Month: March 2017

Kings Court Trust sign partnership with St James’s Place

Kings Court Trust has signed a partnership with St. James’s Place, one of the UK’s largest wealth management firms. This agreement enables the St. James’s Place Partnership to provide a complete estate administration service to bereaved clients and their families nationwide.

St. James’s Place clients will be able to access Kings Court Trust’s market leading service through their wealth manager for the first time, helping to make the process of dealing with an estate a less time consuming and distressing process.

Sales & Marketing Director of Kings Court Trust, Christopher Jones, commented:
“This is a very exciting development for us.  We are proud to be working with one of the UK’s foremost wealth management firms to help recently bereaved families deal with the estate of their loved one in the most efficient and cost-effective way. The estate administration service will help thousands of wealth managers provide a highly professional and comprehensive service to clients and their relatives, removing the stress and burden of this potentially complex legal process.”

Industrial Strategy-reasons behind the proposals

In January the government published a green paper on “Building our Industrial Strategy”. The report lays out 10 pillars consisting of wide reaching measures with implications for the whole economy. In my previous post I pulled out the proposals which I think are most relevant to the UK early stage tech sector.

In this post I wanted to discuss in more detail the report’s reasons behind those measures, some of which I agree with, some of which I don’t.

The macro problem: low productivity

The strategy is principally concerned with improving the productivity of the UK workforce.

It reports that despite strong GDP growth since 2010 (second only to the United States among advanced economies), and the lowest un-employment rate for 11 years, real wages have struggled to recover from the decline during the 2008 recession.

The paper points to the ‘productivity gap’ between the UK and its ‘competitors’ as the major cause of this stagnation in real incomes. Whilst the UK had started to close the gap in terms of output per worker (middle chart, below) with France, Germany, and to some extent the US, much of this progress was reversed during the recession.

More importantly, the UK remains far behind all three countries in terms of productivity per hour worked. As the right hand chart below shows, workers in the US, France and Germany produce as much in 4 days as UK workers do in 5.

As well as improving overall productivity, the strategy aims to correct stark regional disparities. As the chart below shows, productivity in London is now 72% higher than the national average with all other UK regions except the South East having productivity below the national average.

According to the paper, this is more pronounced than it is for our neighbours, although it is difficult to compare apples with apples given the differing geographies of different countries.

So what does this have to do with tech start-ups and investors?

Well the report rightly highlights technology innovation by early stage businesses as an important driver of productivity improvement and it specifies two main barriers holding this innovation back.

1. Insufficient access to R&D funding.

2. Lack of support for ‘scale-up’ businesses.

As I explain below, the report makes a good case for the first, but I’m not so sure about the second.

Access to R&D funding

The green paper concludes that there is a need for increased government R&D funding, highlighting a correlation between government support and business investment in R&D (BERD) as shown in the chart below.

The UK invests 1.7% of GDP in public and private R&D which is below the OECD average of 2.4% and far behind leading backers of innovation (e.g. South Korea, Israel, Japan, Sweden, Finland and Denmark).

This is a function of lower government spending but also a below average ratio of private to public investment.

The report also emphasises that whilst the UK has a strong record of early stage research, we are relatively weak at turning those innovations into commercial successes.

The UK has 3 of the world’s top 10 universities and 12 of the top 100 and it has the “most productive science base of the G7 countries”. However, the report claims that we have a long standing weakness in translating research into commercial outcomes and have “too often pioneered discovery without realising the commercial benefits”.

This may be partly due to the way we distribute funding across the different stages of R&D. Whilst our distribution is not hugely out of line compared to other European countries, we have a striking skew towards early stage research (basic and applied research rather than experimental development) compared to innovative countries such as Israel and many Asian countries. Notably China spends 80–90% of its R&D funding on later stage experimental developments compared to 30–40% for the UK (see below).

You can read about the proposed measures to boost R&D in my previous post.

Support for ‘scale-ups’

The paper highlights that whilst the UK has done a great job of creating a world class start-up environment, it has done less well at fostering those start-ups to reach ‘scale’.

The UK ranks 3rd for business start-ups but only 13th for scale-ups according to OECD research, and whilst 2015 was a record year with 5.4 million small businesses in the UK, a “lower proportion of UK start-ups grow into standalone businesses than in the US”.

According to the paper “some observers say we have an under-supply of late stage venture capital compared to the US” and this is presented as the main cause of our ‘scale-up’ under performance.

However, the report provides no evidence to support this, and as a ‘scale-up’ investor myself I haven’t seen any evidence of it in the market. Of course, it depends on how you define ‘scale-up’, but in the £2–15m range that we invest at Smedvig Capital, its doesn’t feel like there is a shortage of capital.

According to Beauhurst (a data provider) there are 76 funds who can invest up to £25m in equity finance in the UK, there are 112 that can provide up to £15m, and 247 than can provide up to £5m. So that’s somewhere between 76 and 247 funds chasing roughly 200 deals per year (I acknowledge there is a certain amount of ‘chicken and egg’ in this relationship).

Yes, the UK is far behind the US in terms of scale-up successes but I am not sure that this is down to a lack of funding. I don’t have any strong evidence to say what the underlying cause is, but let us not forget that the UK is a fundamentally smaller market than the US (which is 5–10x bigger in most cases). For UK businesses to reach anywhere near the scale of similar US competitors they either need to go to the US or to multiple other markets. Given the challenges of entering new markets this must make it harder for UK businesses to reach ‘scale’.

Some of the current and proposed work by the Department of International Trade (including expansion of export finance) may well help with this by making it easier for UK businesses to scale internationally.

The paper also suggests that fund management incentives weaken long-term decision making in Europe as “funds are expected to deliver short term returns versus industry benchmarks”. At Smedvig Capital, we are lucky to have a very flexible mandate and we certainly see that many successful investments take longer than the 3–5 years that many companies are forced to aim for (our average hold period is 7 years).

The report also singles out lower levels of fixed capital investment for UK listed firms compared to other OECD countries as a possible symptom of short term incentives in public markets holding back long term investment (we have been in the lowest 10 per cent for 16 of the last 21 years).

If you have a view on this topic, the government has launched its business scale-up inquiry and is looking for feedback by May 3rd.

You can read about the proposed measures to help UK businesses scale-up in my previous post.

Conclusion — good proposals, not sure about the reasons

Whilst I definitely support the measures laid out by the report, I’m not sure I fully agree with all of the reasons behind them. In particular, I haven’t seen any evidence of a lack of ‘scale-up’ finance in the UK.

Industrial Strategy-implications for tech start-ups and investors

In January the government published a green paper on “Building our Industrial Strategy”. This week I got round to reading it and although it is long (132 pages) and far reaching, it does have some proposals relevant to the UK technology ecosystem.

I don’t necessarily agree with all of the report’s conclusions, but below I have summarised the key proposals that start-ups and investors should be aware of.

In my next post I discuss the main reasons behind these measures, some of which I agree with, some of which I don’t.

The government is looking for feedback on the strategy so if you have any, I would urge you to respond to its request for input by 17th April.

Proposed changes — 10 pillars

The strategy outlines 10 ‘pillars’ (copied below) aimed at increasing productivity and driving growth across the UK. The pillars are far reaching but several of them present potential opportunities to boost the UK’s early stage tech sector. Pillars 1 and 4 are particularly relevant.

There are many broad implications for business, but I will highlight the three main implications for early stage tech.

Implication 1: increased access to R&D funding

The first ‘pillar’ of the strategy aims to boost R&D investment and help drive commercialisation of research. There are many approaches discussed with varying levels of rigour, but the key proposals are:

 – Increase government investment into UK R&D by 20% — a further £4.7bn of funding by 2020–2021. Start-ups should keep an eye out for how to access this funding.

 – This will be coupled with efforts to optimise the funding and tax environment to drive up the ratio of private to public investment. Again, an important area to watch for start-ups and investors alike.

– Creation of UK Research and Innovation (UKRI) which brings together Research Councils with Innovate UK to develop a strategy for how to optimise spending of the additional R&D funding. The government seeks initial views which can be submitted here by 17th April. Start-ups and investors should have their say.

 – One project that is already underway is the Industrial Strategy Challenge Fund which creates a new funding stream for UKRI to back technologies where: the potential market is large, the UK has research strength and business capacity to meet the market need, there are significant social and/or economic benefits, and there is evidence that government support can make a difference. Start-ups should consider whether their sector might be applicable for Challenge Fund support.

 – Sectors that have been suggested are smart energy (including batteries), robotics and AI (including autonomous vehicles), satellites and space tech, healthcare, manufacturing and materials of the future, biotech, quantum technologies, and ‘transformative digital technologies’. But again, the government seeks suggestions.

Implication 2: increased support for ‘scale-ups’

Pillar Four is focussed on measures to help businesses scale-up, with the following proposals being of particular interest:

 – A Patient Capital Review will be launched in Spring 2017. Scale-up companies should follow how this review could help them.

 – Increased backing of institutions to catalyse private sector investment including an additional £400m for the British Business Bank. This could be a valuable source of finance for scale-up companies.

 – The government will ‘explore’ how its data (such as VAT returns, other HMRC data, or companies house data) can be used to help investors identify potential scale-up targets. Growth investors should input into what data could help spot potential targets and how this could best be accessed.

The government has launched its business scale-up inquiry and is looking for feedback by May 3rd.

I should say that whilst I’m absolutely in favour of increased support for scale-ups, as a scale-up investor myself, I’m not sure that I agree with the conclusion that there is a shortage of scale-up venture capital in the UK. More on this in my next post.

Implication 3: investment in tech infrastructure

There is a whole section focused on improving the UK’s infrastructure given our poor relative ranking vs other developed countries (ranked 24th globally on transport infrastructure quality by the IMF).

A wide range of infrastructure investments are planned, but most importantly to the tech-sector is a new £400m Digital Infrastructure Investment Fund to boost fibre broadband providers and a further £740m “earmarked” for:

 – “Full fibre broadband roll-out” for businesses and the public sector.

 – A “coordinated programme of integrated 5G and fibre projects to accelerate and de-risk the deployment of future digital technologies.

Conclusion — funding opportunities for R&D commercialisation and scale-ups

The government clearly acknowledges the early stage technology sector as an important part of the solution to the UK’s productivity problems. It proposes increased R&D funding (particularly aimed at later stage commercialisation) and support for ‘scale-up’ businesses as key steps to boost the sector, as well as improvements to the UK’s digital infrastructure.

There are many other implications for business more broadly, but I have chosen to focus on those which specifically effect technology start-ups. One example of a broader proposal is an expansion of export finance and the Department of International Trade (DIT) in an effort to boost exports and make it easier for UK businesses to scale internationally. If you are thinking of international expansion, I would recommend that you find out how the DITcan help.

Start-ups and investors should keep an eye on how these new measures evolve as they could present valuable opportunities for funding and support.

Importantly, the strategy is presented as work in progress and the government welcomes input from industry, you can respond here if you have any feedback.

In my next post I will look at some of the reasons behind the measures discussed in this article.

Captify win BVCA Growth Management Team Award 2017

Captify have won the Growth Management Team Award at the BVCA South East Management Team Awards 2017. The awards recognise and reward brilliant businesses up and down the country that have been backed by UK private equity and venture capital investors. Captify will now go forward into the national final to compete against other regions, before the national winners are announced at the BVCA gala dinner in November.

The Judges of the awards made the following comments on Captify’s win:

“Captify showed phenomenally rapid growth in 2016. The company now has a genuinely international presence with a roster of blue chip clients and is second only to Google in Search Intelligence. Dominic Joseph and Adam Ludwin have built this business from start-up in a very competitive space in only 6 years.”

Quill announces new partnership with Taggstar

Quill has announced a new partnership with Taggstar, the leader in real-time social proof messaging, to provide online retailers with a dual offering to boost conversion rates at the penultimate stage of the purchase journey.

This partnership unites Quill’s ability to create high-quality pre-purchase primary content at scale and Taggstar’s ability to serve highly relevant messages in real-time on product pages – for example, to alert shoppers to trending, popular or low-stock items at just the right time to drive conversion.

Online retailers will now be able to leverage Quill’s specialist multi-language content production service and Taggstar’s real-time social messaging in tandem helping them to deliver an improved experience to consumers

Read the full article here.

SaaS Metrics – how to improve?

In my last two posts I explained why LTV:CAC and CAC Payback are the two most important metrics for SaaS startups and how to use them to interpret the health and potential of your business.

But what do we do if we need to improve either of these metrics?

Unfortunately there is no easy answer. There are limitless tools and tricks, but with imperfect information there is rarely an obvious ‘right’ answer. Even if there was, the right approach would be specific to each individual business situation, so there is no generic playbook for how to improve.

In practice you have to be constantly testing and adapting, seeing what works and what doesn’t. It is a on-going tactical and strategic battle.

However, in this article I will discuss some high level steps that may help you to forge an informed path and give yourself a fighting chance of making the right moves.

Step 1. Measure

It sounds obvious, but it’s amazing how many businesses don’t track their LTV:CAC and CAC Payback. We have already discussed why these metrics are important, and if you are not tracking how they evolve on a monthly or quarterly basis, you should be.

Of course for an early stage business you can expect metrics to move around quite a bit as you make changes and your business evolves. But by measuring LTV:CAC and CAC Payback, you can see how the changes you make impact the fundamental unit economics of your business.

More on the specifics of how to actually calculate key metrics in a later post.

Step 2. Measure some more

LTV:CAC and CAC Payback are nice, concise metrics that give you an academic read on the overall health and potential of your business. But they are not actionable. To understand how to act to improve either of these two key metrics, we first have to measure their constituent components.

CAC Payback is a function of sales and marketing spend, new Monthly Recurring Revenue (MRR)landed by the sales team, and gross margin.

LTV:CAC is a function of average MRR (sometimes referred to as Average Contract Value, or ‘ACV’), gross margin and gross churn.

The simplest way to track these components is using a Monthly Recurring Revenue bridge (‘MRR Bridge’) as laid out below.

Here you can see what your opening MRR was at the start of the month and what closing MRR you finished the month on. You can see how the change between opening and closing was driven by new MRR from new clients, expansion or contraction in MRR from existing clients, and finally gross churn, which is MRR lost due to clients who have left.

It is important to track your gross margin for the month and your sales and marketing spend. I also like to track the total number of customers.

More on the MRR bridge and how to use it to actually calculate your key metrics in a later post.

Step 3. Segment your metrics

Sometimes you can improve your key metrics just by shifting your mix of customers, products or channels, without having to think about driving change in any given component.

For example, you may find that the unit economics don’t stack up when serving customers below a certain size. You may decide to change your approach by cutting sales and marketing spend to that segment, or reducing their account management. In some cases, you could decide to just stop serving customers below a minimum threshold altogether – saying no can be a powerful tool.

But to make decisions about your segment mix, you first need to be able to measure the key metrics and their components at a segment level.

Segmented metrics is probably something I would only consider for later stage businesses (post Series B) because it only really makes sense if you have enough customers and use cases to segment meaningfully and if your product, and sales teams are sufficiently structured.

There are three common axes of segmentation.

1. Customer segments

The most common type of segmentation. Typically broken down by size (e.g. small, medium, enterprise), but sometimes by vertical or use case.

2. Channel segments

It can be useful to see how your key metrics vary by channel. For example, inside sales vs field sales vs re-seller partnerships, or online marketing vs direct mail. Also up-sell vs new sales.

3. Product segments

This is less common, but in some cases where you have different sales teams selling different products, it may be worth considering the economics of each product individually.

If you measure LTV:CAC and CAC payback for each segment you might find that one customer segment, or one channel, or one product group is pulling the rest of the business down. Conversely, it might be that you have one or two star segments with stellar economics where you should be focusing all your resources.

Step 4. Get tactical

You may decide that tweaking your segment mix is not the right approach and that you need to take corrective action to drive improvements in a specific component of your unit economics.

There are too many options, and the answer too dependent on the specifics of the commercial situation, to go into detail here. But below I have laid out some of the questions you might consider when trying to improve each component of unit economics. These suggestions are by no means exhaustive.

How can we increase average MRR (‘ACV’)?

– Is our product suite and pricing optimised to encourage cross-sell, up-sell and volume increases from our clients?

– Can we add functionality or features to drive more value for, and spend from our clients?

– Is our account management team properly structured and incentivised to deliver maximum value from our clients?

– In particular, how do we recognise and compensate up-sell vs the initial sale?

How can we increase gross margin (reduce variable cost to serve)?

– Can we streamline our processes or use technology to reduce delivery and support costs?

– Can we productise further to make the delivery and operations teams more efficient?

– How can we make our account management and support more scalable? Can we productise these services?

– Can we encourage more ‘self-help’ customer behavior?

– Are we offering too much support too cheaply to certain customer groups?

How can we reduce churn?

– Can the proposition be adapted to better serve high churn customer segments?

– Are there common reasons for churn and can they be fixed?

– Are there early warning signs of churn such as falling Net Promoter Score, or usage metrics?

– If so, can we implement processes to flag these signs before it is too late?

– Can we create more ‘sticky’ functionality and features or can we do more to become more embedded in our customers’ workflows?

– Can we see a high churn ‘bedding in period’ after which customers tend to stick around?

– If so, what can we do to increase engagement during this bedding in period to maximise the likelihood that a client becomes ‘bedded in’?

How can we increase sales efficiency?

In other words, how can we deliver more new MRR for the same or less sales and marketing spend?

 – Is the sales team structure and compensation mechanism optimised to match our desired customer and product segments?

– Can we tweak the sales process and compensation structure to shorten the sales cycle and increase sales cadence?

– Can we adjust our terms to shorten the time from landing a sale to revenue recognition?

– Can we improve our training and recruitment processes to reduce the ramp-up time for new sales reps?

– What is the variability in sales rep performance, what can we learn from this?

– What does our marketing funnel look like and where can we improve conversion?

– Which marketing channels are most effective, how can we optimise for this?

– Can we unlock attractive new customer segments with pricing and proposition adjustments?

Over the last three articles we have seen the importance of LTV:CAC and CAC Payback and how they can be used to indicate the health and potential of a business. Finally we have considered ways of improving these key metrics.

In reality it is a constant tactical battle which is never over. There are limitless tools and options and no easy right answer. But a good starting point is to at least measure your key metrics and their constituent components so that you understand what is driving performance. If you have sufficient scale, it can be useful to segment your metrics to see if certain customer groups, channels, or products are holding you back or driving you forward. Finally, there are a whole range of levers you can pull to try to boost the different components of unit economics.