Cambridge Enterprise eyes possibility of £30m late-stage investment fund
Cambridge Enterprise is considering setting up a major late stage investment fund to take a full and active role in venture capital rounds of Cambridge University spin-outs, but not before it can close its £5m alumni led Discovery Fund.
Anne Dobrée, the new head of seed funds at the university's technology transfer business Cambridge Enterprise, says a late stage fund of around £30m raised from endowments would allow it to make important follow-on investments, prevent its early financial support from becoming overly diluted and could land it with valuable preference shares.
By only participating in seed funding, Dobrée says Cambridge Enterprise is getting squeezed out at the later stages of deals and is also unable to provide important support.
A larger fund would also allow the company to take up preference shares. Preference shares often provide first right to proceeds from an eventual sale and a second payout when the remainder of the money is shared between lower preference and ordinary shareholders.
“When you go on to series venture rounds, not only do we have a diluted percentage, we don't have the top preference share rights” said Dobrée.
“If you have multiple rounds you can be up to preference E who get paid before preference D who get paid before preference C, etc., and there may not be much left b the time you get to the bottom of the preference stack, so we suffer doubly for not following.”
Dobrée says the fund would need to be around £30m to be able to follow-on and make the initiative worthwhile. However, such a fund would only be considered once the Discovery Fund is wrapped up: “The idea has always been at back of our mind, but there’s no point in a follow on if we do not have the first fund.”
Launched in the 2007/2008 academic year as part of the build up to the University's 800 year anniversary celebrations, the idea behind the Discovery Fund was to appeal to the philanthropic nature of Cambridge alumni with a new investment vehicle for proof of concept, pre-licence, pre-seed and seed investment.
So far though, it has raised £1.5m of its £5m target and with most of the money from across its three funds already invested (the other two are the £2.5m University Venture Fund and the £4m University Challenge Fund), Cambridge Enterprise only has between £1m and £2m left to invest, a situation Dobrée, who has just taken over from newly retired Dr Geraldine Rodgers, is eager to address.
"My main priority is the Discovery Fund, it had a good initial push and we're going to start a second push to raise the £3.5m we still need."
Cambridge Enterprise says its evergreen funds have proved good value for money. By the middle of 2009, companies from all three had raised over £600m in grants and follow-on funding, leveraging the original investment by a factor of 75.
An impressive figure for the companies, though flattered by the immense financing skills of Plastic Logic, which accounts for half this figure alone (and would be higher if it included the Rusnano investment).
A closed Discovery Fund would give Cambridge Enterprise £12m of funds under management, but even that is too restrictive when considering helping its companies through the later stage of investments. One option is
"While we always have some money in the pot, we are always having to watch our pennies so we want to increase that to help put more cash into companies and to follow on better,” said Dobrée.
This is where the later stage model could help. “It would be good to have a bigger fund like Imperial Innovation and their model is interesting, but it is not quite something we could do here," says Dobrée, referring to the fact that Imperial Innovations has a number of outside investors in its funds.
"Follow on funding would be really easy to with a fund of external investors, but that does not do anything for the university, it just helps the investors.
Instead, her preferred model would be something similar to Old College Capital, the venture investment arm for the University of Edinburgh which only launched this year and uses university endowment to back startups and early to mid-stage companies.
Dobrée says irrelevant of the new fund, Cambridge Enterprise’s work is critical, particularly in the current climate. ”Without our funding, which is almost pre-seed, most technology would not be able to cross from the laboratory to a company.
"Local angels are brilliant - the Marshall fund (Martlet) is interesting and I think that will be very useful when looking for co-investors - but it’s still very hard to find support for some of ours, which tend to be different propositions to outside university. They tend to be technology heavy, like CDT, Plastic Logic, or CamSemi where there’s a lot of development work to do.”
Dobrée will also continue to work at encouragin the venture capitalists, something Cambridge Enterprise has been doing for several years.
"We play quite an active role with VCs and have a venture partners programme where we regularly get 20-30 VCs. While VC has dried up to some extent and had to get VC funding are funds yet as you see from our figures, can raise follow on.”
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