We were delighted to have an opportunity to catch up with Lucius Cary, Founder of Oxford Technology and to talk in detail about both the risk and the potential rewards of investments in science start-ups.
GBI MAGAZINE: We are delighted to welcome you today Lucius. For our readers benefit let’s start with the fact that you are unusual among fund managers in that you say you invest in high risk investments. Can you just talk us through that strategy?
LC: Well it is true that most fund managers say that they invest in low risk investments and the idea is to preserve people’s capital and not put it at risk. But we don’t do that, we invest in science start-ups. They are very high risk with lots of things which can and do go wrong with such investments. Sometimes the science doesn’t work out as one expects, sometimes the market turns out not to be there, sometimes you can’t sell your product or your service at a price which makes it viable as a business. But the other side of the coin is the gains, when they go well, can be enormous.
So we invest in high risk, high potential reward investments and the SEIS scheme is absolutely perfect for this activity. You get 50% of your investment back in year one against your income tax. That’s like a 50% guaranteed cash return on the investment. Then if the business fails, you get further loss relief. So the amount that you lose on an investment that doesn’t work is quite small. If you’ve got capital gains tax as well, it can be as low as 12.5% of the sum you invest. The gains on the winners, if they go well, can be enormous. We’ve had gains of 14 times and we’ve even got one potential gain, which is more than 100 times the cost of the investment. The maths says that if you do that it should show a very good return on balance. We now can demonstrate this after doing this for ten years. We started our SEIS and EIS fund in 2012 where we have made 50 investments and the returns have been very good for the investors.
GBI MAGAZINE: You started making investments in the SEIS and EIS funds in 2012. How many investments have you made and what have the returns been?
LC: We’ve made 54 investments and we’ve had four failures, which is much fewer than we expected. We’ve got 50 investments in the portfolio at the moment, and we have now had some exits. We’ve invested a total of £10.61 million. The cash back from tax returns is just under £4 million. The cash back from the proceeds of exit is about £2.25 million. There’s another £1.15 million due in cash held on escrow from an investment. One of the exits is a biotech company. We made the first £50,000 investment in 2015 and then a bit more was invested in it about, I think about 3 million in total. Then that business was sold for $400 million to a US quoted company. But that 400 million is not paid all upfront. It is £30 million upfront and then further milestone payments. The milestone payments to the fund are total about £38 or £40 million. In total, the amount of cash received back now almost equals the gross amount invested in the fund as a whole. Then there’s another £10 million invested and there’s another £28 million of value in the companies. We value our investments by the latest share price paid by an incoming investor. So if a company does badly, we write the value down. If the company does well, we don’t increase the value until somebody else is invested at a higher share price. The disadvantage of investing in a fund, apart from the initial tax you get back which you get in year one on the SEIS investments, the companies could take ten years to come to fruition or even longer and you can’t get your money out until there are exits. The other thing we do is that we are very transparent in what we do. Every quarter we produce a report and that has a page of information on each of the 50 investments in the fund. It says exactly how they’re doing so anybody who’s interested, including the people who are in the fund and shareholders, can read about the companies and how they’re getting on as these are publicly available.
GBI MAGAZINE: Can you tell us about the monthly presentations as we have heard that these have been very successful?
LC: By way of a little background, where we invest we put in up to £150,000 SEIS money at the start and then as the companies grow, if they do well, they very often need to raise additional capital. We invest money over three years so if somebody invests in our fund, we invest one third in year one in SEIS investments and then we have the money in the bank to be able to invest the same amount again, typically a year later as an EIS investment and then the same again in year three. I’ve learnt the importance of being able to support early investments with additional capital if the money is needed and the investors who don’t have the ability to do that, it often ends badly for them and they get taken out by later investors who come in and often on very bad terms. If we invest £75,000 in a business at the start, we have the ability to invest another £75,000 a year later and then another £75,000 a year after that. Often that additional money is not enough. It’s something, but the company needs more. Then what we do, the first Thursday of every month at 10:00, we hold presentations from companies who are seeking to raise additional capital. It’s by Zoom and any sophisticated investor or high net worth individual can come and listen to the pitch and invest. That’s something which a lot of our investors really like because they can hear the pitch direct from the founder. They’re probably already a small shareholder through the holding in the fund and then they can invest more capital to support the company.
So we’ve been doing this for about two and a half years and it’s very effective. We did one last month and the company was wanting to raise up to a quarter of a million and it was older than three years so we had no ability to invest in that ourselves because after three years we didn’t have the money to put in. That company raised over £500,000, which is exactly what it needs and will keep it going.
GBI MAGAZINE: Just one last question. Can you remember what sparked the idea of having these monthly presentations to help funds.
LC: Before Zoom and Covid we used to book a room in London and we would get about typically 20 investors and one or two companies would make presentations and then hopefully they’d raise some money from those investors. It’s been much better via Zoom because it is much easier for people to attend, so we get more people attending and we can have all the documentation ready so anybody who wants to consider making an investment, having listened to the presentation, can download the business plan and the shareholders agreement and an application for shares. They can also ask questions to the founders which works really well.