The early-stage funding scene got a bit less dire as Scottish Equity and InnKap launched new funds. Here’s what they’re looking for.
Wanted: Tech, bio and energy start-ups with good technology and teams, in search of capital. Apply to InnovationsKapital, and Scottish Equity Partners.
Raising capital for a tech start-up is always difficult – especially in Europe. But the task got slightly easier this week with the launch of two new funds, one in Britain and the other in the Nordic region, with an interest in early-stage investing.
What are they looking for?
This is what the fund managers are looking for in early-stage companies:
SEP
Sector:
Information Technology, 40 per
cent of portfolio – including security and banking software software,
infrastructure, and semiconductors. Not shrink-wrapped consumer
software – prefer companies with corporate customers who “are very
large and sticky,” says LeSueur.
Healthcare & Life Sciences, 40 per cent. Greater emphasis on medical devices and diagnostics, with less interest in drug development.
Energy, 20 per cent –
“Cleantech is hot, and we will invest potentially – but our track
record is built up on the dirty tech side of things,” says Le Sueur. He
means new technologies for finding and pumping oil and gas, rather than
solar and other alternative energies.
Criteria:
• “The beginnings of a good management team – that is the most important part,” says Le Sueur.
• Quality and strength of the technology and intellectual property. “We
do tend to focus on tech-rich businesses, because of the barriers to
entry” for competitors.
• “A very significant market opportunity – global, very valuable and growing very rapidly.”
• “We’re looking for customer validation – even at the early stage it has to demonstrate a connection to the market.”
InnKap
Sector:
Information and communications technology - including software, hardware, semiconductor and services.
Healthcare – including medical technology,
diagnostics and specialty pharmaceuticals aimed at “smaller niche
segments” such as so-called orphan drugs. “We wouldn’t do the really
big (clinical development) project – too much money and too much time,”
says Ingeborn.
Criteria:
•“Fairly general – we want to see unique technology
well protected with good IPR….Our portfolio companies are (often)
spin-outs from the scientific world, either academic or research
centres. Sometimes it can be a spin-out from bigger companies.”
The second fund, launched by Scottish Equity Partners, is broader, covering all maturities of companies but – rarely for such a fund – with a declared interest in early-stage investments. The fund, SEPIII, said it raised $300 million for investment in healthcare, ICT and energy companies based in Britain.
Nurturing seedlings
The funds’ formations are the latest in a series of actions around
northern Europe in the past few years to free up more capital for
technology start-ups – a perennial problem for tech and bio
entrepreneurs. The importance of seed and start-up funding has been
rising on political agendas – with, for instance, the European
Investment Fund recently launching a new programme that provides cash
to other organizations that make seed investments.
And lately, with the rise of London’s Alternative Investment Market, a few tech-transfer companies that specialize in seed funding have, themselves, been successfully raising private capital. The biggest was the flotation in July of Imperial College London’s tech-transfer office for £26 million.
But the problem of seed funding in Europe is by no means near solution – so great is the gap and so dull are investor appetites for this riskiest phase of the investment cycle. For instance, the EIF reported that there is three times as much capital available, as a percentage of gross domestic product, for early-stage investing in the U.S. as there is in Europe. And other studies have shown there are at least 50 times as many wealthy individual investors – so-called angels – in the US as there are in Europe.
Several reasons are behind that, including unfavourable tax policies. But one problem for most venture capitalists is that early-stage investments are, by definition, very small and very risky – and while the pay-off from the rare success story can be huge, most fund managers say the odds don’t compensate for the very high costs of picking and managing a portfolio of many small investments. As a result, most of the big VC firms in Europe focus their money on bigger, later-stage investments.
Risk v. return
But InnovationsKapital thinks that approach isn’t necessarily the best,
and has focused since its founding 12 years ago on early-stage
opportunities. “Some people invest a lot of money at a later stage and
they take lower risk – but they don’t get the return,” said Staffan
Ingeborn, managing investment director at InnKap. “In our experience,
if you invest early and you know what you’re doing you can select the
right investments.”
Mr. Ingeborn declined to disclose the private fund’s track record,
beyond saying: “People continue to invest in our funds, so people are
satisfied.” But earlier this year InnKap announced it earned SEK
190 million on a SEK 21 million initial investment – a nine-fold return
– on Carmen Systems, a computer software and service start-up acquired
by Boeing. It also announced it reaped SEK 100 million this year on a
1999 investment in an Internet-video startup called Kreatel.
With the latest fund-raising, InnKap has €317 million under management
– all in early-stage investments. In InnKap 4, 70 per cent of the money
came from previous InnKap investors, including Access Capital Partners,
Chalmers University of Technology, Swedish national pension funds, W
Capital and Britain’s Wellcome Trust. New investors in the fund include
BP’s pension fund, CnB NOR, Etra, KLP Insurance and Wega support – in
all, about 20 investors from Europe and the US, InnKap said.
Paying out
Its first two investments:
• SEK 25 million in Ludesi AB, a bioinformatics spinout from the University of Lund, Sweden. The company was formed in 2001 and lets bio researchers analyze their electrophoresis gels – one of the most common lab techniques for protein analysis - online over the Internet, rather than with costly in-house analysis software.
• About €3 million in Action Pharma, a spin-out from Aarhus University in Denmark. It was formed in 2000 to bring drug candidates into early clinical trials for subsequent licensing to big pharmaceutical companies – and is working on drugs that protect organs against failure during surgery.
The new SEP fund is broader, with an interest in late-stage as well as early-stage tech investments. Its focus, according to Gary Le Sueur, director of investment operations, is on promising UK tech companies with international ambitions. It’s focusing on Britain because “you can only find excellent opportunities if you are geographically and culturally close to the companies. But although we focus on UK businesses, our businesses are not looking to be dominant in the UK; they’ve got to have global aspirations from an early stage.”
The investors in the new fund include some prior SEP clients, including the European Investment Fund, Foreign & Colonial Private Equity Trust, Capital Dynamics and Royal Bank of Scotland. New investors include Skandia Life, Etera Mutual Pension Insurance Co., Swiss Re Private Equity, Gartmore, Co-operative Insurance Society Ltd., Finama and Scottish Widows Investment Partnership.
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