Boris Johnson and the London Mayor’s Office back Playfair Capital

Big news!

Last Thursday 4th December, the Deputy Mayor of London announced the launch of the London Co-Investment Fund (LCIF) at City Hall. This new initiative, founded and managed by Funding London and Capital Enterprise, comprises of a ￡25m fund dedicated to supporting local technology startups. This capital hails from the Mayor’s ￡110m Growing Places Fund. Playfair Capital was selected from a pool of 38 venture firms, angel groups, and crowdfunding platforms on the basis of our track record investing and building tech companies in London. Along with the LCIF and 5 other investing partners, including our friends at Wellington Partners, we’re tasked with deploying over ￡80m of private and public sector money into 150+ Science, Technology or Digital companies based in London over three years. A key target for the fund is to fuel rapid job creation in our burgeoning technology ecosystem, which already counts a healthy 34,400 businesses, 155,600 employees, and 32 incubators.

Addressing the funding gap

The reason for the genesis of the LCIF stems from the challenges faced by early stage companies to raise capital to fuel their growth. Research commissioned by the Greater London Authority and the London Enterprise Panel a year ago found a glaring ￡1.4B finance gap for small and medium enterprises (SMEs) in London. While a majority of this gap (76%) was attributed to a reticence of banks to loan money, the remaining 24% (or ￡343m) gap was categorised as a lack of Angel/VC finance. The rapid rise of peer-to-peer finance, including the likes of Funding Circle, Zopa, and RateSetter for loans, and CrowdCube, AngelList, and F6S for equity, are definitely helping in this regard. It appears that more needs to be done, however, on the Angel/VC front.

If we place the lens over technology startups, their fundraising frustrations become clearer. A report published this year by TechCity UK (a publicly funded organisation dedicated to supporting innovation) noted that one in three businesses suffer from a lack of investment for growth. Of the 43% of respondents raising a second round of financing, almost a quarter faced roadblocks. These ranged from an unwillingness for investors to write cheques, to an excessively protracted period to close rounds when they decide to do so. A consequence of this climate is that those companies experiencing rapid growth in the UK are turning towards the US and Asia to add fuel to their engines. If the UK’s most promising companies outgrow the ability of the local ecosystem to nurture their maturation, we will lose out on job creation and human capital, as well as economic activity and innovation.

This state of affairs was further explored in an independent report to the UK government led by Sherry Coutu, the Scale-Up Report on UK Economic Growth. Published last month, this study focused on companies beginning with at least 10 employees that averaged an annualised growth in employees or turnover greater than 20% p.a. in the last three years. The major finding, depicted in Figure 1. below, was striking. If we compare companies growing between 1–20% p.a., a far greater proportion of them are based in the US rather than in the UK. The latter were also significantly smaller on average than their US counterpart. There’s also an interesting dichotomy in that both static firms and companies growing at more than 20% p.a. are more prevalent in the UK.

Figure 1. Closing the gap between the UK and US average annual company growth rate (Source)

If we’re able to close this “scale-up” gap within three years, the potential uplift in job creation and additional turnover in the UK economy is significant: 238,000 jobs and ￡38bn. Gazing further afield into the medium and longer term (by 2034), we’re looking at another ￡96bn p.a. and ￡225bn additional gross value added along with 150,000 net jobs, respectively.

Initiatives such as the LCIF, the British Business Bank and the Business Growth Fund, which have together invested over half a billion pounds, are therefore crucial for addressing this outstanding funding gap for UK businesses to thrive. Given that the US venture industry outsizes that of Europe’s in terms of dollars invested and deals completed by circa. 4-fold (Figure 2., Sources: WSJ, EY, BVCA), this influx of capital into our ecosystem should help UK companies compete on fairer terms with their US counterparts.

Figure 2. Global annual VC investment 2006–2013 (Source)

What this means for Playfair Capital

Needless to say, we’re thrilled to win the support of Government (#BackedByBoris) to further establish Playfair as a key pillar in the early-stage financing arena for ambitious entrepreneurs operating in London. We’ve expressed our views on the importance of speedy decision making when investing or raising venture capital. Having the fire-power of the LCIF at arms-length is a massive win for entrepreneurs wishing to partner with us for their first round of financing. It’s also helpful for the 18 London-based companies who are already part of the Playfair family as they go on to raise subsequent rounds. Specifically, we’re now able to rapidly source up to ￡490k of ￡1m early-stage investment rounds from the LCIF. With a turnaround time of less than a fortnight, we we will be able to close out rounds faster. Our companies will receive more resources to build their A-list teams quicker and they will be able to deliver their promise of innovation faster than ever before. As early backers of DueDil, Appear Here, and Festicket, and many others, we strongly believe that London is a fertile ecosystem for emerging world-class companies.

Partnering with the LCIF is also a key milestone in the history Playfair. The royal ‘we’ started out as an Angel, first investing in DueDil back in December 2010. Based in White Bear Yard with Passion Capital, Federico built a portfolio of two dozen startups over two years. In mid-2013, the single-LP fund model we are today was born. We’re now an investment team of four (Fede, Joe, Georgia, and myself) and an operations team of two (Anna and Linda)?—?more on us here. We’ve deployed over $10m in more than 30 companies in the US, UK, Nordics, and as far afield as Kenya, all from the earliest stages.

Figure 3. On a fund basis, we realised a 6.5x leverage ratio of Playfair to syndicate partner funds

Having started from scratch four years or so ago, our Angel heritage has meant that we’re syndicate friendly. While we now take a lead investor role more so than not, we are extremely good at building value-add syndicates. We view this as a key way to reinforce the core competencies of our founding teams and fill in knowledge gaps to optimise for successful outcomes. Figure 3. above, taken from our LCIF application, shows the leverage ratios we achieved across our portfolio, grouped by year of our first investment. We represent here the quotient of total syndicate funds and Playfair funds (new and follow-on rounds). On a fund basis, we have called 6.5x more syndicate capital for every Pound we invested. This means our startups benefit from a diversified investor base, which can prove handy for follow-on rounds.

Figure 4. Our co-investor network by numbers and categories

Diving deeper into our co-investor network, we measured the number of unique investors (angels, VCs, accelerators, and corporates) with whom we shared a capitalisation table, grouped by the year in which we first invested. Our universe of co-investors has expanded at a compounded annual growth rate (CAGR) of 104%, with the vast majority of our co-investors being Angels (80%), followed by VCs (18%). We’ve now blown past 200 unique investment partners, and counting.

Figure 5. How Playfair portfolio companies have grown headcount from the time of our investment to present day.

A final point worth noting is the pace at which the companies we invest in grow. In the early days, the chunkiest line items on a startup’s P&L refer to wages paid to their staff and the principal value driver is human capital. Hence, we measured the fold change in employee counts of 18 London-based portfolio from the time we invested to present day. Looking at the dataset as a whole, these companies started out with 60 staff (principally founders and founding engineers) and today employ 229 people. This equates to an average of 3.82x?—?the outlier in 2010 is DueDil (excluding this data point, we achieve 3x).

All in all, the diverse teams we’ve been fortunate to work with have gone on to build consumer and enterprise companies in e-commerce, big data, API platforms, fintech, hardware, and marketplaces with a combined enterprise value north of $250m. The LCIF marks the next stage of our journey. We’re doubling down on our focus to find and back those trailblazers who are bold enough to ideate, build, and execute on a technology that generates a quantum leap in the way people live, work, and play for the better. If that sounds like you, come say hi.

Questions or comments welcome @nathanbenaich