“It’s the service people want, not the product...”

Luke Jones of MML Capital explains the factors that his company look for when targeting a fast-growing AMT company for investment

When you’re looking to invest in a company, what factors attract you to the business?

Luke Jones (LJ): One is the scale of the market opportunity. We’ve seen success in investing in sort of growing businesses which have a disruptive or innovative proposition, but to a large market. Obviously then you’ve got the proposition itself: why should that proposition win? You need to be able to explain and understand why that is a compelling proposition to the market.

The final factor is proof of concept. We’re investing in established profitable businesses, we’re not investing in ideas.

We found that respondents in the AMT sector say that services will generate more revenue for them than products in the coming years. Do you agree and how is this going to show itself practically?

LJ: We definitely see that happening. People don’t want to buy boxes of kit and then a bunch of consulting services to set that kit up anymore; they just want to buy the service, the outcome. It’s the service that people want, not the product so much; they don’t really want to know about the products that sit behind that.

What are the major risks that you think fast-growing companies are facing in Europe?

LJ: The volatility and exchange rates have been pretty difficult to manage for a lot of businesses, particularly if you are buying stuff in dollars, which a lot of those businesses will be. And just obviously managing the flow-through of that into your end markets. And also, if you’re trying to demonstrate a certain profit trajectory, it’s not very helpful when the FX rate is playing havoc with your margins.

Another challenge is the speed at which markets transition. If you are a product business and you’re having to transition to all services, the skill set of your sales force will need to change. You’re going from selling products to a much more consultative sell, and actually that can be quite a different skill set.

Our survey shows that automation is going to be the main type of technology that’s going to be prioritised by these businesses for the next three years. Are you seeing this with the businesses that you’re investing in, and if so, how is this manifesting itself?

LJ: We do see this happening – for example, one challenge we see in businesses is the tightening of the labour pool. Access to low-cost labour has become pretty difficult now. In that environment, automation becomes more important.

On the technology side, respondents state that data is potentially going to be a future source of revenue for companies. When you’re making an investment decision into these companies, is data part of that? And if so, how are you looking at it and how are these companies looking to monetise that?

LJ: Absolutely. In a number of our businesses, the data they hold has potentially significant value. However, I think for that sort of small- to medium-sized business, data is a challenge: they are often very operationally focused and don’t know how to monetise the data.

The challenge is not so much that the data exists and it’s got potential value, it’s actually the skill set of monetising that data that is probably quite different to the core operations of that business. And when you’re trying to grow a business, suddenly saying: ‘Can I just get a data analytics expert in to come and monetise this database that we’ve got which sits behind our core business?’ can be seen as a distraction. And especially when you’re unsure about what the value might be.

Our survey found that alliances were very important to these fast-growing companies. Are you seeing this from the businesses you’re investing in, that they are looking to ally with other businesses more than usual? And how are they doing this effectively?

LJ: I think some bigger businesses know they need to evolve their own business model, but they can’t work out how to do it and what they’re doing at the moment is still too lucrative to move away from. Therefore, they’re struggling to move forward so they’re using smaller disruptive players as a kind of partner to deliver to the market instead of doing it themselves.