Patrick joined BGF in March 2012 and is based in Edinburgh. Patrick covers the central belt of Scotland and Northern Ireland, where he identifies and invests in growing businesses.
Patrick has 15 years’ investing and corporate finance experience leading investments into over 30 businesses. Prior to BGF, Patrick was Investment Director at Sigma Capital Group, where he focused on providing development capital into the general tech and clean tech sectors across the UK and Europe. In a number of cases, Patrick also joined the board of the companies. Patrick began his career at Deloitte & Touche, working in the financial services team as well as the corporate finance department specialising in SMEs.
Patrick has an honours degree in Law from Edinburgh University and is a qualified Chartered Accountant. He is married with two children and lives in Edinburgh.
“My role at BGF gives me a fantastic platform to meet and interact with a vast array of entrepreneurs and business people. It is immensely rewarding to have the opportunity to work with these individuals, and the wider management teams, to create further value in their businesses.”
- Braidwater (Board Director)
- Stevenswood (Board Director)
- Jumpstart (Board Director)
- Duncan and Todd (Board Director)
- AFG Media
- M Squared Lasers (Board Director)
- Campion Homes (Board Director)
- RiverRidge Recycling (Board Director)
- Bar Soba (Board Director)
Q&A WITH RALPH KUGLER, CHAIRMAN OF MorphCostumes
How did you come to this role?
I worked at Unilever for many years in general management, latterly as a member of the main board. When I left, I was keen to get involved with entrepreneurial businesses, and for the last seven years that’s what I’ve been doing – either as a non-exec chairman or director, often investing myself and frequently backed by private equity.
What do you enjoy most about the role?
It’s all about the people. At AFG, I found a great team of young, dynamic entrepreneurs and that is highly motivating. I’m also a businessman. I’m excited by growth and this was a business with great products and brands, operating in an exciting space and demonstrating real potential. My starting point is always the relationship between the key people – the founder/entrepreneur, the CEO and management team, other shareholders and the non-exec. In the case of AFG, we have complementary skills and we get on well; there is a mutual sense of respect, and everyone is pulling together in the best interests of the business.
This is very different to working in a plc board?
What I think is fundamentally different with working with smaller businesses is that you need to roll your sleeves up and get involved. It’s not just a matter of sitting down at the board table. You need to be available to the business as it needs you and regular interaction with the CEO is key. But it’s also important to realise that it is management making the decisions at the end of day. As a non-exec, you are helping them to make better decisions.
Small and medium sized businesses – many of which are still young – have particular needs. What is it that they get from a non-exec?
SME businesses with a strong proposition and growth potential are spoilt for choice. Sometimes it is hard for them to step back from the day to day and non-execs bring objectivity and an ability to prioritise. One of your jobs is to help management make the right choices.
With AFG, where have you seen an immediate opportunity to make an impact?
We’ve been talking to a large retail customer – and it’s somewhere I have been before. We’ve thought about how to approach these discussions, what our priorities are and where we will and won’t negotiate. It’s been an engaging and rigorous process. There are all sorts of ways that this discussion could have been played; there was no one right or wrong answer. But we thought it through carefully, we agreed, disagreed and debated. As a non-exec, it is helpful to be the one to facilitate disagreement so that issues can be looked at from all directions, and then you stand behind the outcome.
What are the qualities needed to be a good non-exec? How do you make it work to best effect?
I think the most successful non-execs in small businesses are informal and their most important role is that of mentor to the CEO and management. This means regular dialogue outside formal meetings. Style is important – in my view it’s best to be frank, honest and straightforward.
If there’s a generational difference then it’s important to make sure there’s a good rapport and shared values between individuals. When you go into a business for the first time, the immediate challenge is to listen before you speak. I realise that the management knows more about the business than I do, so I listen and learn.
And a non-exec mustn’t swamp the management and try to become a quasi-CEO themselves. When you come in from the outside, you also need to appreciate that everyone on the board may not of be of the same mind. Different viewpoints are healthy and the job of the non-exec is to make sure that they are discussed and that everyone can have their say.
Sometimes management will make decisions that you don’t agree with. That is their prerogative. Some humility is important. A non-exec needs to remember that they are being employed for their experience not for their ego.
Are you always expected to have the answer?
No, but you are expected to be confident in helping to tackle the issue at hand. You need to help the team to achieve the best outcome and this is likely to be a collaborative process. Sometimes we get it wrong and when we do, it’s important to learn from it.
Does it help to bear some of your own battle scars?
Working with young businesses is not always plain sailing. All businesses hit roadblocks. What’s important is how they recover from them.
As a non-exec, you also need to learn from your mistakes and bring the benefit of that insight to the board table. Being able to see when a large influential customer is being unreasonable for example. It can be a very difficult thing for a young business to have the confidence to walk away. So you advise and you support.
What is your level of commitment?
At any moment, I hope my businesses think that they are my priority. The time commitment becomes superfluous. It’s about where I can add value. Certainly the role is more diverse than attending board meetings – and there are misconceptions out there, particularly among people who have never before worked with a non-exec. The agenda has to be driven by the CEO but certainly I’ve been to trade shows with management, met and paid respect to important license partners and customers – the role is varied and that is part of the appeal.
What do you see as the main obstacles to growth for SMEs?
Financial resource, of course. And human resource – it is important to make sure that you have people who are capable for the next phase of growth. You need good leadership and an entrepreneur who is employing a group of mates is very likely not to be doing the best for the long-term health of his or her business. Small businesses also need to invest in training, Lastly, innovation. Good ideas can be copied and superseded. So you need to continue to innovate and retain your unique position or someone else, probably a larger competitor, will eat your lunch. SMEs can go up like a rocket and come down like a stick if they don’t stay ahead of the game.
FUNDING PRODUCT DEVELOPMENT
What is it that fast-growing businesses have that enables them to leap forward when so many companies are simply coasting? The answer, very often, is an unerring commitment to product development – both of the existing range and of new goods or services.
Take AFG Media, the company behind the Morphsuit phenomenon. After its three founders racked up £1m of sales in their first year, having launched the business in their spare time with just £3,000 of their own money, one might have expected the company to catch its breath. Not a bit of it – instead, AFG’s focus has been on developing its core product, the spandex all-in-one suits that have brightened up so many Halloween parties and stag-dos, while launching two new product lines.
“Once we were able to give up our day jobs, we became much more ambitious,” recalls Fraser Smeaton, one of the trio of founding directors at AFG. “We started to think about going after licensing deals with the Morphsuit product, as well as launching into the children’s market,” he says. “And we launched two new ventures – Foul Fashion, selling outlandish party shirts, and Royal & Awesome, which sells golfing trousers.”
Still, despite its stellar organic growth since that 2010 launch year – AFG’s sales hit £11m in 2012 – the business could never have pursued such an aggressive product development strategy without support from investors. “As we scaled up, we really started to think about equity finance,” says Smeaton. “Our cashflow was incredibly tight and while we were able to get limited trade loans, we were paying through the nose for them because the banks want to see that you have a backer with deep pockets and we didn’t have that.”
For AFG, the answer was growth capital, in the form of a £4.2m investment in the company from BGF, which completed in June 2012. BGF took a minority stake in the business, rather than buying its founders out, as other private equity firms might have wanted. And the company no longer had to beg for funding from the banks.
Duncan Macrae, an investment director in BGF’s Edinburgh office, who joined AFG’s board following the deal, says the company impressed from day one. “AFG had great management even though they were young – they had followed their convictions and committed themselves fully to maximising the potential of their idea,” he says. “But they really needed capital to pursue those licensing opportunities, which are huge but can require a financial commitment that might take two years to pay off, especially as they were also developing other product lines.”
Growth capital is ideal for growing companies concentrating on product development argues Macrae, because it gives them the time to bring the right offer to market. “If AFG had gone to the bank and asked for millions of pounds with no security to sit on the balance sheet so that they had the confidence to go after licenses, for example, we think that most debt providers would have laughed them out of the building,” he says.
However, says Smeaton, it wasn’t just money that attracted AFG to equity investment and BGF in particular. The company’s founders were acutely aware that while they had developed one smash-hit product, they had no experience of developing a business capable of repeating the trick. “We were three young guys who had previously worked in middle management and we had no idea about how to build a multi-national company,” he concedes.
To that end, BGF introduced AFG to Ralph Kugler, who joined the business as chairman. Kugler, whose career has included stints on the board at consumer giants Unilever and InterContinental Hotels, has provided AFG’s founders with the experience they so sorely lacked. “He is someone who the company would just never have met, let alone persuaded to join, without our introduction,” says Macrae.
The tie-up between AFG and BGF has already begun to pay off, Smeaton says. “We were already profitable but this money has given us a platform that has really set us on our next stage of growth.”
The company’s new brands are beginning to take off, it has appointed a developer to work on a new offering for the thousands of fancy dress shops that already stock its products and, in October, AFG announced its first licensing deal – within days, Power Rangers Morphsuits hit the streets (literally, since Facebookorganised flashmobs are one of the company’s most successful marketing tricks).
AFG’s product development and diversification strategy is one that is familiar to Graeme Malcolm, the chief executive of M Squared Lasers , another of BGF’s portfolio businesses. For Malcolm, who co-founded the high-tech business in Glasgow in 2005, has been on a similar growth trajectory.
By 2011, M Squared was already producing strong growth, with an impressive roster of science-focused blue-chip clients for its precision laser technology. “However, we were at an inflexion point,” says Malcolm “We knew our existing technology had a wide variety of different applications that could push it into new industry sectors, and we had also developed a new product using our lasers for remote sensing that would take us into a whole new market.”
However, the company needed capital to exploit those opportunities – partly to develop the infrastructure to support sales and marketing, particularly in export markets, but also to commercialise all its potential technology applications as quickly as possible. “It’s possible we could have chosen to go for further organic growth, but it would have been significantly slower,” says Malcolm. “In an emerging technology, you need to be one of the first movers in the market and we would have missed that opportunity.”
Duncan Macrae, who was also involved in BGF’s decision to invest in M Squared – the fund injected £3.85m of growth capital into the business in April 2012 – says the deal was recognised as the right way for the company to pursue its ambitions. “Would M Squared have got debt funding for their core product? Maybe, but cashflow lending is very limited and if you need to build a product to sell, rather than having the order upfront, you won’t get it,” he says.
“The business certainly wouldn’t have got funding for its products in development – you couldn’t finance that in any other way than with equity – so their growth potential would have been really limited.”
Malcolm shared that analysis, but he was also wary of investors that would have wanted to buy the company outright or take full control. Together with his co-founder at M Squared, Gareth Maker, he had launched a similar business in the mid-nineties which the pair eventually sold to a US technology company that subsequently reaped all the benefits of its growth. This time around, the BGF deal has worked out much better, Malcolm says. “The money has already had a substantial impact on our business,” he explains. “We’ve been able to scale up in order to really confront those technical and marketing challenges and we’ve already made inroads into those new sectors – we’re really excited about where we go from here.”
HOW THE INTERNET CHANGED THE WORLD
“The internet’s biggest impact on SMEs has been as a great leveller, making it possible for a small firm to be a global company from day one, with the reach and capabilities that once only large companies could possess,” says Charles Roxburgh, a director at the management consultancy McKinsey, which has been researching the impact of the web on the global economy.
“They can reach customers, find suppliers and tap talent on the other side of the world – and also use the internet to provide significant marketing and brand muscle.”
McKinsey’s work suggests the internet has been a hugely powerful enabler for many SMEs: in a survey of more than 4,800 firms in 12 countries around the world, it found that those which use web technologies grew more than twice as quickly as those with little internet presence.
Nor are the benefits that the internet offers available only to online businesses. While the web’s development certainly has spawned thousands of new ventures that could not exist without it, many more conventional businesses are harnessing its power to grow far more quickly than they would ever have dreamed of had they launched in the preinternet world.
The interenet is now making a major contribution at every stage of the value chain, boosting productivity wherever you look. Not only has the web fundamentally changed the way products and services are sold, but it has also revolutionised development, design, production and distribution. Even the smallest businesses now operate with the sort of geographically diversified supply chains and global workforces that until these past few years would have been the preserve of large multinational corporations. There is more to come. McKinsey’s research suggests that on a global scale, the internet is now responsible for 3.4 per cent of GDP (in the UK, it says, the figure is as high as 6 per cent) but will deliver much more. Large companies are part of that story, but it is small and medium sized enterprises for which the internet presents the most exciting opportunities.
BUILDING A COMMUNITY OF CUSTOMERS: AFG MEDIA
AFG is the company behind Morphsuits, the all-in-one fancy dress costumes that have become a common sight at stag dos, fancy dress parties and special events all around the UK. Founded in 2009, AFG had revenues of £1.2m in 2010 but has grown astonishingly quickly. This year, sales total £11m and the business is now expanding internationally.
Gregor Lawson, one of the three founding directors of the company, says AFG has social media to thank for its 300 per cent year-on-year growth. “Without Facebook, we simply would not exist in the way we do today,” he explains.
With little to spend on advertising or marketing in its early days, AFG’s strategy was to build a community of customers through its Facebook page – not everyone would buy a costume straight away, Lawson reasoned, but the more they participated in the community, the more likely they would be to spend money when the occasion arose.
“People underestimate the commercial power of Facebook,” says Lawson. “For every one person who does something on our page, another nine will ‘like’ it and another 90 will see what’s been done.”
AFG is scrupulous about engaging with everyone who posts on its page – even complainers become advocates of the business if you engage with them, Lawson argues.
In addition to the ideas its Facebook users come up with – not least a remarkable number of photos of Morphsuit wearers in ridiculous poses – AFG offers plenty of proactive opportunities to engage. It organises competitions and even meet-ups – a flash mob in Trafalgar Square, for example, attracted 200 Morphsuit-wearing fans.
“People think social media is flitty,” Lawson says. “I disagree – if you’re clear about your objectives and your customers, you can deliver real commercial advantages on Facebook.” AFG’s own statistics prove the point – they have 1.1 million Facebook fans and counting. And only a small proportion of those fans need to become customers to sustain AFG’s rapid growth.
ACCESSING GLOBAL SUPPLIERS: PRIMROSE
The business model at online garden products retailer Primrose developed as a consequence of the way search engines operate. Type, ‘barbecue’ into Google and the site it delivers you to has to pay the search giant for referring you – even if it then discovers you were after a £5 disposable barbecue rather than the £300 gas-fired models it sells.
The solution, says Ian Charles, one half of the husband-and-wife team who founded Primrose in 2003 and still run it today, is to make sure you sell every barbecue the customer might possibly be interested in – or water feature, or garden bench and so on.
“We realised we needed to expand into every possible type of garden product and to offer the deepest possible range in each case – to become the Amazon of the gardens world if you like,” says Charles.
“Fortunately for us, one thing the internet has done is made the infrastructure of sourcing free – it now requires far less of an investment to find the manufacturers.”
Primrose aims to offer greater depth in any given garden product range than its suppliers and therefore needs to source huge amounts of stock in an industry where manufacturers are based all around the world – often in inaccessible, emerging market locations. For a relatively small business, the cost of such a sourcing operation would traditionally have been prohibitive, but the internet has changed that.
Much of Primrose’s sourcing is now conducted entirely online. That has enabled it to build the sort of stock range that means customers who use imprecise, generic terms when using search engines – that’s most customers – will usually find what they’re looking for at Primrose. “This sourcing has enabled us to be real product specialists in larger and larger number of ranges,” Charles adds.
It seems to be working – despite the entrance of giants such as Tesco to online garden products retailing, growth of up to 40 per cent a year has proved sustainable.
TAPPING TALENT: UNRULY MEDIA
Unruly Media makes and distributes social video campaigns for some of the world’s biggest companies, as well as many smaller businesses. It’s a business that wouldn’t exist without the internet, but for Unruly the web is also hugely valuable for back office operations such as recruitment.
“The internet opens up the passive talent pool,” says Deana Murfitt, the company’s chief people officer. “Prior to the internet there were lots of people sitting around who were ideal for the kind of jobs we recruit for, but there was no way of getting at them.”
Thanks to sites such as LinkedIn, Murfitt explains, Unruly has effectively been able to transform part of its human resources team into an “in-house head-hunter”. For the majority of roles for which the company recruits, the process is to identify the skills and experience needed and then to scour LinkedIn and other talent databases for candidates who might be suitable.
One obvious advantage is hugely reduced spending on recruitment agencies, but “our approach is about the quality of candidates sourced as well as the expense of finding them”, Murfitt adds. By cutting out intermediaries such as recruitment agencies, Unruly can be sure it targets only those people with the exact skillsets for the roles it is looking to fill.
Tapping talent in this way has other advantages too. “This is extra helpful for us, and for all small businesses, because the brand may not yet be recognised in the marketplace,” Murfitt says. “If you can build up your online profile, by building up lots of collateral around the type of employer you are, the kind of culture you have and the values you look for in people, you can build up your profile and reach out to passive candidates over the internet.”
Unruly has been so pleased with the results of its internet networking that it now offers staff a bonus if they are refer successful candidates for jobs. Murfitt explains: “It’s like an ecosystem of connected people who are all interfacing across the internet to try to find the right person for the role.”
BUILDING A BRAND: BROADBANDCHOICES.CO.UK
As viewers of daytime television will know, brand is everything in the price comparison business – several competing personal finance sites have spent a fortune on advertising in an attempt to build it. In the home broadband sector, however, Broadbandchoices.co.uk has chosen to set out its stall a little differently.
“In a business-to-consumer market like ours, brand is really important but the proposition has to be absolutely right too,” says Michael Phillips, the managing director of Decision Technologies, the owner of Broadbandchoices.co.uk. “We’ve spent a great deal of time building an engine that has every tariff in the marketplace – nobody lists as many packages as we do, so nobody can claim our level of expertise.”
Since launching in 2005, the company has worked especially hard on its user interface, directing customers to an extensive list of potential broadband deals and then using a succession of filters to narrow down the choice. In a market that isn’t entirely commoditised – people are looking for different speeds, for example, or to bundle their broadband with TV and a phone service – this is crucial to the customer experience.
“Broadband is getting more complicated all the time,” Phillips adds. “Our job is to help people prioritise the variables in order to make the right choice for them.”
The business has, in other words, used the power of its technology to build a brand that is based on quality rather than ubiquity. And it is now in the process of doing the same thing in international markets such as Spain, France and Germany.
The great thing about the internet, however, is that once your brand value is established, ubiquity follows more quickly than ever before. “What’s really exciting is that in the broadband price comparison market there has been no definite brand leadership established yet and that’s a huge opportunity,” Phillips says.
ACHIEVING GLOBAL REACH: WORKSHARE
For Workshare, the internet has delivered global scale in a remarkably short space of time. Founded in 2009, Workshare provides businesses with a highly secure cloud-based document management service that enables users to share files with colleagues and clients of their choosing. Those files can be accessed via PC, laptop, tablet or smartphone and worked on by any user granted the right access privileges – the system also tracks all changes made to documents. Workshare targets markets such as legal services and financial services, where there’s a high concentration of skilled and mobile workers operating in a regulated and sensitive environment. Other examples include the pharmaceuticals industry, as well as government services.
Ordinarily, it would take years to build trusted relationships with such businesses and even longer to achieve critical mass. But not for Workshare – while it has only a handful of overseas offices, it already has hundreds of customers in 65 countries all around the world.
Anthony Foy, the company’s chief executive, says that in addition to the right product offering, it is the viral distribution model on the internet that has enabled Workshare to achieve such reach so quickly.
“Every one client that subscribes to our service typically invites five others to join them – and every one of those five then invites three more contacts of their own” he says. “We haven’t got round to tracking what those three contacts do yet, but you can see how the maths works for us.”
Clearly, the numbers begin to add up very quickly, and have already done so for Workshare. But Foy believes there is plenty more growth to come – “we’re nowhere near the point yet where we run short of potential new clients,” he says. Independent research from Gartner supports that view – it thinks this market niche will be worth $8bn by 2014.
Morphcostumes is the fancy dress and party fashion company behind the Morphsuits phenomenon and was founded in 2009 by Edinburgh University graduates Gregor Lawson and brothers Fraser and Ali Smeaton, who gave up their day jobs to sell all-in-one skin-tight costumes that they branded Morphsuits, after witnessing the dramatic reaction generated at a fancy dress party.
In June 2012 BGF invested £4.2 million in AFG Media (subsequently renamed as Morphcostumes) to enable the company to bring new product lines to market; to expand the potential for existing products (such as the development of Morphsuits for children and investments in licenced products such as Power Rangers and Spiderman); and to develop its supply chain. In 2013 the company acquired Digital Dudz, which brings multi-media interactivity to its product range.
With backgrounds in sales and marketing, the team recognised the potential of the product and developed a distinctively branded all-in-one spandex suit that enables the wearer to see others, whilst remaining anonymous and therefore morphing into a more fun and outgoing version of themselves.
The global market for retail party goods is estimated by operators within the industry as being worth $10 billion per annum, while the Halloween market alone is valued at $6 billion. Morphcostumes is expanding into broader costume ranges as it looks to capture a larger share of the fancy dress market and now retails party wear and a brand of highly patterned and colourful golf clothing under the name Royal & Awesome.
In addition to funding, BGF contributes guidance and operational support to the company and introduced Ralph Kugler as Chairman. Ralph has been a main board director at a number of global companies including InterContinental Hotels plc and Unilever plc. He is an advisor on the board of Mars Incorporated and Chairman of the board remuneration committee; Chairman of Cognita Limited, the global schools group; and Chair of the International Advisory Board of Leeds University Business School.