Lockdown proves tech’s appeal to growth investors
While the Covid-19 pandemic has brought economies and healthcare systems close to collapse, the ability of fast-growth companies to power through — and profit — remains somewhat undiminished.
Aside from a pause when national lockdowns were first imposed last year, and companies raced to assess the impact on economies worldwide, many start-ups and scale-ups have largely emerged in good financial health — in part because investors have continued to back growth in a low interest-rate market.
“When March came around, there were a few months of panic in the venture community with a scramble to shore up cash balances in portfolios, but the Fed and central banks aggressively supporting the markets changed the approach to risk completely,” says Toby Coppel, co-founder of venture capital firm Mosaic Ventures.
“Since July, we have seen tremendous amounts of new money . . . chasing growth, which means valuations have increased very substantially across the board,” he explains.
The FT-Statista ranking of Europe’s fastest-growing companies, which assesses their 2016-19 revenue growth, does not show the impact of the pandemic on these businesses. Instead, it indicates the firms and founders that entered 2020 with strong support. However, the success of many of the companies on the list — before and since — is down to more than just financial strength.
In many cases, it is due to the pandemic changing the way the world uses technology, catapulting many niche innovations into everyday use by people stuck at home under lockdown.
“We are in the golden era of European tech,” says Tommy Stadlen, co-founder of venture capital fund Giant, which last month created Tailwind International — a special purpose acquisition company to list European tech groups in the US.
Such fast-growth companies, he says, have the “answers to a lot of problems” raised by the pandemic, which have led to technologies “penetrating into the wider world”.
He cites the rapid adoption of telemedicine and video conferencing: “This would have taken 10 years but has happened in 12 months.” On the back of this, he adds, start-ups have grown from zero to multibillion-dollar valuations in less than two years.
Alongside enterprise software and collaboration tools, education tech and health tech are also growing strongly, notes Erin Platts, head of Emea at Silicon Valley Bank, the US-based lender. Again, it is partly because of a pandemic-led shift in habits.
Several sectors are going through the same sort of transformation as fintech did following the financial crisis, argues Gerard Grech, chief executive of Tech Nation, a government-backed organisation supporting UK entrepreneurs.
“We are in a humanitarian crisis but that has meant that people are thinking differently,” he says. The annual Tech Nation report this month showed investment in the UK reached a record $15bn in 2020, despite the impact of Covid-19 and Brexit.
Tech is also the largest sector within the FT 1000 ranking, accounting for 22 per cent of the entries, but this year’s list shows that fast-growth companies are emerging across other industries, too. After technology, construction and retail were the largest sectors by number of companies.
Glencar Construction is the fourth-fastest-growing company. It develops distribution warehousing and is building the UK's first vaccine manufacturing and innovation centre. Other high-ranking entries include Chilly’s, a maker of fashionable reusable bottles, and toothbrush maker Happybrush.
Several of those on the list provide services and hardware around renewable energy as companies ramp up their zero-carbon plans ahead of the COP26 climate change conference in Glasgow this autumn.
Bulb Energy — the six-year-old energy provider that claims to offer 100 per cent renewable electricity — enters the list for the first time, heading straight to the top, while rival Octopus Energy also features in the top 25.
Octopus founder Greg Jackson says the business continued to see “exponential growth” up to and through the pandemic. “We are at the intersection of two [booming] sectors in energy and technology,” he says.
Octopus last year raised money from Tokyo Gas and Origin Energy, large energy groups in Japan and Australia. “There was a queue of investors,” Jackson says. “London has long been the hub for fintechs but energy tech is equally as strong. The same themes underpin both: heavy regulation, the need for big data to drive efficiencies and consumers that have been underserved and overcharged.”
Charlie Jardine, chief executive of EO Charging, which provides charging points for electric vehicles, and ranks 27th on the list, agrees that the inflection point for energy tech has arrived. He points to the prospect of further growth in the next few years, given that “companies are committing to electric fleets by 2030-40”.
EO became profitable last year, and he expects it to remain so as “the economics of EVs are stacking up”, for both consumer and fleet use.
Bulb, Octopus and EO are all based in the UK, but are growing in other regions. Jackson and Jardine say the UK is the best place in the world to be a disruptive energy company.
“The government does a good job of laying foundations,” says EO’s Jardine, “but the market is growing regardless of government help.”
Hamburg and Stockholm are new entrants to the ranking’s top 10 cities by number of companies. And, for the first time, Italy is the country with the most entries — 269 — followed by Germany and France. Giant’s Stadlen says this is partly due to Italian industry investing directly into the nation’s start-ups.
Although the UK places fourth this year, London remains the top city by number of fastest-growing companies, with 71 on the list compared with 45 for nearest rival Paris and Milan’s 36.
Still, the UK’s slip from third place in last year’s ranking is a potential worry, given that many tech founders say Brexit-related restrictions, such as the free movement of skilled talent, make Britain less attractive.
Ian Connatty, managing director of state-backed investor British Patient Capital, says the UK is succeeding in creating tech clusters outside London, but adds that the pandemic also raises a “profound question” about where companies needed to be based, given their newfound ability to build operations virtually.
The UK government is taking action to address these concerns, with a new tech visa for workers from the EU and incentives to help build and retain promising companies.
SVB’s Platts points to the importance of forthcoming reforms to the UK listing regime and other supportive measures to ensure the UK remains an attractive environment for investment and skilled workers.
“The UK is by far the most mature ecosystem in Europe and we are now seeing a stable of market leaders emerge as the UK becomes an innovation hub for fast-growth companies to scale,” she says. “We start really great companies but we need to ensure they go through the full life cycle to recycle capital, talent and drive new company creation.”
More broadly, there are questions over whether the tech sector as a whole can sustain such breakneck growth — in terms of valuations and funding rounds, if nothing else.
“Is it going to end badly? Is it the top? I have never seen anything like it in my 25-year career in tech investing,” says Mosaic’s Coppel. “But regardless, transformative companies are started in booms and busts and you can’t predict when the next Alibaba will come along.”