The technology sector is hot right now. Professional services company KPMG predicts that in 2014 growth in the UK tech sector will outstrip the average for the private sector overall, while European venture capitalists in general are also exhibiting a higher level of confidence in the sector.
Ed Lascelles, a partner at Albion Ventures, a venture capital trust management company, says it is looking good on a number of fronts. "There is no question that the funding environment is improving. A couple of years ago there were hardly any flotations on AIM but now we are seeing a rash of new companies coming to market successfully."
This, he says, "feeds down through the whole system". He reveals that Albion Ventures took on as many new investments in August 2013 as they did in the whole of 2012 and adds, "Banks are becoming less cautious and are more interested in the right areas. The outlook is definitely improving.”
He believes venture capital is crucial to the technology sector. "What venture capital allows companies to do is ramp up quickly in the early stages, which is pretty critical in this sector. For a number of companies where the intellectual property is not just an invention or hardware, but also around delivery and execution, you can scale-up much more quickly than your competitors if you’ve got a VC involved."
In the UK though, stories of companies that have been outgunned by US competition which have got the money to market aggressively are legion. "If you raise finance early on it can enable businesses to grow extremely rapidly – and it’s those businesses that are attractive to VCs as those are the businesses that will generate substantial returns.”
For an ambitious company then, venture capital is a good early option. However, not all companies are "investable”. Lascelles is clear about the key elements that he wants to see in a company that will form a strong part of his portfolio. "Growth potential is fundamental. If that potential is limited then we wouldn’t invest. And that is particularly true in the technology sector."
One of the key appeals of the technology sector is that if you get it right you can often scale up very quickly. "Especially B2C companies, which can grow very rapidly if you have the right product – you can see this in the online travel sector for example."
He says Albion tends to look at the size of the opportunity and then think about how easy it would be for that company to deliver. " For example, if we’re looking at an early stage B2B software business, will it need to employ a direct sales force or rely on the channel; how does the structure of the company reflect this approach and what is the experience of the management team in running this type of organisation?”
Lascelles says that the experience of the management team is critical to the company’s "investability". And while Albion are happy to work with a management team to build up capability – bringing in experience where it is needed, for example – he is clear that the existing team has to either have the talent now or have the potential to grow into it. "It is our job to back management teams, and we would pass on the investment if we didn't feel that the team had the flexibility to grow with the company.”
This is not simply corporate speak – it has been learned from (good and bad) experience he says. "For example, we had one business where for various reasons the CEO, Chairman, Finance Director and Sales Director all left over a nine month period, Little of this was our doing, yet we had to oversee a complete overhaul of the senior management team.
"This had huge consequences on trading. We lost at least a year’s growth and there was a huge impact on resource . It is experiences like this that underpin our total focus on the management team fielded by potential investee companies.”
Lascelles is clear that the biggest challenge that faces technology companies is making sure that the product, the team and the opportunity all work together. He believes that a “cracking market opportunity” can be identified through analysis, but the key is then to have the right person or people to exploit that market.
“If you have a person with the right skills, the product will follow the opportunity – so in real terms the person drives the product road map and the opportunity drives the person. So the team really are critical to the growth of the company. No matter how good the market opportunity, no matter how good the product, without the right people in the team in our view it is unlikely to be a success.”
While people are key to growth it's also a fact that it is a very exciting time to be involved in the technology sector. "Four years ago the iPad didn’t exist. Twenty-four million adults in the UK now check their Facebook page at least once a day. We are living through a time of immense change and innovation. And what is really good to see is that the investment side is also learning: the investment community is broadening and becoming more experienced in this area; there is an increaslingly large body of research available and we are now able to make much more sophisticated decisions.”
Combine those sophisticated decision-making processes, Lascelles says, plus an inspirational team that can grow the investee company in record time, and you may well be on your way to securing that elusive multi-million pound exit.
Chris Chapman
[email protected]
www.mybusinessfd.com
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