The genesis of venture capital in the UK can be traced back to the great crash of public stock markets in 1929. The Macmillan Report in 1931 highlighted the equity gap which was a constraining factor in the recovery and growth of companies. This ultimately led to the creation of two organisations: the Industrial and Commercial Finance Corporation and the Finance Corporation for Industry. In the 1980s these merged to form what is now. Since 1983 (when records began), members of the British Venture Capital Association have invested an aggregate sum well in excess of £60bn in more than 25,000 companies. This contribution to the UK’s economic effort cannot be over-stated. Many companies who might otherwise have languished, or even disappeared completely, have achieved growth and prosperity.
Some explanations and definitions
The venture capital industry has evolved into three main areas:
1. Venture Capital for early-stage investment. This is also referred to as
start-up capital, seed capital or boot-strap funding.
2. Development Capital for emerging businesses, which have grown
beyond the start-up phase.
3. Private Equity funding for mature businesses.
The practitioners, however , tend to be referred to generically as venture capitalists. Investments by venture capitalist organisations have historically been concentrated in unquoted companies. In recent years investments in public companies (public-private or P2P’s) have become more common, as some boards have opted to leave the increasingly demanding and unforgiving arena of the London Stock Exchange’s
Rather like air under pressure, equity invested by venture capitalist organisations always seeks an exit, usually by sale to another trade party, or occasionally via flotation. That said, the most common exit for MBOs/MBIs since 2001 has unfortunately been receivership – but more on that later. First, a few term definitions.
Management buy-out. This is typically where an existing management
team buys the company in which they work from the shareholder(s).
An institutional buy-out. An institution will acquire a company and
incentivise a management team to run it for them.
Management buy-in. A new management team acquires a business from
shareholder(s) and replaces the incumbent management.
A combination of an MBO/MBI. An existing management team is joined
by at least one new manager as it acquires the company
A vendor initiated MBO, where the owner encourages and facilitates the
management team taking ownership of the company
The venture capital market is mind-bogglingly large. The British Venture Capital Association (BVCA) has around 165 full members, which comprises the vast majority of UK based firms in this market place. These firms are invested in companies who in total employ nearly three million people in the UK alone. That is equivalent to some 18% of the private sector workforce. The venture capital industry invests in virtually every known sector of the economy across the country. In addition, the UK accounts for about 40% of the whole of the European market; globally, only the market in the United States is bigger.
Why do a deal?
The right answer to this, or at least the one your backers will want to hear, is because you want to make money, since if you do, then so do they. That’s the easy bit: now how do these deals come about?
There are some truly wonderful and elegant stories of how management teams of gifted individuals, researched, targeted, approached, negotiated, and closed the perfect deal. Some of these, within no time at all, might also have soldout and sailed off into the horizon, fulfilled and financially secure for life.
This hasn’t always been my experience! The conception of my first MBO was, oddly enough, at a gents’ urinal, in Suffolk. The Taunton Cider board meeting was being held at Copella Ltd, which we had recently acquired, and Peter Adams (Taunton Cider’s managing director) informed yours truly that, “You can forget the new incentive scheme Nasher [that’s me], Tony Portno [Bass plc’s main board director] has just told me we are up for sale”. You can picture the scene! I didn’t know it then but that is where the Taunton Cider MBO was conceived. No sooner had Peter Adams dried his hands then he was off on a
I believe many MBOs and MBIs begin in such a random fashion. The trick for
management teams is to spot the opportunity, and then know how to exploit it.
Are you sure you really want to do a deal?
This is a question worthy of the most serious soul-searching. Whether your first deal is conceived at a gents’ urinal, as happened in my case, or in lectureroom 3b at Harvard Business School, you need to focus on this. You are welladvised to pause for serious thought before embarking on such a whiteknuckle
ride which, if it goes pear-shaped, could ruin your finances and
Rags or riches?
Bluntly, if your deal works out well, and you achieve a successful exit, you will have reached a land of milk and honey. You will have achieved partial or total financial independence. You could burn your suit, play golf all day, do that world tour, and write that novel maybe. Fantastic!