‘Google, Facebook and Amazon were all originally backed by venture capital’
To look at the funding lever of patient capital in more detail, Business Leader spoke to Judith Hartley, CEO at British Patient Capital.
What is patient capital and how is it different to other options?
Patient capital is long-term equity investment into high growth and highly innovative companies. While it can exist in several forms, patient capital most commonly refers to investment in to venture capital funds by long-term investors such as pension plans and life insurance schemes. These venture capital funds in turn take a shareholding in young companies that have the potential to grow quickly or in the language of our industry, ‘scale-up’ quickly.
In return for giving a stake in its business, the owner of the high growth company gets capital to fund the company’s long-term growth and to develop products and services. Unlike bank loans or bonds, there is no capital or interest to be repaid, enabling the owner to concentrate on long-term value creation by growing the company.
Venture capital funds typically have a life of at least ten years, which is why it’s referred to as ‘patient capital’. During the first five years, the venture capital fund manager seeks out and invests in companies and in the second five-year period, it looks to ‘exit’. This ‘exit’ usually happens when the company is bought or is listed on the stock market.
Investing in young, innovative companies is risky and not all companies will succeed. To help manage this risk, venture capital funds will diversify their investments across several companies.
The largest companies in the world, such as Google, Facebook and Amazon were all originally backed by venture capital. Closer to home, the UK is now regularly producing tech unicorns, private start-up companies valued at $1bn or more, whose growth has been accelerated by patient capital. In our own portfolio, fintech bank Revolut is now worth over $30bn.
Does it suit a particular type of business?
Venture capital fund managers are highly selective, often seeking companies with products and services that are highly scalable, with the potential to transform industries. Technology businesses in areas such as software, life sciences or fintech have proven a good fit with venture capital.
Companies should be typically seeking at least £1m, and often a lot more, have a defensible business model or technology and a plan or ‘roadmap’ for growth, even if in some cases the application of the technology they are developing may be unclear.
Each venture capital fund manager is different, and their investment strategies vary. However, what doesn’t change – for companies and venture capital investors alike – is that the company must have high-growth potential and that both sides must recognise that they are developing a long-term relationship that goes beyond the pure provision of capital.
Any trends you’re seeing in this space?
We’re certainly now seeing more venture managers with the ability to make larger investments, and also the appetite to hold these investments for periods of more than five years.
It’s not just the supply of patient capital that’s grown and become more diverse, the quantity and quality of tech companies across many sectors has also increased. This trend has been driven by several economic and societal factors, including a widespread shift towards increased digitalisation, which has accelerated as millions of people have moved during the pandemic to home working and hybrid office environments.
Another societal driver is the use of tech to address major global challenges such as disease and climate change.