What fun cynical hacks like myself used to have with the concept of British unicorns. When the subject came up it was a golden opportunity to riff on the theme of much talked about but rarely seen mythical creatures.
Well, things have changed a lot over the past two or three years. According to analyst, Beauhurst, there are now around 40 privately owned $1 billion businesses in the United Kingdom. What’s more, the Digital Economy Council and Dealroom.co have identified 13 “decacorn businesses valued at $10 billion or more.
All of which confirms that in the current tech ecosystem, aspiring to become a unicorn is no longer a hubristic ambition. Achieving that $1 billion valuation point has been done many times before and it will be done again.
What Has Changed
So what has changed? Why is the U.K. seeing increasing numbers of companies not only scaling up but hitting milestone valuations?
Bruce McFarlane, is well placed to provide a perspective. As co-founder of VC fund, MMC Ventures, he has been investing in tech companies since 2000, a period often characterized as the time when the dot com bubble of the 1990s was spectacularly punctured. Today, MMC focuses on “transformative” tech and invests on behalf of institutions and high net worth individuals, using the tax-friendly Enterprise Investment Fund rules to reduce the risk. As things stand it has $500 million under management. Three portfolio members have attained unicorn status and a fourth is in the pipeline.
So when I spoke to McFarlane earlier this week, I was keen to get his take on the current investment climate.
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Public To Private
One of the key factors enabling businesses to raise finance and scale up is the changing culture among UK investors, particularly as regards where they are prepared to put their cash. “We have seen a changing attitude towards risk in this country,” he says. “That’s partly because the public markets are not particularly attractive. People are realizing that the action is in the private markets. We now have 5,000 investors and the appetite has grown. We also manage institutional money.”
It’s probably a fairly simple equation. As the U.K. startup sector has matured, nurturing some successes in the process, investors have been more willing to embrace the venture model as characterized by big wins more than balancing the failures. More cash coming in has made it easier for businesses to raise the capital to scale up.
But importantly, McFarlane says the ecosystem has become more flexible with secondary trading in shares allowing founders to partially cash in. “Secondaries allow CEOs to take money out of the – that’s a massive thing,” he says. Investors can also sell their holdings.
This flexibility has helped address one of the perennial problems of the UK ecosystem, namely that businesses were often seen to be selling too soon – perhaps being gobbled up by trade buyers or overseas corporations before having the chance to achieve their full potential.
Another factor – one that applies specifically to Enterprise Investment Fund companies – is that investments under the scheme aren’t limited by the traditional VC ten year cycle to invest and make returns from a fund.
The Ability To Raise Cash
That’s the funding side, but what about the companies themselves? What makes a business unicorn material? McFarlane has had direct involvement with two MMC portfolio unicorns – fintech, Interactive Investor and food delivery service, Gousto. He cites two important factors.
“Firstly, what is critical is the dyanmism of the CEO,” he says.
“For instance, with Gousto, the CEO absolutely gets it,” Macfarlane adds, noting that he has worked tirelessly to build a team strong enough to allow himself to step back from the day-to-day business and focus on strategy.”
McFarlane’s second point is that potential unicorns must be able to raise money, even in difficult times. “If you look back to the dot com boom and bust, Amazon went on raising money. In our portfolio, Timo Boldt, Gousto’s CEO has been very successful in raising money and Interactive Investor has also succeeded in bringing in big new investors.”
Teams are also important. “There may be gaps at the beginning but we will help our companies flesh out their teams,” says McFarlane.
McFarlane has seen the turn of millennium boom and bust, so will the current flow of cash last. McFarlane thinks so, not least because tech companies are leading a much more embedded digital revolution. However, he does expect some of the froth to come off the market. Good companies will continue to raise the cash they need, but those that are perhaps marginal in terms of potential or performance may struggle more in the future.