what are investors looking for. catherine simpson, scottish equity partners

Venture capital and SEP7 November 2013

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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

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.

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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

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

What we don’t!

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What VCs bring

> Investment

> Experience of growing companies

> A portfolio of other like-minded entrepreneurial companies

> Contacts

> Mentoring and monitoring

> Exit planning

> Corporate governance

Stages/type of investment

Venture Capital Private Equity

Seed MBO, MBI, BIMBO

Start-up Secondary, replacement

Early Stage Refinancing bank debt

Growth equity Turnaround

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

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

The plan

> Product or service

> Market size and growth potential

> Competition

> Management team

> Financials past and future

> Funding requirement

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

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?

Structuring

> Lead or sole investor

> Generally minority stakes

> Preferred ordinary shares

> Tranches

> NXD appointment

> Monthly management meetings and corporate governance

> Exit

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

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

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

Some of our investors…

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

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

Portfolio companies

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TMT Energy Healthcare

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

17 Blythswood SquareGlasgow G2 4ADT: +44 (0) 141 273 4000F: +44 (0) 141 273 4001

29 St George StreetLondon W1S 2FAT: +44 (0) 207 758 5900F: +44 (0) 207 758 5901

www.sep.co.uk

Authorised and regulated by the Financial Conduct Authority