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Digging deeper: insights on Follow-on and Scale-up funds

by | Feb 3, 2022

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GBI was pleased to recently host a webinar, ably chaired by Martin Fox, to discuss the topical issues of scale up and follow-on funds. Focus was on drilling down to establish what sets these funds apart, what they each offer, how they manage risk and what returns investors can expect from them. In conversation with Martin were Fred Soneya of Haatch Ventures and Sanjeev Gordhan of Newable.

MF: I’m delighted to welcome you both today as scaling up has been a very topical issue in the financial press recently. Research by the OECD highlighted that although the UK is third in the world for creating start-ups, we seem to be trailing in 13th place when it comes to scaling these up. Let’s start with this, how is what you are both doing relevant?

SG: The UK has some of the world’s best universities and incubators helping spin outs, and start-ups. When the EIS and VCT schemes were set up they encouraged angel investors to take the risk with capital into the early stages of a business. Then funds were set up by financial institutions as products rather than by entrepreneurs and this led to is a different way of analysing these businesses on key metrics and revenue rather than growth and scaling the business.


This is now changing and follow-on and scale up funds are working with businesses in a very different way where we’re getting a lot more heavily involved.

FS: Traditional funds had a mandate to invest very quickly and not support the lifecycle of a company. Any entrepreneur that starts their own business wants to scale and take it all the way through to the big exit. It’s a journey and involves multiple funding rounds and that is why later stage funds and follow-on funds, are so important. If you like it is a new breed of fund manager that has emerged to support and work with them and achieve better returns.

MF: You are both working with companies in the longer term and you both run slightly different things. Perhaps it’s worth explaining the difference between follow-on funds and scale-up funds.


FS: It comes back to the life cycle of a company. EIS rounds involve companies that are finding a product market, and that are generating some kind of monthly recurring revenue. We had appetite from our investors to back them at an earlier stage, so we launched an SEIS fund to back entrepreneurs and take them through to EIS funding. The follow on fund enables us to invest further in a meaningful way. These are companies that we know very well that we’ve worked with for a minimum of 12 to 18 months and it enables us to invest in companies that are scaling up. We have been really fortunate over the last eight or nine years that we have some great VCs come to the table and need the series-A deals in our portfolio companies. We want to take a more meaningful stake in these companies because ultimately, we discovered them. Follow on funding invests later, still in a mix portfolio of companies.

MF: Sanjeev can you explain how yours is different from a follow on fund?

SG: In the larger VC market scale up this where a business has got to Series B. In medical technology, space tech and deep tech, businesses require a lot more capital at an earlier stage than say a software business. We look at the scale up phase as part of how we add value to that business rather than just adding costs say for hiring staff. It relates to where that business is and the type of sector that it’s in. Rather than having an SEIS fund we have an angel network. A lot of our angels will get involved in those businesses very early whether through SEIS, or EIS. Once that business reaches revenue stage or proven concept through Project Income or Pilot we will then take it on in the scale up fund where we’ll back it from the fund investment alongside the angels and syndication.


MF: How do the companies looking for money go forward in this scale up stage?

FS: One of the biggest costs in our portfolio is people as other costs tend to be hosting and we help cover this through relationships with Amazon, Google, HubSpot and others. Second to people is marketing. At follow on stage and beyond we’ve got a product and a market fit and now we’re scaling. It’s about customer acquisition and how quickly we can scale to an exit. We ask how we can drive triple digit growth, and that’s about marketing costs, traditional marketing or more likely in digital, whether that’s Facebook, other Social channels, Google or enterprise sales.

SG: We tend to focus more on the mid to deep technology and these are businesses that are spun out of universities from PhD research and have created a lot of IP. When we’re investing, there is still a lot of money going into developing the technology and the product and the service based on the product. We are funding a financial runway to commerciality, but money is still going towards product development, even though they may be revenue generating, it’s constantly developing that product to the next stage.


MF: Sanjeev, can you just clarify the point about scaling up many different things in different sectors?

SG: We don’t tend to do typical life sciences and therapeutics because a business within that side is going to require a minimum of 15 to 20 million pound investment before it even gets to a point in which they have FDA approvals or are able to come to market. You’ve got a business that has a long regulatory time horizon, very capital intensive, but could still be at a point in which that is scaling or eligible for Series A. Then you’ve got businesses on the other end, software based and they wouldn’t require much capital and they have no regulatory hurdles to meet and could get to a stage in which they are generating strong income within two to three years. It is dependent on the capital requirements of the company and the stage of that company, because those two journeys are very different.

MF: Once you invest in the company, what role do you play then in further rounds of funding?


FS: It’s important to continue to back our portfolio companies, as it sends a really important signal to other investors as well. We prefer follow on rounds led by other investors to avoid conflicts or discussions on valuations. It is important that as a company scales, you get the next tier of funds that support longer term growth. It doesn’t matter how big a fund you have it’s unlikely that you’ll be able to back every company, at every stage. Funds don’t work like that. We want to participate, and that’s why we’re launching this new Follow-On fund because we know these companies, and having a bigger seat at the table creates better round outcomes, better valuations and ultimately drives higher growth in our portfolio.

SG: I agree that it’s about the escalation of capital, getting these companies right from the seed stage where there will be different profile investors through AB series onwards from our side. We partner with seed stage investors but then we also have VCs who have observer rights at our investment committee. They are invited to the investment committee where there is a suitable deal within our portfolio. In some cases, we’ve had situations in which a large investor who typically goes in at Series A B and onwards has done a small cheque size with us at an earlier stage to be able to follow that on. It is being able to create those partnerships very early on with the right types of investors and when that business is ready to go on to the next stage of investment, they’ve got people around that table who have helped to get them there.

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