Cash for bright ideas
Article Date: Jan 03 2006
Growing firms in many science and technology sectors can find it tough to get funding in the current climate. GrowthBusiness finds out what sparks the interest of venture capitalists and attracts them to invest in innovative tech companies.
The UK’s private equity community is currently focusing much of its investment firepower on supporting management buyouts of established businesses, so early-stage technology firms are facing a struggle to find funding.
Fortunately, all is not lost, as tech companies can attract a plethora of venture capitalists that specialise in providing development capital to hi-tech hopefuls. Of course, hundreds of companies apply for this type of funding and only a lucky few are chosen. Venture capitalists must, therefore, carefully sort the wheat from the chaff and decide which firms are the ones to back. So, what key attributes do they look for in potential investment opportunities, and how can you encourage them to part with their cash?
Name: David Mott
Company: Oxford Capital Partners
Typical initial investment: £0.5m-£1m
Hot sectors: Mobile/wireless communication & environmental technology
Headed by father-and-son team Ted and David Mott, Oxford Capital Partners (OCP) bills itself as an investor in science and technology. The group’s strategy is to invest in funding rounds of up to £3 million, with OCP itself typically providing between £500,000 and £1 million of this, though it will go as low as £250,000 for businesses matching its investment criteria.
‘We will back a range of enterprises, from seed opportunities through to companies looking to float,’ says David Mott, ‘though most of the businesses we back are at the development stage.’ Having said that, he adds, ‘We look to support businesses at a point of inflexion and try to avoid those with long-term development work still ahead of them.’ The company’s goal is therefore to become a minority investor in businesses at the appropriate point of development, where management are left free to drive strategy itself.
OCP looks to divide its portfolio equally between three broad areas. These are IT (including software, hardware and communications), healthcare and medical, and security and environmental technologies. Advances in mobile/reless devices, as well as networks and environmental technologies, are, Mott says, ‘particularly high-profile at present’.
In fundraising terms, however, he believes times are now far tougher for those engaged in drug discovery. ‘It’s a sector the really deep-pocketed investors have moved away from and the smaller investors simply can’t fill that gap.’
In terms of what attracts OCP to a deal, he explains, ‘We always look at management because bad managers can make good technology fail. That said, we don’t have a policy of not investing in first-time management.’
One thing to bear in mind is that to secure investment from the likes of Oxford Capital Partners it is important to think long-term. ‘One of the biggest turn-offs is a team that hasn’t thought about its eventual exits,’ argues Mott, ‘as that raises all sorts of questions about management. And when a team is overpaying itself, that’s another worry. Just keep things in perspective.’
Name: Ernie Richardson
Company: MTI Partners
Typical initial investment: £1m-£5m
Hot sectors: Materials science & medical technology
To Ernie Richardson, chief executive of MTI Partners, the venture capital market has evolved considerably in recent times. ‘I think what’s interesting is that technology venture capital has a much broader emphasis today. Five years ago when people spoke about it they were only referring to software and communications. Now material science and medical technology (med-tech) are just as important.
‘We like material science in particular,’ he elaborates, a comment reflected by recent investments like antenna-maker Sarantel and Screen Technology, the producer of large-scale video displays. ‘Med-tech is also appealing. For us the emphasis is not on drug discovery, but rather the use of IT and innovative materials in monitoring systems, patient care programmes and the like.’
At the other end of the spectrum, Richardson believes that, ‘Enterprise software is one area in which it is difficult to do much at present. There are lots of companies developing systems and that makes it hard to get the deal structures right. It’s the “vanilla” customer relationship management and enterprise software systems that are particularly tough to back, and there are exits issues too.
‘The thing we emphasise is “market, market, market”. You can never find out too much about the market you are trying to address in advance [of meeting a potential investor] because you need to know who your customers will be. The most common weaknesses in business plans relate to this point.’
Like Oxford Capital Partners, MTI also tends to invest at the first round of institutional investment, although it looks to take larger stakes of between £1 and £3 million initially. This figure will often double over the course of an investment’s life.
‘We see several hundred possible deals each year, of which we might do eight,’ says Richardson. ‘But the great thing at the moment is that there are so many opportunities to choose from.’
