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What does the venture landscape look like in 2015? - 27/01/15

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For the latest in our series of business articles we spoke to three venture capital providers active in the Cambridge market about recent changes in the venture landscape, their investment plans for 2015, and the technologies & markets that have taken them by surprise.

Rob Trezona is Head of Cleantech at IP Group plc, a leading UK intellectual property commercialisation company, developing technology innovations primarily from its research intensive partner universities.  The company’s portfolio comprises holdings in around 90 early stage to mature businesses across Healthcare, Biotech, Cleantech and Technology. Rob has been working in technology venture for over 9 years and prior to joining IP Group, was Head of Research and Development at the Carbon Trust.

Victor Christou is Senior Investment Director at Cambridge Innovation Capital (CIC), an investment fund launched in 2013 to invest in high-growth technology companies emerging from the Cambridge cluster.    CIC aims to invest its initial capital of £50m throughout a 3 year period.  Victor has considerable experience on both sides of the investment table, having been Venture Partner in the Tech Team at Wellington Partners, and previously founder of Opsys, an organic electronics business which he sold to Cambridge Display Technology (now owned by Sumitomo Chemicals).

Jon Edington is Director Technology Ventures at Imperial Innovations plc, a technology commercialisation company which focuses on commercialising the best academic research sourced from the golden triangle formed by Cambridge, Oxford and London.  Jon focuses mainly on software and IT investments and is on the board of Featurespace, Acunu, JustYoyo, Semetric, Cortexica and Permasense.  Prior to Imperial Innovations, Jon specialised in healthcare services transactions at Sovereign Capital, and managed technology investments at 3i.

1. What are your aims?

Rob: “Our mission is to evolve great ideas into world changing businesses.   That may seem a grand statement but we are here to bridge the gap between great science and commercialisation so that our portfolio companies can have this impact. By way of example, Oxford Nanopore Technologies, which has offices near Cambridge, is aiming to democratise DNA sequencing – a move that could make putting sequencers in every school and every GP’s surgery a reality.   Another, Xeros Technology Group plc, one of our portfolio companies which is now listed on AIM, has developed a totally new process for clothes laundry that is already being sold in the US as well as the UK.”

We are passionate about the value of high tech business in society.  Impact is a word which keeps coming up, and science does have an impact.  It is not just in terms of Nobel Prizes. Science creates wealth and contributes to society.”

Victor: “CIC exists to provide follow on funding to support great early stage technology businesses.  We work with other early stage investors and the University to fill the gap at the growth stage. We invest off our balance sheet so we are not limited by the amount of time that we stay in the business.  One of the advantages of this strategy is that it takes the pressure off the company to exit early, helping to build bigger and more successful businesses in this region. For example, we have recently announced an investment in Congenica, a business based on world class research into the human genome at the Wellcome Trust Sanger Institute in Hinxton.  The business didn’t exist when we first took a look at the opportunity in the research.  We’ve worked with the founders to create a company that provides diagnosis of genetic diseases in minutes.  We expect to be involved in Congenica, alongside the founders, on the journey to making the company a global player.  This will take several years, but we have the patience and the funding to allow the business to develop to its full potential.

At the other end of the investment spectrum, at Cambridge Imaging Systems, we have backed a founder team several years into their entrepreneurial journey.  Cambridge Imaging is the Dropbox for video and Tom Blake, the CEO, and his team provide the best video archival system that you can buy.  Our role there is to be a cheerleader, where we provide guidance and encouragement to help the team expand internationally and, using our network, provide best-in-class support for the business as it grows.”

Jon: Fundamentally our goal is to create the next generation of world-leading technology companies by commercialising intellectual property developed at or associated with the academic communities within the ‘Golden Triangle’ area broadly bounded by London, Cambridge and Oxford.

This area is home to many new technology companies through its proximity to the academic communities of Imperial College London, the University of Cambridge, the University of Oxford and University College London as well as other leading research institutions.

We have the expertise and the capital strength to select the most promising technology opportunities from the output of this research and progress them from inception to maturity, with the ultimate aim of either building great companies that can generate significant value for our shareholders or through licencing out technology to commercial partners in industry.

Since our IPO in 2006, Innovations has raised more than £346.0 million of equity (before costs) from investors, which has enabled the Group to invest in some of the most exciting spin-outs to come out of UK academic research. In that time, we have created more than 100 companies and invested more than £176.0 million in our leading companies, which have raised collectively investment of more than £822.5 million. Our largest investment to date has been Circassia Pharmaceuticals plc into which we invested £25.5 million over a series of funding rounds prior to its initial public offering (IPO) in March 2014.”

2. How much has the venture landscape changed over the past couple of years?

Rob: “I see three trends that have been going on since the start of the economic crisis. Firstly, there is less institutional VC in general. Investors are either getting involved at a later stage, and getting tangled up with private equity, or they are investing in digital with companies such as Uber and Just Eat coming to the fore.  IP Group backs a lot of hard tech and there are fewer institutional investors in this area. 

Corporate venture capital is the second trend.  Some of the corporates who have entered the market have been unsuccessful, and the corporates haven’t come to the rescue filling the gap as it seemed they might, but some have worked out how to invest successfully.     

The third trend is for individual investing, and this is particularly apparent in Cambridge which, of course, has a great angel network.  This is a trend that has been on-going for all of this government, and is continuing to grow.

What is new in the venture landscape is that we are seeing a trend for more company structures rather than funds.  IP Group pioneered this model in the UK and we continue to see more companies emerge.  This is a UK innovation and the US is now following suit, as in the case of the recent Allied Minds IPO.  It is telling that Allied Minds chose to list here in London rather than on NASDAQ.” 

Victor “It has been really interesting to see the growth in crowd funding and early stage tech investing. From 2008 to 2012 tech investing was at a low point.  Since then, the impact of Government tax incentives such as EIS has driven an increase in high risk early stage tech investments, whilst crowd funding has changed the funding dynamic. 

Arguably there is now a glut of capital at the early stage for technology.  Aspiration levels have changed. Founders believe that they can do bigger and better things, and this is a wholly positive development.  Not all businesses will be successful of course, and there is potentially a problem at a slightly later stage, as unrealistic expectations have been set in terms of available capital. 

Some traditional investors are backing growth companies, but there is not enough capital available at this stage. This is one of the areas where CIC can come in, providing capital to meet some of that need.

We have also seen an increase in investment from corporates coming into the venture market.  Corporates recognise the need to engage with the early stage tech companies to keep up to speed with innovation.  Lots of corporates are hiring people out of the VC community to be a part of their M&A group making strategic investments.  But there is a fundamental disconnect as corporates find it hard to move at the speed it takes to invest in early stage tech.”

Jon: “It seems to have changed quite a lot.  Five or six years ago I would say it was dominated more by institutional investors like 3i, Atlas Ventures etc.  We have seen many of these businesses exit the venture asset class over time for a number of reasons.  In 3i’s case for example it was because Venture was a small business compared to their buyout and growth capital businesses, plus the impact of the financial crisis meant they didn’t want to have a commitment to early stage venture and the returns were unlikely to impact 3i’s balance sheet much.

These institutions have been replaced by two types of funds, typically run by ex-entrepreneurs.  This might either be a larger fund such as a Notion Capital (co-founded by Jos and Ben White and Stephen Chandler – Jos and Ben White founded and ran Messagelabs and sold it to Symantec) or it might be a smaller, angel funded syndicate type investor like AngelLabs or Firestartr. 

There are advantages to this type of fund as they are typically run by entrepreneurs with operational experience.  These fund managers can help entrepreneurs they invest in to build businesses, however, many of these funds are small so need to syndicate later for Series A/B/C rounds.  This is probably healthy but there is definitely less capital in the sector overall, although I would argue it is more effectively deployed.   There is a bit of a Series A overhang however, where many businesses were funded at seed stage that perhaps shouldn’t have been.  These companies are now struggling to raise further capital. 

Then there are a few larger, more established funds that have remained constant through the past period.  These include Index, Accel, Balderton etc.  They have significant amounts of capital under management but they are small in terms of numbers.

I would also say that over time the number of experienced, professional managers in the technology market has increased as has the number of serial entrepreneurs.  This can only be healthy for the sector.”

3. Which markets or technologies have surprised you?

Jon “There are a few technologies that have surprised us.  First is 3D printing.  This is a technology that has been around for a while but some of the applications are really innovative and exciting.  It’s an area we are maintaining a watching brief on. 

The second areas is the Internet of Things (IoT).  Essentially I regard this as sensors, communications and wireless networks rebranded (with some unanswered questions about protocols and standardisation).  There is significant potential for growth in this area but the business models of companies we are looking to back need to be clear. 

On-demand transport like Uber has also surprised us, as has mobile payments.  Uber has grown quickly on the international stage and it’s incredibly convenient and cheap for users.  Mobile payments is a growth area too.  This is a sector that many people expected to emerge over the last 10 years but has only done so recently.  We have an investment in Yoyo which handles mobile payments and loyalty programs for a large and growing number of retailers in the UK.  Customers and retailers love it – it is convenient to use for customers and retailers can use it to finally understand customer purchasing data at the till; retailers can use this to build loyalty programs, designed to retain customers and drive sales.”

Victor “It is difficult to look past the explosion in digital media.  What has surprised me is the pace of change in this sector at the investment expense of clean tech.   Clean tech has gone out of favour, largely because of how long it takes and the effort involved to bring these businesses to market, in comparison to digital companies.  Jon mentioned the speed with which Uber has come to the fore.  It is difficult to go anywhere today without hearing about Uber, whereas a couple of years ago they were nowhere.

The use of analytics has also been interesting to observe.  In Cambridge there are lots of Bayesian analytics businesses springing up.  Data has become incredibly important, how to use it and who owns it.  And this has come from a background of being too boring to be on the radar.  This focus on data extends into biotech with genomics.  Again it is the pace of change that has been surprising.

A third area is the proliferation of micro communities of 3, 4 or 5 people driving an app. It is interesting to see how quickly this has become a viable career for entrepreneurial individuals.”

Rob “If we look back a couple of years, we were not expecting battery electric vehicles to have the impact that have had.  This is in terms of increased sales and column inches, but also the willingness of the major OEMs to buy tech from the start-ups.  Jaguar Land Rover, Volvo, Ford are having to look to the start-ups.   We have a great Formula 1 tradition in the UK but until the past couple of years it was really hard work in this area.  Now the OEMs are looking not just to engage with the early stage tech community but also to spend money and that is a pleasant surprise.

4. Do you see Cambridge as nurturing the next unicorn? 

Victor “I don’t see why not. Cambridge is the biggest tech cluster in Europe.  A quarter of the people employed in CB1 are employed in tech.  The skill set is here, it is very tech friendly, there is a fantastic angel scene, and we have the support of entrepreneurs. All of a sudden there is the capital here. If it is going to happen in the UK, there is no reason that it will not be in Cambridge.” 

Rob: “Cambridge certainly has the necessary concentration of talent, capital and ideas. Initiatives like Cambridge Innovation Capital, in which IP Group has a strategic investment, are very helpful and, for me, point the direction for potential stellar success.”

Jon “I think Cambridge is an incredible environment for entrepreneurship.  Firstly, you have the University which is one of the top 2-3 in the world, producing absolutely world-class students and technologies. 

Then there is a long history of start-ups – Abcam, Autonomy, the list is long.  There is a real entrepreneurial spirit and the people naturally recycle themselves into new businesses following exits.  Tim Moreton, founder and CTO of Acunu, for example graduated from Cambridge Computer Lab where he worked on the XenServers project, then went to Tideway as a Senior Software Engineer then started Acunu.  Because of the history and all these elements I think Cambridge will continue to create great businesses, and hopefully one (or more) of these will prove to be a unicorn in future.

Within our own portfolio, Featurespace is great example of an exciting company coming out of Cambridge.  They have a predictive analytics technology that is based on Bayesian statistics, it was originally a spin-out from Cambridge by Professor Bill Fitzgerald.  The technology is incredibly clever – by allowing the real-time tracking of both individual and group behaviour by using advanced proprietary algorithms to exploit the vast amounts of customer interaction data that many companies collect, to deliver behavioural insights that can help to detect and prevent fraud, and prevent customer churn. The technology can be applied to any business that generates and needs to understand large amounts of data and is now packaged up into innovative anti-fraud software which the company has sold to a number of companies.  Featurespace is led by an impressive and highly experienced management team – CEO Martina King was formerly Managing Director of augmented reality company Aurasma, and previously Managing Director of Capital Radio and Yahoo Europe – and could become a really big business.”

5. What does success look like in 2015?
Rob
“Success in 2015 is about how we sustain the growth that we’ve seen historically. What are the changes we need to make to continue our trajectory?  We are going to be very ambitious, so success will be about being able to see how the new initiatives we implement contribute to continued growth.” 

Jon “2014 was a great year in which we took four companies public, delivered record profits and raised £150m so that is going to be a tough year to beat! We now have an accelerated growth portfolio of 36 companies, many of which are proven entities in the region of 8-10 years old, and total available cash resources of around £190m to invest.

So, the aim over the next 12 months therefore is to do a couple of things.  Firstly we plan to invest further into the portfolio – by investing significant amounts of money behind our leading portfolio companies – business that we know intimately, have co-founded & been instrumental in building.  Secondly, we are actively looking for really high quality new technologies and businesses to invest into – these will provide our pipeline for the future.  To that end, we will be spending a lot of time in Cambridge looking for these investment opportunities and hopefully we will find some good ones.” 

Victor “CIC is a relatively young fund, so we are actively working to cement our position.  Success will be to see ourselves fully integrated into the fabric of the Cambridge cluster, and to be seen to be a part of the community.

For me, this fund is the most exciting fund in the UK.  I feel incredibly positive about it. We are operating in a hugely exciting, rapidly growing sector.  We are founder friendly; we are here to help and we are in it for the long run.  We are actively seeking opportunities to invest in innovative Cambridge companies.  Making exciting investments, developing relationships, becoming the trusted partner in the Cambridge growth community. This is what success will look like for CIC in 2015.” 

Bailey Fisher Executive Search is an independent international executive search firm specialising in technology and life sciences. Bailey Fisher assisted Cambridge Innovation Capital with the search for an Investment Director when the fund launched, resulting in the appointment of Victor Christou, and recently assisted Imperial Innovations plc with the search for an Investment Principal, resulting in the appointment of Mario Branciforti. www.baileyfisher.com

This article first appeared in the February 2015 issue of Cambridge Business Magazine.

 

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