Venturing into the big bucks

Bringing in investment or venture capital is one way of speeding your way to a lucrative exit, argues Greg Orme in his second column on going it big

Last week I argued that ‘Big is beautiful’, and that you need to grow your small design consultancy – the classic sub-five-person design boutique – if you want to reap the financial rewards, usually in the form of a trade sale. But to get to an exit fast, or at all, you may need to use venture capital.

The biggest barrier to a lucrative exit for most consultancies is the mindset of the founders. Many designers who’ve set up on their own have left employment at bigger groups and don’t want to grow. I agree with Mark Adams of the Pembridge Fund, who argues that designers need to make a decision on which of the ‘Four Ws’ really motivates them: a pleasant Work environment, gaining Wisdom, doing excellent creative Work or Wealth creation.

Wally Olins mentors Designation, one of the aspiring groups we help at the Centre for Creative Business. He is chairman of Saffron Brand Consultants, which is growing internationally backed by Spanish venture capital. Olins told me, ‘Most UK consultancies don’t think in terms of money and growth. They are crafts people who are just happy to ply their trade.’

So, it will be the minority who will decide to perceive their group as a profit-making entity. For these managers a trade sale is the most common goal. The economic logic is that a large creative group will pay a premium over a non-trade buyer because it can wring additional revenues from cross-selling new services, having a broader or deeper proposition, and lowering costs per employee by spreading overheads.

However, you can grow a consultancy without finance. The economics – selling time for fees – is cash-generative. Working capital can be covered by net profits and an overdraft. This has meant that there have been few examples of angel (wealthy private investor) and venture capital funding.

But this may be changing. There have been a number of well-publicised marketing roll-ups (one group buying others using outside finance) which are now listed on Aim. Some of the founders of these groups, which employ the same simple fee-earning business model as designers, have made a bundle from their stakes. Perhaps the more entrepreneurial design entrepreneurs will sniff the opportunity and follow suit?

Those that do will first need to attain a certain scale. It obviously depends what this size is, but £83 000 in revenues a month (a £1m-a-year group) is an important psychological and managerial barrier. Here the founders can start to release time to more actively manage the business. They might also consider attracting funding from angels, angel networks (investors who club their money together) and venture capital trusts (listed funds started by Government to encourage investors to back non-listed groups). These sources of finance typically invest between £100 000 and £1m, looking for 10 per cent to 30 per cent of a group’s equity. Management may then start to feel confident enough to raise further funds from venture capital firms to acquire other groups, or speed organic growth by adding services or expanding geographically.

But financiers are notoriously difficult to persuade to invest in creative groups because of the inherent riskiness of ‘human capital’. This is why it is imperative to have a professional business plan, a strong management team with commercial skills, excellent growth prospects, and an infrastructure that can cope with an influx of staff – or even the acquisition of another group.

A recent example of ambitious buy-and-build growth is the progress of Loewy, which bought in £12m of investment from Veronis Suhler Stevenson. This cash injection will allow it to finance an ambitious growth plan, including a further merger. It remains to be seen how Loewy will fare in the next five years – but it is certainly blazing a trail for others to follow.

Greg Orme is chief executive of the Centre for Creative Business, a not-for-profit joint venture between London Business School and University of the Arts London to improve management skills in the creative industries

TERMS OF INVESTMENT
• Outside investment is not for all – most don’t have the ambition
• If you have the ambition, but lack the commercial ability, think about investing in yourself to gain those skills or hiring in help
• As well as the quality of your work, investors are looking for very fast growth – well above 30% a year
• Investment upside: grey-haired business wisdom, which comes with an active non-executive board
• Investment downside: once you’ve sold a share in your business, you give up some of your independence and control

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