What’s stopping the scaleup?
In this article from strategic advisory experts FinnCap, the company explores the different reasons preventing the growth of scaleup businesses. This comes following the recent publication of the ScaleUp Institute Annual Review 2021.
Insights from the ScaleUp Institute Annual Review 2021
The biggest barrier to scaleup growth remains access to markets and finance. Marcus Stuttard, Head of UK Primary Markets and Head of AIM, London Stock Exchange Group, remarked on the wealth of great British brands that have floated on AIM in the last 12 months, and that trend continues.
Meanwhile there’s been a big influx of institutional capital and international capital into UK business, something our team at finnCap Cavendish have witnessed a lot recently, not least courting the interest of US buyers to British brands like Pimlico Plumbers. The US market makers are attracted to the favourable ecosystem nurtured here.
So, what’s stopping the scale?
Still more can be done on an international level. Better access to markets for scaleups really means dialling up that international collaboration and connecting with networks of global corporates is key to unlocking opportunities.
“UK and European investors can be quite conservative compared to their US and Silicon Valley counterparts,” explains Jamie Blewitt, finnCap Group’s Co-Head of Private Growth Capital. “The US community are more akin to making big bets on taking market share in large end markets.”
There’s also an expertise need. This is true at the top level; scaleup companies are more and more looking to engage NEDs to support their growth right now.
It is also true in terms of skills recruitment; these types of companies apply both left brain and right brain talent – a combination of science plus creativity at its best. Indro Mukerjee, CEO, Innovate UK, remarked that we need a pipeline of technology, science and engineering skills, but that needs to be matched with a similar pipeline of commercial skills, to create talent base that ensures our future economy thrives.
And that expertise is furthermore needed in sector specificity. Advice from experts in our biggest sectors, like the green economy, life sciences, direct-to-consumer, and video games development, for example.
The ScaleUp Institute heard from Stephen Welton, Executive Chair of BGF Investments commented that the public markets are alive to the life sciences and green economy innovators. Indeed, just this week, finnCap Capital Markets successfully advised Eneraqua Technologies on its admission to AIM; Eneraqua is an innovator in water and energy efficiency technologies and has, following the IPO, received the London Stock Exchange Green Economy Mark. To ensure these kinds of companies continue to float, what is needed is investment expertise in these sectors to accelerate growth.
In that vein, Dr Andy Richards CBE explained that it was collaboration between the public and private sectors in life sciences and healthtech that has really driven this industry, especially over the course of the pandemic.
The Series B crunch
Irene Graham, CEO, ScaleUp Institute, commented that while growth of the scaleup economy has slowed somewhat, still more companies than ever before are reaching scaleup status. There are, however, some vital disconnects in communication; Marcus Stuttard explained that a common language and understanding needs to be established between founders and institutional investors if better investment cases are to be made. This may have manifested somewhat in the ‘Series B crunch’ – a real investment gap into scaleup businesses at the Series B funding level, which was identified by Judith Hartley, CEO, British Patient Capital.
Jamie Blewitt explains more: “There are lots of reasons why scaleup founders find it hard to close the Series B round; broadly speaking it’s about turning an idea with good early traction into a scalable and repeatable business model. Ultimately, things fail as companies run out of runway before they should realistically be raising another round, meaning that they haven’t proved out their business model enough from a metric or revenue perspective to get a Series B investor to write a term sheet and value appropriately.”
“There are so many decisions a founder must make at the point of Series A investment. For instance, founders might believe they have a product that is the finished article and that the next step is to hire lots of salespeople. But if the product doesn’t have the market fit the founder predicted, then sales lag, which in turn means the company starts to lose its salespeople, frustrated at missing their targets, and you’re back to square one when you should be on the runway towards Series B.”
“Series B investors typically look for a repeatable sales model. The ‘Series B crunch’ largely happens when you struggle to prove this model. As has been touched upon by the ScaleUp Institute, the growth of this country’s innovative scaleup ecosystem hinges on knowledgeable, sector-specific, trustworthy advice at accessing finance and the markets.”