ENTREPRENEURS AND GROWTH COMPANIESINSPIRATION FORISSUE 23, 2019

Also in this issue

Transferwise: ‘Two Estonian dudes’ take on the transfer market

OakNorth: Bringing funding options to small businesses

Wagestream: Smashing payday loans through flexible payroll

RationalFX: Leading the disruption of change in the foreign exchange market

“If entrepreneurship is a choice, you probably shouldn’t do it” George Bevis on how he built Tide

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It is not just customers that are moving towards these fintech groups. The sector has attracted vast amounts of investment, giving rise to number of home-grown ‘unicorns’. Of the companies included in this issue, recent raises include TransferWise (raised £230 million at $3.5 billion valuation), Monzo (£113 million raised at £2 billion valuation), Tide (£60 million grant), OakNorth ($440 million raised), Wagestream (£40 million raised).

We hope that you enjoy the insights from these companies that are shaping the future of finance in the UK. ▪

Technological power has grown exponentially, and consumers now expect a seamless and

intuitive user experience from their financial services providers. Traditional groups who do not embrace advances in technology are likely to find themselves left behind as their competitors make the most of new and innovative ways of enhancing their customer service.

More than almost any other, the financial services sector has seen the entry of several, very successful disruptors across a number of financial disciplines. In this edition of Enterprise magazine, we hear stories of innovation in the insurance, money transfer, banking and investment space.

Foreword The future of finance

Nick Travis Partner, Head of Entrepreneurs, Smith & Williamson Investment Management LLP

020 7131 4223 nick.travis@smithandwilliamson.com t: @_NickTravis_

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Starting with the customer

How did Monzo begin?We started with the belief that a lot could be done if we weren’t restricted by legacy IT. We thought we could offer people a far better deal than they were getting from the major banks.

Initially, we decided we would only offer a retail current account rather than selling a multitude of products. We focused on setting up the basics and getting a banking licence. Ahead of that, we launched a pre-paid card, which we could do without a banking licence. We thought it would be a good way to test the product and to get our name out there.

We thought we might be able to roll out 20,000 cards but the thing took off like nothing on earth. By the time we completed our licence application, we had 400,000 accounts. We set about converting those into current accounts. Today, Monzo has around two million current accounts.

Monzo quickly became ‘cool’ — was that deliberate?It wasn’t a conscious thing, but it was more about the nature of the product. It was ground-breaking in the banking industry. We started with a group of followers that were really ‘into’ technology, who liked that we were taking on the big banks. We got a bit of ‘cool’ from that. The ‘hot coral’ card was also popular. People felt they were buying into something.

Gary Dolman was the Chief Financial Officer at challenger bank Monzo. He started his career at PwC as a chartered accountant, working in London and Australia, before spending time at a series of major investment banks — including ING, ABN Amro and Japan’s Mizuho Group. Disillusioned with large banks, he decided to turn his hand to start-ups and helped form Monzo in 2015.

What was different? It was all about giving our customers the type of information they wanted in a way they understood. We put artists and designers to work, ensuring that they started with a blank sheet. What would a bank statement look like in an ideal world? Too often, when we looked at what banks were providing, it didn’t meet customer needs.

We hadn’t started out from the same point, with legacy systems. Instead we had started with customer expectations. We wanted to start with the customer experience and build out. We considered what an ideal bank statement would look and feel like. It needed to be easy to understand.

How did you find the transition from the corporate world to being an entrepreneur?As an entrepreneur, every week feels like the most important week of your life. Working in a large corporate is more like a long-distance steeplechase — the obstacles are fairly well sign-posted and you can prepare for them ahead of time. Being an entrepreneur is more like a sprint with hidden hurdles – you’re never quite sure what’s coming round the corner.

Coping with growth was a real problem. At one point, we were growing at 4% a week. That meant we needed to be growing our customer operations capacity by 4% a week and that’s really difficult to do. It was a huge challenge.

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Gary Dolman Monzo, Co-Founder, former Chief Financial Officer

@Monzo www.monzo.com

Why did you move away from the business?I retired from the business earlier this year. I’d done five years end to end and wanted to pursue a range of activities rather than being dedicated to one company. I recruited my successor, took time to hand over and then stepped away.

I’m now spending time on a small portfolio of things including advising and mentoring business leaders and chief financial officers.

Given your time again, would you do anything differently?I’d have done it all a whole lot sooner. I’d say to anyone at the start of their career, have a go at start-ups. Pick one you believe in and give it a try.

Do you believe the industry is fully disrupted?Yes, it is disrupted. There was perhaps some scepticism at the start about how well this would do but two million customers is more than a flea-bite on the industry. Looking at Lloyds, Barclays and so on, they are often copying things that Monzo has done. In the early days, it was like they were patting a child on the head and saying ‘there, there’ but now they realise it’s really working and they need to respond.

However, I really believe this disruption will continue. It has reached a wider group than you might think. The parents of millennials often use it because it’s the easiest way to move money between themselves and their offspring. The more people use it, the better the product becomes. ▪

TransferWise: Living up to the hype“There were lots of unknowns when we started. Would anyone trust this website set up by two Estonian dudes? Would anyone else have this problem that we wanted to solve? And all these people around the world did have the same problem, and they did trust us.” — Kristo Käämann, BBC, January 2019.

TransferWise’s latest fundraising puts it firmly among Europe’s fintech stars. As it turns out, those ‘Estonian dudes’ — Kristo Käämann and Taavet Hinrikus — are now trusted by over 4 million people to move the equivalent of over £3 billion a month across borders.

It has not been a conventional journey. At one point, the founders and employees were to be found running naked through London’s financial district in freezing February to draw attention to their ‘nothing to hide’ fees policy. The sauna in the office is also worthy of mention — and presumably helpful on the night in question.

However, it’s not just this millennial chutzpah that has set TransferWise apart but a unique corporate culture focused on experimentation and humility, learning from failure and constant reinvention. At one point, there was so much experimentation going on that when monthly volumes saw a jump, Kristo and Taavet couldn’t initially tell what had pushed it higher.

Nevertheless, its central mission has remained the same: moving money without borders: instant, convenient, transparent and, eventually, free. The customer is at the centre of everything: not only is this reflected in falling transfer fees but also in the ability of helpline staff to resolve problems and even sending chocolates to clients when they get it wrong.

It continues to fight against the bad habits of older rivals, such as banks and money exchanges. ‘Zero fee’ money transfers are nothing of the sort, they suggest, with companies making up the fees in poor exchange rates. The group continues to push for legislative changes in the UK and elsewhere. Regulators are slowly coming round to their way of thinking — recent regulatory changes in the EU and proposals in Australia are designed to force more transparency in foreign exchange fees.

A focus on transparencyKristo and Taavet say they want their fees to be completely transparent, and as close to zero as possible. They point out that although their mission is long-term, the average price users pay on TransferWise continues to trend downwards. In Q1, it dropped back to 0.63%.

It was the lack of transparency that motivated Kristo to launch the business in the first place. He received a £10,000 bonus in the course of his job as a management consultant. Keen to put it into his Estonian savings account (the interest rates were higher), he found the bank gave him a rate some 5% lower than the prevailing spot rate, plus a £15 fee for good measure. Kicking himself for being “incredibly stupid”, it ultimately led to the 2011 launch of TransferWise with Taavet.

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The pair started to look for funding in early 2012 but initially struggled to find willing investors. They still bemoan the lack of a failure culture in Europe. In the US, they accept failure as part of business success, this is not the case in Europe and it holds businesses back, they believe. Eventually, having been turned down by 15+ European investors, they received capital from a small fund in New York called IA Ventures. A number of high-profile individuals also saw the potential, including Virgin boss Sir Richard Branson and PayPal Co-Founder Max Levchin.

Capital raisingThis latest fundraising sees the pair selling around one-fifth of their holdings in the company. American growth funds Lead Edge Capital, Lone Pine Capital and Vitruvian Partners have bought in, while investors Baillie Gifford and Andreessen Horowitz increased their holdings. The pair were named as the two richest Estonians last year with combined wealth of almost €500 million, but that is certainly higher today. The company is now valued at $3.5 billion, double its level a year ago.

The group now has over 1,500 people across 12 offices and plans to hire 750 more in the next year. It currently supports 1,600 currency routes and is available in 49 currencies. By own estimates, it saves customers £1 billion in bank fees. Last year, it made a net profit of £6.2 million on revenues of £117 million.

TransferWise attracts an almost religious devotion among its users. 5-star rated on Trustpilot, a recent Financial Times article drew the following comments:

Kristo Käämann & Taavet Hinrikus TransferWise, Co-Founders

@TransferWisewww.transferwise.com

“TransferWise is one of the few startups out there that does not have the ‘growth at all costs’ mentality. They actually care about their customers and solve a real problem [that they have] with a great service.”

“Great product, absolute pleasure to work with and customer service is top rate.”

“A fintech success story that actually lives up to the hype.”

The company holds this reputation sacred. It has a compliance team of 300 people taking care of anti-money laundering, verification, fraud and enhanced customer due diligence. It won’t offer transfers in companies where they can’t offer the requisite level of customer service or safety: “Sending money from India is one of our most requested routes, but it’s been hard to reach a user experience that we can be proud of.”

It has recently developed ‘smart verification’, using online checks to verify people’s identity instantly, rather than waiting up to two days for documents to be checked manually. The cost savings have been passed to clients.

Kristo and Taavet are clear that the recent fundraising allows them to expand and provide better customer experience, lower fees and faster speeds. Regulators are likely to prove supportive. The future looks bright for TransferWise. ▪

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What was the germination of OakNorth?In 2006, Rishi Khosla and I faced an uphill struggle while trying to secure working capital to support our previous business venture, Copal Amba. Our business was in a good shape with a healthy cash flow, and strong projections for the future, yet none of the banks we spoke to were willing to lend to us because we didn’t have any property to act as security.

As Copal Amba kept growing, Rishi and I realised that there are millions of other businesses in the UK facing the same struggles in securing growth finance. The idea for OakNorth began from there. We want to help growth businesses around the world secure the debt finance they need to compete against large corporates.

Which values did you consider most important when building the business?At OakNorth, our values play a huge role in what we do on a day-to-day basis, as well as helping us in terms of attracting great employees and keeping them. We want to make sure everyone understands our purpose and conducts our business in an ethical way.

OakNorth was created in 2014 to provide UK growth businesses and entrepreneurs with bespoke debt finance solutions. Today, the bank is one of the most active lenders in the UK having lent over £3 billion with circa 55,000 savings customers. Its loans have directly helped with the creation of 10,000 new homes and 13,000 new jobs in the UK.

The bank is now one of Europe’s most valuable fintechs, having secured a $440 million investment from The Vision Fund, the $100 billion investment portfolio from SoftBank. The addressable market for lending is estimated to be around $7 trillion. Here, Joel Perlman, Co-Founder and Senior Managing Director, at OakNorth, discusses the group’s progress.

Funding the future Securing growth finance for small businesses

Most importantly, we aim to offer our customers products and services that are ten times better than the competition. To do this, we believe certain elements need to be in place. The team needs to work collaboratively to achieve the best results, putting energy and drive into everything we do.

We also promote a culture of openness and transparency. We aim to ‘say it as it is’. As part of this, we ‘zero base’, questioning the status quo and striving for efficiency.

What was the most difficult element as you grew?We’re not alone in finding it tough to ensure the company’s culture and values scales effectively as we continue to grow to hundreds of people across multiple markets and offices. In the beginning, we hired too quickly because we needed someone in a seat as soon as possible, before realising it’s better to have no hire than the wrong one - the wrong one will bring down the quality of the whole team.

Did you have any notable bits of luck? Or was it all hard work?We have been very fortunate and we continue to be very fortunate and we’re very grateful for that. However, hard work is also essential — as they say, the harder you work, the luckier you become.

Do you think there is further disruption ahead in the banking industry?I think traditional banks will still be around in hundreds of years but consumers’ behaviour towards them will have changed. The majority of consumers and businesses still treat their bank as a one-stop shop, keeping most of their financial products with just one institution, rather than shopping around for the best products and services for their needs.

In the future, I think what we’ll see are a lot more individuals and businesses banking with multiple providers — they might have their current account with one, their savings account with another, go to another for a loan, another for a credit card, and so on.

From a personal point of view, have you ever regretted becoming an entrepreneur?No, never. I couldn’t imagine doing anything else.

How have you preserved the team relationships? Have you all had assigned roles and responsibilities? I think at OakNorth, we’re trying to reinvent what it means ‘to work’. We don’t want people to think about work and life as mutually exclusive — we want them to think of work as a great part of their life. The worst thing would be if people sat on a Sunday evening dreading the week ahead. So this goes back to our values, making people feel valued, ensuring they see the tangible contribution they’re making at the company, as well as the positive impact they’re having on the wider community and SMEs around the world.

We also give all employees the opportunity to become owners in the business and invest their own money. Today, more than a third of our team are owners in the business, having invested the equivalent of a year’s net salary in it. This helps ensure people take decisions for the long term. ▪

Joel Perlman OakNorth, Co-Founder

@OakNorth www.oaknorth.com

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Rising Tide

“I don’t think anyone ever regrets leaving banking. Entrepreneurship is a vocation. I don’t take the view that it was a choice — I was driven to distraction in a big bank and I knew working on my own was the only way I could lead a happy life.”

Having worked as a banker and as a small business owner, George Bevis had seen first-hand the poor quality of business banking but also the vast administrative burden on businesses. Business banking tended to be an afterthought for the larger high street banks, which make their money on consumer or investment banking. Business banking simply didn’t hold their attention and this was reflected in a poor service to customers, where set-up could take weeks, access to credit was poor and the product was essentially the same as a consumer account, but with extra fees.

George says there was also a ‘cultural madness’ that assumed that what entrepreneurs really wanted was time with staff in the banks, people they could go in and talk to. He knew from experience that the last thing most entrepreneurs wanted to do was talk to people. They are phenomenally busy running their businesses and had no time to chat.

The right answerFor him, it was clear the way business banking should operate — “there was only one right answer”. At the same time, the technology was straightforward as well: “Tide ensured that people could set up an account quickly on their mobile, pay per transaction, ensure that most of the things a small business does are automated and that the owners never have to speak to anyone.

“If entrepreneurship is a choice, you probably shouldn’t do it.” For George Bevis, frustrated in banking, with a clear idea of the problem that needed be solved and the way to solve it, it was a no brainer.

The admin problem was a little different. They made it easier to do book-keeping, creating useful tools such as a team expenses card. They automated payments and ensured that the system worked seamlessly with various accounting systems. Invoices could be uploaded, for example. “We built a whole raft of tools designed to give small business owners their time back.”

However, it was expensive to build a regulated banking business. George says: “Trying to convince people that this project had a chance and to put up the capital was difficult. It was a full year before we raised the £1 million we needed to get started. This came from a couple of small investors putting up £135,000 — £150,000 and then we finally pulled in some larger amounts from venture capital funds.”

Swift take upThis was in spite of near-immediate take-up for the group’s services. The founders were clear who Tide needed to target initially: “We wanted white collar technology businesses in and around London — people who looked a little like us. We figured that we understood them and could get to them reasonably easily through our network. We had good connections in the sector and could get the word out.” This went as far as taking over a pop-up store in Old Street, the centre of London’s ‘tech roundabout’: “It proved a good way to get noticed” says George.

But ultimately, Tide succeeded because it was a good product, badly needed by the market. Very early on, it hit its target market and moved beyond it, bringing in new businesses from across the UK and from a broad variety of sectors.

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George Bevis Tide, Founder

@TideBanking www.tide.co.uk

Even with this strong pipeline of clients, a sound proposition and well-established technology, it wasn’t easy to raise financing. George admits that it was only when they had a £10 million cash injection in the summer of 2017 that they felt they had the capital to run Tide as they wished to run it.

This last capital round established Tide as a ‘proper corporate’, says George. It is now nearly 200 people, with 80,000 small businesses signed up and is a different sort of entity. For him, it was the moment to exit. His passion was for early stage businesses and Tide now needed an experienced corporate management team to take it forward and scale it up internationally.

He now works on a range of new start-up ideas, including some not-for-profit options. Mostly, they are not in fintech, but he still believes there are opportunities in emerging markets: “There is still a need for someone to sort out fintech in the developing world, particularly in Africa. In Western Europe, most of the important problems have been solved by innovation over the past 10 years and there aren’t the big ideas for fintech that others haven’t had. However, the opportunities in the emerging world are significant.”

Tide still has big ambitions — aiming to serve millions of business customers round the world in a few years. In the meantime, George has delivered on his promise — to remove the burden of financial admin for businesses and help them get back to doing what they love, rather than spending their time on banking. ▪

Read more stories from entrepreneurs like George here: www.smithandwilliamson.com/hall-of-fame

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Is disruption over?The banking and financial services industries have been subject to significant disruption in recent years. There has been the arrival of challenger banks, new payment systems and roboadvice. The incumbents have been forced to raise their game and are now, in many instances, scrambling to replicate their fintech rivals. Today, has this disruption largely played out? Or does fintech still have new worlds to conquer?

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Fintechs have certainly built scale and made a real impact, but for the most part, they still have relatively small market share. As such, we believe there is still considerable scope to take business from the incumbents. People are only just recognising that they have a choice of provider and that they can trust these new names.

With banking, for example, people tend to use accounts with the challenger banks as an addition to their main banking relationships. They may do it because it is what their children use and it’s easy to transfer money. Or they may use payments apps for holidays. They tend to be separate from their main bank account. There is room for challenger banks to become the preferred provider to do everything, disrupting these existing banking relationships.

The same is true for business banking. Fintech providers in this area are moving into accounting and tax services. They have the breadth to own the whole relationship rather than just one part of it, a process likely to be accelerated by Making Tax Digital. This brings further potential disruption.

The attitudes of incumbent businesses reflects this potential. Studies show that after a period of complacency they now feel extremely vulnerable to the rise of fintech. This suggests that they are still seeing erosion of their businesses. They are striking partnerships or, in some cases, trying to compete. They recognise that fintechs are far more agile. Fintechs, for their part, recognise this agility is their greatest competitive strength and are increasingly trying to remain independent.

We believe there are also new parts of the financial services industry that are ripe for disruption. Every part of the industry believes it can’t be disrupted, until it is. A decade ago, the banking institutions looked untouchable - huge, powerful, with a long-standing client base. The global financial crisis blew that away.

Equally, it is not always easy to see what the client wants next. Henry Ford famously said before the rise of the motor car: “If I had asked people what they wanted, they would have said faster horses.” People don’t tend to realise what they want until it is put in front of them.

That said, some areas are harder to disrupt than others. Capital markets, for example, are more resistant to change. However, there is a lot going on behind the scenes across the world, with the brightest minds striving to come up with the next big idea.

London is a fintech hotbed. This is driven by a number of different factors: a strong talent pool, successful infrastructure, funding, plus a strong financial services sector. The regulator is well respected and progressive. The tax and legal environment is very attractive.

Will this change under Brexit? Uncertainty is unhelpful and may disrupt access to funding. That said, recent fundraising cycles for TransferWise or Monzo have shown that the right businesses can still raise a lot of money in the UK irrespective of Brexit.

Fintech has many more worlds left to conquer. As society changes, financial services will need to change with it. The insurance industry, for example, needs to adjust to ‘generation rent’. This is difficult for incumbent businesses, with a raft of legacy systems. Fintech will pave the way. ▪

Tom Shave Partner, Business Tax, Smith & Williamson LLP

+44 (0)20 7131 8865 tom.shave@smithandwilliamson.com

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Smashing the payday lenders:Wagestream’s smart payroll options

The sensation of having too much money left at the end of the month is not familiar to many. One in four families has less than £95 in savings*. However, for Peter Briffett, it was clear that payday loans were making the problem worse rather than better. The key, in his view, was to find a way to give families more wriggle room when faced with unexpected bills, but in a way that didn’t compound the problem over time.

The idea for Wagestream came from an article Peter read about Walmart in the US. The shopping giant had created a flexible income deal with its staff, giving employees access to their earnings in real time. Bills didn’t come on a regular schedule, so why should earnings? On investigation, Peter found that, if anything, the need was even more acute in the UK. Walmart employees were paid every two weeks. The majority of UK workers — around 85% — were on a monthly schedule.

Wagestream sought to give employees access to their wages in real time. It would allow salary or hourly-paid workers to have access to their income, but they would have to have earned it — so Wagestream would not provide loans or credit in any way. An app would show them the level of earnings they had accrued, to the nearest five minutes. They could then withdraw a percentage of those earnings ahead of their next salary payment. The percentage that could be withdrawn early would be set by the company.

The statistics for payday loans make for dismal reading. While the amounts are small — around £260 per loan — the average customer takes out six per year. Far from just being used in an emergency, payday loans are being used as an expensive way to manage the ebb and flow of day-to-day expenses.

Wagestream would provide the financing, so the company’s balance sheet wasn’t affected and it wouldn’t impact on the payroll process. There would be employee and employer apps and a whole banking structure behind the scenes.

This is where the group started in 2017. It started small: they tried it out on the pizza delivery business below their offices: the early days of a start-up involve long hours and they were good customers. However, household names soon started following, including Carluccio’s, Stonegate Pubs, David Lloyd Gyms and Rentokil. The group now has 130,000 employees on the platform, working with a broad range of companies, but particularly those that use a lot of shift workers, such as the retail and hospitality sectors.

RetentionCompanies have found it a useful tool to retain staff, but also to make those staff more productive. Briffett says: “A happy side effect was that giving access to accrued earnings encouraged people to do more shifts because they could access the cash immediately after they had earned it. This was a massive incentive and a really important aspect of income streaming.”

It also tapped into the financial wellness movement. An increasingly insistent body of research shows a relationship between poor mental health and financial stress. Enlightened companies increasingly realise that if they can take steps to ease their employees’ financial worries, they are happier and more productive at work.

* https://www.theguardian.com/society/2017/feb/20/one-in-four-uk-families-have-less-than-95-in-savings-report-finds

Peter Briffett Wagestream, CEO & Co-Founder

@Wagestream www.wagestream.co.uk

This has helped the group win investment backing from philanthropic organisations such as the Joseph Rowntree Foundation, Big Society Capital and the Barrow Cadbury Trust, alongside more conventional venture capital backers. It has so far raised £4.5 million and is in the process of creating another round of funding.

Peter sees many more opportunities out there. He says: “NHS workers are the biggest users of payday loans*. If we can do something to ensure that people working in the health service don’t have to take these horrible loans, that would be a really important step.”

“When we looked at this, we saw a clear benefit for employees and employers and a chance to give payday loans a kicking at the same time. The end market is far bigger than we thought.”

Smart payrollTo date, Wagestream has focused solely on its payroll ‘smoothing’ system. However, it now sees a market for workplace savings and a range of other financial products. They are in the process of signing a number of blue chip companies. Equally, open banking opens up a number of possibilities. The app could be extended, so that if someone takes £300 out of their wages, the system automatically books them in for a number of extra shifts, “like a financial Fitbit that can stop people going into overdraft”, says Peter.

Why has no-one done it before? Peter says that running payroll is expensive, so the less pay cycles that employers run, the better it is for their cashflow and costs. Also, evolution of technology now allows us to link workforce management data with financial data, which is the big breakthrough for a businesses like ours. With this link we can provide financial products no-one has ever seen before.

Peter has a number of successful projects behind him. He sold his first technology business to Microsoft and then built up online marketplace LivingSocial to £100 million. “I’ve always been in technology, so I’m used to the highs and lows. I like to grow and build things — maybe I had too much Lego as a child.”

His partner at Wagestream, Portman Wills, has a background in engineering and operates as chief technology officer. Peter says: “I’ve always been on the commercial side, so our skillsets are well-matched.”

“You’ve got to have real focus to go through the rollercoaster. If you believe in something and have a mission the whole company gets behind, it has a really good chance of success. For me, the social impact component is important — we know 38% are using our service so they don’t have to use a payday loan. If you provide real value, you should always be able to create a great company.” ▪

I like to grow and build things - maybe I had too much Lego as a child.

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* https://www.theguardian.com/money/2018/apr/18/nhs-workers-top-list-of-those-applying-for-payday-loans

Foreign exchange: the rational way

How did people make an international payment 13 years ago? At this time, most people were using their high street bank or a retail branch to send money overseas. It’s likely they would have paid a high price for making an international payment, being stung on the foreign transaction fees. In addition, the process was complex and time-consuming.

This was the world that Paresh Davdra, along with Co-Founder Rajesh Agrawal, decided needed a shake-up. In their mid-twenties at the time, they had been working at a leading currency specialist and recognised the limitations of the system as it stood. With a small personal loan the pair founded RationalFX and so began the transformation of the foreign exchange market.

A simple solution“The company we had been working for helped the industry send money abroad for people with overseas properties. We felt there was a big market to offer this service online. We were the first business to offer an online solution for exchanging currency when buying a property abroad. Most of all, it was straightforward: we offered a much simpler way to register online and complete all the regulatory checks. We didn’t have a great deal of money at the time but there were few barriers to entry. For example, I remember writing a £35 cheque to HMRC and using my credit card to buy a laptop just to get us off the ground.”

The foreign exchange market has seen significant disruption over the past decade. Paresh Davdra, Founder of RationalFX and Xendpay, has been instrumental in leading in this change.

Starting young meant Paresh didn’t have the same ‘should I, shouldn’t I’ of many entrepreneurs. He admits it didn’t even feel like much of a risk: “After I graduated I was working in the currency brokerage firm and wanted to buy a house. Although my father was willing to support me by paying the deposit, with my low income, we were refused a mortgage by pretty much everyone. At 24, I had nothing to lose. It really didn’t feel that risky.”

And while he hadn’t always had entrepreneurship in mind, from a very young age, he knew he wanted to do his own thing: “I was always financially focused! I know I should say that I came into this to change things, but I also really wanted to make money — like any 16-year old.”

Defined rulesNot that there weren’t sacrifices along the way. The pair didn’t pay themselves for the first 18 months and had around £50,000 of debt but they both believed in the concept and kept each other going through tough patches. “The roles were clear from the beginning. He was a few years older than me and we became like family with him taking the older brother role. There has always been a natural respect there as a result. The relationship took shape over the years. Rajesh was the innovator, thinking of new ideas, the strategic brains. I was doing the running, getting sales and driving new business.”

The pair initially worked out of a little office in Brighton, but the business grew quickly. People recognised they were getting fleeced by the banks and could save a lot of money with a currency specialist. They moved to central London and expanded their team and their reach. Notably, they started to offer services to business clients in 2007. “The market was extremely large and there were always new businesses opening up who needed FX,” says Paresh.

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Paresh Davdra RationalFX, Co-Founder

@RationalFX www.rationalfx.com

The breadth of the business helped it during some tricky patches, notably the recession of 2008. At that point, the business clients kept revenues ticking over. Shortly after, the group became FCA regulated, which meant it could passport into Europe and it soon built a presence in France, Spain and Germany. Today, around half of its revenues come from Europe.

ExpansionOther new business brands formed, including Xendpay in 2012, which became part of the Rational Group. This allowed expats to send small, regular payments to their families back home. The group also devised an innovative fee structure, which allowed some flexibility in payments made by its clients. This has grown quite substantially, says Paresh.

Looking to the future, the Rational Group is focused on big payment rails such as Blockchain. It is also looking to building up its infrastructure. RationalFX currently has other businesses and institutions using its payments infrastructure to make money transfers across the world and it plans to further develop this part of the business.

The business has spawned many rivals, a testament to how disruptive the idea has been. However, it does not plan to go down the route of some of its rivals in offering an increasingly broad range of services — wealth management, bank accounts and so on. Neither does it plan to offer cryptocurrencies, which, for Paresh, feels

like a bandwagon: “We have been quite clear on our markets. Lots of our rivals have gone to crypto but that is because they don’t have sufficient scale in their existing markets.”

This isn’t a problem for RationalFX, which now has over 100 people in its main HQ in London. All its growth has been organic, there has been no outside funding and the business is still 100% owned by Paresh and Rajesh. In 2018 the group had revenues of £10.7 million and has now processed over $10 billion in payments for more than 180,000 registered clients.

The pair recently took a step back from the day-to-day running of the business, having put a capable management team in place. Agrawal has been busy, working alongside Sadiq Khan as London’s Deputy Mayor for Business, which encourages support for entrepreneurs in the capital. Paresh has taken a quieter route: “I’ve been doing a bit of travelling, visiting a few countries that I couldn’t see while I was running the business. I also have a few things in the pipeline, entrepreneurial projects.” He wants to move back into earlier stage business, which, he says, is much more fun than running a large business. “It’s setting things up that’s exciting. The best bit is the building.” ▪

Following a gap identified by Government, and the need for a voice for the sector, Innovate Finance started life located in Level 39 — the technology hub operating on three-floors of One Canada Square in the London Docklands, providing support and mentoring for high tech businesses. It was clear that as financial technology grew in importance and impact, it needed its own representative body.

CEO Charlotte Crosswell, who joined the organisation in 2017, said: “We want the sector to thrive and are doing what we can to facilitate that. We want to make sure that the right messages get across, that the right capital is in place, that policymakers are supportive. If people are talking fintech, that they’re using the same numbers — on jobs data or on growth, for example.”

“We have also been working on our international outreach, including international trade missions. It is more about the macro side rather than setting rules.”

She says there is an increasing recognition among mainstream financial services groups, such as the high street banks, that they need to embrace fintech or risk losing out. They are either trying to build their own solutions, or — more often — backing innovative start-ups. Charlotte says this is an important part of Innovate Finance’s role: building partnerships and helping to match capital with innovation.

“There are still some who say ‘fintech won’t affect me’, but that’s moving,” she says. “Those who try to play catch-up may well find it’s too late. You don’t do it at your peril. In the past five to ten years, huge swathes of jobs have been lost to AI/machine learning. The rate of change is quite incredible.”

The UK’s fintech hubThe UK punches above its weight in terms of fintech adoption. It is currently the third biggest market outside China and the US. Facebook recently announced that it would be trialling its WhatsApp payments service in London, a good example of the attractiveness of the UK fintech sector. Charlotte attributes its success to an enlightened regulator, but also to the problems created by the financial crisis, which forced diversification in the sector. The FCA has been good at encouraging competition through its regulatory ‘sand-boxes’ and engaging with the industry.

There remain many challenges. Financial inclusion remains front of mind for many providers. There is a danger that, in the drive to innovate, those without a digital connection are left behind. In a cashless society, how do they send cash and pay?

Charlotte says: “We are likely to see a lot around financial inclusion and wellness, getting the unbanked banked. We have an increasingly cashless society, and fintech inclusion can be excluding as well. 16 million people in the UK have less than £100 in their bank account.”

The voice of the industry Innovate Finance was set up to be the voice of the fintech sector, tasked with connecting the ecosystem and bringing it together with a single voice. That means drawing the government together with banks and fintechs, with entrepreneurs, and with other interested parties such as venture capitalists, to tackle issues such as funding or the skills and talent gaps.

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This is leading to companies such as Wagestream (featured on page 14), which gives individuals early access to wages they have accrued to help smooth their payments. The fintech sector is keen to disintermediate payday lenders, which can contribute to keeping people in poverty. This is partly about education and inclusion — 60% of those taking payday loans would qualify for a bank loan, but don’t think it’s for them.

The next wave?Where is the next big area? So many areas have already been disrupted — from payment systems to FX transfer to wealth management. Charlotte says capital markets have been slower to embrace fintech, but could be next: “Capital markets are very difficult to disrupt and depend on the procurement processes of individual investment banks. This can involve many levels of sign-off. Trying to onboard technology is a big challenge and this is why Blockchain has not yet been widely adopted. That remains an area ripe for disruption, but with some barriers.”

Insurance technology has generally been relatively slow to adopt new processes. However, it will need to change to accommodate changes in its end markets — the demands set out by driverless cars, for example. “There is also a question over what happens to insurance when people don’t own things anymore.” Charlotte says. “It will change insurance premiums.”

Health insurance is already seeing some changes — linking to fitness trackers and other measures of well-being. However, while data is increasingly being collected, no-one has monetised it effectively yet.

Changing consumer preferences will also hit the pensions industry. Millennials are a generation of renters and care less about long-term savings (whether by necessity or design). This will have implications for pensions and other savings schemes. There is also a clear mismatch between men and women, says Charlotte, with women saving and investing far less. This needs to be addressed.

Millennials will inherit from the boomers, which could change the wealth management landscape once again. Charlotte also highlights the diversity problem across the industry. Solving these problems will require breadth of thought, as financial services has traditionally been a male preserve. Innovate Finance is striving to raise awareness of fintech among the next generation of women. It has launched an outreach programme in schools: “We want to show them that female role models come from all backgrounds and inspire people to come and work in fintech. Fintech should help everyone, not just an elite. It should promote social mobility.”

It is a bold mission, but fintech has the potential to benefit many layers of society. Innovate Finance will be front and centre of driving the industry forward and ensuring it achieves its goals. ▪

Charlotte Crosswell Innovate Finance, CEO

@InnFin www.innovatefinance.com

Facebook recently announced that it would be trialling its WhatsApp payments service in London, a good example of the attractiveness of the UK fintech sector.

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RegTech overcomes resistence

The global financial crisis prompted a wave of regulation, designed to guard against a repeat of the catastrophic systemic failure. This has placed a significant burden on financial institutions, not only to comply with the new regulations, but to evidence their compliance and produce regular reports. ‘RegTech’ (regulatory technology) has emerged as a means to ease this burden, minimise errors and speed up the process.

Diana Paredes was working on the trading floor at a major bank, doing a lot of its regulatory analysis, when she recognised the problem. “Regulation was asking the same thing from one financial institution to another. We saw a means to relieve the burden of regulatory maintenance and reporting.”

She set up Suade Labs in 2014 as a ‘Regulation-as-a-Service (RaaS)’ software platform, part of a new wave of ‘RegTech’ solutions. The firm’s software enables financial institutions to process large volumes of data, sorting it to meet the regulatory requirements, and perform the necessary calculations for risk measurement and reporting. She firmly believes that a data-driven approach to regulation is key to preventing the next financial crisis.

Breaking throughIn the early stages, the difficulty was not, as might be expected, a technological one. Yes, banks and asset managers had legacy systems that needed to be replaced, but the real issue was encouraging companies to see how their existing processes could be re-engineered. There were those with a vested interest in the status quo that weren’t keen to adapt.

“The resistance we encountered was due to legacy mentality, people being used to doing things manually or outsourcing efforts to contractors and consultants who only realised how compelling our proposition was when they understood the cost savings they made. We were trying to disrupt legacy systems but really most of disruption comes down to changing people’s mentality and approach,” says Diana.

“The difficulty lies not so much in developing new ideas as in escaping from old ones” – John Maynard Keynes

Diana Paredes Suade Labs, CEO & Co-Founder

@SuadeLabs www.suade.org

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Nevertheless, once she and founding partner Murat Abur started building traction, the business grew rapidly. Financial services companies increasingly recognised that they needed a better solution. The difficulty of keeping pace with regulatory change with systems that are old, antiquated and not flexible grows over time. As Diana points out, businesses end up in a situation where they can’t adapt to the rules, which are constantly in flux. Modern technology is really the only way to do this.

Today, the business serves a broad range of financial services groups,from small challengers to Tier 1 banks. It focuses on prudential regulation stemming from Basel III and MiFID II, and its products including a stress testing platform for capital requirements and scenario testing for liquidity management.

Controlling your destinyThe group has been profitable from its first year of operation. This has had a number of advantages, notably that it has not had to call in significant external funding. It has worked closely with Microsoft Ventures, which has provided invaluable support, but in general, the group has been able to control its own destiny without the pressure of external board members. It also means it can sustain its independence, which has appeal for many of its clients.

Diana believes that external finance can be a hindrance as much as a help: “We have never had the pressure of having to go to the market for funding because we are running out of money or have someone on the board deviating us from our laser sharp execution. That means we are free to run the business as we want. Investors are not always bad but it is disappointing to see the poor quality of investors in the EU market in particular. There is a stereotype that investment always helps, but the wrong investor can have a terrible impact on a company as well.”

There is also the problem that the type of places where she may look to raise finance do not necessarily understand how to support female founders. As an engineering major and someone with a decade of experience on the trading floor, she is well-used to an all-male environment. She hasn’t been aware of any bias through her career, but she is aware of the issues women founders face in raising finance, with the lack of infrastructure for working mothers and childcare being one of the key reasons investors do not tend to invest in female founding teams. She aims to get involved in projects that raise the profile of female entrepreneurs and women in technology to change that.

She participates in a multitude of events as a thought leader advocating for more women in technology and more transparent supervision.and regularly lobbies on behalf of the tech community on key issues to the government and policy makers. That said, it wasn’t her plan to be a trailblazer for female entrepreneurs. She didn’t even know that would be ‘the job’, she says, until she tried it: “Entrepreneurship is not for everyone, but if it’s for you, it’s the best job you’ll ever have. I didn’t really understand what it meant to be a CEO, but it’s really amazing.”

Her advice for those looking to branch out? As Nike said, ‘Just Do It’. She adds: “In the worst case scenario, you find it’s not for you and you will have no regrets that you did not try it out and can always go back to a ‘conventional’ environment. In the best case scenario, you discover you love it and cannot imagine ever working anywhere else. Either way, you will have learnt something and isn’t that what life is all about?” ▪

Entrepreneurship is not for everyone, but if it ’s for you, it ’s the best job you’ll ever have...

The personal touch in an AI era

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How do you balance the needs of existing clients with a more traditional approach and attracting the next generation?It’s not proved as difficult as you might think. We are always open to new clients. Before we had online banking, existing customers weren’t asking for it. They didn’t know they wanted it. However, we’ve had significant take up and now have 60% penetration in online banking, less for our app but that is building.

The essence of private banking is relationships. No technology can replicate that. It is human to human; for us, humans are the decision-maker. For many of our customers, the ability to speak to someone who knows you and your life is vitally important. They’ll use the app to pay the gardener, but anything complicated – such as financing for a new property – and they’ll talk to us.

What does that relationship look like in practice?When someone first joins the bank, they are introduced to their relationship manager, who handles their day to day needs. These relationships are enduring – some people have had their relationship manager for over 20 years, and have even invited them to their weddings.

That isn’t for everyone. Some customers just want their manager to do exactly as they ask them to do. We can accommodate that model as well. The skill of the manager is in judging the type of relationship the customer wants.

The ultimate decision maker is always a human being. With any lending decision, we will meet the principals and consider the proposition. We may say no, but we can tell the borrower exactly why we have said no. We can look at their whole situation – the assets they can put up as collateral for example.

This is a labour intensive model – does being privately-owned help?Definitely. We have a small number of shareholders, just six of us. It gives us a razor-sharp focus on that private banking market. The sale of the wealth management business made that a lot easier. It meant that we could build relationships with other wealth managers and give our clients options: some want everything as cheap as chips and others want discussion and investment advice. We can offer that now.

What was your background? I started at Cazenove, but my first husband was Russian and so I ended up working in Moscow. This was great experience, because I got a much higher level of responsibility far earlier. Everyone was learning, so if you did something right, tomorrow it would be your job. Before long I was doing team management, cash flow management, technology management. It was a career leapfrog. I came back to join the bank in 1999 (which wasn’t a great year in Russia). I was made a partner in 2001.

How does the family ownership influence the way the bank is run?We’ve been lucky in that finance is the core of what we do and it is still a valid service. If we’d been in the printing business it might have been a different story. This is a family business, but it’s not a normal family business. There is no automatic right of inheritance and you don’t know you’re going to join the bank. It is a partnership model and those who don’t join the partnership don’t have a financial interest in the business. This is the 11th generation, so some of us are fairly distant relations. One of my fellow partners is my 9th cousin, so we haven’t grown up fighting over the Lego.

Bella Hoare is one of six partners who head up the UK’s oldest private bank C. Hoare & Co. The bank was founded by Richard Hoare in 1672 at the sign of the Golden Bottle on London’s Cheapside and today employs around 400 people in its Fleet Street headquarters. Bella talks about how private banking is adapting to the new world of finance.

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Bella Hoare C. Hoare & Co., Partner

@Hoaresbank www.hoaresbank.co.uk

We have chosen to work together. It’s a business that happens to belong to a family, but the interests of the business are more important. There are around 2,500 living cousins and only six lead the business.

What is your client base today? It is fairly broad. We have entrepreneurs that like the way we do things. We also have landed estates, (who may also be entrepreneurs). These tend to be good borrowers – they are asset rich and cash poor. We have lots of clients in the legal sector – barristers and QCs. We have lots of nice people with complex lives that are wealthy enough to want the help of a private bank.

When I look at the challenges they share, it is time. We give them time. They are very busy and/or very uninterested in finance. One type of client just wants to make sure that when they give the bank an instruction, it is done quickly and efficiently. The other type of client is someone who really wants us to take the time to talk to them and build the relationships.

Lots of modern banking works on the basis that it is very efficient because you do it all yourself. This just doesn’t work for people with multiple assets and income streams. It is difficult to lend to someone who may be selling down their wine cellar, or have irregular cash flow from their properties, or dividends from their business. We can look at the whole picture of their wealth.

What else is important in cementing C. Hoare’s place in the future of finance?People know their deposits are safe. We saw our deposits rise 40% in 2008. Our rates are not the highest, but they know they can trust us.

What do you see as the threats to your business?There are always cost pressures, certainly to stay up to date with regulation. The regulators make it harder to maintain a relationship-based approach. Our terms and conditions have gone from two to seven pages and, to my mind, are less clear than they were. I’m not sure the customer is better off. We are quite small, so regulation is expensive for us.

We worry about staying relevant, but while we worry about it, I believe we’ll be OK. Our worst enemy would be complacency. The generation that is coming through in their 20s – will they change? Will they be a different 40-year old? We may need to be a different bank for them. The pace of change is speeding up and we are investing in that change.

We are aware that our technology has to be good enough to compete, but with the overlay of an actual relationship with a human being. We don’t have strict limits on the amount of money people need to have. We will always take a view and are happy to build relationships over time. We’ve got time for people. ▪

The essence of private banking is relationships. No technology can replicate that.

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While plenty of fast growing businesses grow into substantial enterprises without raising external equity, or even accessing debt, they tend to be the exception rather than the rule. The majority of ambitious UK businesses have either raised money in the past or hope to in the future.

To help them make this well-trodden path successful, the Smith & Williamson ‘Dream Bigger: Funding ambition’ report studies the fundraising experiences of more than 1,000 companies. By exploring their rationale for seeking finance and their understanding of the different routes available, the report aims to offer valuable insights to any business embarking on its finance-raising journey.

Crucially, of the businesses we spoke to, half were scale-ups. These are the UK’s turbo-charged companies, undergoing rapid growth, and most of them recognise that their funding strategy and capability has been fundamental to their success. As this report shows, not everybody gets it right but, by drawing on some of their unique experiences and insights, we aim to help them find the right funding for their business.

Key findings

• Money talks: Nine out of ten (89%) businesses have sought finance successfully, are actively seeking it or intend to in the future

• Use capital to dream bigger: Scale-ups take calculated risks aimed at future expansion; they are more than twice as likely to seek capital to fund an acquisition (30% vs 13%), to grow organically through overseas expansion (14% vs 6%) or to fund new premises (30% vs 12%)

• Equity vs debt: Nine out of ten (91%) firms that have raised finance successfully have used equity at some point, making it by the far the most popular route

• Rabbits in the headlights: 70% of businesses don’t know how to approach venture capital or private equity investors, while fewer than half (45%) are confident about accessing equity from angel investors

• Preparing like a scale-up: Before trying to raise, scale-ups are far more likely than other businesses to have a business plan ready (52% vs 29%) and a suitable management team in place to execute it (41% vs 18%)

• Looking forward not back: Scale-ups are more than twice as likely to feel they gave away too much equity (18% vs 8%), perhaps because they’ve exceeded all their targets, making the equity more valuable today

• Knowing the target audience: Two in five (43%) businesses waste time and resources approaching the wrong type of investor, while 40% of those who failed say they were unable to meet investors’ criteria

• Hiring an adviser: Scale-up companies value expert advice more than the rest - of those businesses that have successfully raised finance, far more scale-ups (37% vs 24%) have used a third-party adviser during the process

Your business &

Funding ambition

Dream Bigger:

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DreamBigger

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DreamBigger

Entrepreneurialism: it’s not a job, it’s a lifestyle choice Converting a big dream into a scaleable business requires intuition, skill and stamina. Visit Smith & Williamson’s Hall of Fame to meet the people who have aimed higher and worked smarter. With vision and dedication, these entrepreneurs have built great teams and strong, sustainable businesses.

From Nick Jenkins of Moonpig to Mike Clare of Dreams, and Jackie Fast who appeared on The Apprentice 2018, they share their experiences with us: what helped, what hurt and the lessons for the next generation of business owners.

The hurdles they’ve overcome will be familiar for many: struggling to raise finance, getting the right team of people in place, finding a key point of differentiation. Other hurdles were out of their hands: being diagnosed with cancer, the global financial crisis of 2008, the burst of the dot.com bubble and the September 11 attacks.

Find out more about these entrepreneurs forged their own path at: www.smithandwilliamson.com/hall-of-fame

At Smith & Williamson, we actively champion the cause of entrepreneurs and their businesses to help them realise their aspirations. By visiting our dedicated entrepreneurs’ resource:

smithandwilliamson.com/entrepreneurs

you can access reports and tools to help you. For example, our interactive benchmarking service will allow you to compare your business with your peers in the UK.

“Most entrepreneurs aren’t in it for the money – there are easier ways to make it” Duncan Cheatle, The Supper Club

“The best way to learn is to have crack people around you” Sir Rod Aldridge, Capita plc

“Successes and failures count in equal measures” Jackie Fast, REBEL Pi

“As a business owner, you get used to running through brick walls and relishing the pain” James Meekings, Funding Circle

“Never feel bored at work” Nick Jenkins, Moonpig

“You need to challenge yourself” Alan & Juliet Barrett, Grenade

“When we started, no one thought it would work” Nicolas Cary, Blockchain

“The biggest lesson you’ll ever have really slaps you in the face” Sheila Flavell, FDM Group

“There’s no such thing as certainty” Wilfred Emmanuel-Jones, The Black Farmer

“Make what you love into a business” Mike Clare, Dreams

“There are no shortcuts in business” Kanya King, Mobo Awards

The war for talentThe 2018 ScaleUp Institute Annual Review found that 80% of scale-ups identify access to talent as important to their continued growth. Talent has consistently remained the top priority for scale-ups over the past four years. It is perhaps even more important for fintech businesses, where the right technical skills are vital for the long-term sustainability of the business.

There are a number of inescapable features of today’s labour market: unemployment is at its lowest level in a decade and wages are rising. As such, the right talent can be increasingly discerning about where they work and the terms they demand. This is not just salary, but lifestyle considerations – remote working, flexible hours and equity participation. In fact, surveys consistently find that these lifestyle factors rank higher than salary when it comes to choosing a job, particularly among young people.

Two key elements are likely to define the success or failure of fintech businesses: the quality of the team they can recruit, and the extent to which they can access new markets, both in the UK and abroad. How can businesses manage these twin challenges?

What defines your business?

The majority of successful entrepreneurs acknowledge that having the right people in place, people who share their values, has been the most important thing in realising their strategic vision. As such, while many still look for people with established skills, most recognise that a training programme is vitally important. Companies increasingly recruit for attitude and train for skill, recognising that social skills may be harder to teach than technical skills.

The Review identified building stronger connections with schools and universities as a means to improve the talent available to growing businesses. One of the ScaleUp Institute’s ten recommendations to the government for the year ahead was to ensure that Britain is in the top five of the OECD PISA rankings for numeracy and literacy by 2025. It also wants to ensure educational institutions guarantee that students come into contact with the top 50 scale-up business-leaders within 20 miles of their establishment.

Discovering new marketsNew markets are the lifeblood of a growing business. Yet accessing those markets brings major challenges. In the 2018 ScaleUp Institute Annual Review, accessing new markets was listed as the second most important factor (after talent) for delivering growth in scale-ups – 79% identified it as vital or very important. Yet ill-considered expansion is a peril for scale-up businesses and has been a major factor in business failure.

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New markets can be domestic or international. For domestic expansion, a new market will often represent a step-up in size. A scaling business that wins an anchor customer, such as a major corporate or a government department, passes a huge milestone. It is a gateway to other large customers, and even international businesses. Scale-ups consistently cite the culture and procurement processes that go with trying to become a supplier to a large corporate as difficult and time-consuming.

Certainly, corporates need to become clearer and more transparent in their supplier requirements and to create simpler online tools that make the procurement process easier for smaller suppliers. However, scale-ups will struggle to influence this. In the meantime, corporate collaboration can also be an important step in improving the procurement process. Sharing best practice between businesses on how to improve connections with larger buyers and more easily integrate into their supply chain is all important.

Looking at international expansion, scale-ups say the government can help and they want more effective support: that means better introductions to buyers overseas. In the ScaleUp Review, four in ten wanted a single point of contact with the Department for International Trade in the UK.

Trade missions have previously been an important means for scale-ups to build an overseas presence. An increasing number of industry or government-sponsored bodies now organise trade missions to help British exporters explore international business opportunities, introducing them to key business contacts, distributors, agents, partners, buyers and sellers.

The Brexit challengeScale-ups have an international employee base, with two-thirds employing people from overseas. Fintech businesses in particular need to draw on a global skills base. 61% of scale-ups employ staff from the EU and 35% employ staff from outside the EU. Two-thirds say it is vital or very important that they can continue to bring in talent from abroad. Half of all exporting scale-ups say it is important to have a fast-track visa system when hiring people and talent from overseas. As such, with no apparent resolution on the table, Brexit remains a major challenge that fintechs need to navigate. ▪

Speak to one of our Scale-up team to see how we can help you.

+44(0) 808 164 0100 scaleup@smithandwilliamson.com @SmithWilliamson

John Morris Partner, Smith & Williamson LLP

+44 (0)20 7131 4450 john.morris@smithandwilliamson.com

How businesses should approach finance Guy Tolhurst is an entrepreneur, author and business champion. He runs three small businesses that help investment to flow into growing companies, and this year will host the first Growth Finance Awards, celebrating the lenders that offer ‘more than finance’ to businesses.

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With a thriving entrepreneurial culture, the UK is the third-largest producer of start-ups in the world. People up and down the country are setting up businesses — innovating, disrupting, and having a go.

In 2017 (the last year that data is available) more than 382,000 new businesses began trading. That brought the total number of small firms to 5.6 million, employing 16.3 million people.

But despite this wave of entrepreneurship, the UK struggles when it comes to scaling up those businesses. There are still too few fast-growing companies, even though there are some encouraging signs — the latest ONS figures show that the number of scale-ups (companies growing by 20% per year) grew by 3.7% in 2017.

Part of the problem is that small businesses tend not to use finance (which in this article is taken to mean debt, not equity).

A recent poll by BVA BDRC found that only a third (32%) of small businesses are happy to use external capital to help them grow.

So why are business owners so reluctant to borrow? Some business owners simply don’t want to — they would rather grow at a slower rate than burden themselves with someone else’s money.

For other SMEs, though, the problem is a lack of information. Many busy business owners simply don’t know about the range of products available to them.

This has given rise to what is known as the ‘perception gap’: a belief by some entrepreneurs that if they apply for finance they will probably be rejected. However, the data shows that eight out of ten businesses that apply for a loan are successful. And there are lots of lenders who specialise in working with small businesses, who are used to first-time applicants.

Using finance isn’t for every business. But if approached intelligently and delivered by the right provider, growth finance could help many of the UK’s small businesses.

The growth journey is different for every business, but here are some general tips for business founders who are weighing up whether to take on external capital.

• The first thing a business owner should do is set out its goals in the short, medium and long term to determine whether finance is the right course of action. Does the business want to access new markets, for example, or develop new products? And if so, can it do so through its own cashflow or does it need a capital boost?

• If an owner decides that their business needs external capital, then the next course of action will be to decide which form of finance is the right kind. There’s a rich variety of finance available to growing companies, depending on factors like how its business is structured to the different kinds of assets it can offer as collateral. From bank loans to invoice financing, from asset finance to venture debt, deciding on the right kind of capital will be important.

• Do plenty of research on the different capital providers. There are more lenders available to SMEs than ever before, and each of them will offer something slightly different. A business founder can use their peer network to learn about different finance providers, as well as excellent online resources such as the Finance Hub by the British Business Bank.

• Finally, take every possible step to ensure that the business partners with the right lender. For growing businesses in particular, it’s important to find a lender that understands the needs of the company and is looking for a long-term relationship. Things can change quickly for a small business, especially during periods of fast growth, so it’s important to choose a supportive finance provider.

Guy Tolhurst Intelligent Partnership, Founder

@Intelligentwit www.intelligent-partnership.com

... data shows that eight out of ten businesses that apply for a loan are successful.

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Summary of the different kinds of growth financeMore and more small businesses have been using equity capital in recent years, but for the sake of simplicity this list only features debt options.

1 Loans & Overdrafts

Loans and overdrafts are the most common source of finance for growing SMEs. They are used for a wide range of reasons — from financing new hires, to buying stock, to developing new products.

Both are typically provided by high street banks, although in recent years a wide range of new providers (often referred to as the ‘challenger banks’ have begun offering them).

To get a loan, a business must show to a lender that it can generate the income it needs to pay back the debt. Lenders usually require security or a guarantee as a condition of providing the loan.

Overdrafts are slightly different. An overdraft is a short-term line of credit that a business can ‘dip in’ to from time-to-time. It is capped at an agreed amount, and a business is under no obligation to make use of the full sum.

2 P2P business loans

In the past five years, peer-to-peer (P2P) loans have become more and more popular among SMEs. They connect businesses to many different investors via an online platform.

P2P platforms are often able to lend when banks don’t. Many small businesses have found that they can secure funds through an online platform after their bank has turned them down.

The process of agreeing a loan from a P2P platform also tends to be faster than from traditional lenders. Many small businesses have reported accessing a P2P loan just a few hours after applying.

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3 Leasing & hire purchase

Leasing and hire purchases allow growing businesses to use equipment without having to pay upfront for its full cost.

They are very common financial options for SMEs: a fifth (21%) of businesses with 10-49 employees use leasing or hire purchase, while 43% of businesses with 50+ employees use them too.

The kinds of equipment that can be leased range from small items to the very large. Businesses use leasing and hire purchases for everything from coffee machines or vehicles to large machinery and manufacturing equipment.

Leasing and hire purchase agreements range in size and are offered by a variety of specialist providers.

4 Invoice financing and factoring

Invoice finance is a tool that offers SMEs ‘more than finance’: a solution to the danger of late payments.

Unfortunately for lots of small businesses, late payments are a constant pressure. According to research by BACS, 43% of SMEs face late payments, with many of the delays stretching months. The cost to UK small businesses of recovering that money reached £6.7 billion last year, up from £2.6 billion the year before.

Lots of small businesses can’t afford to wait weeks or months to receive payment from a buyer. Cash shortages due to slow payments are a common killer of small firms.

That’s why invoice financing is such a useful tool. By helping businesses to get paid promptly it allows small firms to free up cash and focus on developing their businesses.

Another benefit to invoice finance is that it doesn’t require an SME to have any other assets than its unpaid invoices. For a small firm it can be one of the easiest ways to raise finance.

5 Asset-based lending

Asset-based lending is a way for a growing company to use its assets as security for a loan.

It allows an SME to raise cash against its valuable property, freeing up funds to invest in its growth. Rather than keeping cash tied up in large assets like machinery or real estate, a business can raise debt against them and use the cash to fund its growth.

Traditionally it has been more popular at the larger end of the range of SME companies, although it is increasingly common at the smaller end of the scale.

Asset-based lending tends to be cheaper than unsecured loans because the lender has the right to the assets in the event of a default. Because this reduces the risk to the lender, it can offer lower interest rates to the borrower.

Given that many assets can qualify as collateral, there is a wide range of facilities available. Smaller SMEs can raise modest amounts against lower value assets, while larger SMEs can raise far more.

6 Venture debt

Venture debt is a way for fast-growing businesses that are between equity rounds to boost themselves with extra capital before their next fundraising.

Venture debt is closely tied to venture capital funding, which is a form of equity investment in early-stage businesses. It’s a specialist product that can be highly useful for the fastest-growing SMEs.

Some growth companies use venture debt to ‘lengthen the runway’ until their next planned equity round. They use the capital to scale up in advance of their next valuation, helping them to raise more money in the future.

Alternatively, they might like to secure it as a sort of insurance policy to cover unexpected cash demands or equipment purchases. Lots of early-stage businesses don’t break even in the first few years of operations and are reliant on external capital until they reach profitability.

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7 Direct lending

Direct lending platforms offer senior loans to growing businesses, usually secured by the company’s assets.

It’s hard to assess the full impact of direct lending funds on the UK’s growth businesses because data collection is sparse in this section of the market.

But there are two things we can say about direct lenders’ relationship with growing companies.

One is that the volume of direct lending to SMEs is growing. The number of companies taking loans and the value of private debt deals have been increasing.

The second feature of direct lenders is that they are more active in the middle and the top of the SME market than at the bottom. They tend to offer larger loans to companies that are well-established with a strong trading history and assets.

8 Export finance

SMEs can use export finance to help them sell goods to customers abroad.

It typically involves a business securing advance or guaranteed payment ahead of goods being shipped, so that it can grow internationally without fear of missed payments.

Export finance is available to both large and small businesses, providing they are making revenue and have export contracts or orders from abroad.

It is offered by high street banks as well as specialists, plus it can also benefit from government support.

Because exporting is good for economic growth, the government has a special department, UKEF, whose purpose is to support export finance. Thanks to the guarantees it provides to banks, export finance can often be offered cheaper to SMEs. ▪

HiB - sorting out its cashflowArriving at the optimum point to accelerate scale-up activities is different for every business. For HiB that time came five years ago after twenty years of successfully growing the company. HiB had carved out a niche supplying high-end designer cabinets and mirrors to independent retailers in the UK and the Middle East.

“We have created a niche and have become the market leader,” explains managing director Robert Ginsberg. “Sometimes, you have to create a market to scale.”

HiB sells products that had been traditionally viewed as accessories that people buy last in their bathroom upgrades. “But customers are now choosing a bathroom cabinet or mirror with LED lighting, integrated bluetooth speakers and charging points as a key item when designing a bathroom experience,” says Ginsberg.

The company worked with its long-standing relationship lender Lloyds Bank to roll-out a growth-focused invoice factoring programme, by raising working capital against its receivables. Its regular sales and purchasing patterns supported this finance option.

“We had a cash flow struggle between needing the stock to support growth and having cash to support this,” explains Ginsberg. This strategy helped HiB grow its revenue from the £8 million level to around £15 million. “It provided the boost and energy that we needed for three years until the increased sales generated cash,” he adds.

Having just two relationship managers at Lloyds Bank since 1990, Ginsberg says HiB benefited from this “consistency and stability” and didn’t really need to look around for other finance options.

Robert Ginsberg HiB, Managing Director

www.hib.co.uk

Read more about Robert’s story as an entrepreneur at www.smithandwilliamson.com/hall-of-fame

34 Enterprise

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Nick Travis Partner, Head of Entrepreneurs, Smith & Williamson Investment Management LLP

020 7131 4223 nick.travis@smithandwilliamson.com t: @_NickTravis_

Enterprise 35

Read more about Robert’s story as an entrepreneur at www.smithandwilliamson.com/hall-of-fame

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