From The Chair: Horses for courses – how to build and invest in successful growth businesses
Building a successful growth business can be likened to a relay race. It requires a well planned and executed strategy and great teamwork – and those who cross the finishing line may not be those who started the race. Investing in them successfully, requires sector expertise and ongoing oversight.
Because there is significant capital available in the UK for investing in businesses at Series A and beyond, many such businesses command demanding valuations and are more difficult for private investors to access. As a result, there is much better value to be found in early stage businesses, and this is one of the reasons I advocate a sensible allocation to pre-Series A, focusing on SMARTCOs - my term for companies which offer Step Change Productivity Improvement (SCPI).
But it is important for investors in early stage companies to understand that the companies they are investing in are likely to pass through a number of development stages on their way, hopefully, to delivering great value to their shareholders. And a key part of this evolution will likely be the composition of the management team – to use another sporting analogy, the players capable of winning in the lower divisions may not be the ones required get to the premiership.
In business terms, early stage founders with entrepreneurial mindsets generally have no experience of building sizable businesses. But SMARTCOs typically address market opportunities that enable a business worth at least £100M to be built, and as a result, it is rare that an early stage founder will be able to successfully lead a business throughout this journey. Correspondingly, whilst professional managers with experience of building sizable businesses in a large corporate environment generally have no experience of developing an SCPI business from scratch, what they are good at, is taking on an established process and rolling it out.
AB Dynamics - www.abd.uk.com - is a good example of the different types of CEO required at different stages of development into a significant business. Formed by an ex-Rolls Royce suspension engineer in 1982, its initial product was a Suspension Parameter Measurement Machine to help automotive OEMs develop suspensions for new vehicles more efficiently. In time, the founder also saw the opportunity to automate tasks undertaken by test drivers, delivering improved task repeatability and generating better data.
In 2012, the founder stepped down as CEO to become Chairman. The new CEO oversaw the listing of ABD on AIM in 2013 at a share price of 86p and a post money valuation of £14M, steering the company very successfully until 2017 when he stepped down, to be replaced with a new CEO for the next stage of the journey, targeting increasing, acquisition-lead growth. Today, the share price stands at 2,560p with a market cap of £562M.
But of course, few early-stage companies have the luxury of recruiting highly experienced CEOs, and it is often for lack of experienced management that they fail to deliver on their initial promise.
A key reason I accepted the invitation to become Chairman of Aspremont was because it brings a highly unusual combination of business development experience, including building software businesses based on ‘as-a-service’ business models. Consequently, Aspremont, in addition to acting as a lead-investor/fundraiser, is very well suited to overseeing the development of SMARTCOs from the pre-Series A stage to their first liquidity event, ensuring the composition of the management resources is appropriate at each stage of the journey.
So, recognizing that access to the appropriate management resources for each stage of the journey will be essential, as an investor, I like to see that there is a credible business-led sponsor/lead investor (many fund-raise sponsors do not play a lead investor role once the capital has been raised), capable of mentoring, coaching and if necessary getting on the pitch and playing, to oversee the composition of, and support the management team, at each stage of the company’s development.