Building a scale model and accessing finance

How easy is it to scale-up and grow a business? That’s the question we put to our expert panel, drawn together by Boost Business Lancashire at the Energy Centre in Nelson.

How do you define a ‘scale-up’ business and why do they matter?

AV: Scale-up has become more of focus within Lancashire. We’ve always talked about growing businesses, which generally means success. From my perspective scaling is about capacity and capability.

As a business grows it creates demand for its service or product. However, at the same time the cost base, capacity and capability are not always looked at. It’s alright creating demand, but what if you can’t supply? What if you don’t have the infrastructure in place? What if you don’t have the staff in place?

PRESENT:

• Richard Slater – Lancashire Business View (chair)
• Sue Barnard – British Business Bank
• Ian Dixon – Access to Finance
• Frazer Durris – Businesswise Solutions
• Carole Garrett – Profit Optimiser
• Peter Leather – University of Central Lancashire
• Michael Lough – Blue Wren
• Pauline Rigby – Forbes Solicitors
• Stuart Thompson – Reorient Consulting
• Amin Vepari – Lancashire County Council
• Heather Waters – NatWest Bank

What we’re trying to do in Lancashire is identify our scale-up businesses. They are a massive part of the economy.

It’s about really working with the private sector and people that have got experience of scaling their business to really add value and to really push our ‘success’ businesses.

ID: It’s easier to talk about the characteristics of scale-ups rather than absolute statistics. So typically, if you think about those businesses, turnover isn’t necessarily one of the key characteristics. You’re looking at things like product market fit, have they demonstrated commercial traction of contracts, revenue and so on? Have they got a management team in place as opposed to a sole entrepreneur owner/manager who’s driving that forward? It’s those softer characteristics. Typically they’ve been through a number of funding rounds, that’s often one of the key questions when they engage with us.

ML: We’re a software house and we were growing at a good rate in terms of turnover and employment. However, in terms of productivity, if you looked at our net profit, it was plateauing. We had to stop and look at our productivity and our processes. On the back of that we created our own product.

The attitude was to say ‘no’ to scale, it’s not sustainable to keep growing turnover and we’re putting our business at risk. We had to invest in process and work flow and management and technology. But then there is a financial challenge. How do you invest in that and still do business as usual?

We’re entrepreneurs, we want to create value. You don’t create value by increasing costs and putting the burden on an individual. You create process that you can repeat.

PL: In terms of scale-up, businesses must recognise they may need to get new management. Having the same management team at seed stage when you’re going through your second or third round of funding isn’t necessarily the best way to go. It’s important to understand that they may need to bring in a new CEO or two or three different management teams over the lifetime of the business.

PR: A scale-up business has a product that has the ability for concentration in the market, with low resource. Private equity (PE) houses looking to invest in scale up businesses are looking for that, as well as a strong management team willing to adapt, show resilience, look at their processes and change things around as and when required. It’s not necessarily about the product itself; it’s more about whether the management team has experience in scaling-up businesses.

CG: Most businesses would never categorise themselves as a scale-up business. One or two may see themselves as a growth business, but in terms of the definition, I don’t think you’d be able to differentiate.

In terms of a business owner’s aspiration for scale-up, as we go through that step change they may get to burn-out mode. I’d start by asking them what is the exit strategy, what is the aspiration?

ML: We’re ten years old, we have gone through a very challenging environment, but we’ve always looked at what we can do to grow our business in a sustainable way. Scalability was our watchword for sustainability.

We wanted to create value and you do that by not making it dependent on you as a business owner. You need to bring in a team that can run the business and then create a process and an output - whether that is a product or a service of some description - that is repeatable. That is where scalability comes in.

ST: As a non-exec I sit on boards and people who are getting burned out haven’t built the right set of people around them and lack that management acuity to say, ‘Actually, I need help’. When you get into equity investment, you’re going to hopefully get that person coming on to the board who will give you that support.

PR: There seems to be resistance against equity investment because there’s a lack of understanding of what it is. There’s also a feeling of ‘I don’t want to lose control’ and you need to look at what investment can bring to the table. How can it enable me to get to that next stage?

CG: Where you get an entrepreneur or a business owner that is coached or advised, taking that step back and putting somebody in that business development role is really key. Sometimes it might take 12 months to persuade somebody to do that, but once they’ve been persuaded to do it, they don’t get to the burn-out situation. They’ve got somebody there who can actually take the business forward with them.

HW: Some people have that mind set at the beginning, saying ‘this is where I’m going and that’s my vision’ and other people will organically grow to the point that they realise or are advised that they need to change as it is the only way they’re going be sustainable.

ST: Half the challenge for a business of any kind is the due diligence. Does your accountant have experience of equity investment? Does your non-exec director? Even before you’re going for investment, get somebody around you that knows. Part of the journey is getting the knowledge you need, and you do that before making any critical decisions about growth.

FD: We’ve never acquired, we’ve never raised big funds. We’ve never needed to raise equity. We’ve got a project running at the moment which might see us scale-up.

We’re considering, ‘Do we start acquiring or do we just continue our organic growth curve?’ Because the next two or three years looks very strong, but there is also an element of thinking we could go faster. We’ve got the infrastructure too.

It’s deciding what we want with the business and what we are trying to build here. We’re trying to build a business for the long-term and as soon as you take private investment it’s becoming more of a growth platform.

CG: This is about risk, and you need to do a risk analysis because some people will become shackled with debt, and it can be to the detriment of them.

ID: I tend to work with early stage venture capital (VC), scaling capital. It’s getting your head and your management team’s heads around the fact you’ve got an external influence on the business and the journey is a very different one.

PL: Once you’ve dipped your toe into VC you are reporting into somebody else and it’s all about them - what they want rather than what you want.

AV: It is about learning and education. Most scale-up businesses have a mentor or want a mentor but don’t know where to find one. The other part, which is just as important, is peer to peer networks. Having that network around you and having those people that you can go to lends itself to growing and scaling a business.

What are the key sources of finance for scale-up businesses, what are financiers looking for and how do you get your business ready for investment?

SB: In the last five years, under British Business Bank-backed programmes we’ve invested £500m in more than 4,000 SMEs across Lancashire.

We’ve got people on the ground now really heavily promoting the Northern Powerhouse Investment Fund. So there is a lot of active investment under the regional funds but we need to look wider at exactly what is going on. It’s about getting more understanding. We invest but we don’t track how these businesses go on.

ID: There is a lot of money in the marketplace, there are lots of programmes. The fact is a lot of scale-ups are undercapitalised.

For me, the bigger issue is where businesses can actually access that scale-up capital.

Currently in the marketplace there’s a gap for businesses that aren’t supported by VC. The biggest challenge is to persuade more ‘seed-based funds’ in the North West with a higher risk profile inherent in that.

PL: The issue we have in this country is risk. In the US banks have an ability to write off an element of what they lend. In the UK I don’t think we do. We need that ability to take a punt. We don’t take punts in this country. Unless you turn up with a fully-formed business plan, nobody is interested.

ST: Businesses very often fail to understand the business model of the VC, because they don’t understand the timeframe, they don’t understand the appetite for risk and all that.

CG: Everyone shies away from business grants. There are 28 opportunities listed on the UK government’s site that have grant assistance for business. If they are clever in getting grant assistance in the first place and use that as leverage in an area that perhaps isn’t open to them, they might not need VC.

HW: The funding landscape is huge but how many businesses go down the VC/PE route? It’s a small number. A lot shy away, because they don’t want to give control away.

We need to give people more information, to get them to feel more comfortable to make that decision.

PR: It’s just such a mass of information out there that businesses just get so confused. They’re trying to run owner-managed businesses day to day, trying to just grow their business. We need to break down the information into more of a consumable format.

ID: Back to structural problems in the marketplace, the money is there, the appetite from the fund managers doesn’t appear to be.

SB: One of the other issues is capacity in the market in fund managers. Everyone is shouting that VCs need to be in the North, that we need to have more funds in the North, but we’ve got a new £2.5bn fund and we’re out looking for fund managers to deliver that across the UK.

FD: Businesses have to be ready to take on any kind of investment, because it’s got to be sustainable. If they can’t raise money from the bank then there’s a problem, isn’t there? If the bank won’t lend money to a business, there’s a reason for it.

Businesses need support to get them ready and to open their eyes to the availability or access to funding. I don’t think raising money is an issue if your business is ready but what you do need is quality support and mentorship.

ML: We got some finance a year or so ago around product development. I would have liked to have known the time it would take to get that money, because it took far too long for us. It took five months when it should have taken three weeks.

We’re ready to scale our business, but we are a little bit more reluctant to look at other funding options, just because we need to know what the likelihood of the decision is. Whether it is no or yes, that’s fine, as long as you get a decision because otherwise, you’re in limbo.

The good thing is that by looking at investment, you actually are looking at your own business and asking are you a robust, scalable, growing business.

PL: There is plenty of money out there but it’s about getting the right money for your business.

PR: The process for equity investment is very similar to a sale, so your business must be ready. You have to have done your own due diligence of your business. Your systems all have to be in place, your paperwork has to be top notch. These are the hoops you have jump through to show that you are a sustainable business, just like you would on a trade sale.

PL: We see companies coming to us that don’t have a business plan and think that a ten page pitch is going to get them an investment, because they see these types of things on the TV.

ML: You don’t necessarily set out to say, ‘I need investment’ and then go and work on your business plan. You do it the other way around and you actually look at your business and what your aspirations are and your vision for your business. Then you decide, ‘Okay, how am I going to get there? Then you look at the gaps and funding is quite often one of them.

CG: There are an awful lot of businesses and there might even be growth businesses, that don’t have a business plan. They think that they might have a plan in terms of finances, but they’ve no strategy written down. They’ve no purpose written down and they’ve got to be coached into doing that.

ID: The key thing with funders is they don’t mind problems, but what you are trying to do is establish credibility and trust and honesty are the key things.

HW: We talk about working on the business rather than in the business. There’s an opportunity when you get to that point to actually look how you grow it. Having the right team around you, having that business support, that would be the first stage - before you even look at the finances.

AV: It is about educating and learning; and showcasing is really important. We do invest but do we shout about it? Do we pull these great stories together? Do we celebrate it enough? Do we measure that impact?

What one piece of advice would you give to scale-up businesses?

ID: Peer to peer networks are critical.

CG: Challenge yourself in terms of the professional support team that you’ve got around you. Is your accountant the best accountant and offering you the best advice that they can? Is your bank supporting you? Have you got the right mentor or coach?

FD: Do your own research, don’t take anyone else’s word for it and go and speak to as many people or investors or finance houses or whatever as possible, over as long a period as possible and make your own conclusions.

ML: You’ve got to be realistic and you’ve got to be prepared to be challenged, and if you can answer those challenges, then you can start to speak to as many people as possible and work out what would be best fit for you, as a business. Get yourself productive, then you can easily scale.

PR: Lean on your support network, make sure you have a good sounding board in place.

AV: Surround yourself with people that are really going to challenge you, and not necessarily people that will tell you what you want to hear.

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