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What I look for in a technology business
Chris Nixon is an investor based in BGF’s offices in Belfast and Edinburgh. He has invested in technology businesses such as ReBOUND Returns.
1. Solves a pain point
A good technology business understands and can clearly articulate the problem it solves. The solution doesn’t have to be revolutionary, but it does have to offer something different from competitors, such as a better user experience, more efficiency, or a lower price. Fledgling technology companies often fail because there isn’t enough of a need for the product. It’s not good enough to be a nice-to-have; a business has to fix a pain point.
2. Big addressable market
In my experience, the number one driver of value in technology businesses is scalability, and to scale well, you need a big addressable market. As a rule of thumb, a new entrant will do well to capture 5% of its total market in five years. Estimating the total addressable market can be tricky, however, which is why businesses must be realistic in their assumptions. For example, before including Asia in your total addressable market, you must research the region and factor in any extra operating costs.
3. Barriers to entry
Good technology businesses are well-defended against competitors. They have protectable intellectual property, proprietary technology, sticky customers. Without barriers to entry, even large businesses struggle to demonstrate value. Take the example of Deliveroo. The food delivery app listed on the London Stock Exchange in 2021 at a steep discount to expected values; it was described as the “worst IPO in London’s history”. The main reason cited by analysts: concerns over competition brought about by low barriers to entry.
4. Motivated people
Retaining the brightest minds is a growing challenge due to a skills shortage, remote working and inflation, which is driving up salaries. How are workers being motivated? This goes beyond salaries, artisan coffees and gym memberships. What I like to see is a culture of humility, collaboration and ambition, and appropriate training and support. If a business is merely paying lip service to these elements, it will be evident in staff turnover rates and business performance.
5. Ability to sell
To state the obvious, a business needs to have traction with customers. For a start-up, it may be enough to demonstrate that several parties have committed to purchasing, or are currently testing, a beta version of your software. For a more established tech business, I would look at the spread of customers, contractual terms and ‘embeddedness’. To do well, a business needs to implant a robust sales mentality – a proven team, customer relationship management, appropriate incentivisation and accountability.
6. Commercial edge
Tech businesses are full of innovators; that’s a prerequisite. But to really grow in a competitive marketplace, they need hard-nosed commercial acumen. How well are customers and competitors understood? Do the unit economics stack up? What are the key performance indicators? When it comes to the business plan, it’s important to be realistic. There is little benefit in predicting improbable, ‘hockey stick’ growth – this will call into question credibility. While tech businesses are expected to be product obsessed and ambitious, this needs to be underpinned by good old-fashioned commercial sense and financial planning.
Which BGF investments have you made that are examples of what you look for?
Based in Shropshire and co-founded by Graham Best (CEO) and Phil Smith (COO), ReBOUND Returns provides software to manage and process customer returns on behalf of global retailers. The service solves a pain point for retailers, offering a good user experience and competitive rates owing to economies of scale. We were attracted to the scalability of the platform – it grew to a turnover of £40 million in just under five years. BGF invested in 2018 and exited the investment to reverse logistics consolidator Reconomy Group in 2021.
Looking ahead, are there any sectors that you are excited about investing in?
BGF is sector-agnostic and seeks to back the best and fastest-growing businesses irrespective of industry; however, I’m interested in tech-led solutions that make a positive impact on the environment – ideally one that is measurable. BGF has already backed over 40 companies like this, including developers of hydrogen fuel cells and next generation lithium-ion batteries. We recognise there is still much more to do.
Job title: Investor
How long at BGF: 5 ½ years
Which office are you based in: Belfast/Edinburgh
Work prior to BGF: Qualified as a chartered accountant with PwC. Worked in transaction services and corporate finance teams.
Interests/hobbies outside of work: Visiting good restaurants, cycling the coastal routes of Northern Ireland, and following Manchester United
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