A look at Entrepreneurship in the UK

Overview

According to Crunchbase data published through April 2022, the UK boasts 43 companies with a valuation in excess of US$1bl, worth a total of 190bl. This compares to 88 in all of the EU, with a total valuation of 275bl. The UK boasts nearly 50% as many as the EU even though the UK GBP is only about 20%. The entrepreneurs leading UK Headquartered companies it seems can build more valuable enterprises than those located in the leading EU countries.?This does not by the mean necessarily translate into British entrepreneurship.

Examining some other facets

Venture Capital interest in backing UK small to mid-sized based companies (defined as those with up to 250 employees) has been on the rise consistently after the financial crisis despite the turmoil that has been caused by Brexit on certain important industries.??This can be seen in the chart below extracted from Crunchbase data, with 2021 clearly a year of exceptional acceleration above trend.

?The interest in this part of the UK market shows a stronger pre-dominance of activity vs. EU counterparties, with UK market share roughly representing between 2/5 up to nearly 3/5 since the financial crisis. UK companies punch above their expected weight behind the availability of more capital, greater financial transparency than their EU counterparts, and reduced participation of traditional lending sources (i.e., banks oriented toward SME clients).

While 10,000 companies in the UK have received venture capital financing at some point, the overall presence of venture capital in the UK market remains small. This can be seen by the fact that there are more than 500,000 businesses that are operating in this part of the market, with turnover on average in these companies ranging from just less than ￡2ml per annum to ￡50ml.?Despite most of these companies generating a gross revenue stream of between ￡175-225k per employee, only 2% of them have acquired venture funding.?This underscores the fact that venture capital is usually looking at market sectors that can achieve hyper growth, and thus does not often look at industries that grow too slowly or may be too capex intensify. In the UK, only about 2.5% are classified in this way, thus suggesting that when a firm does manage to start demonstrating hypergrowth characteristics than venture capital interest in such a company will be strong.

Private Equity

Turning toward an examination of Private Equity, one notices that here the UK appears to operate more in line with its GDP position vs. the EU.?Since the financial crisis, while there has also been strong growth in PE deal flow as part of the overall M&A and majority acquisition landscape in the UK, the UK vs. EU deal volume has roughly between 20% and 25%, with the value multiples being a bit more favorable at 25% to 30%.

Private Equity firms have had an increasingly important role in creating exit strategies for UK entrepreneurs since the financial crisis. Of about 41,000 eligible companies that could be targets for private equity, roughly 1/10 have executed a transaction of this nature.??This now represents more than 1 out of every 3 majority sale transactions that are taking place. This suggests that more privately owned firms are open to transactional structure that provide them with operational leverage combined with partial exit rather than a full sale to a strategic buyer.??

?Business Evolution

Before we start to evaluate how entrepreneurs should think about interacting with private equity or venture capital financing routes, it is worth mentioning that

1) The UK has been spawning about 375,000 new businesses a year over the past 5yrs through the first part of the pandemic. The underlying data on births vs. deaths confirms that across the UK between 1/8 and 1/10 will not survive beyond a year and that the survival rate at the 5yr anniversary is about 2/5 across the country with some areas showing survival rates at sub 30% and none across the UK being above 50%. This hasn’t prevented more businesses starting than dying on a consistent basis in the country, even considering that the implementation of IR35 sharply reduced the number of consultancy type businesses across a number of different sectors significantly in 2020.

2) An analysis on business growth and declines continues to show how broadly important the property segment is to the UK, both in relation to core delivery of construction services, and also in the distribution and maintenance of property. At the same time, the shift to e-commerce and on-line retailing has been a dramatic feature of the UK market. The number of non-physical retail businesses has more than trebled in the last 5yrs, mimicking the growth of non-specialist wholesale trade, and also fueling even faster growth in delivery and courier services.?These advances in new business have been offset by a substantial reduction in entrepreneurs targeting warehousing and storage, reflecting a continuing consolidation trend in this market, as well as perhaps more unoccupied real-estate being available for use in this way.

?Implications for Entrepreneurs

As a person who frequently works with and interacts with entrepreneurs, the evidence I draw from the above and would share can be summarized as follows

1) Venture Capital allocation to the UK has been outpacing that of the EU for a while now, so had it not been for the destabilization of the Ukrainian conflict we might have expected to see some rotational shift from the UK to the EU from within the global VC community. This however now seems less likely as the opportunity for the emergence of hyper growth sectors in the EU seems highly diminished due to inflationary pressures and substantial supply chain dislocation. This is likely to be positive news for UK companies that can continue to demonstrate hyper growth capabilities as well as potentially branch out their operational footprints significantly into emerging market domains. One notes that a lot of African ventures have actually been spawned from entrepreneurs based or educated in the UK (esp. in e-commerce, transport, and financial services) so this might be where more funding activity is focused while the broader instability related to the Ukrainian conflict continues.

2) Private Equity appetite for buying into mid-market growth companies has become a much more significant exit and scale up strategy for entrepreneurs who are able to build and operate profitable growth-oriented businesses in the 50 employees to 200 employee range. The sweet spot seems to be gyrating toward organizations that are turning over roughly ￡20-￡25ml and employing between 100-150 people. PE firms seem to be prepared to pay higher multiples than strategic buyers at this level for the scale up potential these business offer if entrepreneurs have the appetite to put more risk into this cycle and have a demonstrated track record in a larger corporate setting to buttress their credentials.

3) The underlying message to draw from Unicorns is that the UK has been one of the primary beneficiary markets for entrepreneurs seeking to build and fund fintech ventures, with some additional capabilities around the presence of artificial intelligence, and e-commerce further aiding entrepreneurs who are leading with a Fintech slant.?When it comes to Fintech, UK entrepreneurs have been backed to pursue challenging the status quo in a number of different financial service sub-segments, as well as re-imagining the way that solutions for payments, core retail and sme financial services, and insurance products are priced and distributed.?

Conclusion

When one considers that transactions involving entrepreneurs across venture capital and private equity have amount to well over US$2tr of total capital invested in the past decade, it is quite surprising to me that the underlying availability of appropriate financial services to reflect the needs of these individuals has not really been an evolving theme widely pursued beyond a bit of lending interest from the likes of Oaknorth.?By my count, the UK outside of its listed plc companies has at least 1.5ml private shareholders to service, of which each year about 10% are moving toward legitimate wealth, and a similar number are being courted to realize substantial value.??This is an opportunity that deserves much more attention.