There is a colourful handbook of venture capital innovation called Britain’s Hot Talent 2014/2015. It makes interesting bed-time reading. It’s a neat play on Britain’s Got Talent. The book, published by the British Private Equity & Venture Capital Association, profiles the 100 most inventive and exciting growing companies in the UK today.
Scotland’s investors actually punch pretty highly in this list with Pentech Ventures named for its backing of Acunu, Par Equity’s support for miiCard and PathXL, Souter Investments supporting the medical device firm Neoss, while Braveheart likes a Sheffield University spin-out called Phasefocus.
Trumping all this, Scottish Equity Partners (SEP) have investments in nine of the elite growth companies, including Aridhia, Skyscanner, Anesco, CamSemi, Smarter Grid Solutions, ip.access, Zinwave, Control Circle and Metaforic. Quite an accolade for the investment group with its offices in a Victorian townhouse in Blythswood Square in Glasgow and a London office, tucked away off Oxford Street, near the St James’ cluster of venture funders. This selection of winners is a tribute to Calum Paterson, the managing partner of SEP, and his team. Calum, a mildly-spoken judo black-belt, is someone who is not thrown easily. He measures his words to explain why SEP has been able to chart its way through
Private equity and venture capital plays a critical role in the UK economy. Over the last five years £33bn has been invested in 4,500 UK companies, creating tens of thousands of jobs. SEP is part of this economic set-up, although much of its work is now driven from the London office.
In the debate about ‘patient investor’ against vulture capitalists, Scottish Equity Partners are seen as patient investors seeking a return when the timing is right.
“We have built a leading position in the UK market and SEP is one of the largest venture capital firms in Europe. We have done that from a base in Scotland, albeit we obviously set up an office in London as well. The critical thing is we’ve managed to build our business without turning our backs on the Scottish market. Even today almost 30% of our portfolio is based in Scotland and we view that as a good thing,” explains Paterson. “We’ve achieved what we wanted to do while maintaining a very strong commitment to
It all began when Crawford Beveridge was the head of Scottish Enterprise and when Sir Ian Wood was SE’s chairman. Shortly after, Beveridge left to return to Sun Microsystems before later joining SEP as chair of its investment advisory board.
“We set the firm up in 2000 although it had taken some time to get it to the stage of being able to launch. It was essentially a start-up because although we came out of Scottish Enterprise, we really had a clean sheet of paper and pretty much started from scratch.”
“We decided that we wanted to set up an independent venture firm because we understood the funding gaps in the market at the time and the opportunities that would be open to us if we worked hard. The point I made at the time was that we had built a really strong investment team and the only way to keep it together was effectively to let it go. SEP could not have been a sustainable entity within the public sector over the longer term.”
It was time for SEP to leave the security of Scottish Enterprise’s Glasgow empire and
stand on its own feet. The team was a determined and talented group of young men and one woman who quickly infiltrated the university departments and start-ups to identify potential winners. “It’s incredible really. Nearly 15 years later and virtually all of the team are still here.
Richard Sparrow, Gary Le Sueur, Stuart Paterson and Catherine Simpson, are all still part of the SEP team. Brian Kerr has recently left the firm but is still working closely with us. Maybe having me as a colleague has made them all unemployable!”
Very soon thereafter, former colleagues Andrew Davison and David Sneddon, joined from 3i and Bridgepoint Capital respectively. Since then the team has grown steadily, with the addition of specialists such as healthcare partner Jan Rutherford, CFO Lorna Foy and Andrew Buchan as head of legal.
“It has been a fantastic team effort from the very beginning. Venture capital is a people business and in the same way our investment decisions tend to be based on the calibre of the entrepreneurs and management teams we are being asked to back. Fundamentally we want to invest in companies with the right people who have the right temperament to succeed and the right character and attributes,” he says.
The team has expanded to over 30 people with the office remaining in Blythswood Square and one in central London, where an increasing amount of investment business is undertaken. When you add in the advisory board, which includes Malcolm Thoms, former chief operating officer of Cairn Energy, David Shaw, of Bridgepoint and 3i, Walter Nimmo, who founded clinical trial business Inveresk Research, Ian Marchant, the chairman of WoodGroup PSN and former head of SSE, Brian McBride, the former head of Amazon.co.uk, Wendy Alexander, Associate Dean of the London Business School, and longest-serving member Cameron McLatchie, the chairman of BPI, the largest polythene firm producer in Europe, there is a formidible body of advice and networking. SEP is clearly in a very strong position in 2014, but there have been significant challenges along the way.
“We have had to navigate our way through some very choppy waters because the last 14 years or so have not been plain sailing on the economic front, particularly for innovative technology companies. There was the technology crash in 2000/2001 and then the more recent financial crisis. We had to stick together and work hard and carefully manage our way through all of that,” says Paterson.
After some early investments in Scotland, SEP began looking across the UK, especially to the likes of Silicon Fen and the Cambridge technology cluster.
“There are great companies in Scotland and very good deals to be done. The view that we took though was that to build SEP into a successful venture capital firm we had to broaden out and we had to go out of Scotland, in particular working across the rest of the UK. That’s what we have done.”
It has been a strategy that has literally paid dividends to those who have placed their faith and their funds with SEP.
He says that venture capital, outside of Silicon Valley, is a nascent industry that has taken its time to develop in the UK. “The Silicon Valley eco-system and its environment for creating great companies is unparalleled anywhere in the world. Venture capital over there has contributed to that but undoubtedly has also been helped enormously by it.”
“We have stuck pretty much to the UK in terms of investment focus, which accounts for 90% of our portfolio, and that is quite different to most of our competitors who have generally favoured a more multi-country model. It is based on a fundamental view that to do what we do well we have to be close to our investee companies. Our competitors in 2014 are almost entirely different from those in 2000, so perhaps the strategy we have been following hasn’t been completely daft,” he says with a disarming smile.
“I think it’s fair to say that we have been at the forefront of developing a stronger UK venture capital sector over the last 15 years or so.
Now conditions for both venture capital investors, but also for the companies that we invest in, are quite good. Much more dynamic and vibrant,” he says, adopting a more
Nevertheless, whatever kind of investment is chosen an exit is the goal and ultimately required, so that a return can be made for taking the risk.
“We are long term investors, but we eventually need a liquidity event for each company we invest in so that we can return capital to our investors. This is made very clear to all of our companies from the outset. However, instead of agitating for short-term exits, we know it takes patience to build world-class companies and it takes time for companies to fulfil their potential. Typically, five to seven years would be a holding period for us, sometimes it is more, and that is long term in the context of what we do.”
SEP has had the advantage of being patient at building long-term businesses. And in the best cases, the longer the investment holding period, the better the return on capital. “We have launched four funds, including a secondary vehicle, since establishing the firm and in total we have raised about a billion dollars for our investment activities. We don’t view fund size and even the size of our individual investments as any particularly significant measure of success. We have chosen deliberately to stick to a size of fund and underlying deal size that we think is commensurate with our market opportunity and what we are good at.”
SEP’s investors are pension funds, alternative asset managers, private family offices, some corporates and other financial institutions. “Our current primary fund, which closed at the end of 2011, was almost 90% contributed by existing investors, so that was a good endorsement. I think our investors view us positively and as doing our very best for them.”
And, back to team playing, SEP’s investment model also has to fit with the team’s skillsets and experience.
“There is a natural tendency to be drawn up the way in size. If you are successful, raising capital becomes relatively easier and more straight-forward. We have no great desire to become something else, however, and see ourselves very much as a venture capital and growth equity firm. Sticking to that places some limitations of fund size but that’s what we decided we wanted to do and the path we have gone down.”
SEP has had some incredible investment success which has propelled its reputation. There is nothing more satisfying for a growth equity fund than to point to a strong technology company that’s doing well and think: ‘Ahhh, that’s one we backed’.
“One of the most successful investments shortly after we set the firm up was the initial public offering of Wolfson Microelectronics. Our return was something like 70 times the money that we invested. But since then we have had some other notable successes such as the flotation and IPO of Cambridge Silicon Radio and the $1 billion exit of BioVex in 2011, which I think is still the largest-ever European biotech venture capital exit.”
As we meet in Glasgow, SEP is tidying up the details after its latest investment exit. “We have just realised our investment in Control Circle, a London based IT services company, the exit from which was completed at the end of January.”
In March 2010, SEP invested £6 million in Control Circle – then with a turnover of £10 million - to help support offices openings in Amsterdam, Frankfurt, and Singapore.
In January 2014, Alternative Networks bought the business for £39.4 million in cash. The company had doubled its revenues since SEP’s investment to £21.1m, making £900,000 profit.
“Exits have held up reasonably well, but the conditions more generally have definitely been improving in the last six months. We can influence exit timing to some extent because we make more investments on our own these days, rather than with larger syndicates. We prefer that because we can build close relationships with the teams and companies we invest in. We learned over time that the more control we have over our own destiny the better. That does not mean we do not co-invest, but we are very selective about who we partner with,” he explains.
SEP is sitting very happily as the largest investor in Skyscanner, alongside Sequoia Capital, one of the US’s most famous VC firms. Skyscanner is now the number one independent travel search engine in the world, and is based in Quartermile, in Edinburgh. The company has grown over 100% year on year for the last four years and has nearly 500 employees.
“Skyscanner is a truly international business. It has been a great investment for SEP. It has also been a real privilege for me to sit on the Skyscanner board during its phenomenal growth over the last few years and to work with such an incredibly talented and dynamic group of people.
“Often our investment in companies coincides with changes in their management teams, be it chief executive or other senior positions. Generally those changes have been considered, discussed and agreed before we invest.
Sometimes a founder, who has been running the company for a while might reach the point of saying I want to continue to have a great influence over what happens but I want to bring in someone with more direct management experience or experience of being a chief executive.
“Then you get others who can take their companies all the way, such as Gareth Williams who has been a fantastic success as chief executive at Skyscanner. The vision of a founder CEO can be such a powerful thing within a business. I think Skyscanner has the potential to be one of the world’s most successful web companies.”
Everyone in Scotland is excited about the prospect for Skyscanner as a global Scottish-based winner.
“It has predominately been about flights so far but the plan has been to broaden out into travel search more generally. Skyscanner is already doing hotels and car hire and there are other things that can be done over time. The company has a hub office in Singapore, an office in Beijing and the company has also set up in Miami, not forgetting Glasgow as well of course.”
“The platform it has built is a great reflection on Gareth and his co-founders but also on others who have joined the company including COO Mark Logan and CFO Shane Corstorphine, who have been tremendous additions to the team,” he says. “We feel honoured to have been involved in the company over the last few years and to have helped it on its journey.”
SEP is also a majority investor in Anesco, recently named Britain’s fastest growing private company in the Sunday Times Tech Track 100 List. The Reading-based energy services firm topped the poll.
How does SEP select its portfolio? Isn’t there a chance that they turn away a nugget, like the A&R man who turned down the Beatles?
“That’s always possible, but there’s no point in worrying about it. We have our own investment model and criteria and we have a clear understanding of the kinds of characteristics that we like to see in companies and the entrepreneurs who run them. But we clearly couldn’t and wouldn’t invest in everything we see. For venture capital to work, you have to set the quality bar at a high level, but equally that doesn’t mean the companies that we don’t invest in are not good companies or indeed that they won’t go on to achieve great things - it’s just that we have to be very disciplined, selective and have the confidence to make decisions,” he says.
“We are, I hope, still quite modest and grounded. We have never been particularly exuberant on the trumpet blowing front,” he says.
For SEP, it is about relationships. Paterson reckons the challenges associated with building great companies are tough enough without problematic dynamics with the people you are meant to be backing.
“Investment decision making is the combination of objective assessments and a lot of subjective considerations, which inevitably involves making value-judgements on the team and on the various other aspects of the businesses that we see. We are very aware that doing what we do is a privileged activity.
We try to ensure that for the people who come to us, it is a positive experience. Even if we don’t invest in them, we want them to have had some benefit from the interaction with us, and who knows, we may invest at another time,” he explains.
The SEP team comprises of people that have good investment skills, commercial judgement and those who have particular industrial or technology backgrounds, providing a blend of skills and experience. SEP’s investment committee (made up of its partners) is then the gate to get through - it’s a rigorous process.
What is the view on the economic and market outlook from the SEP hotseat?
“We are cautiously optimistic, as always! Market conditions are improving, the climate is good, and there is a much higher level of confidence. I think we are slightly conscious of valuation expectations being out of step with underlying reality and we are maybe seeing that in the IPO market too.”
Calum Paterson is a person with an equitable temperament, forged by years of tough bouts on the martial arts floor, where respect for your opponent is in-built.
“I think we need more encouragement for business generally - right across society. More confidence and more ambition. Perhaps in the past Scotland hasn’t been as strong as it might be in that regard but I think things are getting better. I am confident that Scotland can have a successful future.”
A cautious Calum Paterson says SEP is neutral about the forthcoming referendum debate, but believes all parties, whatever their political hue, must do their utmost to support enterprise in the economy.