Why we work with scale-ups and not start-ups

First published for Intelligent Partnership.

The transition from start-up to scale-up is an incredibly exciting time for young businesses. A landmark of success, it signals the point in a company’s journey where it has established proof-of-concept, a product/market fit and is now moving towards commercially scaling the business.

Investing in start-ups is a risk and statistics show that almost 60% of businesses fail in their first three years of operating.¹ In this article, we explain the reasons why we think there is value to be found in investing in businesses that have graduated from start-up to scale-up. We believe that this investment strategy can deliver compelling returns, all while delivering the full range of tax reliefs that come with VCT investing.

Here at Puma Investments, our methods are tried and tested having raised 14 VCTs to date and a strong track record of producing exits. We are within the top five of VCT managers in terms of sums raised each year (based on the last tax year) and are the top manager by performance (based on three year NAV growth).

Key reasons why we fund scale-ups

1. Proven concept

Companies that are moving away from the start-up stage have undergone all the earlier stages of development and have overcome the associated hurdles. For example, this can mean that earlier prototypes or a Minimum Viable Product (MVP) will have been produced if investing in a tech company.

In addition, beta testing may have identified potential issues and given founding teams the opportunity to iron out any issues early on when trialling products to the target market. Many companies can fail at this stage and moving away from an exhaustive Research & Development (R&D) phase towards commercial organisation usually signifies firm proof-of-concept and that product/market fit is in place.

2. Early market traction

Investing in scale-ups often means that a company has already established an early market presence and the proposition has been commercially validated. Key metrics to look out for here could be early user sign-ups, customer acquisition figures and perhaps even early revenue generation. This type of early validation can be invaluable for investor confidence and provide partial mitigation against some of the initial risk.

3. A clear business model

At the point of scaling a business, founding teams are beginning to consider who is best placed in the senior leadership team to drive the company towards sustained growth. There’s a clear business plan in place and conversations are beginning as to how the team could further scale.

This could be enhanced customer acquisition, multiple territories or targeting different vertical markets. The proven commerciality of the business is also usually when larger VCs/Private Equity firms can be welcomed onto the cap table and provide further validation.

4. Faster track to liquidity and potential exit

By investing in scale-up, high-growth businesses there is the potential to achieve start-up levels of return at lower risk. Ultimately these companies are still early-on enough in their growth journey and investors can generate a meaningful return before the business completes later-stage funding rounds, such as its Series C or D.

In terms of liquidity and potential exits, this can also sometimes provide a shorter investment time horizon in comparison to when investors get in at the initial seed stages. A recent example of this can be seen in our exited investment, Pure Cremation. A part of the Puma VCT 13 portfolio, this investment was realised as a 4x money multiple after just two and a half years of hold.

Scale-ups in action: CameraMatics case study

CameraMatics, a portfolio company of the Puma VCT 13, is an award-winning fleet management solution with a focus on fleet and energy efficiency, vehicle safety and data visibility at all levels of an organisation. The business operates in a well-defined market that is impacted by many macroeconomic mega-trends such as ESG awareness and road safety.

Prior to Puma’s investment, the Company was beginning to show the usual flags of a business on the verge of scale-up. Key signs of this included the development of the core functionality of the product, along with strong sales traction in multiple territories underpinning market fit. The Company strongly aligned with the criteria we usually look for when selecting opportunities to take through to our investment committee.

Since Puma’s investment, the Company has gone on to achieve many notable milestones including:

Expansion to the US market
Launched several pilot projects with large logistics firms in the UK and US, each of which has the potential to lead to very large customer contracts
Continued to generate revenues in its established UK market

According to the recent Tech Nation 2023 report, scale-ups in the UK have returned just under $600bn in value over the last ten years - achieved by an exit of some form, whether an acquisition, public listing or some other route.²

Funding scale-up ventures is therefore crucial to the UK’s long term economic growth and future job creation. The Puma VCTs are proud investors in the space and are helping drive forward the success of British-backed businesses.

¹https://www.beauhurst.com/blog/startup-fail-scale-exit/

²https://technation.io/tnr2023/