A New Venture

Sport, SMEs and the Red Wall

A few months ago when I left Policy Exchange for Fix Britain and to write the book, I mentioned there was another venture yet to be announced. The new start up AdVictus whose advisory board I have joined, is a fascinating opportunity. It forms a logical bridge between issues I’ve been discussing in these substacks and the policy programme for the country I’m working on at Fix Britain. In particular it is about addressing the UK’s perennial problems with productivity and the economic gulf between London and the rest of the country.

The UK’s poor productivity is well known; but it’s a particular problem for small companies. German SMEs generate a Gross Value Added per employee 25-30% higher than their UK counterparts, and we similarly lag SMEs in France and the Netherlands. There is also a much bigger gap between the productivity of smaller and larger companies in the UK.

There are great companies in this sector, but they are struggling to grow. Government and Bank of England analysis shows the funding gap SMEs are facing, perhaps as a result of the growing centralisation of banking in London, leaving fewer people with real decision making power embedded in provincial Britain. We know that UK SMEs are investing much less in automation and IT than their counterparts elsewhere.

The flight of larger companies to take their HQ to London has hollowed out regional leadership, and reduced the opportunities for powerful clusters to emerge, which in turn lead to higher productivity growth as companies learn and emulate. There are currently only 12 FTSE 100 companies registered in the UK but outside London. All of these trends could help explain why SMEs in the UK are lagging in applying the latest management techniques.

A few weeks ago, I was writing about Joseph Chamberlain, who built a world class engineering company then became mayor of Birmingham. During his dominance, a whole series of outstanding businessmen served on the council, helping Chamberlain oversee the council’s flourishing new utility companies. The contrast with Birmingham now or local government generally is sobering.

AdVictus is neither a traditional consultancy nor venture capital outfit. It sits somewhere between the two – we are calling it a “Growth Studio”. It doesn’t just advise, but commits and shares risk. The idea is that AdVictus will partner with high-potential SMEs to help them grow, through enhanced efficiency, access to a family of partners providing expertise, and services. The aim is to expand markets rather than relying on cost cutting or depending on leverage. At the heart of the relationship is profit share – AdVictus’ return is intrinsically dependent on our involvement delivering the sort of growth promised, with the returns coming either from investing in the companies or a profit sharing advisory and co-delivery relationship. The same goes for AdVictus’ partners. All stand to be compensated at market rates and even beyond – but only by delivering the expected growth.

Unlike many venture capital ‘studios’, AdVictus isn’t looking to build startups from scratch, or recruit founders. Instead, it looks to work with existing businesses and their owners, those with an established footprint, with the potential to go much further. AdVictus is expanding its capacity both to work in additional SMEs and to bring in a wider range of capability partners. Together, this should unlock SMEs ability to grow to a wholly new level.

AdVictus intends to concentrate on established SMEs (5 years+) with current turnover under £2m – with an initial focus on sports-related companies. This reflects the unusual background of the cofounders. Alex Lee is an experienced and impactful management consultant whom I got to know when he supported one of my programmes in the Home Office. Nathan Thompson is a professional footballer with a long career and a remarkable dedication to learning and development, and highly thoughtful about how to apply the lessons of elite sport to success in business.

Sport is one of the strongest remaining bonds of local pride and commitment. Pretty much every father, of boys in particular, has seen the sad dawning on them that a career in sport isn’t going to happen. Fewer than 1% of boys playing youth football ever get into a professional academy. Fewer than 1% of those end up signing a professional contract. All too often the remarkable talents of the tiny minority that do make it aren’t recognised in a career after sport. AdVictus wants to make the most of these sort of talents, both as ambassadors and by holding out the prospect for them to contribute to businesses and retrain. And of course AdVictus is championing this prospect for the rapidly growing women’s game, and for athletes more broadly.

The vast majority of the sort of companies we are looking at have not sought, nor can afford, top tier external consultancy advice to improve their businesses, meaning there can be a surprising amount of ‘low hanging fruit’ around. The consulting industry is expensive, and dominated by a few large companies who focus disproportionately on the largest private and public sector clients.

Anyone who has run major programmes in government will be all too painfully aware of how big consultancy operates. Bring in a ‘Big 4’ company, and you will be lured in by the promise of sector leading expertise for your project area. Only then to be told that what you particularly need is to pack your Project Management Office or comms teams with all of Rabbit’s friends and relations[1] to be billed to the taxpayer. In government and elsewhere, we’ve also seen all too many examples of formerly solid companies taken over by private equity, loaded up with debt to be dependent on continuing cost cutting and left hugely vulnerable to a downturn with the temporary private equity owners seeking every opportunity to flip them and move on to the next project.

AdVictus is also looking to provide a longer term exit plan for founders that keep the companies thriving. Recent surveys suggest that 30% of SME owners are looking to retire imminently (in the next couple of years), in what has been termed a “silver tsunami”. They may be struggling to find a buyer or are reaching the point at which they would like to step back, but relatively few options exist for SME owners to exit their businesses whilst securing their legacy. There is private equity, venture capital or trade sales; employee ownership or finally shuttering, but many of these options are likely to see the company in which they had invested so much time and effort essentially disappear. Buying, looking after and developing the companies we partner with is a driving ambition.

AdVictus is close to finalising its first deals with a handful of companies (agreements in principle and Heads of Terms are already in place), and is actively engaged with multiple potential corporate partners.

There is a real pleasure for someone with my background trying to build something a little different. So much time in government is spent in abstract policy areas; dealings with business are overwhelmingly with the largest players or the trade associations. This is not where the real dynamism is, or where most of the jobs are created.

Most of the discussion about founders in SW1 is about biotech, about ‘fintech’, or about generating ‘unicorns’. All fantastically interesting and important. But the less glamorous parts of the SME economy are where most of private sector turnover sits, the forgotten area whose turnaround would do much to help Britain close the productivity gap.

For me personally there is an element of risk and personal investment, which is an interesting contrast to the near total institutionalisation of over 30 years in the civil service. Most of all there is the element of ‘touching grass’ – working with a great team at AdVictus and the fellow advisory board members. I’m looking forward to the opportunity to consider in real time the challenges that actual companies are facing, perhaps reflecting on it here and learning from it as we in FixBritain develop a day 1 programme for the next government.

[1] With apologies to Winnie the Pooh