Has there been a better time to raise scale up capital?

By Ian Waterfield
Partner, YFM Equity Partners

Has there been a better time to raise scale up capital?

YFM has completed growth capital investments into five young fast-growing businesses so far this year and a strong pipeline of opportunities reflects an increase in demand for scale up capital.

What is scale up capital?

Scale up capital, also known as later stage venture capital, is targeted at businesses with the following characteristics:

  • fast growing – the investment is being raised to accelerate existing growth which can be evidenced through clear KPIs.
  • differentiated product or service, often underpinned by its own IP
  • growing and loyal customer base – there are returning customers which have adopted the Company’s product or services. These are typically businesses which have achieved minimum revenues of £1-2m pa.
  • scalable business model – the core product or service has been designed to enable it to be rolled out or expanded without requiring significant further development, albeit there are likely to be opportunities to enhance and expand the offering.
  • ambitious management teams – teams that are not satisfied with the current rate of growth and can see the bigger opportunity and want to get there quicker.

Where can scale up capital be deployed?

Ambitious management teams are generally looking to increase market share in existing markets, access new markets and further develop their product or service offering.  The fresh capital is usually deployed to recruit additional people, expand sales and marketing activity levels or fund working capital.

Why is now the right time?

  • Alternative business models – the latest generation of technology-enabled businesses have easier access to their markets and are increasingly selling their services through recurring monthly revenue models, often under 2 to 5-year contracts. This allows young businesses to get to market quicker and show evidence of traction earlier, providing investors with an underpinning of value, when the Company might not yet be generating material profits.  As a result, companies can attract larger investments earlier in their development and scale quicker.
  • Strong investor appetite – the principle investors in this stage of company in the UK are Venture Capital Trusts. VCTs are regulated by the UK Government and the regulations have changed over the last few years to focus their investment activities on growth capital investments.  At the same time VCTs have raised significant further funds to invest in scale up opportunities.
  • Alignment of shareholders – this is key to the success of any ambitious company. Fast-growing businesses have often outgrown their existing shareholder structure, with early investors who are looking to exit and/or de-risk their current holdings.  Small-scale cash out alongside VCT growth capital transactions, can enable companies to set out on their next phase of growth with the equity in the right hands.
  • Professional support –corporate finance and legal advisors are eager to support fast-growing businesses, as they see deals being done and the potential to build long term relationships with ambitious management teams. This professional support can make the process of raising capital less disruptive, allowing the management team to focus on what they do best.

Recent scale up investments by YFM:

  • Matillion – based in the North West, Matillion is a leading provider of cloud-based integration technologies, helping companies optimise their data flows to and from the cloud. YFM originally invested £4m to accelerate revenue growth, in particular to support expansion into the US, and recently invested a further £1m alongside US investors in a $20m funding round.
  • Hutchinson Networks – based in Edinburgh, Hutchinson is a leading provider of IT and networks solutions. YFM invested £2.2m of growth capital earlier this year to enable the Company to recruit an additional 50 staff over the next two years.
  • NCam – based in London, NCam is a provider of augmented reality solutions to the entertainment industry. YFM invested growth capital earlier this year to support US expansion and continued technology development.

In each case, YFM introduced an experienced chairman with specifically relevant sector background into each of these businesses to work with the executive management teams.