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Driving the Venture Capital Message

Neil Martin talks to Matt Penneycard, manager of Downing’s forthcoming Growth 4 Venture Capital fund


penneycardInvesting in the high risk tech sector can be a lonely business, which perhaps explains why venture capitalist Matt Penneycard has come in from the cold and joined forces with London based firm Downing.

A hardened venture capitalist who spent five years at the sharp end of the technology sector in New York, Penneycard is starting a series of funds based on high risk, high return tech stocks within a new part of Downing. Called Downing Ventures, it will target the early-stage technology sector, and Penneycard hopes to raise around £15 million for the first fund by the end of this year.

Penneycard explains that his reasons for joining the firm just a month ago were to get together with a group of likeminded individuals with whom he could share the investment decisions. “I didn’t
really like making investment decisions in a vacuum, just one guy. You can get stuff wrong easily, and that’s the beauty with being part of a team. It’s better.”

A Different Process

Penneycard says it was his own decision to go out and find a partner. And that, after meeting a number of City firms, he had opted for Downing. “Downing ported me in, together with my investment strategy, my pipeline of deals, and the way I invest in this sector, and rebranded me as Downing Ventures.” That, and the fact that he had previously worked with Downing’s own Head of Investments, Chris Allner, at Octopus for three years and knew him to be a successful VC in his own right.

“I now get the best of both worlds, in that I get to run the business but I also get the support, I get all the back office, and the clients, and the accounting. Now, when I want to do a deal, I take it through an investment committee instead of writing the cheque on my own judgement. Having to persuade or explain investment opportunities to a group of our partners gives a discipline that I like.”

“I always wanted to invest with other people, so I know most of the VCs and a lot of the angels. I’d rather have three smart brains than one brain looking at an investment. If I’m looking at something, it will be pretty unusual for me not to call up someone I know who knows them.”

EIS Focus

Downing for its part has been in business for 28 years, but this is the firm’s first foray into the high risk, high return space. “Until now, it has managed lower risk, lower return assets,” says Penneycard. “They have engaged me to run a venture capital fund that invests in high risk high return investments.”

Downing Growth 4, the firm’s first fund to contain the higher risk situations, will invest in EIS and seed EIS qualified companies within the UK tech sector. Individual investments will range from £100,000 to £1m. The fund will focus on very fast growth situations which are, as Penneycard admits, at the risky end of the sector.

But then, Penneycard is no stranger to such situations, having spent most of his career working in the private business equity sector. Starting at investment company Octopus in 2002 and then moving to Hermes Private Equity, he eventually went to the US in 2009, where he co-founded a Venture Capital Company called DTI Capital in 2010. Upon the success of that company, he became an angel investor in the tech sector, investing in both UK and US companies.

‘Very Pregnant’

There was no point in ducking the inevitable question about Penneycard’s own track record with his own investments in the States. “I have had successes, yes,” he says, “but I haven’t had a full exit yet. For example, one of those investments is written up over ten times. We haven’t sold the company yet, but our investment is worth more than ten times. So you could say I’ve got a portfolio which is very pregnant, but I haven’t given birth to anything yet.”

Penneycard says he will contemplate pure seed deals, as well as larger deals. He cites the example of Downing’s joint venture with Ploughshare, which manages the commercial licensing to industry of defence technology developed by the Defence Science & Technology Lab. This is part of the MOD at Porton Down, and Penneycard and his team are the organisation’s venture capital partner – meaning they get first shot at any intellectual property which comes out of Porton Down that has no military application.

Small Is Beautiful

Asked if he’s worried that the high-risk sector is a hard place to be, he says that actually it’s the late-stage venture rounds that make tech VCs sweat. “That’s the rounds where the pre-money valuations are at least 100 million. If you look at the private markets where companies like Uber, or Dropbox are situated; these big tech companies are still private assets, and require a lot of capital to really scale. If you’re raising more than 20 million dollars there, I personally find that quite a scary place to be from a valuations perspective.”

“But where I’m investing, the seed deals we’re investing in are typically 100,000 to 150,000. And we’re using a pre-money valuation of about five or six hundred thousand, so we feel comfortable there.”

Transatlantic Attitude Gap

We touch on the main difference between being a tech investor in the US, as opposed to the UK. In the States, he says, it’s part of the culture and most investors want a share of the pie. Even Penneycard’s US dentist had a tech portfolio, he says. And what’s more, failure is seen as a badge of honour over there, rather than the stigma that gets attached to people who have failed in the UK. Investors in the US worry mostly about what they’ll miss out on, rather than worrying about the decision to invest.

Will UK Advisers Like It?

But how will IFAs react to being presented with this high-risk, high return fund from Downing? And in the post RDR environment, too? “Well,” he laughs, “that’s part of the due diligence I did on Downing before I started to bring my life over here.”

“I said to them, you’ve raised money for lower risk assets in the past, but how likely are we to raise £10m, £15m for this strategy? The very strong sort of steer I got is that the IFAs are continually asking the business development managers at Downing: “When are you going to bring us high risk, high return products.”

“It does seem that there is an appetite for say five per cent of the portfolio to have some exposure to things which may return you significant multiples of money.”

Skin In The Game

Penneycard and the partners at Downing have all agreed to invest significant personal amounts into the fund. “It’s a bit suck and see,” he agrees, “because although Downing has been around a long time, its their first real foray into a high risk growth fund. There is a track record there, but this is the first time they have actually recruited somebody to lead the effort and invest exclusively in this sector.”

He continues: “I presented the fund to the whole salesforce some weeks ago and they were all really excited, and couldn’t wait to get the materials out to their IFAs.”

Part of this excitement is driven by some of the valuations that tech companies are currently achieving. As Penneycard points out: “People see Facebook paying $19bn for WhatsApp and they want to know what’s going on there.”

However, as he points out, he has to manage expectations. “These are high risk, high return assets, and we expect a percentage of the portfolio to fail completely – that’s the nature of investing in start-ups, after all. So that’s why you have to have a large portfolio, and spread that across several different companies.”

From Roadshows To Signing On The Line

Once Penneycard has finished his IFA roadshows, he will be joining the firm’s regional BDMs and meeting professional advisers around the UK. And although he thinks he’s pushing at an open door – because IFAs are undoubtedly receptive to higher risk situations – he knows he’ll still have his work cut out to get them to sign on the dotted line.

But this might just be a case of the right man at the right time. Okay, the UK can’t compete yet with the likes of Palo Alto, but if Penneycard and others like him have their way, it’s not going to be behind for long.

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