Consolidating data from subsidiaries in different countries and following different rules increases the time and effort required to close the books and is a common source of reporting errors. Adopting an accounting solution specifically designed for companies with multiple legal entities allows you to post every transaction to multiple accounting books at once. In doing so, it ensures the correct standards are applied at local and headquarter level, enabling you to identify and deliver information faster.
- Exchange and volatility
When entering a new market, companies are expected to conduct business in the national currency. This isn’t just a convenience for local trading partners, but a legal requirement in most countries.
However, dealing with multiple currencies adds uncertainty, risk, and complexity to financial processes.
Converting financial data into a common currency for analysis is often a manual process. Automating conversion using the latest exchange rates produces more timely insights, leading to more accurate results.
- Local tax policies
Companies expanding internationally will need to keep up with tax policies. Changes are likely as economic conditions continue to put pressure on countries to raise taxes, as governments look for ways to increase revenue.
Tax rules and rates vary from country to country and at a regional level too. Knowing when to collect these taxes and what rates apply can be confusing and it becomes more difficult as you sell into more markets.
Keeping up with tax policies is too often done with spreadsheets. Automating tax collection within a single, fully-integrated system is an easier and more accurate approach to managing risk and compliance.
- Complying with local regulation
Compliance may be the biggest challenge companies face when entering a new market. It’s easy to misinterpret regulations and that can lead to costly fines or other penalties. It helps to draw on local expertise to ensure rules are being followed and automate compliance by embedding those rules within the applications you use to run your business.
With a governance, risk, and compliance programme you can confidently anticipate and act on customer, third party, compliance, enterprise, and financial risk while elevating corporate governance and controls across your organisation.
Gain a competitive advantage
Modern businesses must be data-driven, innovative, and scale rapidly, so it’s difficult to argue against the automation of areas that can threaten the speed and success of that expansion. A single, fully-integrated global system brings a more consistent, holistic, real-time view of risks, geographic nuances, and regulations that impact on domestic and global expansion strategies - freeing you up to grow your business across international markets.
Tax as an enabler
Willo Renehan
Partner, Deloitte Private Tax
Often tax is seen as a compliance burden, a cost, something which a company is forced to address when instead it would rather be applying scarce resources to running the business.
But what if tax can be used to drive business efficiency, help create shareholder value, make it easier to contract with your customers, and be a driver for growth? How can this be achieved? Set out below are some ideas across six key growth areas for any startup or scaleup business.
- Intellectual property
Central ownership and management of IP is not just good for value creation, it can also assist with R&D claims, as well as using the Patent Box to reduce corporation tax. One of the keys here is to ensure that upon diligence, there is clarity as to how the IP has been developed, who owns it, and how the owner is exploiting the IP.
- Supply chain
Minimising costs such as customs duty, VAT and withholding taxes in getting your offerings to market. Even in the case of businesses offering services, costs and delays can be incurred on going to market where the supply chain has not been designed appropriately and is understood across the business.
- Internationalisation
Consider how to establish overseas operations to best meet commercial objectives whilst reducing costs. It is important that overseas activities do not take up a disproportionate amount of management time whilst allowing the group to expand in target markets.
- Funding
Efficiently raising funds, and getting those funds to where they are needed, whilst managing foreign exchange, tax costs and foreign controls.
- Employee reward
Incentivising your employees in a manner which keeps your business competitive with the market and avoiding unexpected tax costs. Each territory will have a different approach to options and shares, with the timing of certain elections/notifications being key to the reward be valued by the employees.
- Governance
In modern parlance… if it is not evidenced, it is not done. Improving tax controls in a manner which reduces costs and reduces and aids business. As with most things in this fast-changing environment, successful businesses are looking at tax through a different lens, one which enables the business to be more efficient, makes you a more attractive employer, and eases your path to market.
