A growing band of venture capitalists is focusing on identifying smaller deals, according to Zephyr research commissioned exclusively for Director. Claire Oldfield analyses the results and talks to some of the UK's top dealmakers
Nick Newbury and his business partner, Alastair Poulain, are what you might call gamekeepers-turned-poachers. After several years working on venture capital deals in the City, the co-founders of Original Travel scooped their own investment in June this year. The high-end tour operator received a £1.2m development capital investment from Hotbed, the private investor syndicate. Original Travel provides luxurious and extravagant short breaks for cash-rich, time-poor people. It is in a growth market and is just the sort of early-stage business that appeals to venture capitalists.
Identifying and then backing the successful businesses of tomorrow is what motivates these investors. If they discover the next Google or eBay at start-up, they will make a return on their money many times over. But they are having to work harder to find prize investments, especially when it comes to winning over the entrepreneur looking for less than £10m to fund the next stage of a company's growth.
Director commissioned Zephyr, the mergers & acquisitions (M&A) database, to track deals of this size since the start of the year, in an attempt to identify some rising stars in the investment market. The research shows that a new generation of venture capitalists is emerging—deal-makers who have either narrowed their focus by sector or investment size, or changed the way they raise their funds. Some are forging links with university research departments in some cases, others are targeting only high-tech investments, or combining capital by aggregating the investments of high-net worth individuals to invest in companies.
This research also reveals that the landscape of the sector has changed. Where once 3i dominated, there are now a bunch of new investment houses that are leaner, meaner and focused entirely on the high-risk, high-return investments under £10m.
Gary Robins, chief executive of Hotbed, is part of the new wave. He worked with 3i for 14 years before deciding to take the plunge and establish his own house five years ago, focusing on deals at the smaller end of the market.
According to data compiled by Zephyr, Hotbed invested £12m in four deals between January 1 and August 15, making it one of the top VC houses in the UK by volume of deals, and making Robins one of the country's top deal-doers.
Other significant players in the sub-£10m deal space are Peter Davies at YFM Venture Finance; Susan Searle, Russ Cummings and Julian Smith at Imperial Innovations Group; Geoffrey Thomson at Braveheart Investment Group; and Barry Maloney at Balderton Capital. Between them, they invested a total of £49m in 32 deals between January and mid-August 2007.
These are the 21st century VCS. Many, such as Robins and Thomson, are themselves entrepreneurs, who have built their VC businesses from scratch. Others, including Maloney, are risk-takers, who embraced technology at a time when investors were scrambling to escape from the dotcom fallout. All are proof that there is a core of early-stage or small deals that will potentially bring high rewards.
Zephyr's data puts YFM Venture Finance at the top of the Director league table by volume of deals over the period analysed. Since January, says Zephyr, YFM has completed some 13 deals with an average value of £1m, placing it 22nd by value of deals, with a total investment of £8m made in UK companies during this period. Peter Davies is YFM's star investor and he says the key to success has been a concentration on funding opportunities at the smaller end of the market. "We are the most active investor sub-£5m—and we are seeing that tick up," he says. "We see very little competition at the £500,000 level. We see lots of expansion capital opportunities. The larger transactions, over £1m, have a high level of management buy-out/buy-in (MBO/MBI). But sub-£1m, they tend to be true venture capital and expansion capital. Some 60 per cent of what we do is technology and healthcare."
Focusing on a sector in this way is a common strategy among the most successful venture capitalists. Susan Searle at Imperial Innovations also focuses on specific sectors, including healthcare, energy, environment and emerging technologies.
Imperial's success is partly due to this sector-specific approach, but it also comes from a commitment to teamwork and a unique mix of technology transfer, incubation and investment that the university link makes possible. "No other company brings these three together," claims Searle. "We also have a team of people that enables us to spot things earlier than most VC groups. We are in constant dialogue with industry and against that background we are seeing ideas from Imperial College." Such start-up investments, she adds, are backed by 10 to 15 years of research.
Braveheart also benefits from university ties. Thomson says that of the 17 exits the company has made since it started out, most have been from companies with university links.
But Braveheart, which floated on the AIM earlier this year, has another differentiator from more traditional venture capital set-ups-its method of investing relies on the funds of high-net worth business angels. "The angels help us make investment decisions," explains Thomson. "We do not risk internet companies and we only occasionally invest in traditional businesses—such as the Capital Pub Company and Clapham House, which have made us a good profit. We are investing in technology with global potential."
Of course, all of the venture capitalists identified in the Director tables are seeking out the next big thing. Most are investing small amounts in several deals—but some have made our league table because of the value they have invested rather than volume of deals. Balderton's Barry Maloney and his team invested £19m between January and mid-August.
"Speed of an investment is not always a good thing," says Maloney. "Being an active investor does not mean you get the best results. We look for something that is a home run and will make us 10 times our money. That is what is different about us—we are swinging the bat for big returns."
Such ambition has stood Balderton in good stead. According to the data compiled by Zephyr, it has invested in three deals in the UK. According to its own data, which tracks deals outside the UK as well, Balderton has made nine investments with a total value of $30m (£14.7m) since the start of the year.
Some 70 per cent of Balderton's investments are early stage and Maloney says the climate for such deals is good and has been for the past couple of years. Even so, the investments made in smaller or early-stage deals remain risky.
"We get paid to take risks in the hope that we are going to get good returns," points out Maloney. "Because we operate that way, some things are not going to work."
Balderton began investing in Europe six years ago. It focused on technology and internet at a time when the climate for such investments was disastrous. But Balderton worked hard to create the market, and Maloney claims one of the company's key strengths is that it has raised the barrier to entry by creating its own network.
"Some 80 per cent of the deals... come in through the network we have established," says Maloney. "That network has taken us six years." All the venture capitalists we have identified have individual talents, but they also share common traits. Maloney believes the best of them are marked out by their judgement. "What we do is an art," he says. "The best judgement comes from those people who have built companies themselves."
All the deal-doers agree that theirs is an attractive investment space. Thomson points out that while "lots of people are feeding at the £5m-plus trough", few are in the space below that—which means there is an enormous opportunity there. Market wobbles may have resulted in large private equity deals being put on ice, it seems that those who are focused on pure VC are being rewarded. "The big MBO deals are going to suffer," says Thomson. "There will be a gradual shift to the lower end of the market."
Hotbed
Gary Robins, chief executiveBackground: He spent 14 years with 3i before setting up Hotbed to concentrate on deals up to £5m. Hotbed uses a network of private investors to back companies.
What he says: "We want to harness that huge latent talent that has ambition."
Deals completed: January 1 to August 15, 2007: Four
Total deal value: £12m
The deal: Original Travel
Venture capitalists often find their best deals by word of mouth rather than through a formal sale process. That is what happened wen Robins and his team found Original Travel, the fast-growing, high-end tour operator. They helped raise £1.2m for the company's expansion. "It was introduced to us by one of our members," says Robins. "It was a good team and a great concept." The founders of Original Travel will use the investment to fund their marketing efforts.
Braveheart Ventures
Geoffrey Thomson co-founder and chief executiveBackground: One of the four founders of Braveheart in 1997; before that Thomson was a company doctor. Braveheart floated on AIM earlier this year.
What he says: "Venture capital investing is about the management team. But it is also about investment in the right business—and the right business at the right price."
Deals completed: January 1 to August 15, 2007: Five
Total deal value: £4m
The deal: Inxstor
Start-up firms present investors with the highest risk. But Fife-based technology start-up Inxstor caught the eye of Braveheart because its software should make pay-TV content available anywhere at any time.
"In an increasingly mobile world, we see the demand for 'place-shifting' technology as growing significantly in the future," says Geoffrey Thomson, who put in second-round funding of £600,000.
The investment will provide the fledgling company with working capital for 12 months. Thomson says the attraction is "a significant upside if we get it right".
YFM Venture Finance
Peter Davies investment director, South West Ventures FundBackground: More than 10 years experience in venture capital; previously at Advent Venture Partners and 3i.
What he says: "Entrepreneurs is a much abused term. It suggests seat of the pants stuff. But what I see in the south-west is that we are backing experienced CEOs."
Deals completed: January 1 to August 15, 2007: 13
Total deal value: £8m
The deal: Dynmark Growing businesses thrive under strong management—and Dynmark is no exception. When the Cheltenham-based text-messaging firm received £250,000 funding from YFM Group's South West Ventures fund as part of a £500,000 investment package, it also attracted a former Vodafone executive to the board.
Davies says the mix of good management and bulk SMS text messaging technology in an area that is predicted to grow rapidly was a seductive combination for investors.
"We had seen it growing and it had a lot of momentum," he says. "We liked the team—and we were able to introduce a non-executive director."
Balderton Capital
Barry Maloney, partner (formerly Benchmark Capital)Background: He worked in technology and telecoms businesses. The Balderton team's skill set is drawn from business and industry rather than finance and accounting.
What he says: "Capital going to start-ups is the highest risk. But if you do not take enough risks, you won't be getting any home runs."
Deals completed: January 1 to August 15, 2007: Three
Total deal value: £19m
The deal: Daylife
UK venture capitalists are increasingly gaining a reputation for global excellence. Earlier this year Daylife, a US online news aggregator, came to Balderton Capital in search of funding, rather than looking to Silicon Valley.
At the end of June it announced it had raised £4m from Balderton and Arts Alliance. The attraction for the Daylife management team was the venture capitalists' experience in online media, and the exit route of the UK's AIM market.
"UK companies now account for 50 to 55 per cent of the stock we look at," says Maloney. The rest of the opportunities are coming from Europe and the US.
Imperial Innovations
Susan Searle, chief executiveRuss Cummings, chief investment officer
Julian Smith, chief financial officer
Background: All three have a varied work history combining venture capital, finance and board experience. Imperial Innovations draws on a pipeline of technology from Imperial College's research.
What they say: "This business is successful because of the team and not because of one person."
Deals completed: January 1 to August 15 2007: Seven
Total deal value: £16m
The deal: QuantaSol
Spotting new technology that could transform people's lives is the holy grail of venture capitalists. Imperial Innovations has a head start because it benefits from ties with Imperial University-and from the lengthy research that is carried out.
QuantaSol, which is involved in solar power technology that converts sunlight into electricity, is one such research project. In June the company received a £1.35m investment round in which Imperial Innovations invested £300,000.
Cummings says they have tracked QuantaSol's progress. "We spotted an opportunity some time ago," he says. And Searle adds: "We are keen to support them through the early stages and will continue to work with them as they develop and become a significant player in the solar energy market."
The research
Methodology:
The league tables were compiled by Zephyr, the M&A database. It measures venture capital deals by both volume and value from January 1 to August 15, 2007.
The deals are based on equity investments under £10m. The data is based on completed deals and only on deals that are in the public domain. This means the league tables are not exhaustive and there may be some deals that are omitted from the data.
The data is presented by venture capital house. Individuals have then been put forward as star performers.
Completed DC/VC deals involving UK targets 1/01/2007—15/08/2007.
| Advisor name | Deals | Total deal value | Average deal value |
| YFM Venture Finance Ltd | 13 | £8m | £1m |
| Imperial Innovations Group plc | 5 | £4m | £2m |
| Braveheart Investment Group plc | 5 | £4m | £1m |
| Hotbed Ltd | 4 | £19m | £5m |
| Advent Venture Partners LLP | 4 | £19m | £5 |
| Finance Wales plc | 4 | £6m | £1m |
| Quester Capital Management Ltd | 4 | £15m | £4m |
| YFM Group Ltd | 4 | £5m | £1m |
| Company Guides Venture Partners Ltd | 3 | £7m | £2m |
| Ingenious Ventures Ltd | 3 | £10m | £3m |
| National Endowment for Science Technology and the Arts | 3 | £8m | £3m |
| Doughty Hanson & Co., Ltd | 3 | £9m | £3m |
| Low Carbon Accelerator Ltd | 3 | £4m | £1m |
| NorthStar Equity Investors Ltd | 3 | £4m | £1m |
| Benchmark Capital | 3 | £19m | £6m |
| IP Group plc | 3 | £4m | £1m |
| NewMedia SPARK plc | 2 | £4m | £2m |
| MSIF Partners Ltd | 2 | £5m | £2m |
| The Ridings Early Growth Investment Company Ltd | 2 | £0 | £0 |
| Index Venture Management SA | 2 | £5m | £3m |
| Oxford Capital Partners Inc. | 2 | £6m | £3m |
| Aberdeen Asset Managers Private Equity | 2 | £10m | £5m |
| Beer & Partners Ltd | 2 | £1m | £0 |
| Scottish Enterprise | 2 | £5m | £3m |
| Close Venture Management | 2 | £4m | £2m |
| All others | 46 | £152m | £3m |
| Total | 118 | £315 | £3m |
Top 25 by value of deals
| Advisor name | Deals | Total deal value | Average deal value |
| Benchmark Capital | 3 | £19m | £6m |
| Advent Venture Partners LLP | 4 | £19m | £5m |
| Imperial Innovations Group plc | 7 | £16m | £2m |
| Quester Capital Management Ltd | 4 | £15m | £4m |
| Scottish Equity Partners Ltd | 2 | £15m | £7m |
| Hotbed Ltd | 4 | £12m | £3m |
| 3i Group plc | 2 | £11m | £5m |
| Gateway Global Partners Limited | 2 | £10m | £5m |
| Amadeus Capital Partners | 2 | £10m | £5m |
| Ingenious Ventures Ltd | 3 | £10m | £3m |
| Ingenious Media Active Capital Ltd | 2 | £10m | £5m |
| Aberdeen Asset Managers Private Equity | 2 | £10m | £5m |
| Doughty Hanson & Co., Ltd | 3 | £9m | £3m |
| Tudor Capital (UK) LP | 2 | £9m | £4m |
| Evolution Placements Corporation | 1 | £9m | £9m |
| Black River Asset Management LLC | 1 | £9m | £9m |
| Credit Suisse | 1 | £9m | £9m |
| Meditor Capital Management Ltd | 1 | £9m | £9m |
| Investor Growth Capital AB | 1 | £8m | £8m |
| Radius Ventures | 1 | £8m | £8m |
| Delta Partners Ltd | 1 | £8m | £8m |
| YFM Venture Finance Ltd | 13 | £18m | £1m |
| National Endowment for Science Technology and the Arts | 3 | £8m | £3m |
| Scale Venture Partners | 1 | £18m | £8m |
| Esprit Capital Partners LP | 1 | £18m | £8m |
| All others | 67 | £141m | £2m |
| Total | 118 | £315m | £3m |
