MF: It’s been said that a follow on fund is a way of de-risking EIS. Do you agree?
FS: I can see why investors or advisors would view a follow on fund as less risky because we will have worked with these companies for a long time and they are at a later stage. At Haatch our offering provides investors and advisors the ability to invest at the stage that they’re comfortable investing at and that creates a different return profile across each fund. A follow on fund is investing in businesses which are more mature.
MF: Sanjeev your scale up fund it slightly different because it’s generally new investments. So how do you identify them?
SG: In some cases, it is a new investment to us but sometimes it’s investments that have come from our angel network and escalated up into the fund. We look at what types of proof of concepts have they had. Then we will go away and speak with their blue chip clients the likes of say Johnson & Johnson. On the software side of things, we’re looking at how much of their revenue is recurring and how we create growth.
MF: What sort of returns are you targeting with a follow on fund and is it different from your other funds?
FS: Investing at later stage brings the perception of lower risk, as you are investing in businesses that have much more value than they do at the earliest stages. With this comes a likely higher valuation. So, our target returns are between 3 and 5x as a guide but it’s not a specific target return. Backing a company doesn’t mean that it’s still a sellout success, it’s just a different point of investment. So, for us, we want to invest at a sensible price, and we want to believe that every business we invest in can be £100 200-million business; that’s our fund philosophy.
SG: We say our fund is targeting a 3x return, but that is a target, there’s no guarantees on that side of things and that target is based on our track record. If we look at the last five or six exits that we’ve had, we’ve returned an average four point five times on each of those companies. So, in terms of the overall funds, they’re tracking at that level and the time scale for us is probably going to be between the five-to-eight-year period in that we’re looking at taking that business through several rounds and exiting at that stage through potential secondaries.
MF: Probably the most common question that I get asked about follow on funds is whether investors can be reassured that you’re not spending money bailing companies out in the portfolio?
FS: It’s a great challenge and the biggest comfort to give investors is that our follow on fund is not designed to be the sole investor in any of our Series A deals. Our process is that an external investor comes in and meets a series A round in one of our portfolio companies. So, there’s going to be a lead investor and it’s very unlikely that they are going to value a business in significant millions and not do due diligence on the business. The second point is that, companies need time and that’s what earlier stage funds are for. If a company hasn’t found product market fit by series A it is probably unlikely to find it later after it’s already had a couple of rounds of investment. So, I think there’s a different approach in a follow-on fund and no, it’s not for propping up existing portfolio companies.
SG: The good funds are looking at external validation so it’s not going to be a situation in which we’ll be able to keep a company capitalised without having external funds. When you get the external investors you want them to be doing the due diligence as they would if it was a fresh deal for them.
MF: What impact can follow on investment make?
FS: A typical portfolio company that’s performing well, that’s going out to market to raise Series A will raise at a higher valuation than the seed round. In theory, the exit at the end is at a further higher valuation. Our follow on fund is about backing the highest performing companies in our portfolio at series A. For us, it’s not about making products to fit investor’s needs. It’s about making products for investors that fit our portfolio companies’ needs. We need cash to start to scale and then we need cash to really scale and get to the next level.
MF: I have asked both of you to come along today with a company that you can talk about and where you had experience of developing them over time and with follow on funding.
FS: I think Poplar is a great example of a company that we’ve worked with right from the early stages. Poplar started life as an incubator business in an accelerator in the UK called Founders Factory as an augmented reality platform. Four years ago, augmented reality was a buzz word and not something that many people took seriously. Founded by former Google and Netflix execs, we backed them in a seed round led by an external investor, and we did a follow-on cheque from our EIS fund at 3.5x valuation increase, which for 12 months is great. That business is now scaled to a full live platform in market, with thousands of creators using the platform to create campaigns for the likes of Tik-tok, Premier League, and L’Oréal. They’re out in market, so a perfect fit for our follow-on fund. They will have an extended lead investor, and this is a hot mainstream space now after Facebook rebranded as meta.
SG: This is a company that we have been working with for probably close to two and a half years and was a spin out of Nottingham University, the technology created from PhD research. NuVision Biotherapies, created a process to be able to use the amniotic tissue from babies to create a tissue material for contact lenses and to treat eye problems. Really innovative and quite deep tech it had been going for about six or seven years when we put it out through our partnership about two years ago, and to our angel investors and did a small round for them. The investment committee now with them has deep domain knowledge within the medical tech sector and has been able to support to structure the right type of team.
MF: Thank you Fred and Sanjeev, its an exciting part of EIS the investing in young and later stage companies with great ideas and global appeal. Thank you for your insights and to GBI magazine for hosting this.
