VC spotlight with ScaleUp Capital
TL;DR
- ScaleUp Capital launched its fourth fund earlier this year, raising c£100m, to continue to invest in and help scale up B2B technology businesses in the UK and Europe.
- We sat down with Simon Phillips, CEO at ScaleUp Capital, to discuss all things ScaleUp, how their approach differs from traditional VC & PE and his thoughts for the future.
The quickfire round…
Where are you based, and how big is the team?
We are based here in Victoria, London, and are a team of 17 people. It’s quite a large team for a small fund, but it suits our way of working, with half in the Investment team and the other half in the Growth team.
What sector, stage and geography do you typically invest in?
We focus on the B2B technology & services space. So, generally, this is software, content or data platforms. But crucially, all the businesses we invest in will all have a similar business model: subscription, SaaS, managed service or outsourcing.
Interesting, so really, it’s a lot less about the sector and more about the business model.
Yes, exactly, the verticals can be anything, but we end up in those sectors where there is most going on. For example, we see a lot in HealthTech, EdTech, FinTech and HRTech.
From a geographical perspective, we mainly focus on the UK, but with our new fund, we are looking to branch into Europe. We have just hired an investment director in Switzerland, who will cover the DACH region.
Stage wise. Well, we call it the scale-up stage. We operate in the SME space, but we are not a venture fund and so don’t use the language A, B or C. We are usually the first institution coming into the company, so in that sense, I would say Series A.
And what is your typical deal structure?
We like to take significant positions, 20% and upwards, doing anything from straight growth investment to a full buyout. The most common deal is actually in the middle, where the founder(s) de-risks by taking some money off of the table and we invest growth capital.
We aren’t a Venture fund investing in very early-stage companies that have been around for 1 or 2 years. We are investing in companies that have been around for 5–6 years or longer. So the founders have been at it a while, reaching a great milestone and deserve some money off of the table. Then, together, we can kick on. That’s going to take 4 to 5 years, maybe 6. They, and us, will need to work hard, so we are quite happy. In fact, in some instances, we encourage them to take money off of the table.
Total check size is generally £6m — £8m and may come in two tranches.
What is the background of the partners?
The three founding partners, myself, Frank and William, are all business builders and ex-CEOs of operating businesses within our focus area.
I built two companies within B2B technology & services and did that for ten years. It was this experience that was the acorn for what we do now. Frank started in Strategy Consultancy and William in Accounting and Banking before both moving into senior management positions at VC/PE-backed businesses and then joined us at ScaleUp.
So, all three of us have operational experience. Whilst we have pivoted to being investors now, that experience underpins the whole ScaleUp ethos and style. We love working with founders, rolling up our sleeves, and being in there with them on their journey.
And how many funds have you raised in that time?
We are currently on our fourth fund, our largest one yet. The 1st was £10m, 2nd £25m, 3rd £60m and now targeting £100m.
We don’t have many investors, maybe 8 or 9, that have grown up with us, and with every fund, we have added a couple more. They are all mainstream institutions and a couple of family offices. It’s quite a simple setup.
A deeper dive…
Great, I think that sets the scene well, and you touched on a couple of points that I’d love to get more detail on.
ScaleUp Capital was founded in 2001. Can you talk me through your journey to where you are now?
ScaleUp Capital was founded as Root Capital in 2001, and since then, it’s been a journey of professionalising and systematising how we operate. We have been on our own scale-up journey really.
Back then, we were doing exactly what we are doing now, but it was just me doing it all by myself, and it was very serial. Now we can help many companies at once.
The lightbulb moment I had after building two myself and investing in 4 or 5 companies was that each company had the same issues, challenges and requirements every time, and the advice and feedback I provided was similar. It was very repetitive. I thought none of what I am doing is rocket science. It’s all just good, normal management, but the founders don’t know it, so it is really helping them. And you can turn this into a system. You can build teams internally, build out the platform and codify it all to operate similarly to a consultancy engagement. And that’s what we have been building over the past 20 years.
How do you typically engage with a scale-up?
As I mentioned, our team is split into two: the investment and the growth teams. The growth team goes in to help and support the founders and management teams by working with them through our ScaleUp Programme. We are really interested in helping founders build their businesses, and we spend a lot of our time thinking about, learning and developing how we can do that better. It’s what we are really good at; it’s our DNA.
So much so you’re yet to have a write-off?
Exactly, we haven’t had a loss in our portfolio and have had over a 6x return.
Wow, that’s pretty impressive! Can you give me an insight into how you have achieved this?
Well, it’s partly because we pick good businesses to invest in and work with in the first place. But it’s not just that. We have built up a lot of expertise and experience in how to scale and build companies. We bring that to the companies that we invest in, to the founders, and it really makes a difference.
And how do you look to work with the founders and management teams?
The style can vary and is dependent on the founder. Some want a proactive, working partner. In this scenario, we would lean in and lead the way. Other times, we are more of a ‘phone a friend’ partner — there when we are needed but are more reactive. Either way, we are always wanted by the founders and provide a lot of guidance, resources and expertise, which is great!
It’s a proper partnership and a model that has worked very well. We like it. The founders like it. It’s a win-win. And the benefit of the model, the difference it makes, you can see it! These companies succeed way more than normal.
What are your thoughts on the scale-up phase?
It’s the next big challenge for the business, which I don’t think is any easier than the venture stage. It’s just different, and there is a lot to be done.
It’s about management, professionalising the way the business is run, governance and putting in place good process systems for sales, marketing and other areas, so you can take it from a £1m — £5m a year business to a £10m, £20m or £30m a year business. And we think with experience you can get good at it. We have done it 25 times now, so we know how to do it. We have baked that experience into our Programme and Platform and have everything that a business needs to succeed in the scale-up phase. We are de-risking this next stage, and that’s our message to founders.
The ScaleUp Programme that you take companies through — what does it look like?
There are four workstreams in the programme, which typically takes 6–12 months, sometimes a bit longer. That’s the time when our growth team goes in and helps with the heavy lifting, and at the end of that 12 months, the businesses do look and feel quite a lot more grown-up.
The first workstream is about recruitment of the senior leadership team.
Typically when we come in, there are the founders plus one or two people they have brought in who are running the company and doing everything. They are overworked and stressed and coming to the end of their ability to do it all. Many businesses, at this point, become lifestyle companies and don’t take it to the next level. But for them to kick on, you have to go from where they are today to having a proper management team. That’s 5–7 people with the right expertise and experience in all the correct areas to run a 10x business.
Hiring great people and the right people is difficult and is a crucial job. We will help the team with that and have done it many times now, so we know what good looks like. We will work hand in hand with the founders to create that team, and it takes about 12 months.
The second workstream looks at professionalising and building the organisation.
Normally you’ll find, when we invest, the founders, maybe a couple of others, will have done the selling, and they have got clients through their passion, through their network, through being great. But it’s not a scalable process; it’s very human-centric. If you want to 10x your business, you need to create a proper sales and marketing function with good processes and systems.
We have done that loads of times and have fantastic experts, content, training materials, job specs, and incentive schemes. All of it. We will lean in and give a lot of support to ensure that everything is scalable, working well and hitting good metrics.
Third is implementing good Governance.
We focus on installing good management & KPI reporting, a proper board and chair, and a good incentive scheme around the whole company. Putting all that stuff in place is needed, but often they haven’t got it when we invest. It’s important not to do this too quickly though, and stifle the organisation with bureaucracy. But over a 12-month period, you do want to build this infrastructure to help fly the plane better.
And the last one is about developing the Go-to-Market.
They will already have product-market fit when we invest. However, usually, the founders still have outstanding questions, such as exactly which part of the market to go after or which customers to target. It’s a job of sharpening up and focusing on the go-to-market, and our process can help with that. It involves a lot of research, going out to the market and talking to customers, looking at the competition and figuring out where to focus. Essentially, we are answering the question — what is the market sweet spot that we should go after?
We have a step-by-step process for each of those workstreams, and we are very happy to lead the way and be more proactive, or we can do it differently, depending on what the founder wants and needs.
If you look under the bonnet of the programme, there is a lot there, and it’s all about the sequencing of the work and workshops. When and how you do these things. So we are providing our team to help manage the process and help do it quicker, with fewer errors.
You mentioned the ScaleUp Platform a couple of times during our conversation. How does that differ from the Programme that you offer?
The ScaleUp team is only the tip of the iceberg, there is a whole network behind the scenes, which is accessed through our Platform. The Programme is a step-by-step process, whereas the Platform contains all our resources that support the scaleups. It’s essentially a resource bank with three key areas.
Knowledge — This is where we store our helpful tools and content for whatever the founders are looking to develop in their business.
Network — It contains all of our experts and practitioners across every function and who can be brought in as wise council or experienced advisors to support.
Service Providers — Vetted, proven and good-value agencies, consultancies, training companies etc. that are all fit for purpose.
We will match what the scaleup needs with the right piece of information or partner, saving them time, effort and, crucially, the opportunity to get it wrong. Bringing in the right expertise at the right time to help these companies is really important and will make it 10x more likely to succeed than a founder who has never done it before trying to do it on their own.
We have talked a lot about how you work and support your portfolio companies, but what are you looking for in a potential scaleup?
We look for a variety of different things when looking to invest in a company
- They have found product market fit, with enough customers and history for someone external to prove the demand for the product.
- £1m ARR, with good retention rates and customer referencing.
- Scalable systems and processes. Nothing that’s going to be a major bottleneck in the implementation of growth.
- A strong relationship — We are interested in a good fit between ScaleUp, the Founder(s) and their team. Collaboration and partnership are key so we can become part of the team. We want to feel like it will be an honest, constructive and positive relationship.
- Fair valuation — We run a different model to the Venture model, focusing on less speculative and more proven companies with stable and not hyper-growth (think 40% — 60% YoY). We think they are fantastic businesses, which can be scaled if the market is big enough, to be worth £150m — £200m in 4–6 years. We don’t tend to compete with traditional venture funds, so want to pay a fair and right price for the company.
You led the raise into one of our past clients, Sifted. You have just talked through what you look for in a potential company — what led you to invest in Sifted?
It met all of the requirements that we just discussed. Clear product market fit, a big market, a good team of people and there is nothing in that business model that isn’t scalable if you get the execution right. And it’s a business model that we are familiar with — B2B media, B2B subscription. We knew exactly what challenges they were going to have, and we felt that we could help.
It’s a classic scale-up for us. They were at that point in their scale-up journey, where it was about filling out the senior team, professionalising the process, creating scalable sales and marketing operations, and investing in a subscription product. All that stuff. It’s actually a great example of what we are looking to do here at ScaleUp.
What was the most recent company that you invested in? Can you tell me a bit about it?
With what we are looking to invest in, the metrics are all very similar. Investment into a SaaS or Subscription business with £1m — £3m revenues, and if it’s more of a service business, it’s £5 — £10m revenues. Growing at 30% — 60% and somewhere between +£1m EBITDA and -£1m EBITDA.
The one we have just done, GoReport, looks exactly like that. It automates property sector workflows, helping surveyors digitise their inspecting, reporting and analysis process, driving greater efficiency and more effective workflows. It’s a classic workflow automation tool.
To the future…
What are you looking towards in the future with ScaleUp Capital?
We want to scale up ScaleUp! This fund size is bigger than our last, we are hiring a larger team. We just want to carry on doing what we are doing and get better in the future. We aren’t looking to change the model, that’s pretty fixed. But the number of companies that we can invest in can change. There will be 10 investments from our current fund, and hopefully, the next one will be 15–20, and with the team getting bigger we can provide the required support.
We are also looking to internationalise. The kind of scaleups that we invest in exist in every country, and there is the same shortage of institutional money in our space. It’s a bit too small for PE, and VC funds are more focused on hyper-growth companies. It’s an open space for institutional investors, and we thank that’s true in every country. We will make 2 or 3 investments overseas in this fund and in the future we will look to do more.
What are your thoughts on the VC environment?
We are very pro-tech. Looking at the big picture, we think that we are still at the foothills of where tech could be and have seen no shortage or reduction in the number of interesting software and tech businesses to invest in. There is lots to be done, especially with AI, robotics, VR, and metaverse coming through. There is a big wave of interesting companies and we feel as if we are in a good space to help them grow.
Due to our business model, we weren’t really affected by the venture bubble growth and burst. So our view on cycles and recessions is neutral and have a positive outlook on finding good companies that are doing good things and helping them to develop. You can do that at any point in the cycle. If you time it right, you might make more money, but our core value proposition will not change.
And, finally, what are two sectors that you are really excited about?
I’m really interested in HRTech. Technology that helps employees engagement, employee development, well-being, skills etc. It’s an interesting area using software, data or platforms to help organisations to perform, collaborate or communicate better.
We always see a lot in HealthTech and EdTech, they are great areas. But, still, within work, I think that there is a lot of good workflow automation to be done. A lot of processes are clunky and can use tech to make them better and more streamlined.
Brilliant. Simon, it’s been an absolute pleasure chatting with you, and I wish you all the best for your plans in the future.
For more information on ScaleUp Capital, visit their homepage here.
Are you a founder raising institutional funding? Head over to our fundraising resources page, list of active funds or get in touch with a team member here!
Read previous VC spotlights with Crane Ventures here, Samaipata here and World Fund here.
