BILL JAMIESON NOVEMBER 29 2016
Furrowed brows and hand-wringing have greeted news of the sale of Skyscanner to Chinese buyers. But there is a hidden gain for Scotland’s fledgling businesses aiming to copy Skyscanner’s achievement.
As an example of Scottish entrepreneurial flair and ‘new economy’ success, Skyscanner was the name that sprang immediately to the lips.
The Edinburgh-based company has been a phenomenal success and an inspiration for ambitious young tech entrepreneurs seeking to build their seedling business to fame and fortune.
Founded in Edinburgh by Gareth Williams in 2003 to provide free flight search services, Skyscanner began life in a spare bedroom as a disembowelled TV screen from which protruded a morass of wires, switches and PC keyboards. Few at the time would have imagined a business of any sort could emerge from this electronic mini jungle.
But a stunningly successful business duly emerged, enabling travellers to find the cheapest flight deals online – and book ‘on the spot’.
Today Skyscanner has more than 60 million users per month. Last year, it had revenue of £120 million, up 28 per cent on 2014 – the earnings it makes for transferring its customers onto the sites where they buy the tickets.
Its gross bookings – that is, transactions facilitated through its search engine – was more than £9 billion, up 49 per cent in a year. It now has 470 staff working across the Edinburgh and Glasgow offices, out of 800 worldwide.
Little wonder Skyscanner and its founders became the toast of business Scotland.
But last week the cheers turned to cries of dismay. The Scottish online flight booking business was sold to a Chinese buyer through a deal valuing the business at £1.4 billion.
In this it become another example of a highly successful Scottish business where ownership was prematurely lost to a foreign buyer. Little wonder that Scotland has a dearth of mid to large size companies when its most promising firms can be cherry-picked so easily.
Politicians from Left to Right have bemoaned the loss of successful British companies falling into foreign hands.
Staff cuts and product changes brought heavy criticism of food giant Kraft after it acquired the iconic Cadbury business. Similar concerns were expressed when Pfizer threatened to pounce on AstraZeneca.
Former Business Secretary Vince Cable sought to make such overseas raids more difficult by imposing a “national interest” test and seek commitments to preserve jobs and investment.
And now comes the Skyscanner deal – which could hardly have come at a more sensitive time. Just a day earlier chancellor Philip Hammond proudly announced a £400 million fund to help small companies grow into the giants of tomorrow, rather than selling up to the first foreign rival who writes a big enough cheque.
But is it all “a terrible loss” and “bad news”? Every business transaction involves a buyer and a seller. And when a price is agreed which fairly values the business and its prospects, the owners of the business agree to the deal.
Are they losers? Let’s look at the beneficiaries, for this deal has brought a massive windfall for Skyscanner staff, outside investors – and above all, its principal venture capital investor, Scottish Equity Partners (SEP).
Over the years Skyscanner raised more than £130 million from investors including SEP, Sequoia Capital, Vitruvian Partners and Artemis.
SEP, which also counts Babbel, Sport Pursuit and SolarCentury as portfolio companies, first backed Skyscanner in 2007. It has invested a total of £9 million during that time.
Last week it told Real Business that the firm is the largest shareholder in the technology business with a one-third equity holding on a fully diluted basis.
So, based on a £1.4 billion deal valuation, SEP’s stake is worth almost £500 million. . With £9 million invested from start to finish, that provides the venture capital firm with a near 50-fold return on investment.
That is a massive gain by any standards. It is all the more astonishing given the number of times that venture capital firms lose large sums on young businesses with new and untried technology. Hands are routinely wrung in despair over investments that have “gone wrong”.
But that is at the heart of risk capital. Investment sums are almost routinely lost in ventures that mainstream finance providers such as banks and fund managers wouldn’t dare to touch.
As a rough measure around three in every four companies backed by venture capital fail to grow into successful businesses. But without venture capital we would have very few businesses at all.
The rationale of the venture capital industry is that over time one or two big successes will help make well the losses on the others that failed – and that the gains help to augment the pool of capital for future investment.
Viewed in this light, the Skyscanner sale is a plus for young entrepreneurs, augmenting as it does the kitty for new venture capital investment and not an unmitigated minus.
For the record, Scottish Equity Partners, with offices in Glasgow, Edinburgh and London, has £1 billion under management, is currently holding 150 investments including 30 high growth companies including Babbel, Sport Pursuit and SolarCentury, and boasts a 20 year track record. The managing partner is Calum Paterson.
In addition to the founder’s stake, staff have built up equity totalling more than 10%. And the buyer, NASDAQ-listed travel company Ctrip, will allow the current management team to continue to run the business independently. The current management team remains in charge and the business will continue to be headquartered in Edinburgh.
Furrowed brows? Perhaps only at SEP as they apply their own ‘skyscanner’ technology as they step up the search for new undiscovered new businesses to back.