20x: The hunt for outliers

Before there were unicorns, there were gazelles.

Where once us Brits were dubbed a nation of shopkeepers, now we are a nation of entrepreneurs. It has never been easier to start a business – and especially a tech business. You don’t need to consider the cost of goods sold (COGS); plus, in an AWS economy where building can be a reality for anybody, you can hit infinite distribution.

When we think about technology businesses driving growth for the economy, our minds often turn to ‘unicorns’ - a term coined in 2013 by venture investor Aileen Lee - which typically represents firms with a valuation of over $1 billion. They are increasingly common, with the likes of Hopin, Gousto and Cazoo (the fastest ever unicorn - in which Forward has a stake) growing bigger by the day. And this couldn’t be more true for the UK - who stand head and shoulders - in terms of volume - against markets across Europe.


With the glittering success of the British unicorn, it’s easy to forget that these businesses make up just a fraction of the innovative, technology businesses powering the UK economic growth.

Thirty years before the term ‘unicorn’ was coined, researcher David Birch identified the ‘gazelle’: young, fast-growing companies usually defined as having at least 10 employees, and with average growth in revenues of more than 20% a year.

Often overlooked, these gazelles are core to our economic recovery and growth. In London alone, mid-market companies were estimated to contribute £38 billion to the UK economy in 2020. Not only are gazelles great contributors to the economy, they outperform in terms of international trade with predictions indicating that gazelle-led trade will account for £1 in every £5 of exports by 2020 (for more see Gowling WSG’s excellent report ‘Make Way for the Middle’.)

The unicorn-hunt has become business-as-usual for many funds.

The venture value chain has ballooned as investors hunt unicorns. So-called early-stage firms often now start investing at Series A, and see companies through to exits. Meanwhile, growth investors and private equity firms are shifting downstream, investing in C and D rounds as they seek less contested spaces and better deals found in early stage markets.

This hunt is blurring lines between investment stages and funds, and driving sophistication in the broader market too. 2020 was the year of the Special Purpose Acquisition Company (SPAC), though regulatory changes have seen them cool somewhat. But the rise of solo capitalists, rolling funds, direct listings and growing retail investor interest (from cry

But unicorns aren’t the only outliers.

Every fund should be looking for outliers - the high performers who realise great growth potential - but few invest early enough to allow them to search for anything other than unicorns. Specialising in the early stages of building high-growth businesses means access to a bigger herd. And with the right expertise, identifying and supporting those that have the most potential, getting in early also improves the odds of success and outcomes for both founders and investors. Critically, it also means that the distinction between unicorn or gazelle simply matters less.

Regardless of where a company ultimately ends up, a high performing outlier can deliver incredible returns over a wide range. In gazelle territory, that can be up to 20x.

It’s not only good for a fund, it’s key to a thriving ecosystem. Research from Startup Genome, for fellow early-stage VCs Ensemble, shows that seed investment is the most important stage in the venture capital cycle, and the most correlated to exits.

[CHART https://www.ensemble.vc/research/the-importance-of-seed-investment]


Data from the British Business Bank shows that early-stage investing can have a great impact on returns for the whole ecosystem.

Today more than ever, businesses need to be outliers, not unicorns.

In a software-based, global economy growing at breakneck speed, category-defining companies don’t always need to be fighting it out for the highest valuation. Invest early across a portfolio of these businesses, and the value of a portfolio can be greater than one that relies on bagging unicorns alone. Data from CBInsights shows that around three in five million companies may go on to unicorn status. The unicorn cohort as a whole numbers just over 600 globally. Meanwhile, in 2019, there were 13,000 high-growth businesses that fell under the gazelle definition in the UK alone, according to the ONS.

We believe that the key to success is to find the high-potential outliers, whether they’re a unicorn or a gazelle. Early stage investment is a great way to do that. Investing in a large number of companies, however, doesn’t guarantee success: in our experience it’s pairing this approach with deep sectorial understanding and robust frameworks for assessment that allows judgement calls to be made when revenue or market data is unavailable.

This approach to investment has allowed us to identify outstanding, fast-growth, robust and major players. It’s also why we, as a firm, can offer revenue-based financing, in addition to equity investment: we not only understand digital businesses better than most traditional lenders, we use the latest open banking technology to understand their potential with more clarity than ever before.

Now is the time for a change.

We’d like to see a change in the paradigm where investors think of outliers solely in terms of $1bn+ outcomes. We believe backing the herd not only greatly increases the chances of success for founders and their investors, but helps build stronger startups, collectively fuelling the wider tech ecosystem and economy.

This gives us a new model for VC: less focus on valuation, more focus on outcome. At Forward, we hunt for outliers not just unicorns and adopt a herding mentality to create as many successes as possible.

We’ll touch on this further in a piece on what earliest-stage founders need from their VCs – the tools, know-how and support we can give, what founders should look out for and the changes we as an industry need to make.

Nic is the founder and CEO of Forward Partners. He has worked in venture capital in London and Silicon Valley for over 20 years. Prior to founding Forward in 2013, he was a founding Partner at leading venture capital firm Draper Esprit. Before entering the venture capital industry he worked as a strategy consultant for Gemini Consulting and at London based startup Operis Group plc.

Outside of Forward he’s a proud husband and father of two teenage kids and a long-time season ticket holder at Chelsea Football Club. He’s developed a keen interest in mindfulness and philosophy that’s proved to be a great asset at home, at work and as a supporter of the aforementioned club.


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