What are investors looking for. Catherine Simpson, Scottish Equity Partners

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Catherine is Head of Operations at SEP. With a background in law and investment, she was one of the SEP founder team members. Catherine will give an overview of SEP, what they are looking for from …

Catherine is Head of Operations at SEP. With a background in law and investment, she was one of the SEP founder team members. Catherine will give an overview of SEP, what they are looking for from companies seeking investment and what makes a good pitch!

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  • Its not about the money money money…Internationalisation/expansion/new products or service roll outA network of helpful contactsA sounding boardMonthly management meetingsRegular financial reportingAudit and remuneration committeesStaff incentive schemes
  • VC is generally investment into young entrepreneur led, high potential companies that are typically driven by technical innovationPE tends to be into more established businesses who wish to internationalise, professionalise or develop their products and services – but overlap with growth equityBuy out – where acquire all or the majority of an established business
  • Business plan should detailProduct or serviceMarket size and growth potentialCompetitionManagement teamFinancials – past and futureFunding requirementMost VC’s give out details of their investment criteria on their website. Don’t do a blanket mail out of your plan. Identify who is most likely to be interested in your proposition.reference investors with other early stage businesses.SEP IV invested in 10 companies – investing since Jan 2012
  • For venture capital need capital efficient business modelStrong differentiation and competitive advantageScalable businessProduct commercially validated
  • Be honestBe realisticHighlight your weaknesses as well as your strengths- we will find them out in diligence anywayManagement, management, management Gaps in team? Funding requirement – remember to include fees
  • Note that each investment partner generally splits their time20% deal sourcing – including initial review30% deal execution50% monitoring/follow on/ portfolio management/realisationsTiming from meet to complete can be 3-4 months. Best we have done approx 8 weeks.Diligence costs depend on stage of deal/number of investors/structure and amount of diligence required – venture deal could be approx £50-70k on later stage could be double that. Company meets diligence costs and so they need to be factored into funding requirement
  • What is the funding requirementWhat are the forecast profitsWhat are quoted comparables for industryDiscount to reflect that business is privately held and early stageEstimate future value of company and discount to present day valueThen determine what stake required for the amount of the investmentNo one size fits all – much depends on sector/stage/profitability/element of technology/ and competition for the deal
  • Take care to ensure that structures are capital efficientLeverage unusual in SEP stage investments but aim to ensure that debt levels are manageable. Significant financial modelling done at time of investment and beyond20-40% equitystakes – nb this means you really have to rely on relationships with management. Earn trust and respect.Drag along rights
  • Creating sufficient value typically takes 5-10 yearsGenerally need value to increase by 8% per annum to enable PE fund manager to get reward (carried interest)Venture base returns 3-5X money with high returns 10xGrowth generally 2-3X money – reflects later stage and lower riskRemember still high risk and so generally will look for a balanced portfolio approach – some riskier to compensate for other workhorses
  • So venture capital is basically your money! If you have a pension scheme or an insurance policy chances are some of it will be invested in to a PE fund.
  • .
  • Sectors – e-commerce; enterprise software; healthcare; energy technologiesCurrent stage split 50/50 venture growth – moving much more towards growthGeography – 47% England; 27% Scotland and balance Ireland/EuropeSector: 47% IT; energy 13%; cleantech 21% and healthcare 19%

Transcript

  • 1. Venture capital and SEP 7 November 2013
  • 2. F
  • 3. Venture capital > Venture capital is medium to long term finance, provided in return for an equity stake in early stage, high growth potential, unquoted (private) companies > As shareholders in the company, returns on investment are wholly dependent on future growth and profitability > Used where cash from operations is insufficient to fund growth and other sources of funds are unavailable > Differentiated from bank debt where the lender has a legal right to repayment and interest, irrespective of the company’s success or failure
  • 4. Objective To invest in a company and make it more valuable, over a number of years, and finally sell it to a buyer who appreciates that lasting value has been created. 4
  • 5. Economic and social impact > £40bn has been invested in >5,000 companies by venture capital and private equity over the last 5 years > 3,800 businesses are backed by UK venture capital and private equity firms > 90% of VC investments are directed at UK SME’s > 0.5m+ people are employed in the UK in venture backed businesses > PE / VC backed companies grow sales, exports and jobs faster than FTSE 100 and FTSE 250 companies
  • 6. What VCs look for > Non-“life-style” businesses > Aspirational companies with potential for significant growth > Competitive edge/USP > Large market opportunity > Experienced and ambitious management teams > Willingness to sell shares in return for investment
  • 7. What we don’t! 7
  • 8. What VCs bring > Investment > Experience of growing companies > A portfolio of other like-minded entrepreneurial companies > Contacts > Mentoring and monitoring > Exit planning > Corporate governance
  • 9. Stages/type of investment Venture Capital Private Equity Seed MBO, MBI, BIMBO Start-up Secondary, replacement Early Stage Refinancing bank debt Growth equity Turnaround
  • 10. Pitching > Research fund investment criteria > We see approx 2,000 enquiries p.a. > Approx 400 of these are qualified > Approx 44% from advisors; 23% from our own deal origination and balance direct from companies, other investors and NXD’s > Complete approx 5 new investments per annum
  • 11. Growth criteria > Substantial and rapidly growing revenues of > £5m > At or close to profitability > Low residual technology risk > Large and attractive market > High calibre entrepreneurial management team
  • 12. The plan > Product or service > Market size and growth potential > Competition > Management team > Financials past and future > Funding requirement
  • 13. Process > Review of business plan > Management team meeting(s) > Offer letter/heads of terms > Comprehensive technical, commercial and market due diligence > Formal review by Internal Investment Committee and discussion with Investment Advisory Board > Final negotiation and completion of legal documentation > Close involvement post investment - board participation
  • 14. Valuing companies > Valuation depends on:- Risk / due diligence - Growth potential - Investment time period / cash required - Confidence in team (execution) - Anticipated future value - Market competition > Does the potential reward justify the risk?
  • 15. Structuring > Lead or sole investor > Generally minority stakes > Preferred ordinary shares > Tranches > NXD appointment > Monthly management meetings and corporate governance > Exit
  • 16. How venture capitalists exit > Sale of company or merger > IPO > Sale of company to another private equity buyer > Sale of stake in company to another private equity buyer > Sale of stake back to company/other shareholders > Note 10 year LP structure > Expected returns vary
  • 17. Scottish Equity Partners > UK’s leading venture capital company, established in 2000 > Offices in Glasgow, Edinburgh, London and Ireland > Focused on UK companies with significant growth potential > Technology and technology-enabled companies:IT, Internet, e-commerce, healthcare, energy > Investment range £1-20 million covering growth stage investments and ancillary stage venture capital programme > Authorised and regulated by the Financial Conduct Authority
  • 18. Our credentials > 30 partners and staff > Very successful track record across 150 investments > Named the UK’s top venture capital firm in 3 of the last 6 years > Investors in some of Europe’s most successful technology companies > Blue chip limited partner base – pension funds, insurance companies, banks, corporates, fund-of-funds, family offices
  • 19. Some of our investors…
  • 20. Scotland > Strong Scottish heritage with head office and substantial team based here > Investments in >50 Scottish companies to date > Behind some of Scotland’s biggest technology success stories: Wolfson; Atlantech; Craneware; MTEM; Indigo Vision > Current Scottish portfolio includes: Skyscanner; Sumerian; Aridhia; Deep Casing Tools; Daysoft; Green Highland; Cyberhawk; Smarter Grid Solutions and Aquamarine > Encouraging deal activity
  • 21. Investment approach > We look for companies with strong differentiation and high growth potential, rather than investing in themes and trends > We are highly selective in the investments we make and have a strong focus on specific sectors where we understand key market drivers > We are closely engaged with portfolio companies > We are long term investors and usually exit at the same time as the entrepreneurs we provide capital to > SEP portfolio companies have aggregate revenues of £560m and c.3,800 employees
  • 22. Portfolio companies TMT Energy Healthcare 22
  • 23. Portfolio highlights > Skyscanner secures investment from Sequoia at $800m valuation > Aridhia in strategic partnership with Pivotal to create new tech platform for management of chronic diseases > Daysoft sells over 430m lenses and expands premises > Deep Casing Tools delivers100th tool > Cmed opens new offices in Boston and California > Anesco named in top 100 global cleantech firms > Numerous other industry awards
  • 24. 17 Blythswood Square Glasgow G2 4AD T: +44 (0) 141 273 4000 F: +44 (0) 141 273 4001 29 St George Street London W1S 2FA T: +44 (0) 207 758 5900 F: +44 (0) 207 758 5901 www.sep.co.uk Authorised and regulated by the Financial Conduct Authority