Simon believes the UK is missing out on some great tech success stories because of a structural failing in the venture capital and private equity model that has resulted in a “scale up funding gap”.
ScaleUp Capital is a hybrid operating and investment fund that specialises in scaling small tech businesses (£1-10M in revenues). Venture Capital only works for 1 in 30 hypergrowth companies while Private Equity only works for businesses that can sustain debt. Worthwhile businesses that are growing steadily (but not explosively) aren’t given the time of day.
On top of this, there’s a skills gap. Founders are often subject matter experts, but most have never scaled a business before. All this means that while the UK is third in the world for start-ups, it is only 13th in the world for scale-ups. Without funding or support, lots of viable small businesses are struggling to make it through the “difficult teenaged years” and the UK is missing out on jobs, innovation and growth as a result.
ScaleUp Capital looks to plug both the funding and skills gap to reduce the number of small businesses that plateau or fail. They pride themselves on actually improving the businesses they invest in. In 18 years, they’ve never had a failure. Simon talks to Business Matters …
What products or services do you provide?
We are a specialist scale-up investor that helps small businesses with revenues of between £1 – £10 million to scale to critical mass, profitability and long-term success. Over time, we have built our expertise into our Scaler Programme – a proven methodology for scaling that can be applied to any digital B2B businesses.
What type of businesses do you work with?
We specialise in the B2B digital sector, covering technology, software, content and services. Many of our businesses are built on SaaS, subscription, managed service or outsourcing revenue streams.
What problem does your company solve?
We believe that many worthwhile small businesses fail or plateau because they lack the support and funding they need to reach the next stage of growth. The UK economy misses out on jobs, talent and innovation as a result. We aim to plug both the scale-up funding gap and the skills gap to ensure that more small businesses in the UK have the opportunity to flourish.
Many small businesses struggle to attract funding because they don’t fit the Private Equity (PE) or Venture Capital (VC) model. PE investors look for mature and profitable businesses that can be acquired with leverage. Meanwhile, VC investors run a “hits”-based model where they look for the 1 in 30 hypergrowth moonshots. So an emerging business with revenues of £1 – £10 million, growing at 10 – 25% per annum and reinvesting all its profits to fund the growth struggles to raise money from either the PE or VC community.
The challenge is further compounded by an experience and skills gap. Research by Crunchbase showed that 83% of founders are doing it for the first time. Many founders are subject matter experts who know their product and market inside-out, but have never scaled a business before. The same research shows that founders who have done it 3 or 4 times before are 2 – 4x more likely to succeed.
We believe that small businesses at the start of their scale-up phase need a new breed of investor, scale-up specialists like us who provide the “hands on” support and funding needed to reach the next stage of growth.
What is your USP?
While traditional PE and VC are full of smart people who are incredible investors and can advise and guide their investee companies, fundamentally their model is passive or hands off. They are active as investors, but there is a clear dividing line between managing and investing, with often the main interface being board meetings.
We don’t believe that model works for emerging companies in their scale-up phase that need to go through tremendous change and that are run by relatively inexperienced leaders. These businesses need methodology and process, more regular touch points, more granular support, more help with the execution. They need true working partners, not just active investors. And this is exactly what our model is built around, both through our Scaler Programme and our dedicated teams across Strategy, Talent, Change Management, Finance and Investment all created to support our portfolio through the scale-up phase.
What are your company values? Have you ever had them challenged and if so how have you dealt with it?
We invest in entrepreneurial businesses and help them to scale. To do this successfully, we have to be entrepreneurial ourselves. At ScaleUp Capital, we value pace and rigour. Pace delivers results more quickly. If we fail, then we fail fast so we can learn, change and try again. We relentlessly pursue more progress and better results. We are also rigorous in our approach to scaling businesses. We pay attention to details and make sure our decisions are backed by data. By embracing these values, we have successfully scaled 18 businesses with zero failures.
How do you ensure that you recruit a team that reflects your company values?
Our ultimate purpose is to help small UK firms reach their full potential by providing them with the funding and expertise they need to scale. We have built a team that is able to deliver on that goal with specialists across strategy, talent management, investment & finance – all the things you need to scale a business. We continue to recruit people that not only have expertise in these areas, but also share our commitment to getting the best out of UK businesses.
Are you happy to offer a hybrid working model of home/office post-covid?
We have a hybrid model that provides our team with the flexibility to be able to work most effectively. We have found that the hybrid model where the team can still get to together in our office but also have flexibility to work remotely provides a good balance.
Any finance or cash-flow tips for new businesses starting out?
Find the investor that’s right for you and your business. A lot of small businesses seek VC investment but are unaware of what type of business these investors are after. VCs will very closely monitor the performance of all the 30 or so companies they’ve invested in. For the 1 in 30 hypergrowth companies, VCs will put in a lot of time and money. Other businesses that are growing steadily (but not explosively) are put into an unloved category where no more money or time is available.
The reality is that VC funding is not right for most early-stage tech companies that are not hyper-growth. Only a tiny percentage of VC-backed start-ups make it – four percent are sold for more than $50m, one percent make it to ‘unicorn’ status, but seven in ten fail.
Small business owners should consider other types of investment that may be more suited to their business model and provide better results in the long-term.
If you could ask one thing of the government to change for businesses what would it be?
We’re pleased to see the government has recognised the importance of scale-ups to the UK economy. Chancellor Rishi Sunak highlighted the “scale-up funding gap” in his Budget speech earlier this year and has launched several initiatives to support small businesses including the Help to Grow training scheme and the Future Fund. We need the government to continue this level of support while also ensuring the investment industry steps up as well.
What is your attitude towards your competitors?
The problem is there are very few specialist scale-up investors like us in the UK. Ultimately, we want to see more small businesses successfully scaling to critical mass and profitability. We hope that the investment community will begin to recognise the importance of successful scale-ups to the UK economy and that we’ll start to see more specialist investors like ourselves providing scale-ups with the necessary funding and support.
Any thoughts on the future of your company and your dreams?
Our goal is to be the best scale-up specialist in the digital sector, and to pioneer a new hybrid model that fuses an operational scale-up platform with private equity investment.
We have a track record of consistently scaling up companies at an accelerated rate, with improved quality and more robust performance.
We want to build great businesses and deliver world-class returns to founders, managers, co-investors and our own fund investors.
Read more:
Secrets of Success: Simon Philips, CEO of ScaleUp Capital
