Seeding the next generation of UK unicorns

Ian Connatty, managing director for funds at British Patient Capital joins the show to help us explore the VC ecosystem in the UK, including why we may be seeing larger rounds for UK companies, what changes could create a more favorable exit environment and more.

This is the last weekly episode of Season 4, but stay tuned for more timely in-depth conversations on your podcast feed and through PitchBook webinars

Subscribe to get future episodes of “In Visible Capital” on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at [email protected]. Transcript Alexander Davis: Hello and welcome back to In Visible Capital, a podcast on the private markets.

I’m Alexander Davis, editor-in-chief of PitchBook News. This week, we’re wrapping up season four’s weekly run with our colleague Andrew Woodman’s interview of Ian Connatty of British Patient Capital about the VC ecosystem in the United Kingdom. Fear not, loyal listeners, we will be publishing additional episodes to keep you informed of timely discussions and in-depth conversations about the private markets.

To keep up with our podcasts, news and analysis, you can visit for links to subscribe to the daily Pitch, download our reports and find webinars. Without further ado, let’s go to Andrew’s interview with Ian Connatty of British Patient Capital.

Andrew Woodman: Ian Connatty, managing director for funds at British Patient Capital, welcome to the In Visible Capital podcast.

Ian: Thanks for having me. Good to see you.

Andrew: Ian, if you could tell us just a bit about British Patient Capital. Stop me if I’m wrong, but you guys are a subsidiary of the British Business Bank, which is a state-owned economic development fund and you guys were set up in 2018. If you could tell us a bit about the genesis of the British Patient Capital and how it came about and what its remit is in the context of government policy.

Ian: In terms of British Patient Capital, the story with us is, actually, the UK has a pretty proud tradition of being one of the best places in the world to start a business, but once those businesses are established, actually, quite a lot of them are unable to fulfill their potential because of a lack of patient capital.

It often means, as we’d seen in the past, that too many high-growth potential businesses either grow more slowly or look abroad for when they want to scale up. Or the kind of refrain that you used to hear in venture capital in the UK, which is businesses getting sold too soon before they’ve really had a chance to blossom and become a business that’s able to fulfill it’s potential in the global stage.

The government’s patient capital review in 2017 really shone a light on this problem and warned that the UK was lagging behind the US in providing this kind of capital and that was a serious impediment to the success of UK entrepreneurs. As you said, British Patient Capital was established as a commercial entity within the BBB group, and our mission is to ensure the UK entrepreneurs who want to build successful world-class businesses have access to the type of funding that they need at the right time that helps them expand and scale up.

It’s moving from an ecosystem that’s historically been good at startups and helping it double down on the scale-up part of the journey in the hope to create more breakthrough companies. At BPC, we have a £2.5 billion investment program. We invest that principally into funds as an LP, but also through kind investments as well.

Our three major ends in doing that back to this underlying challenge that we’re seeking to address … not only to increase the supply of capital, but also to make commercial returns as we do that. And therefore, thirdly, show that it can be done, if you like, by talking, for example, on podcasts like this about what we’re doing, trying to encourage more institutional investors to think about making allocations to the asset class.

Because ultimately, if we are in the UK and then you’re going to succeed in providing more capital to our best high-growth companies, that capital’s got to come from somewhere. That, we think, is going to come from more institutional investors coming into this space and providing more long-term patient capital for growth.

Andrew: It’s definitely something we’ve covered before. We’ve published articles about this, this gap in funding for startup, so that post-Series A. What you’re saying is, traditionally, it’s been a case that the UK startups and the European startups have been acquired by large companies before they had the chance to scale.

Do you feel that’s changing? Because it feels like we have beenat least of the last couple of years, even before the pandemic, I was writing about thisthat inflection point where we’re beginning to see more, the European startups, have been able to scale. We’ve had IPOs coming up this year that we’re talking about. Do you feel there’s a sense of change and there’s a lot more larger rounds coming down now for UK startups?

Ian: I think that’s right. I think it was always a bit of a conundrum that we are really good at science and innovation. As I say, actually, the stats on starting companies are pretty good. I think it’s really great to see the ecosystem get more efficient at turning more of those great startups into higher-sized companies. If you look back at the history of this, there was a real startup boom in Europe coming out of the last global financial crisis.

There was a lot of innovation as it happened in the UK. For example, there was a lot of innovation in financial services and that would go on to be, to form the backbone of what we now call fintech. Although it wasn’t even called that back then. I think you had a startup boom, you had at the same time, I think, more people. Some people coming back from the valley, perhaps, who made their career over there and come back with a sense of understanding either how to invest in or build companies.

Because it’s quite one thing having the capital to grow, but the other thing you also need is the knowledge of how to grow too. How do you take a business from 20 people to 50 people to 250 or to a thousand people and beyond? That, in itself, is a core capability. It feels like it was a mixture of all of these different factors. Some of it outside the system, in terms of just the world at large in technology and innovation, but some of it quite intentional in terms of government policy, for example, encouraging more startups all coming together all at the same time.

I think as an outsider perhaps, it feels quite sudden. As you said, it feels like in the last couple of years, there’s suddenly been this step-change, but in a sense, that’s not an overnight success at all. It’s been a decade in the making of these companies starting to come through the ecosystem and only really now I think are you seeing the fruits of all of that labor.

Andrew: Fintech obviously has been a big part of this story. A lot of our big startup successes in the UK have been either challenger banks or other fintech-focused startups. I think this year we saw Bought by Many, which is an insurance startup, they reached unicorn status. Then we’ve got challenger banks like Monzo and Revolut. Why is it that UK has been a leader in fintech? Not just in Europe but globally to some extent, it’s been a leader in that area of innovation. What do you think is the driver for that?

Ian: If you step back a bit from venture and technology, just in terms of the structure of the UK economy, we’re a world leader in financial services, so there’s a kind of ecosystem here of operators who understand the industry of potential customers and those customers have pain points and challenges. As I said, if you go right back to the start of the previous decades, 2009, ’10, ’11, we have companies in our portfolio that we now call fintech businesses but at the time were technology businesses.

In a sense, what happened was that, in the end, they ended up applying their technology to the financial services industry or they got real traction in those areas. You put all of that together into a melting pot, this innovation and technology change and customers and know-how. I think that’s how you end up with us punching above our weight in terms of fintech.

Andrew: It’s interesting as well, when we talk about how things have evolved for the venture capital and startups here in the UK, that it doesn’t seem to have been hampered as much as we would’ve expected byI suppose the two major headwinds have been Brexit and more recently the pandemic. Why do you think that is, or do you think that there’s still an impact to be had by those two things, or do you think they haven’t really had much of an impact at all?

Ian: Taking them in order, Brexit, I think it’s too soon and it’s really hard to tell because there is so much going on in the market right now. Record amounts of deployment into companies. You have pretty good statistics on your fundraising for UK-based managers, for example. That story, such as it is, I think perhaps will play out over time for me, certainly for where we sit. The more immediate impact has been COVID, actually, of those two.

I think undoubtedly for some businesses, it has been a headwind, as you say. I would probably flip it around and say, in general terms, in terms of the opportunity that we’re seeing in our portfolio, what’s really interesting are the business that have a COVID tailwind actually. Where they’re feeding into some trend that was probably there before but has been accentuated by everything that’s happened as a result of COVID.

For example, working collaboratively or working remotely like we are now, that sort of thing. All the video conferencing facilities were there before, but there’s a real demand for them now that wasn’t there before; telemedicine, digitization of products and services. You talked about fintech payments, for example, so people shopping online.

It’s not as if this stuff wasn’t around before, but its adoption has really been accelerated by the pandemic and the changes to the way that we live, the way we work, the way we shop, the way we engage with healthcare providers, all that kind of stuff. I think that’s, in some senses, back to your question of why the last two years, does it feel like so much has happened, actually. I do think that COVID is probably part of that, actually.

Andrew: It’s a good opportunity to segue. You mentioned healthcare and medical-focused startups. Life sciences is an area where British Patient Capital is looking to become more active. We had news in July of British Patients Capital launching its Life Sciences Investment Program. If you could tell us a bit about that and the thinking behind that and why that’s important.

Ian: Life Sciences for us has always been an important part of how we think about the market, not just technology. We think there’s really interesting opportunities, actually, in the intersection as well of what’s traditionally been called life sciences and technology. For example, in things like AI, drug discovery, that kind of thing.

The specific purpose of the Life Sciences Investment Program is really to focus on the provision of later-stage capital again, which is what BPC is all about, but very specifically for these high potential life sciences companies where there’s a real dearth of later-stage patient scale-up capital that helps these companies realize their potential. Hopefully, as a result of that, if they’re able to raise that capital here in the UK, retaining their sense of gravity here as well rather than having to consider going somewhere else for their next phase of their journey too.

Andrew: Generally speaking, just about later-stage companies going elsewhere, obviously, it’s good for the companies to stay at least in the UK. We’ve got IPOs coming up this year. We had Deliveroo which didn’t go so great. Is there still a concern that there will be UK companies that are still going to list overseas or still see US as the primary goal for going public? Do you feel that’s changing with the reforms as well, the listing reforms?

Ian: It’s a good question. I think there’s a few issues to that. One is where the center of gravity of the business is, which may or may not be where it’s listed. In a sense, that’s one, where the core operations, and all that kind of stuff. In terms of the listed piece, again, that’s another aspect of access to capital for the next phase of its journey. Where does that money come from?

I think that’s a really interesting question. So you’re right, the Hill review in the UK has been looking at what regulatory changes or impediments could there be such that the UK becomes a more favorable environment for companies listing. I think, in a sense, that’s not the end of it because you have also all the infrastructure that sits around that in terms of the capability, for example, of analysts and brokers and bankers, and all that kind of stuff.

All the ecosystem of finance know-how that also enables companies to be able to access capital from the public markets too. I think that, a bit like we’ve seen in the private markets where Europe has, as we’ve just discussed, gone on this journey over the last decade or so in terms of capability. I think there’s probably something there too around the public market side of that equation.

Andrew: Going back to the idea as well of the ecosystem maturing and investing in later-stage companies, I noticed looking at the data we’ve got on the PitchBook Platform, just about where you guys have been committing your money, recently, you’ve made a commitment to orders and capitals inaugural growth fund. Last year, you made commitments to [a] fifth fund.

I was curious to know, are you looking now, as the ecosystem matures, are you making more commitments to funds that are more focused on these later-stage VC/growth stage businesses? Do you see that being more where the opportunity is?

Ian: That’s where our mission is focused. In terms of what we call venture growth, which is typically Series B and later, that’s where we deploy the majority of our capital. We also deploy earlier stage, but as I say, we are focused on that later stage. We see that provision of capital there either by earlier stage managers moving later or by helping existing growth managers scale up, or new entrants stepping down or from elsewhere into that market.

Helping to fill out the matrix of provision because perhaps one of the things we’ve not covered so farwhat’s interesting about the later-stage market is just how much capital comes from non-domestic sources and even outside of Europe, actually. We see that as evidence of the opportunity for there to be more domestic supply of this later-stage scale-up capital. We are very active in that part of the market.

Andrew: Did you see that, because you still obviously got allocations to early-stage funds, Dawn Capital, Kendrick capital, do you see the growth element becoming a larger piece of that allocation pie, or do you see it is all maintained as, say, predominately early stage with some growth stage?

Ian: I think you can’t neglect the early-stage market because that’s effectively the long-term pipeline for the later-stage, but as I say, the balance of our capital now is deployed primarily at this later stage part of the market. Yes, we continue to be active from pre-seed all the way through to growth, but we are more focused on this, yes, Series B and later part of the market.

Andrew: I expect as the market matures, a lot of these VCs in the UK at least. You do, obviously, you don’t just invest exclusively in the UK, but predominantly in the UK, right? You do some European investments too, but a lot of these fund managers, these VCs as they grow and mature and get into later iterations of their funds, there are going to be bigger funds and there’s going to be bigger ticket sizes.

As time goes on, do you see addressing that kind of growth? Do you see British Patient Capital having fewer manager relationships or have a large allocation to funds? How do you adjust your, say, ticket size as funds get bigger and mature?

Ian: It’s a really interesting question, actually and it touches on the evolution of the market. First of all, there’s only so many GPs that can raise larger sums of money. In a sense, there are more managers that can raise 50, then can raise 100, then can raise 200 and so on. In a sense, as you move up the size spectrum, the number of credible GPs that can actually raise that capital reduces. That’s one thing.

I think the second thing is, what that dynamic does actually, is it leaves a gap; it leaves an air pocket. A fund might start off with a fund of a couple of a hundred million, let’s say, and then they raise 350, 400 in their next one, 600, and then up and up and up. As they move up in size and scale, who’s doing those smaller deals that that fund used to do? That’s one of the really interesting dynamics about this, I think is you end up almost with two different theses as an LP when those dynamics are happening.

Which GPs do you think can raise fund after fund after fund and raise, not necessarily increasing amounts of capital, but can raise at scale? Because most strategies have some kind of ceiling beyond which it doesn’t make sense to grow anymore. You can’t grow your fund size into the sky. But what that does is as they do make that shift, does it leave, as I say, these gaps and opportunities perhaps for smaller managers looking at slightly different kinds of transactions? I think that’s an interesting part of the market as well, actually.

Andrew: When you seek to commit to these funds, do you often look to be the anchor investor?

Ian: Sometimes we’re the anchor investor, for sure, and sometimes we’re just a member of a syndicate just like anybody else. I think, for us, what’s really important is to make sure that the investments that we make really chime with that mission to help bring more of this later-stage patient capital to bear in the market and how we help address and fix that long-term issue.

You’ve always got that sense of, does this make sense in the context of what our mission is? Does it make sense in the context of our portfolio and how we’d like to construct it and how we’re trying to diversify across different vintages, for example, different sectors and manage types, and so on?

Andrew: When you look to invest, do you seek out co-investment opportunities? You have done direct investments. Why is that important? Because I assume that your number one aim is to build the ecosystem over, say, for example, a typical LP pension fund that would look to get better returns for their pensioners? What’s the driving incentive behind that for you to look for those directing permits and opportunities.

Ian: Whilst we have this mission, which is around wanting to see a step-change in the provision of later-stage capital to the ecosystem, we see that as complementary, actually, underpinning the commercial return piece. That was our investment thesis. That’s where we saw the opportunity. I think, in that sense, we’re no different to any other commercial investor.

We’re trying to optimize for returns, but we’re investing to a mission and a thesis. In terms of co-investment specifically, actually, if you’ve spoken to LPs in the past, one of the challenges you have is at the funder funds level, you can end up over-diversified if you’re not careful. We have hundreds and hundreds of companies in our portfolio across lots of different funds, so if we have a winner in there, how do we make sure that we can manage our exposure to that company? That’s what co-investment helps us do.

It helps us fulfill our mission because, obviously, this is a company that’s hopefully on its way to fulfilling its potential, and putting more capital behind non-winners really helps. Then again, as any LP will tell you, it helps you to manage the fee burden as well. For us, it helps across the return dimension, and it helps our mission in terms of concentrating capital behind emerging winners in the portfolio and emerging UK winners as well, which is important for us to have that UK anchor to the portfolio, given where our capital comes from.

Andrew: Do you see that, with more companies getting scale and also feeding back through these exits, seeded back into the ecosystem? On a human resources level on a talent level, are you seeing that virtuous circle where you’re seeing more UK startup talent seed in the next generation of startups? In the same way that we’ve had in the US, we’ve had the PayPal mafia as they call them, people like Elon Musk who’ve funded the next generation.

Are you seeing that in the UK? We’ve certainly seen it in Europe with some of the European big companies like Skype or Spotify. Are we seeing that in the UK, or is that something that’s still to come? Because you did mention, actually, previously of people going to the US and coming back, but is it something we’re seeing in the UK as well?

Ian: Yes, for me, that’s the most exciting part. Actually, we’re beginning to see that. What you’re describing there is a flywheel effect where you have success breeding more success as peopleback to one of the points I made right at the start: Money’s great, it’s necessary, but not sufficient. You need to have this whole network and infrastructure of people that know how to build, operate, scale these businesses.

Seeing talent go on a journey, and then potentially earn significant money, recycle that money into angel investments or join another startup at a relatively early stage, and recycle their knowledge and talent and skills into doing it all over again, I think that’s really great. We are starting to see that in the UK, and it builds this virtuous circle where the collective knowledge, experience, and wisdom just keeps improving and improving and improving.

We see that’s true of the investors, the GPs that we are backing, but potentially, also the founders and operators that they’re working with too. I think in terms of the fundamentals of the ecosystem, that’s probably one of the most exciting things, actually.

Andrew: In terms of how that ecosystem will expand beyond its borders, do you see the future of UK VCs companies expanded into and trading more, say, beyond the EU or within the EU? How does Brexit play into that when you are looking at how these startups go beyond the UK and expand outwards?

Ian: First of all, actually, it’s probably worth saying that there are some really great businesses that are not unicorns and are never going to be, and that’s absolutely fine. You have really great businesses that will be fantastic returns for their investors and do pretty well that don’t need to expand internationally, or don’t need to reach anywhere near that scale to be successful. Even in that a billion-dollar-plus type of category, you can still have a national champion that’s worth a lot of money.

We saw that, for example, real estate and things like that. You had national champions in the UK and potentially other countries emerging. Again, you don’t need to conquer the globe to be worth a lot of money. For other businesses, they’re about becoming global category leaders. They’re operating in a more global environment, a more global market where it might be not quite winner takes all, but first-to-scale may be or where scale is important.

That’s a very different outcome in a very different journey in a very different trajectory. That’s where I think that know-how of those tactical and strategic decisions and when, for example, to expand to the US or other territories and geographies, I think, is incredibly important. Where we talked just before about that collective wisdom and know-how, these decisions, I think, are one of the examples where having experience around the table can be incredibly valuable.

Andrew: Thank you so much for giving your time.

Ian: No problem, thank you for having me. In this episode

Ian Connatty
Managing Director of Funds, British Patient Capital

Ian manages the funds activity of British Patient Capital. He is responsible for developing British Patient Capital’s investment strategy and investment process, as well as supervising all investment transactionsespecially at the advanced due diligence stage and legal completion.

Ian joined British Patient Capital from the British Business Bank, which he joined at its formation in late 2014. Prior to that, he was part of the bank’s predecessor, Capital for Enterprise Ltd. He brings a wealth of experience, including close involvement in the development of the Venture Capital Catalyst and Enterprise Capital Funds portfolios, which have invested in 41 funds to date, facilitating more than £1 billion of investment in over 400 smaller businesses. He previously worked in corporate finance at technology company Infinity SDC and in financial modeling at the Royal Bank of Scotland.