Nesta’s experiences of investing in technology ventures
In a previous blog I provided an overview of Nesta’s first investment phase. In this post I aim to cover the period 2007-2012 when Nesta was actively investing in UK technology companies, with a particular focus upon medical technology, ICT and engineering/cleantech businesses.
Having emerged from the ‘seed’ investing phase with a portfolio of over 200 direct investments, a decision had to be made about how to focus Nesta’s strategy to create a more manageable portfolio and also to increase chances of financial success by building expertise around the core investment themes. At this stage Nesta was still a quango rather than a charity, and the focus shifted from general start-up support to fostering new technologies to power the next generation of the UK technology sector. This shift in strategy was made as the general availability of start-up capital was beginning to improve, following the long funding hangover from the tech crash of 2000. Doing this well required us to make fewer, larger investments and to build more active relationships with those investees, in line with venture capital investing models.
Balancing our portfolio
Prior to launching this new investment activity in 2007, a review of the existing portfolio took place which concluded that of the 212 seed investments, 41 fitted within the new scope and would be transferred across to the new ‘Technology Venture’ investment activity. The remaining 171 investments were deprioritised and a decision made to reactively manage these assets through to conclusion (i.e. repayment, exit, wind-up, expiry of royalty arrangements), with no further capital being made available by Nesta to these companies.
Our ‘Technology Venture’ portfolio was initially made up of:
- 17 were medtech or life science companies
- 17 engineering or clean technology companies
- 7 digital businesses
Nesta had invested £6.7milllion into these 41 companies prior to the transfer. Over the course of the next 5 years, Nesta added another 19 companies to this portfolio, of which 9 were ‘digital / ICT’ companies, 6 medtech and 4 engineering, creating a relatively balanced portfolio across the three focus sectors.
At around the same time, Nesta lobbied and succeeded in obtaining an exemption from certain EU state aid laws affecting investments by government backed entities. This was an important development as it removed some of the restrictions which impinged on Nesta’s ability to build meaningful stakes in portfolio companies (e.g. total investment limits, private sector match funding). Added to this, Nesta’s trustees committed to invest up to 10% of Nesta’s endowment (i.e. c.£30million in 2007) into this Technology Venture portfolio, as part of its ‘high risk’ asset allocation.
Building on our experience
Since 2007, Nesta has invested an additional £10million in follow-on funding to the original 41 portfolio companies. On top of this, we have invested £16.7million into the 19 ‘new’ portfolio companies, bringing total invested across the portfolio of 60 to £32.9million. Results to-date from this activity (as of 31/3/2020):
|Portfolio||Invested||Realisations||Active companies||Holding value||Total Value versus Cost|
It is interesting to observe that of the 18 active companies remaining in the portfolio, with a total holding valuation of £17.1million, 4 companies contribute £15.6million to this valuation, 7 contribute £1.5million and 7 are written off (i.e. we have valued at £0). This level of ‘value concentration’ is common in later stage portfolios as the more successful companies start to emerge.
It should be noted at this point that it is extremely difficult to value private businesses, as there is no daily listed share price or readily comparable companies to measure yourself against. Hence, the valuations we hold for our portfolio companies are based on the pricing by third parties in previous investment rounds, which tends to be a conservative basis for valuing a business. We hope (and believe) that we will generate more than £17.1million from the remaining portfolio, although predicting the timing and value of each exit is an imprecise science.
12 years after refocusing our investment activity towards early stage technology venture investing, we continue to provide follow-on capital, although on an increasingly selective basis. Of the remaining portfolio, we are bullish on the potential of Featurespace, Symetrica and Skimlinks to fulfil their commercial promise and deliver strong returns. Additionally, we are hopeful that some of our portfolio companies working on step-change technologies, for example eoSemi, Camfridge, DesignLED, Smart Surgical Appliances, CellCentric and Surface Generation will deliver commercial value from their technological promise.
Biggest realised ‘win’ – £4.9m realised from Sirigen (£1.25m invested).
Biggest money multiple return – 23x return from Cobalt Light Systems (£25k invested)
Biggest realised ‘loss’ – Gnodal £2.2m invested, £0 returned.
Some lessons /reflections:
- Hardware is hard!
We experienced several late stage and/or expensive failures in companies developing hardware for health, engineering or ICT applications, for example Cellnovo, Veryan, Gnodal, Light Blue Optics. These businesses, and others, raised significant amounts of investment to develop and commercialise innovative hardware propositions, but ultimately found that either the technology did not work to the required standard or that the market had moved on.
- Software is easier, but it’s a relentless quest for refinement and improvement.
Several of our remaining portfolio companies are software based and are starting to see strong commercial traction (including Skimlinks which was sold in May 2020 and which is not reflected in the portfolio figures above). All these companies have pivoted (i.e. changed their commercial proposition) at least once, but unlike hardware businesses, this can be done relatively cheaply and quickly. The predominance of venture capital investment into software companies is testament to the relatively easier journey such companies take to discover whether they will be a commercial success.
- It’s a long journey!
As can be evidenced from our own experiences, and that of the venture capital funds that Nesta has backed, investing in early stage technology businesses is a long and potentially financially arduous journey. Whilst our shortest ‘hold period’ (i.e. the time between first investment and an exit) is 2.5 years, the average across our portfolio is 9 years, and in the remaining portfolio, there are several companies where Nesta first invested pre-2005.
- The rewards are rewarding!
Whilst the journey may be long with an uncertain outcome, Nesta continues to provide investment to innovative companies seeking to make positive contributions to the world. The financial rewards for doing it well can be significant, but as important to Nesta are the ripple of positive effects that commercial success has on the innovation ecosystem that is seeking to positively disrupt the status quo.
In the next blog, I will cover Nesta’s investment experiences from becoming a charitable foundation in 2012, since when all new investments have been viewed through the additional lens of their contribution (or ‘impact’) to specific social outcomes.