Private Equity Vs Venture Capital. Similar but really quite different.

It’s more than sixty years since the birth of the Private Equity (PE) and Venture Capital (VC) industries, where both have evolved into ubstantial pillars of the investment landscape since their humble beginnings in the 1950’s.

While both sectors are now fairly mature, it remains surprisingly commonplace for business owners to use the terms PE and VC interchangeably. In concept, both are vehicles for capital to flow into private companies with the expectation of returns that beat the public markets, but the differences between these asset classes far outnumber the similarities.

In this short reading you will get an introduction to the two investment classes, and if you’re thinking of raising investment for your company the knowledge you’ll gain will help you to understand where you fit into the corporate finance landscape - and what you might want to think about when you pitch your business to GP’s (you’ll learn more about GP’s and LP’s shortly!).

Investment commitments continue to chalk up numbers as 2022 fires up.

With both private equity and public capital markets continuing to give access to new capital this year, we are pleased to have been appointed to advise on a London battery-tech IPO, and concurrently concluded on financial commitments into UK real estate. Our domestic and cross-border investment focus for scaleups provides increased liquidity to founders and this Q1 update highlights how supportive the markets are across ever-broad sectors:

  • Energy and Renewables continues to be a focus for our investor network, and this month we are into DD on a SAAS based energy management solution to reduce power consumption, and CO2 output accordingly – seeing great momentum in ethical investing. We expect to see a further allocation of capital into this sector through the year, with some great entrepreneurs presenting their technology to us.
  • Battery technology of varying forms are high on the agenda for the foreseeable future, and as we progress the terms and pricing for a £100m IPO of our client in the commercial battery regeneration space the co-investment interest from both our UK and North American network is overwhelming. More headlines to follow in the months ahead.
  • Many experienced property developers will cite the increasing costs of materials and reducing availability of skilled labour across the industry. And this continues to be the case on both counts. In spite of this the market remains buoyant and this month we concluded investment terms for a 14 dwelling development in Suffolk to be built and sold over the coming 18 months.
Investment Round-up

This is a week to cherry-pick, as the number of investment rounds that have completed is significant – which means we can focus those that really piqued our interest. Here are the deals that caught our eye:

  • Equity investment into smaller UK businesses grew by 9 per cent last year. That equates to £8.8bn of new money into our small-business economy
  • Axial Capital joined (and successfully closed) and the pre-IPO round for the September public listing of RXLive
  • A government taskforce has urged Boris Johnson to shed a range of UK regulations on investment to unlock more than £100bn of capital to flow into smaller UK businesses by allowing pension funds to invest in earlier stage (and therefore riskier) growth companies
  • French fintech startup Pennylane has secured €15 million in funding to grow its array of bookeeping and financial management tools
  • Upflow, a Paris-based startup that helps B2B companies get paid, has raised $15 million in a Series A funding round
  • MyYogaTeacher closed on $3 million in seed funding to tap into the in-home fitness industry that gained traction in the past year. MyYogaTeacher’s app streams interactive lessons directly to students in the U.S. from more than 120 experienced teachers in India
Cross border investment

Robotics in AgriTech, a MedTech app to support doctors through live procedures, and satellite-based software for real-time monitoring. That’s a snapshot of Q2 funding rounds at Axial Capital. Those three examples are growth companies we agreed to invest into through the second quarter of the year, and in particular with a cross-border angle to the transaction in order to provide greater exposure – and greater market access – to truly enhance the value of the funding round.

One thing the closed borders of the pandemic-world hasn’t been able to stifle is the free flow of information and capital. With our investment focus spanning beyond just the UK/EU, to include North America and the ASEAN regions, the ability for us to invest and to provide access to strategic partnerships in cross-border jurisdictions has in fact become better than ever due to the pandemic. This has become super effective in accelerating the expansion of high-growth companies.

The markets differ in dynamics and investment appetite of course. Where London has a high proportion of scaleup companies trying hard to get in front of VCs, Canada has an active and diverse investment base to support a proportionately higher number of those early stage companies. Where Western EU states have a mature base of investment funds, Eastern EU states continue to produce a pool of world class, scalable startups. This again is where a cross-border focus makes more sense to us when getting behind founders of high-growth companies.

The year ahead might (and hopefully will!) result in greater freedoms to travel and to meet in more personal settings than a video call, which we expect will enhance those cross-border relationships ever further. A positive outlook as the UK Autumn sets in.

July 23rd Investment Round-up

Investment roundup – a few that caught our attention this week in sectors we really like:

– Collectiv Food, the London based direct-to-producer platform that connects food producers directly with customers like restaurants and hotels has raised £12 million in its Series A growth round

– Sales Impact Academy is a go-to-market learning platform providing a continuous live learning solution for management, leadership and revenue operations for high-growth technology companies. This week they took in $4m in funding

– ClexBio, an Oslo based startup developing bio-engineered human blood vessels for transplant secured US$2.2m in seed funding

– Clim8 Invest, an app that helps Brits invest in publicly listed companies and funds focused on tackling the climate crisis, Greentech and Cleantech, has raised £1.26m in growth capital

Lockdown shopping = millions in investment

A few months ago we saw the headlines that the online local supermarket service Weezy raised £15m in their series A, and in the recent week Turkey-based Getir raised substantially more to become (yet another) unicorn in the sector. There’s no question that fast-scaling service oriented companies will be ongoing beneficiaries of investment in the months and years ahead.

An investment we recently evaluated at Axial Capital is gaining ground in this space, though not in the UK market. AOW is the brain-child of an American ex banker who is now firmly rooted in Thailand and expanding his on-demand and ‘online only’ grocery service across Asia. Dressed up as a supermarket service, these businesses are ultimately logistics plays and it’s the Amazon-like technology and distribution network that serve as the driver of value and defensibility. Plus enough capital to make a quick run at securing market share of course.

Fairly simple at conceptual level – select your chosen items on an app and shortly after have a bicycle delivery rider arrive at your door – scaleup businesses in these virtual convenience sectors are adding another line to the national output ledger, and creating jobs where more redundant sectors are inevitably trimming back headcount, at the same time as giving you and I the ability to redefine how we operate on a personal level. We see a positive period of evolution ahead, something we’re excited about.

Cobots. Your new day-job.

We’re big supporters of the efficiencies of automation, but the human side of me likes to see a future for people in the workplace. In a world of nearly 8bn people we don’t need so many idle hands. Cue the cobots, for augmented collaboration that might make an appearance in your workplace sooner than you think.

Current trends in automation are accelerating the adoption of robotic technologies, down to even the most mundane roles in the workplace (for many that might be something to be pleased about).  The global robotics sector is rapidly shifting its focus toward more accessible robots-as-a-service (RaaS) solutions which can solve the ‘last mile of automation’ problem for medium and even smaller enterprises. Because robots have been unable to usurp humans from that last mile (also something we humans might be pleased about), the focus has now turned to human-robot cooperation.

Unlike the super-human robots of a typical feature film, displacing us from our our jobs (and possibly more than that, if we let Hollywood tell the story) cobots are designed to operate in close proximity to humans, in a direct symbiotic partnership to perform tasks. They are intentionally built to physically interact with humans within a shared workspace. They are designed to augment and enhance human capabilities with increased strength, precision, and data capabilities so that together we can can do more.  In practical terms that allows us humans not only to keep our jobs, but to do them better and with reduced physical and mental stress wherever possible.

Wherever you stand on the subject, the reality is that robots, and cobots, will be with us for the long term and will be the increasingly the beneficiary of investment capital – including ours, as we appraise candidates for investment through the remainder of the year.

Venture financing reaches an all-time high for Q1

2021 is shaping up to be a stellar year for fast-growth companies in Europe. Investment into European growth companies reached almost EUR20 billion in the first quarter, roughly double any quarter of 2020. Funding at every stage was up, with late-stage funding growing the most.

Whilst we’re not great supporters of ‘unicorn hunting’, as there’s a plethora of brilliant, innovative businesses out there that will achieve great success without the coveted billion valuation, new unicorn counts in Europe grew all the same. A record-setting 16 new unicorns were coined in a single quarter. In the whole of 2020 just 15 new European unicorns joined the unicorn board.

These current numbers account for 11 percent of all unicorns globally, and the amount of capital raised in the first quarter was more than EUR7 billion.

Early-stage funding  is also at an all-time high for European startups, with total volume up 62 percent on the same quarter last year. The number of early-stage growth companies that received funding was also up, indicating that it’s not just the select few chart-toppers receiving the bulk of the money. The capital markets remain strong, and for companies with a good track record of growth that capital is more accessible than ever.

UK/Europe-based medical and biotech companies have had a good start to the year, with some significant transactions in the digital health and bio/pharma sectors. At Axial Capital we are completing A rounds and pre-IPO financing rounds for two growth companies in the MedTech space, with buy-in from the UK/EU and from North America remaining strong.

Q2 is under way at a good pace, and the good run for innovative growth companies looks set to continue!

Recycling private equity with the public markets

In a season of IPOs, Deliveroo’s market debut made the headlines (for the wrong reasons of course). Following this, the director of AO Appliances offered an appraisal of the broader circumstances around the flotation, noting his view that capital markets are not supportive of entrepreneurship – hence the stock price cliff edge once shares were in public hands.

We see the public markets in a brighter light, noting the number of growth companies that have had much more positive experiences through the public listing process.

On the other side of the transaction is the money that supports growth companies to the point that they are ready for the public markets. Often this is private equity and VC money. This capital is the life-blood of early stage and scale-up companies. To keep that money working in the private markets we see the progression of these growth companies into the public markets as a natural and effective mechanism for recycling capital back into the VC/PE ecosystem.

There is a general view that individual investors are ring-fenced out of the VC space (plenty of crowdfunding platforms are attempting to rectify this – though whether they can provide access to genuinely high quality businesses is another matter of course). There has also been commentary that retail investors don’t get enough access to IPO subscriptions, though this too is being addressed on increasing numbers of public listings. Keeping this dovetail active between private and public markets maintains liquidity in the VC/PE funding pool, and enhances opportunities in the public markets.

We’re fortunate to operate in that dovetail, engaging with private equity markets in funding promising scale-ups, and then taking those companies to an IPO once their market relevance is proven. The equities market remains buoyant this year, and we look forward to seeing the virtuous (re)cycle of capital continue, to support the next wave of entrepreneurs!

Going public with VCs

Going public through a special purpose acquisition company is nothing new, but in the US it’s certainly made a big splash in the mainstream in the recent couple of years. And now it’s in vogue on this side of the pond, too.

Special purpose acquisition companies, still viewed as a less respectable way to go public by the more traditional banking society, have been forming and going public at an unprecedented pace this year. As of this month more than 270 SPACs hit the public markets since the beginning of the year, all of these in the US, and at least 20 of these have been used by VCs to channel growth companies such as SoFi and Payoneer onto the public markets.

Clearly, the companies going public are no longer the under-the-radar types. Well-capitalized companies with brand name recognition are among those to go public or to announce their intent to go public through a SPAC.

With SPACs forming and going public every day, we decided to keep track of the companies that had announced they’ll embark on their next funding round via a SPAC takeover, as it’s a valuable bellwether for UK entrepreneurs when looking toward future funding rounds. Traditionally, the pillars of VC investment involve driving rapid growth in a young company and achieving an exit at a many-times multiple of the initial investment. And the pillars of PE investment were to strip out costs of an established company to drive up bottom-line returns and to achieve the same exit – a many-times multiple of the original investment. The public markets offer an alternative.

Whilst an increasing number of scale-up companies are choosing to remain private for longer, by recycling cashflows and handling investment rounds through more private channels, a good number of high growth companies are enjoying the benefits of a public listing – and in the UK that’s increasingly going to include the power of SPACs.

When a scale-up company rolls into a publicly listed shell (the SPAC), there is often already a level of cash in that shell and a further funding round is brokered for the merger – effectively an IPO in a different guise. Whilst the company is expected to perform and to ultimately deliver dividends and incremental value in its share price (translating into an increased market capitalisation), the sometimes high-pressure existence of hitting a VCs exit horizon of 3-5 years doesn’t exist. Ideally the company will flourish and will remain trading publicly with strong growth and increasing market capitalisation, giving the founders flexibility in when and how they may want to realise their personal value in the company – and ultimately to exit at a time that suits them.

Axial Capital advises on small-cap public listings, typically up to £100m of value, and is actively considering investment for proven scale-up companies across a range of sectors. Contact us to discuss your objectives if a suitable funding round is planned for your company.

Capital for your venture, without the VC.

When your business has traction, and perhaps growth is outstripping the capacity of your working capital, that’s when business owners might turn to investment funding to provide enough financial support to push growth even harder, whilst giving profits time to catch up. So often when a business in this scenario approaches us for advice and investment, the question is asked ‘how much equity do I give away’?

Across the globe this is a common theme for anyone scaling up their business, and in western countries at least there has been a recent shift that has allowed for augmentation of the typical investment model – by way of government underwritten loans and grants on a scale not seen before.

In many cases businesses found themselves with sudden and easy access to bank loans that had previously been out of reach for all but the most mature businesses. Added into the mix was various match-funding initiatives (such as the Future Fund in the UK), and that meant a fairly conservative investment raise could result a substantial wind fall in real terms once the government added their contribution to the kitty – the resulting risk mitigation put all parties in a position to agree (or at least negotiate) that less equity needed to be carved out in the process. This is an investment model we have long advocated, well before the free flowing government money, so it’s a welcome shift in dynamics.

An example of how far a well planned piece of structured funding can go is the extended reality data start-up, BadVR. When they learned that one of their core corporate partners, Magic Leap, was about to shed 1,000 jobs BadVR was unfazed. Despite the fundamental ties that saw BadVR positioned as an enterprise application on the Magic Leap platform, the startup saw it as an opportunity to pivot away from reliance upon consumer-focused apps. Still, this required funding to ride out the transition.

The first step was to access money from one of the government’s business support schemes, to bolster working capital and maintain headcount. Eventually, the company managed to land additional financing in the form of a grant from the National Science Foundation.

What the Magic Leap story shows is that companies don’t necessarily need to take on fully loaded venture capital to make it. Indeed, as costs come down through remote working, and with the gig economy offering democratised access to all the necessary engineering talent, thrifty startups have been able to source much of the capital they need from government sources and corporate innovation grants, giving away much less equity in the process. That’s how BadVR ultimately got hold of roughly three million in funding.

Many entrepreneurs consider fundraising to be the first and most crucial step to starting a business. And a quick online search will give credence to this overcooked viewpoint – there’s no shortage of articles out there about how to raise large amounts of money for your startup (though I add a caveat that it’s typically rapidly growing startups with proven market traction that attract much of that investment, highlighting the point that it indeed shouldn’t be the very first thing you devote time to).

But the notion that you need to fundraise at all can be misleading.

In many ways, fundraising is actually antithetical to the entrepreneurial ethos as it can limit your freedoms to build the kind of company you want – if you’re faced with giving away a substantial amount of your company in return for funding. And there are other ways to get your company off the ground, where the equity you give away can be greatly reduced. Often when we place funding into companies we can take comfort in the fast growing revenues that the company is generating, and the market penetration they’ve achieved, meaning we can offer hybrid funding models that leave founders with a greater equity share – which they can retain for future value, or hold in the cap table for follow-on funding rounds at a higher valuation.

Here’s a point for consideration: entrepreneurship is fundamentally about freedom.

I’ve heard it said that “if I borrow money from a friend, I have to pay him back eventually. And I’ll be thinking about it until I do, because I know he’s counting on it. The same thing happens when you borrow investor money”.

Most entrepreneurs found themselves in business because they felt constrained by being tied to their boss or their boss’s company. They had an original idea they wanted to pursue without being tied down by someone else’s rules. When you take in money from a VC you might find this is similar to being governed by your former CEO, and you might lose some of that freedom. On the flipside, you pick up the support of additional minds and experience that might open doors to really propel your business to new heights – so weighing up the pros and cons in relation to your objectives sits at the heart of the fund raising process.

When you’re dependent on investors, eventually, your company might stop looking like the company you started, and there’s not much you can do about it. This may be because investors opened doors for you that you hadn’t considered possible, but it may also be because the investment board had influence and ambition that’s not entirely aligned with your original plans.

Also consider that if you’re too focused on fundraising, you might be overlooking what’s most important. Entrepreneurs often find that by focusing on what really matters – that is, what you’re selling and the customers you’re serving – the money comes to you. As an entrepreneur, you have to be self-sufficient.

As a final thought, it could be said that the goal of entrepreneurship is to become a business owner by building a product or service that lasts for years, even decades and beyond. This is what separates the true entrepreneurs from those who simply own a business. Keeping your ambition aligned more closely to this notion, and less to the single goal of raising as much money as you can, does much to separate you from the rest of the crowd.

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