23rd February 2022
FPE Capital is a specialist investor focused in private UK small-cap technology companies.
A recent report from Deloitte and The Scale-Up Institute highlighted that SMEs in the UK that require between £5m-20m of equity funding have the fewest options available to them.
FPE Capital are investing into this equity gap with a focus on recurring and repeating B2B revenue models such as software, managed & professional technology services and digital content & media.
Within the digital content & media sector, B2B data and information companies have been a consistent area of interest and success for FPE Capital. Two of our stand-out investments include Defaqto, the financial information business now part of Fintel plc, and The IWSR, a global leader in the provision of data & insight to the global beverage industry, which we recently exited to another private equity firm.
In this industry spotlight Dan Walker, FPE Partner and co-founder, draws on the experience of those investments and multiple conversations with industry participants to highlight three ingredients that make high potential data businesses stand-out from the crowd, both for their customers and for investors.
1. Client intimacy
A provocative title, but a fundamental reality for the best companies. Getting as close to your client as possible is what any knowledge-based business, such as B2B data and business information, must strive to do. By deeply understanding your customer’s challenges, data providers are able to embed their products within the automated day-to-day workflows of their clients. The best examples of this include industry benchmark or pricing rating agency for their sector. Examples in the financial sector would include the credit agencies (e.g. Experian) or in the food & drink sector (e.g. Mintec, The IWSR).
2. "TAM” expansion
We regularly hold a CEO roundtable event that focuses on the B2B data sector, and at our last discussion Total Addressable Market (TAM) was a topic that created much debate amongst CEOs. Smaller data providers that are genuine leaders in their niche can appear to be market constrained when subjected to traditional TAM analysis.
This is often because their data is unique and as a result they are the go-to source of truth within their market, occupying a substantial portion of total market spend. However, if market leaders can continue to add valuable data and functionality to their offering, then they can continue to grow their TAM as customers will pay them more money for access.
Jonathan de Pass, Founder of Evaluate, a leading provider of data to the pharmaceutical industry gave a great example from his experience. Investors declined to invest in Evaluate because of “TAM concerns” when Evaluate was generating £1m of revenue. Evaluate now generates more than 30x that figure, even though it’s list of customers has not really changed!
On this basis, a valuable a data business can consider itself as a market company rather than a product company. With this mindset, even when servicing only one end market, even a relatively small one, there will always be more value that can be created for customers. Defaqto achieved this during our investment period within the retail financial services market, as did IWSR within the alcoholic beverage sector.
3. Product design encompassing modern data architecture, analytics and workflows
Agility is key to business resilience, and in the world of B2B data a key source of agility lies within how products are designed. For example, modern database architecture and dynamic taxonomy enable data providers to quickly incorporate new and complementary data sets and create new offerings, which can then drive revenue growth through upselling to existing customers.
Modern database architecture when combined with modern functionality can also allow data providers to achieve further client intimacy. For example, in the old world of data, clients would download an Excel spreadsheet once a year when the database was updated, providing little to no visibility to the data provider of how their data was being used. However, if clients are able to manipulate data and derive the insights they are looking whilst remaining on the provider’s platform (by using tools such as analytics and visualisation), then a data provider can track activity and form a picture of how clients use their data. And once clients set up their own configuration and workflows on the platform it makes it much harder for them to switch providers.
Investors and advisors will be impressed by financials metrics like rate of ARR growth, % of recurring revenue, lifetime value of customers, net retention rates, etc. However, assuming reasonable commercial planning, these are really by-products of instilling the three ingredients above into the high quality data and insight you provide to your clients.
FPE Capital will be hosting future roundtable events (physical & virtual) for founders and executives of data companies. If you are interested in attending, please do get in touch with Ben Cole, Ben.cole@fpecapital.com.
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