ENVIOUS OF THEIR RICHES? YOU SHOULD CHEER THEM ON

Entrepreneurs who make it big are a force for good, says Henry Whorwood

American me tech billionaires are celebrities: ce Bezos, Gates, Page, Zuckerberg. Zu But where are the UK’S tech billionaires? The answer is: on paper. American A entrepreneurs really are rich: not only are they wealthier, but they actually ac have access to their wealth. Through stock market flotations and sales a lucky few have realised some or all of the value of the companies they’ve they founded.

The majority m of UK founders – including those in the Tech 100 – are not in this enviable position.

Boohoo Booho right? Rich people’s problems. Ma Maybe not. Because we all benefit from tech te entrepreneurs becoming wealthy. First, getting rich is a big part of the reason reaso people start tech businesses in the first f place – and we need to encourage encoura that. Secondly, some of the best backers bac of new tech businesses are those who’ve w already made it. They bring much-needed m capital and expertise, driving driv further growth and jobs in the sector. secto

So aren’t are the entrepreneurs on the Tech 100 list rich? Some are worth hundreds of millions. Yes and no: unlike public companies, c whose full value is clear from fro what investors are willing to pay for easily tradable shares, private company valuations are not straightforward. They are made on the basis of transactions that happen infrequently – when a company needs investment and issues shares, to venture capitalists (VCS) say, in exchange for cash.

Deals can be based on company metrics – 10x turnover for example – but don’t have to be. They are a compromise between the current risks the business faces and the potential size of the future business if it succeeds. Once a valuation is agreed, the founders’ remaining share of the company has a price on it, and often they appear to be wealthy. But they can only sell those shares if the company floats on the market, is bought, or – more rarely – if they enact a minority sale, retaining a controlling stake. This is why these entrepreneurs’ wealth is known as “paper” wealth – the majority of the time they can’t access it.

Apparently loaded founders can thus struggle to make ends meet. This helps explain why minority sales, though still rare, are becoming more frequent. They allow founders to access some cash – say to make a deposit on a house – while remaining committed to the business – a balance crucial for investors who want leaders driven to succeed, but not preoccupied by their personal finances.

Other changes in the market are also increasing the frequency of these minority sales. The crowdfunding platform Seedrs operates an exchange, allowing crowd investors to sell shares to other crowd investors. But it could soon allow founders to sell some of their shares too. The recently proposed merger between Crowdcube and Seedrs will only accelerate this process.

Even as the options grow to realise their theoretical wealth, however, the reality is that in the UK we’re seeing entrepreneurs stay private for longer and see their “on paper” wealth grow ever larger. This is due to the increasing availability of private capital.

Traditionally, entrepreneurs climb a funding ladder. They start by raising investment from their friends and family, then “angel” investors, then VCS, then larger VCS and sometimes banks, before finally turning to public markets for their biggest capital raises.

In 2011, for example, only four companies were able to raise more than £100m without turning to the markets. But last year 24 companies were able to raise that amount (often more) privately. This is creating ever more private start-ups valued above $1bn – known as unicorns. But as they remain private longer, so founders have to wait longer to harvest the fruits of their labours, even as those fruits grow ever larger.

Some tire of waiting. Matt Moulding, founder of the Hut Group, recently sold £54m of his shares in a stock flotation. Darktrace and Deliveroo are also mooting floats. Entrepreneurial ecosystems are cyclical. The US has seen a flurry of recent market listings and something similar may well be in store for the UK. That would make the day (and bank balances) of many of the entrepreneurs on this list. But the rest of us should welcome it too, because the motivation such paydays give would-be entrepreneurs, combined with the investment those rich founders provide to other start-ups, would together form a wonderful spark of life for the UK’S post-pandemic economy.