Why follow-on investment is crucial to fulfilling business potential

Funding constraints can be terminal for growth businesses, which is why follow-on support must become a key component of an investor and company relationship.

Entrepreneurs with vision and ambition know they must be patient as they build their businesses and seek out further growth. But in order to realise their full potential, they also need their investors to show the same degree of patience – and to support them when they need further help to exploit exciting new opportunities.

This should be common sense for investors, assuming they have the time horizons and resources that are required to invest for the long term. It makes sense to prioritise backing your winners, but still many investors succumb to the temptation to sell out early.

By contrast, the Business Growth Fund (BGF) is enthusiastic about follow-on investments, where companies that we have already backed are looking for further growth capital in order to take advantage of new opportunities. Our ambition for these companies is to help them reach the full scale and success of which we think they are capable – and very often, additional funding and support can unlock further growth.

Barburrito, the Mexican restaurant company that was BGF’s first investment in North-West England, is a good example. Since we put £3.25 million into the business in 2012, Barburrito has established itself as the UK’s first national chain of burrito bars, with new openings around the country including three launches in London and two in Leeds and Nottingham. These outlets are performing well while the company’s established restaurants have continued to post strong like-for-like sales growth.

Barburrito has also invested heavily in operations, branding and its supply chain. We introduced the company to Graham Turner, the former chief executive of Tragus, one of the UK’s largest independent restaurant operators, who became its non-executive chairman. And we also invested a further £3.6 million in the business in order to support its next stage of development. 

The low-cost gym chain Xercise4less is another example of our willingness to continue backing successful companies. BGF originally invested £5 million in the company in 2013, and since then it has grown rapidly. The business is set to secure 11 more sites during 2014, which would give it 29 gyms all around the country, and this rapid rate of growth saw us provide the business with a further £2 million of funding earlier this year.

This sort of support is crucial if we are to build British businesses that fully exploit their potential. All too often in the past, the country’s fastest-growing companies have been stopped in their tracks by funding constraints. Finding new investors for such businesses, assuming it is even possible, takes up valuable management time that would be better devoted to securing further growth.

Investment might be required for all sorts of reasons – to invest in plant and machinery, to undertake R&D in order to develop new products and services, to hire new staff, to make acquisitions, to expand into new markets; the list is almost endless. Fast-growing companies that are unable to access the support needed to achieve such goals will never know where the opportunities might have led them.

That’s why follow-on investment and support should be seen as a crucial part of the long-term relationship between investors and the businesses they back.

See also: Our exclusive Business Growth Fund roundtable:

Stephen Welton of the BGF

Stephen Welton

Stephen Welton has over 20 years of experience in the development capital and private equity industry. He joined the Business Growth Fund in 2010 after ten years with private equity firm CCMP Capital (formerly...

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