The investor vision

Our Pacesetters research offers a compelling vision of how Europe’s fast-growing companies are outperforming their peers. We asked four investors in such businesses for their insights

Garri Jones, Venture Broking Lead of Numis Securities
Ben Luckett, Managing Director of Aviva Ventures
Russ Mould, Investment Director of AJ Bell
Martin Wygas, Director of HG

Our research suggests that three particular attributes characterise fast-growing companies in particular: their spirit of collaboration, their focus on technology, and their sense of collective purpose. Have you seen those attributes in practice?

Garri Jones (GJ): This idea of collaborative and open working is something we see a great deal in start-up and scale-up companies. The only way to execute well and quickly amid pretty ferocious competition from incumbents is to be very open and collaborative in how these start-ups and scale-ups work together. And I think this has been accelerated by the ability to work in the cloud; that is changing the way people work.

Russ Mould (RM): Your technology and intellectual property are what, in the end, bring you pricing power. Most companies are going to be using technology in some way to serve their customers and this is what will bring them competitive advantage. But it’s the third idea that strikes a chord with me: at organisations where everybody is pulling together and on the same side, and where everybody has bought into strategy and capital allocation decisions, you can feel the difference.

Martin Wygas (MW): Yes, the third characteristic is really important to me too. If the only reason you are there is to make money, then that may work for a short period, but it doesn’t give you a long-term vision for the business or inspire your people. Whereas if you have a business with a strong sense of “why”, that’s where you get the incredibly engaged and collaborative behaviours.

Ben Luckett (BL): I agree. It’s really the first and the third attributes that stand out for me, because the ability to collaborate and that sense of purpose are really linked to being able to execute at pace – that’s what fast growth requires.

What dangers do investors need to be wary of with fast-growing companies?

BL: The question I always look at is whether the business has the right balance of people to sustain its growth – do they have the right leadership team in place, bearing in mind that the founding team may not have the right capabilities to grow the business to the next stage, and can they recruit the best people?

RM: One thing we look for is good governance. You need a board that is able to hold management to account; you need a succession plan; and you need integrity in the company. That may sound pious but it comes back to having a sense of purpose.

MW: I agree with that, but I think you also need to look at the market context – does the total addressable market provide room for growth, or is there one player in the market which is going to dominate, because it’s tough to go up against that.

GJ: Yes – people think that as long as you have a great product and you can get that to market, the product will sell itself, but actually it’s very difficult to beat an incumbent because they have so much power. People also think there is an unlimited supply of capital, but actually there is a real battle for funding.

What are the big risks facing fast-growing companies in Europe right now?

MW: There are obviously some big-picture macroeconomic dangers but one issue I’d pick out is how these businesses handle data. The winners in these markets are going to be the companies that use their data most effectively to drive sales and also efficiency within their businesses. Doing that in a way that is compliant with legislation such as GDPR is going to be a tough challenge. Then you have the related area of cyber.

BL: Some of the risks are going to be sector-specific but one challenge we see is with raising later-stage growth capital. There’s a great deal of tax support for early-stage investors, but that isn’t necessarily the case later on and that means the appetite can sometimes be lessened.

GJ: There is also a real risk around talent: there is a shortage of people with the appropriate skills, and particularly of people who are prepared to take the appropriate risk. Some of these companies are not going to find it possible to recruit the people they need and that will be a brake on growth.

RM: For me, it’s always the same dangers with fast-growing companies. If you’re making very good returns on capital then eventually you will attract competitors who want a slice of the pie – or, if that doesn’t happen, there’s a good chance the regulator will come and stick their oar in.

What about Brexit?

GJ: Do I think the start-ups and scale-ups talk about Brexit a lot? No, or at least nowhere near as much as the incumbents. The one thing that could be a problem is funding, particularly for UK companies: you have to believe Brexit will reduce the flow of capital despite the best efforts of the UK Government and the British Business Bank.

BL: I do think it’s becoming more challenging, though one quality of many fast-growing companies is that they are able to manage ambiguity. Still, I spoke to one fast-growing financial services company from Germany recently that had been poised to expand into the UK but their thinking had changed on the back of Brexit uncertainty.

MW: I’ve genuinely not seen anyone pull a technology investment because of Brexit. I think people do think it’s ridiculous that there is no plan with so little time left, but they have to rise above the political stuff and focus on executing their own growth strategies.

RM: That’s right but from a corporate perspective, Brexit does make life harder. You’re looking at investment. You’re looking at the availability of staff. You’re looking at which rule book will apply. These are all legitimate issues that make planning more difficult – you could understand why companies would temporarily put any major capital project on hold, or draw up plans for locating staff elsewhere.

Just on funding, the majority of companies have funded their growth through debt and intend to continue to do so. Are you wary of companies taking on too much debt?

MW: Even in this market, where it’s relatively easy to raise debt, it is about doing it with the right people and on the basis of a long-term relationship. For some businesses, this is their biggest risk – if there’s never a downturn it won’t matter, but at some point, the cycle will shift.

GJ: That’s certainly true for some companies because leverage is always a problem when the cycle turns, but it’s also the case that many businesses, particularly at a later stage, are getting much better terms on debt than, say, five years ago and it makes sense to exploit that.

RM: Agreed. Debt is not inherently bad but it needs to be appropriate for your business. I would certainly be reluctant, for example, to mix financial gearing with a business that is substantially operationally geared.

BL: We sometimes come across companies that are too leveraged, but we do support debt funding when it’s the right thing to do for the business – for working capital and cash flow, for example. It needs to be a balance.

At what point does an IPO make sense? Our research suggests relatively few fast-growing companies have initiated IPOs in the past three years, but those that have gone public say it has boosted their growth.

MW: Many small businesses have the view that the barriers to going public are incredibly high and opaque. There’s also a perception that once you’re on the public markets, you will have to deliver quarter-on-quarter growth and that you can’t invest or take risks in the way that you could. The question is going to be whether you can get that public market money from another source – a debt or equity investor – and I think you can in the current market.

RM: That’s all true and there are certainly downsides to an IPO. On the upside, a public listing does give you an imprimatur: it helps you develop brand profile, reassuring customers that you’re sound and trustworthy. In some cases, that may help convince companies that an IPO is a source of growth capital that provides good value.

BL: I guess it really depends on strategy and why you’re looking to raise capital. I also think there’s a certain level of maturity and stability needed before you go through that process. It’s a time-consuming and tricky process which you don’t go into lightly.

GJ: I think most businesses still see the IPO as a very satisfactory endpoint for the long term. However, whilst this might be their ultimate goal, there has been more capital available privately, which allows one to IPO a little later.