Andrew Wolfson: Putting investment to work for UK enterprise

The VCT sector has an opportunity to back quality businesses – particularly if they are willing to manage early-stage risk


As we head towards a full easing of Covid restrictions, confidence is gradually returning to the British economy. Key to its recovery will be the dynamism of small and medium enterprises (SMEs). These six million businesses, covering every sector, can be regarded as the engine of the economy, and the venture capital industry has an important role to play in helping to provide the fuel for their growth.

Bank of England governor Andrew Bailey recently predicted the UK economy is expected to grow by 7.25% this year. That would be the fastest rate in more than 70 years – although we should not forget this is recovering lost ground after the shock to the economy of a 9.9% contraction in 2020. Nevertheless, the upturn in the economy will be built on the success of not only large multi-national companies but also our SMEs.

Big corporates often receive much of the attention from politicians yet we should remember that SMEs constitute 99.9% of businesses in the UK, accounting for 60% of employment and 50% of turnover in the private sector. As the vaccine roll-out allows us to return to some kind of normality, the next few months will be a key period for the economy.

The CBI has urged business to “Seize the moment” to super-charge the UK’s bounce-back from its Covid-induced economic malaise and the investment sector – not least venture capital trust (VCT) managers focused on growth-stage companies – can play a significant role here.

Investor faith

The VCT sector is an area of increasing interest for investors – something we have noted first-hand having recently completed a record fund-raise of £40m, which shows the faith investors have in both VCT managers and in UK enterprise.

One of the reasons investors may consider VCTs for their portfolio is the investment is diversified across the portfolio and therefore a number of businesses. Investors in longer-running VCTs stand to benefit from businesses that have been nurtured over a number of years, with potential exits and returns on the horizon.

As VCTs invest in early-stage businesses that inherently carry a degree of risk, ongoing communication with investors about portfolio activity is vital. This ensures they not only hear of the good news but also how we are engaging with companies navigating difficult times.

Inevitably, when you invest in early-stage businesses, there are some companies that do work out. We do not regard these as failures per se – more a function of the ‘animal spirits’, to quote John Maynard-Keynes, of the market economy.

When a business is not working, it is best to wind it down with the consent of the founder rather than invest more capital to keep it afloat. Often, in such cases, this is not the fault of the founder – consumers may not be ready for the product or service they are offering. The founder may be ahead of their time, or even offering their wares in the wrong country. As a case in point, back in 2014, we invested in a company that offered pulse-based snack foods, but the consumer was not ready for it at the time and the business was wound down.

I know from personal experience how difficult throwing the towel in can be. In 2008, I tried to launch a business for mobile phones whereby children could only be contacted by numbers pre-approved by parents, but I was let down by the mobile network providers. I was bitterly disappointed but had to recognise it would not work and move on to another challenge. While it was difficult at the time, I learnt a huge amount from this aborted venture.

Stand-out characteristics

When we think of the entrepreneurs and founders we work with, there are certain stand-out characteristics we target – the first being resilience and the ability to pivot. Perhaps because of my past experiences, I see the value in the ability to navigate through stressful and difficult times.

When we assess an investment opportunity, we look at the achievements of the founder to date and the valuation of the business. We specifically interrogate where the business will be when it next requires funding. We are also conscious, however, that in business things seldom go to plan.

The business plan will rarely, if ever, be delivered as outlined – what happens may be better or worse. As such, we like to focus on the character of the founder and ask whether they have sufficient resilience – will they be able to pivot to take advantage of opportunities that are not apparent at the time of making the investment?

The second quality we look for in a founder is honest and open communications. We always like to remind entrepreneurs in our portfolio it is much more important to tell us the bad news than the good. The faster they do that, the quicker we will be able to work out a solution together.

One of the outstanding examples of this was Kara Rosen, who founded Plenish in 2012. Through hard work, skilful pivoting and a very effective communication style, she built up the business into an award-winning plant-based milks and juice brand. It was one of our earliest investments and was recently acquired by Britvic PLC.

Humility matters

One final characteristic we appreciate in founders is humility. It takes a particular character to set up and scale a business. Founders are usually passionate and determined but they are not always quick to admit their deficiencies. That is why we appreciate humility, as surrounding yourself with colleagues who compensate for your skills and knowledge gaps is a hallmark of an effective leader.

We saw this trait in the founders of portfolio company Popsa – a tech start-up delivering a user-friendly photo book app. The two founders, both young tech entrepreneurs, appointed a seasoned chair with experience in print. We were impressed they had the humility to recognise their knowledge gap and make an appointment to address this.

The qualities of successful entrepreneurs are desperately needed at this fragile time to develop the next generation of companies. We have a strong start-up culture in the UK. Unsurprisingly, lockdown led to a spawning of new businesses.

Figures show a record 770,000 new business were created in 2020 – a growth of 20% on the previous year. Yet the drive to create new businesses is not just a Covid phenomenon but reflective of a wider cultural shift. In my youth, most of my contemporaries aspired to work for large companies or organisations whereas, nowadays, when I go into schools and universities, I hear that many young people want to be entrepreneurs.

The VCT industry has an opportunity to back quality businesses – particularly if they are willing to manage early-stage risk. If these businesses are not financed, we will miss many opportunities and squander talent. If we do manage to fund entrepreneurial gems, we will be building our future economy.

Andrew Wolfson is CEO of Pembroke VCT


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