01/02/2012

By Modwenna Rees-Mogg, AngelNews

In last year’s Enterprise Investment Scheme issue of Making Life Richer magazine, we introduced you to the team at Highgate. Some of you may have had a chance to catch up with them again at November’s VCT and EIS Investor Forum, but for those of you who did not, we thought it might be a good idea to let you know how they are getting on.

Highgate’s underlying track record of tech success

If you recollect Andrew Muir and his colleagues Ken Nelson and Henk Niewenhuisen have a long track record of investment and entrepreneurial success in the Technology, Media and Telecommunications (TMT) space; they are in the gang of investors we now call super angels. Based on their experiences and after discovering that many private investors were reluctant to invest in the really exciting, but really risky TMT space because they felt they didn’t understand it, they set up a business to manage money for investors in this area via the EIS Fund route. So far they have set up 2 funds under the Highgate Tech Fund banner and are currently out on the road fundraising for the second fund in the run up to the end of this tax year.

You cannot but like Andrew and his team. They think strategically and outside the box. A good example of their approach is the fact that they did not like the typical fund management fee model that operates in UK VC. And having decided to do something different they not only got on with it but even came up with a new name for it.

The 100%/100% rule

So instead of management fees, they have their 100%/100% rule! As they say on their website.

“Investors are not charged any fees whatsoever. This unique advantage allows investors to enjoy 100% of EIS tax benefits and to have 100% of their investment actually put to work earning returns.”

When I caught up with Andrew he was dashing between meetings with potential investors in his fund, whilst managing an ever increasing tide of tech entrepreneurs approaching him in the hope that when the fund closes, he will be putting them to the head of the queue for some money.

“Cash is scarce; entrepreneurship is thriving”

“This is the TMT market in six words, Modwenna. Cash is scarce, entrepreneurship is thriving," he told me, specifically referring to Highgate’s sweet spot of £500k-£1.5m.

“The companies we are talking to have typically received and used up their sub-£500,000 friends and family round, have a product and some sales, but need money to push forward. The founding team usually has no idea what they don’t know, especially in terms of rolling out a profitable business model on a global scale. They are talking to us because as well as money we offer to share our experience with them and help them get to the next stage.

“Why do we wade in with bare feet? Well it’s because it’s far cheaper for us to provide strategic and practical advice, than the company to hire expensive strangers to tell them what we already know; saving investment monies so they can be used for even more expansion. We also think our close involvement also de-risks the proposition from an investment perspective. Because we do not really make any money until the exit, we obviously have a vested interest in preventing failure and making investments into a real success.”

I challenged Andrew about this issue of market failure:

"Did you see that at the end of the year the Office of National Statistics reported that the UK had suffered it’s highest ever number of business deaths in one year? 1,170 every single working day last year!"

It’s the British disease

The British disease is still thriving — great ideas and a spirit of entrepreneurialism which encourages people to have a go at starting a business, but there is a failure in the availability of capital and management resources at the start of the growth phase.”

It is clear that the Highgate team is going to change that dynamic in the TMT sector, if nowhere else. And thank goodness. Andrew is absolutely right and many entrepreneurs whether still running a business or having sold out will raise a cheer for what he is saying.

Talking about the state of the EIS fundraising market Andrew told me that it ever more competitive and that funds are getting ever more sophisticated at their marketing techniques. He says the one message that investors have begun to spot is that EIS funds don’t work simply as a tax dodge. There is a real appetite for proper VC funds which happen to be eligible for EIS. This change of emphasis has been relatively recent, but it is definitely taking off across the market and regardless of the investment strategies different fund managers are adopting.

Companies fail because they do not keep up with technology

Andrew told me he is happy that some large businesses fail. He refers to tired formats such as Woolworths and Peacocks. “Failure of businesses always gives someone else a chance to do it better. And many established businesses have quite simply failed to keep up with the changes in technology, so they lose the competitive edge technology can give them.” He also likes the Coalition’s approach to business especially entrepreneurship. “The more we can encourage people to start tech businesses the better chance we have on a global stage.”

But Highgate will not be getting involved in Seed EIS. “The ticket size is not in our sweet spot as fund managers, although I might use it to invest on my account, at some point.”

The numbers man

You can see why people like to know Andrew. He is a man with statistics at his fingertips. As we chatted he reeled off figures — 1 in 20 people employed in the UK in TMT businesses (that’s 1.5m); the sector is due to grow to £81bn in 2012 with a further £50bn boost to the economy expected from it thereafter; the IT sector is growing at 5% a year; other tech sectors are growing at 30% or more. Every number plays to what we all know instinctively — that the knowledge industry is the largest and, arguably, the most important, on the planet.

Transparency is the name of the game

The Highgate team is keen to showcase its portfolio. It sent one, iVoucher (Britain’s answer to Groupon, but better), along to our Investor Forum, for example. It is keen on the open day approach as a marketing tool — regularly inviting IFAs and existing and potential investors to meet with the entrepreneurs at the Highgate offices, where many of them are being incubated at desks right alongside Andrew, Ken and Henk. Andrew told me that he is delighted that Allenbridge is very engaged with what they are doing and will be writing up independent research on the Highgate Tech Fund 2. Transparency is the name of the game, especially if you have nothing to hide.

As a small team, Highgate team is always focusing on making sure that people play to their strengths. “As well as “the boys” we have Susan (Philips) who manages us from a regulatory perspective and is invaluable in terms of overall strategy. She is working on Fund 3, which will open on 6th April 2012, for example. Emma (Chablo) is a wonder at technology marketing. We just need to bring her the products and services to sell. And Ken, Henk and I are pretty good at spotting new trends, helping companies to ride the wave, and knowing when to get out too. I like to think we are small but perfectly formed.”

What others don’t know - EIS really works best at exit, not entry

Everywhere I go people are talking about EIS, though few really understand what Andrew clearly does. That the real opportunity is not in getting a tax break on the money as it goes in; that’s small beer. The big win will come in getting stellar returns on exit and, as he points out, the sector which has the best track record of achieving this for investors in recent years is TMT. And the trick to winning in this sector where along with the big wins can come big and rapid losses, the trick is to hang out with the people who can spot the former and avoid or prevent the latter.

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