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.
4
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
