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Where are the opportunities in growth capital?

1 Sep 2021

“If UK pension funds can tear their gaze away from the US and look at homegrown opportunities in the same light, they’ll see huge potential for allocation to venture capital and growth equity.”

Chris Hulatt, Co-founder Octopus Group

It shouldn’t be a surprise that Britain’s entrepreneurial spirit is alive and well. After all, start-ups have long been the lifeblood of the UK economy. According to Companies House, 15% more businesses have been registered in the first half of 2021 than in the same period in either 2020 or 2019.[1]

The Covid-19 pandemic has clearly played a part in this. Despite the difficult challenges faced by many, Brits were brimming with pent-up creativity during lockdown, and the furlough scheme encouraged some to look beyond their existing line of work – allowing entrepreneurial ideas to bubble to the surface.

So far, so good. According to the Organisation for Economic Co-operation and Development (OECD) the UK ranks third in the world as a great home for start-ups. This is thanks to support mechanisms like the Enterprise Investment Scheme, which offers tax relief to those who invest in new businesses.  

But there’s a snag. Although the UK is great at fostering start-ups, it’s not so good at turning them into world beaters. The OECD puts the UK only in 13th place for scale-ups – defined as companies that have an average annualised return of at least 20% for three consecutive years, with at least 10 employees at the start of that period.

The struggle to scale

So why are so many businesses hitting the wall? Lack of funding is a large part of the answer. We need to think about how capital is channelled so that promising businesses are able to overcome the hurdles of scaling up. And, crucially, institutional investors need to consider whether they’re missing out on attractive opportunities to help fund these businesses.

Pension schemes in the UK – particularly defined contribution schemes – have a huge role to play in providing this funding. In the coming months, we should see greater appetite for venture-capital investments. The British government’s new Long Term Asset Fund (LTAF) regime should encourage UK institutional investors to feel more confident about investing in long-term, illiquid assets. The LTAFs are scheduled to be up and running before the end of this year.

Levelling the field

The government is keen to create a more even playing field for entrepreneurs to ensure that funding isn’t solely concentrated on businesses in London and the South East, which receive a disproportionately high percentage of venture-capital investment. To help tackle this issue, I’d love to see founder incubators set up on every high street across the country – repurposing our abandoned shops so there is more space for fledgling entrepreneurs in every town, not just in the big cities.

Chasing the homegrown unicorns

We need to do a better job of showcasing UK success stories that have created lots of value for investors. It’s not just Silicon Valley where entrepreneurs can thrive. Take WaveOptics, an Oxfordshire-based company implementing augmented reality in a swathe of industrial, commercial and consumer applications around the world – since acquired by Snap for $500m+. Or Elvie, which is advancing women’s health through taboo-busting and cutting-edge technology.

If pension funds can tear their gaze away from the US and look at homegrown opportunities in the same light, they’ll see huge potential for allocation to venture capital and growth equity. Over the past few years, the wider European venture-capital market has experienced a breakthrough in businesses being built on a truly global basis – from Spotify, Adyen, Klarna to UiPath. This is resulting in enterprise values to match – in the tens of billions of pounds. So there is a real opportunity today to invest significant sums in UK businesses that have similar potential for growth.

Over the next five years, we at Octopus Ventures expect to deploy £1 billion into early-stage businesses with the potential to disrupt existing markets on a global scale. We expect that some of them will go on to join the ranks of ZooplaCazooBought By Many and Depop – companies we’ve backed that are now valued over US$1 billion.

Looking ahead, one sector that’s proven particularly resilient in the face of volatility is healthcare. This is a stable, steadily growing sector that’s driven by powerful demographic trends and an increased focus on innovation and technology. I expect to see more investment here over the coming months, given the sector’s potential for returns in today’s volatile markets – and its hugely positive social impact. From point-of-care diagnostics to digital health, institutions would be well advised to seek out opportunities to support the pioneers improving global health systems.

Healthcare is just one of the areas offering abundant opportunities for growth. Across a huge range of nascent enterprises, the creativity of the UK’s entrepreneurs is a constant. By allowing that creativity to scale, institutional investors can look to benefit while playing a truly transformative role in our fast-changing world.  

[1] ‘It felt like now’s my moment for a new career’ – BBC News

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Chris Hulatt
Venture capital