Venture capital (VC) investing is not for the faint-hearted. Nine out of 10 start-ups will fail. For every WhatsApp or Alibaba, there are countless other ventures that bomb, taking investors’ money with them.
Yet, for those investors that back a unicorn (start-up companies valued at more than $1 billion), the potential returns are enormous. Take Silicon Valley’s Lightspeed Venture Partners’ 2012 seed funding of $0.5 million into Snapchat that has earned them over $2.0 billion at the time of writing – a return multiple of over 4,000x.
The ingredients for a start-up’s success are common across industries – founders who work well together, who can anticipate trends and disruptors within their industry and who give customers innovative products and services.
The funding and expertise that VC investors provide is critical in allowing fledgling companies’ aspirations to be realised.
Yet, the funding and expertise that VC investors provide is also critical in allowing fledgling companies’ aspirations to be realised through expansion of operations, developing new offerings and increasing scale.
Here we look at the transformative power that VC funding can have on a young, rapidly growing company. Aberdeen Private Equity has invested in Skyscanner through underlying funds in its clients’ portfolios.
The world's travel search engine
“Skyscanner’s position as a world leading travel search business would not have been possible without the great support we have had from Scottish Equity Partners. They have been a consistently engaged, informed and astute partner throughout our journey.”
Gareth Williams, CEO and co-founder of Skyscanner
Like all great inventors, Gareth Williams saw a problem and designed a practical solution to it. He was frustrated at the difficulty of trawling through multiple websites to get the best deals for flights for a ski holiday. The solution was simple – automate the process with a single website where users could compare prices for every commercial flight in the world.
Through word-of-mouth, the idea became a reality when he and two friends co-founded Skyscanner from their office in Edinburgh, Scotland in 2003. From humble beginnings, Skyscanner has become a household name in travel with millions of users across the globe.
Skyscanner’s remarkable success would not have been possible without the support and financial backing of private equity investors. Particularly instrumental was its first and largest external shareholder, Scottish Equity Partners (“SEP”), a private equity house that invested in Skyscanner in 2007. In that year, Skyscanner’s annual revenues were £1m; following seven consecutive years of double-digit revenue growth, they reached £120m by 2015.
SEP, and later other investors, helped drive Skyscanner’s growth in several ways.
SEP participated on Skyscanner’s board thus influencing the fledgling company’s strategy, both relating to organic growth and domestic and international mergers and acquisitions. Crucially, SEP provided the much-needed funding for development of the technology platform that underpins the website’s success, and which allowed the company to extend its reach across airlines globally.
It also allowed the growing company to open itself up to whole new audiences. A platform was created that integrated Skyscanner flight search and car hire into other companies’ websites. It also developed fully customisable widgets to allow other websites to generate Skyscanner travel promotions, allowing Skyscanner to earn commission from flight bookings.
In 2012, Skyscanner partnered with Baidu, China’s largest search engine, to become its official search partner for international flights. It powers the search engines of more than 400 companies including MSN, Flybe, Yahoo! Japan and Condé Nast Traveller. A mobile phone app was launched that allows users to book flights, hotels and hire cars in one place.
The creation of a site in over 30 languages helped build a global customer base of over 60 million monthly users.
In response to rapid growth in customer demand, the company was able to expand its headcount and offices, first in Europe and then beyond. In 2015 alone, 280 jobs were created across Europe, the US and Asia. The creation of a site in over 30 languages helped build a global customer base of over 60 million monthly users. Late 2015 saw new investors, Vitruvian Partners and Artemis joining Skyscanner’s share register, coming in with the approval of existing investor Sequoia Capital. SEP had brought in Sequoia at an earlier stage in order to add US VC expertise to the boardroom.
SEP and Sequoia helped Skyscanner innovate in other areas. Skyscanner was among the first travel companies to embrace automated customer support, in its launch of the Facebook Messenger ‘bot’ in 2016. The bot examines flight search trends and finds the cheapest prices to the most popular destinations available. Later in 2016, it merged its flight-search app with its standalone hotels and car hire apps, creating a one-stop solution for travel booking.
Chinese online travel firm and NASDAQ-listed Ctrip bought Skyscanner for £1.4 billion in January 2017, in one of Europe’s largest ever VC deals. According to Williams, the acquisition will allow Skyscanner to expand its existing hotels offering in China and the rest of Asia, while also providing liquidity to shareholders. Skyscanner will continue to be headquartered in Edinburgh and operate independently of Ctrip. It was another milestone in a remarkable journey for one of Britain’s leading unicorns.
As the largest shareholder in Skyscanner, SEP was well-rewarded. Its total £9m funding in the technology business provided a 60x return on investment. Picking a winner may be tough but it can also be highly rewarding.
Image credit: Jessica Durrant / Alamy Stock Photo