01/02/2012

By Modwenna Rees-Mogg, AngelNews

Let’s face it, the announcement by George Osborne about the changes to the Enterprise Ivenstment Scheme (EIS) (and the introduction of Seed EIS), will open up an amazing number of opportunities for private investors. By creating capacity in the market for £1,000,000 of EIS investment per individual, the opportunity for investors to develop sophisticated portfolio investment strategies within the parameters of the Scheme itself are now possible.

Some investors will allocate the additional EIS monies they have available to invest further into angel deals. Then, at the other end of the scale, others will put even more into EIS funds and delegate the fund managers with the responsibility of delivering returns.

But what if you want the best of both worlds? We spoke to Alan Wallace of Octopus Investments about the issue as he is part of the team that manage £250million of Venture Capital funds and probably the most active private investor group in the country.

By way of background, I have known the Octopus Venture Partners team for a decade and have watched its growth with great interest over that period. In that time they have developed a significant reputation for the quality of their deal making and the high service levels they offer to investors. This is evidenced by their string of industry awards. And they have always been excellent communicators, freely sharing with me about what they have been up to. Currently the Venture Partners have some 32 investments ranging from hi tech start-ups into which they originally invested £250,000 to later stage plays in consumer sectors where the sweet spot may be £1.5-2.0m.

Alan started our conversation by explaining that the investments made between 2008 and 2015 will be vintage of all vintages in terms of the venture capital economic cycle. He told me that this is a period which will go down in history as a time where the great entrepreneurial flair of the British people re-emerged in scale. From young graduates to people leaving professional services industries mid-career, the talent pool has never been larger both for people starting businesses and those willing to join a small company and make it big, rather than just sheltering in a conventional career in a large one.

Opportunities for private investors to share in their growth plans have also never been greater. The unprecedented lack of bank lending available to SMEs, has led entrepreneurial businesses straight into the arms of business angels and venture capitalists. Meanwhile, weak economic conditions engendered by the Credit Crunch have rebalanced perceptions of business valuations, making deals easier to strike.

“These conditions, combined with the opportunity to use EIS to mitigate the financial risks mean that the opportunities for investors have never been greater,” Alan told me “but this brings new challenges in deciding which deals to do.”

“We are seeing a variety of reactions from investors. Whilst some people are taking a broadly passive approach and investing in our Eureka EIS funds, and also our VCTs as a way of diversifying their portfolios, there is also stronger interest than ever before from people looking to become a Venture Partner.”

The Octopus Venture Partners are an interesting group of people. Typically they are active private investors/angels and a common theme is that they like the value added that comes with being part of a group of like minded individuals that is also closely associated with a large, experienced professional fund management team.

They come from a wide variety of industries and have considerable experience in all areas of business from sales and marketing to finance, technology and general management. Nearly all of them have made money from building international businesses, so they bring that to the table too.

Alan told me that they find value in many different ways and at all stages of the investment process

“In terms of deal identification, they like to bring us their deals because they can sound them out with people knowing that there are considerable research resources they can access. In fact, 25% of our deal flow comes from the Venture Partners.”

“They also like the fact that the remaining 75% is typically made up of proprietary opportunities which have been brought to us because of the reputation we have built up over the years with high quality deal sources, such as corporate financiers, lawyers and accountants.”

The Venture Partners themselves also offer Octopus and each other considerable value add at the due diligence stage. In a process, which I believe is unique, once the Octopus team has prepared the investment paper, all of the Venture Partners are invited to see potential investee companies present and then have to vote the deal through or Octopus VCT and EIS Funds will not make the investment.

“They really enjoy these meetings, especially the empowerment that the voting process brings” Alan explained. “One of the reasons you become an angel is to have a chance to get involved with the management early on. That starts with seeing them present and forming your views accordingly.”

For Octopus, of course, the Venture Partners can be called upon at any time to share their expertise during the entire due diligence process, especially their industry knowledge and contacts. “For us it’s like having the boards of the entire FTSE100 and more, just a phone call away. We really value that and I am sure it is why some of our successes have been so great and that we have avoided many mistakes.”

Post investment the role of the Venture Partners continues. “We don’t just let them sit back for the ride. Around a quarter of our Venture Partners are formally involved in paid positions with the portfolio, sitting on boards and adding their industry expertise and experience to help these businesses thrive ”We call on them to sit on and or advise the boards of our portfolio companies,” said Alan.

“Most of all they like the fact that we are always alive to the exit. We have always believed that it takes 3-5 years for a company to mature into a saleable proposition and we invest accordingly. Today alone there are at least four companies in the portfolio that we could sell tomorrow. But we don’t invest just to get an exit as quickly as possible. We are always looking for the inflexion when we can decide what to do next. Exit may be one answer, but if we can turn a further £2-3m round into say £20m by investing again, we will stick with the business to achieve this.”

The cost of being a Venture Partner is £3,000 per annum. Although there is no obligation to invest, individuals probably do not get economic value from being a member unless they are investing £50,000 to £100,000 a year, intend to use it as a way to building a portfolio of 8-10 direct investments over say 3-5 years and want to get involved.

“When investors want access to our deals, but have fewer funds available or perhaps are time poor, we typically suggest that they invest directly in our Eureka EIS where the minimum investment is £25,000. Alternatively, the minimum investment into the Titan VCT 1 to 5 Top-Up is £5,000, which closes 5th April 2012, but they will still have access to exactly the same opportunities as the Venture Partners. And our VCTs and EIS Funds invest on exactly the same terms as the Venture Partners. We like to maintain this equality for all our investors, whichever route they choose to use to invest.”

Investors report that one of the best things about being a Venture Partner is the regular reports they receive post investment. This is an area where many old fashioned business angel networks have traditionally fallen down and why it pays to work with a Venture Capital investor for which this approach is second nature.

Octopus provides quarterly reviews on all portfolio companies, which include not only the facts and figures, but also the qualitative information and commentary. Twice a year each Venture Partner is sent a full update with a valuation; if something affects a portfolio company in the interim, they are informed on an ad hoc basis. Crucially they are always kept up to date on exit and merger activity.

There are currently around 100 Venture Partners, investing around £3m to 5m a year between them. Since Octopus set up the Venture Partners, they have invested around £30m in the likes of LOVEFiLM et al. Between them they have experience of 26 industries and 64% have been CEO or equivalent. Many are former entrepreneurs who have moved into investing in growing businesses.

The Venture Partners are VIPs at Octopus, but that does not mean there are impossible barriers to cross in order to become one. It is not a closed club. “What matters to us,” George Whitehead, Alan’s colleague and day to day manager of the Venture Partners said “is that an investor will get value from becoming a Venture Partner. We spend as much time as they need, before they decide whether to join, helping them make sure that it is something they are going to benefit from. As a result many of our Venture Partners stay with us for years."

Those of you who heard and met Alan Wallace at our VCT and EIS Investor Forum last November will know that he is a man of great charm and intelligence. His sense of integrity is also plain to see. And there is no doubt that he and his team have been remarkably successful investors over the years, despite staying firmly in the early stage space and remaining as a generalist investor. So I asked him about what he felt most proud.

“It’s the fact that we have invested in both Graze and Zoopla, but not quite for the reasons you may think. Your readers will probably have heard of them, even if they are not yet using them. What they may not be fully aware of is that they are two of the fastest growing companies in the UK today. And what I am pretty certain is that they have no idea about, is that both management teams emerged from the management team that built LOVEFiLM. So this is the 2nd time we have backed them and both times they have proven their great entrepreneurial talents, applying them to deliver disruptive businesses, with great customer service and experience; thousands of jobs; and creating tens of millions of real value for themselves, their management teams and their investors."

“I am proud that we backed them the first time and it looks like they will make our investors some outstanding returns. I am even prouder that our relationship was strong enough that they came back to us for funding the second time. And I am over the moon that we have been able to help them prove their credentials as serial entrepreneurs. At the end of the day, making money is only the outward manifestation of successful entrepreneurial endeavour. It’s the latter that makes me really happy. Although it would by lying to you to deny that the former also helps me to sleep well at night!”


If you wish to speak to a member of the Ventures team at Octopus about anything discussed in the article, please feel free to call them on 0207 710 2863.

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