Part Two: Scaling up
It’s a strategy that has served them well, attracting a savvy investor following and one that they wish to take to the next level with their first formal EIS fund. GBI City Editor Neil Martin talks to Managing Director Matthew O’Kane about the approach they will take with their Scale-Up EIS Fund.
We’ve already heard how the fund its EIS Scale-Up Fund has been launched to address a large gap in the market by providing investors with access to exciting, but curated UK entrepreneur-led private companies.
The fund has a comparatively broad focus with an exciting spread of health, EdTech, FinTech, AdTech, internet of things, medical devices, university spin-outs, media-tech, healthy drinks, HR tech, healthy food and data SaaS companies.
Current Nexus Investment Ventures portfolio companies include KnowledgeMotion (boclips), Perfect World, Digi.me, Soupologie and Benivo.
Deal by deal basis
The team has raised over £7m from co-investors over the past four to five years, on a deal by deal basis. The new fund has defined boundaries. And the right level of investment, in the team’s eyes, is £10m.
Matthew explains: “Putting a target cap on our new fund of £10m feels the right level to refer to. We believe that we are able to deploy £10m of funds within our target timeframe of 12-24 months into businesses which we believe will perform well, without being in the position of some other EIS and particularly VCTs who are struggling with finding suitable opportunities for the large piles of cash they are sitting on.”
What’s more, as Matthew continues: “Our position is supported by our historical performance and based on the deal flow we are currently sourcing. We believe 8-10+ investments are appropriate as any less would not provide sufficient diversification to reduce the risk of any one company not performing while any more would see the amounts invested potentially fall into quantums where neither sufficient fuel is provide nor value add created.
“We believe that investing between £150,000 to £1m, if necessary on a phased basis, into each specific company, will provide it sufficient runaway to reach a point that it will be attractive to larger funds and institutions, ultimately enabling us to exit and obtain a return.”
As to why the data, digital, education and health sectors are so attractive, Matthew is clear: “The Fund is focussing on what we believe to be four of the most exciting areas of challenge, change and opportunity in the world today and tomorrow. Sectors in which the UK can become global leaders. Not only are these large markets in their own right they have also been shown to be growing strongly.”
And what would happen if opportunity falls outside of those four key areas – would the team still make an investment?
“It is very likely they will not be attractive to us, and by extension, to our investors. It is important to focus on areas we profess to understand, and where our investors would like to be invested.
I move on to ask Matthew, as to how he reconciles the fact that the Government is moving away from safe harbours, yet a key aim of the firm is to reduce investor risk?
Matthew is not phased by the question: “We mean reduce investors risk in the light of the moves away from safe-harbours. By focussing on traditional sound investment attributes, rather than relying on the tax advantage of EIS structuring. So following the introduction of the Risk-To-Capital condition, diversification, active involvement, track-record, a focus on scalable opportunities, strong industry knowledge, and backing really driven, but high-quality entrepreneurs, is the new world order if seeking out an EIS Fund.
“Our expertise and experience since 2014 is in doing all of those things well. Therefore the change in legislation has not impacted the risk profile of business in which we have sought to make our investments. Quite the opposite: the treasury’s view of where EIS should legitimately exist has moved into synch with our view and its one we’ve held for many years.”
The theory is great of course, but firms like Nexus Investments survive on being able to find the right material, the right horse to back so to speak. So, how does the team go about finding their riders and runners?
“We have developed a track record of sourcing and selecting innovative British entrepreneurs to help them to raise capital. We review a significant number of opportunities each year enabling us to be selective in our approach.”
The firm is likely to continue to source and favour investment opportunities into types of companies with one or more of the following core attributes:
- platform companies (scalable);
- knowledge-intensive companies (defensible);
- healthy food and drink companies (scalable).
Matthew continues: “Through our involvement in these sectors over the years we have established a significant network of HNW, portfolio company referrals and board member referrals. We are in the very fortunate, but hard-earned position, of seeing a high-number of very attractive opportunities consistently come to us.
“The Advisor and Manager are also sister companies to Investor Publishing – the eyes and ears of both the health investment and education investment communities in the UK and globally. This makes a positive difference when assessing the merits of potential investment opportunities, knowing who the potential competitors are, both in the UK and overseas, who may already by three steps ahead, but also in later years when assessing optimum exit opportunities and potential acquirers.”
So the next question has to be, how big is the pool in which they fish. Do you see a large numbers of companies that fit their criteria and who are ready to take the next step?
“From inception we have sourced in excess of 300 opportunities which has led to only 20 investments. The number of opportunities arising has increased over the period and we are seeing in excess of 100 opportunities a year and growing, of which a small proportion ultimately have become investments. This gives an indication of our level of diligence and review of opportunities to ensure they meet our criteria.
“Prior to the launch of the fund we have already identified a number of opportunities which meet our criteria and could be potential investment opportunities. Recently we have discussed a sports-team app, a gluten-free bread, a VR led medical device, an international art-app.
“In addition to newly originated opportunities we have the opportunity of investing in our current portfolio as the outstanding performers push on to take later investment. Despite already being well-known to Nexus, those will be subject to the investment committee approval process if they are to receive any funding from the fund in later rounds.”
The team believes that the number of opportunities will increase over time, although this will naturally be impacted with changes in the economic cycle. But, importantly, the conversion rate we believe will roughly remain consistent.
In the final part of the feature, we mine down deeper into certain aspects of the fund.
Part one can be found here and Part Three appears next Tuesday.