When it comes to investment, big is not always beautiful. Sue Whitbread talks to Barry Downes, Chief Investment Officer at Sure Ventures and finds a nimble, specialist investor ideally placed to capitalise on some of the most exciting growth prospects available today
SW: Barry, can we start by looking at what exactly is Sure Ventures? It would be helpful to understand the background to it and the history of the investment trust.
BD: Sure Ventures is a fund that invests in software companies. In particular, we focus on three key areas. These are augmented reality (AR) and virtual reality (VR), the internet of things (IoT) and emerging areas of fintech.
The trust was listed on the London Stock Exchange in January 2018. This is part of a larger strategy, with the trust being a feeder fund to a private venture capital fund called Suir Valley Ventures.
Sure Ventures provides access to this exciting sector for public market investors – in particular for IFAs and wealth managers. That’s exactly why we listed it. We have this fantastic venture capital strategy but normally it is only available to governments and institutions that invest privately. That needed to change.
SW: What’s your underlying investment approach/process to stock identification and selection?
BD: Sure Ventures’ investment strategy and offering provides easy investor access to a broad portfolio of vetted, high growth companies. I think it’s important for advisers to understand our high level strategy for investing. We invest at an early stage of a company’s development. We typically aim to be their first institutional investor, a stage that is often referred to as “seed” or “series A” venture capital investment. Typically, we only invest in a business when we can see that there is a team in place which has brought their product into the market with some initial market validation. This way we’re not taking any product risk or market validation risk. We’re coming in at a later stage and taking the execution risk – scaling up the company, which we do through a number of rounds.
Our typical investment size is £500,000 to £1m – with a typical round size up to £3m as we will work with coinvestors in the round. Over the first 24 months we’re looking to take the company from that initial market validation to ensure that it builds a very repeatable sales proposition with good early revenues. Then we will follow on with other investors with additional capital after the 24-month period – subject to things going well of course. Our aim is to help to scale the company to become a large company. The benefit
Typically we invest in just 1 out of 120 businesses that we meet
of this strategy is that we can get in at very attractive valuations – of between £2m and £6m on average. As these companies progress, we know that software companies can become very large. They can either exit through a trade sale or do an IPO – we expect substantial returns from our individual companies and are targeting an internal rate of return (IRR) of 30% across the portfolio.
For the past two years our broad strategy has led us to make nine investments, with two more likely to be announced very shortly. Primarily our investments to date have been in the VR/AR/IoT sectors.
Typically we invest in just 1 out of 120 businesses that we meet. We have a very proactive origination programme primarily across the UK and Ireland. But also, as we’re a specialist investor we get quality referrals from other sources and high quality inbound approaches too.
So what are we looking for in a business? For us to invest in a company we start with the end in mind.
We won’t invest unless we believe it’s going to have an incredible impact on industry and could end up being a category leader valued up to £1bn. This impact is over the medium term so we look ahead to around 5 years in the future. At the point at which we invest we have to see that this potential in the business exists. We’re also looking to see if it has a team that can do
For us to invest in a company we start with the end in mind. We won’t invest unless we believe it’s going to have an incredible impact on industry and could end up being a category leader valued up to £1bn
it and it has a product which is ground-breaking in some way as well as whether it is properly protected by patents. Also, we want to know the company has a team which can get this out to the market and that they have already proven this. For example, can we talk to their customers?
SW: It’s clear that effective due diligence is crucial to successful investing in such sectors. What does that process look like at Sure?
BD: Our approach is orientated around doing increasing levels of diligence as we go through the process. When we first meet a company we do a very quick screen to check that the business is operating in our business area and whether it has attractive opportunities. We review ten different factors at this stage. If the business does not pass this stage, we are out, and confirm this to the business at this point. If it does pass, we proceed to the next stage where we do a deeper dive. Here we consider 82 different factors. Again if the company fails on any of those we cease our interest. However, if it passes then we proceed to the stage where we consider around 250 factors in the due diligence while we are putting together the investment documents for the company. It’s a progressive approach which works very well.
The reason we do it this way is that we want to be respectful to the companies we pass on as well as the companies we ultimately invest in. We are proud of our reputation and determined to maintain it. This is a timely business and so we only ask for very detailed information as we get further in. It’s a far more cost effective approach which maximises the use of everyone’s time. It’s very comprehensive due diligence but it is staged to maximise the results from the overall process.
Another important point for advisers to understand is that we are active investors in these businesses – we help them to grow. As well as providing capital investment, we go on the Board of the business bringing our knowledge and our network to support their growth. This pays dividends in helping the companies towards IPO or helping them to get to private rounds where they grow too.
SW: What makes the trust different to other investments in this sector?
BD: It’s important to clarify that Sure Ventures is an investment trust which invests in this sector and not a Venture Capital Trust by definition. VCTs carry tax breaks for a five-year hold period and have certain constraints too. The investment trust structure is also tax efficient but in a different way. It gives us more flexibility. With a VCT or EIS fund all the companies have to be EIS qualifying. For us, the investment strategy allows us to consider investing outside the UK should we so wish. Our primary focus will continue to be on looking at companies in the UK and Ireland. We have people based in London, Cambridge and Dublin. The fund has the capability to co-invest too – to take a larger percentage of a particular deal – as long as it’s in our sector.
We are engaged in a rolling placement programme for the fund with new capital raising every quarter. Our goal is to grow the fund incrementally up to the authorised capital limit of £50m. We will be accelerating fund raising as we accelerate deal flow over the next few years. We’ve just announced three new deals which are exciting and there are plenty more in store.
SW: How can advisers use the trust within client portfolios?
BD: Sure Ventures can form part of a portfolio which is looking for attractive capital growth prospects. Of course, as we’re looking at higher return strategies then we have to accept that there is the potential for higher underlying risk. It’s the part of a client’s portfolio that has the potential to really boost the return of their overall portfolio.
We appreciate that advisers will be seeking to maximise the overall returns for their clients’ portfolios whilst minimising risk. Bearing this in mind, why might they consider Sure Ventures? Risk takes many forms. By building a properly diversified portfolio, clients can benefit from exposure to many different sectors, asset classes and geographical regions that the complementary nature of holding so many diverse underlying investment will work to reduce certain elements of risk. The stage and point at which we invest are hard for advisers to duplicate elsewhere in their clients’ portfolios. This brings the potential for growth to investors, where many of the companies we invest in won’t come to the public market. Most should result in a trade sale four or five years after we invest in them. It’s an area that advisers and their clients rarely get access to, but they can do through our fund. The AR/VR areas are expected to grow by some 100% CAGR over the next five years. IoT and fintech are also rapidly growing markets. The companies we invest in will all benefit from this positive tailwind of growth in their markets.
We appreciate that advisers will be seeking to maximise the overall returns for their clients’ portfolios whilst minimising risk
SW: How do you keep advisers and investors up to date with progress and opportunities?
BD: We are really keen to build relationships with advisers, paraplanners and wealth managers to help them to understand the opportunities we can open up for their clients’ investments. It’s a natural fit for us. We have built a very active investor relations team at Shard Capital and a team that looks after investors in Sure Ventures. As part of this we produce quarterly pdates to provide the latest news on the sectors and portfolios and updates but also invite investors – and advisers – to visit our City office in London to see demonstrations of the technology in action. It’s really powerful stuff. When you see it for yourself, it really is very compelling.
SW: Where are you seeing the biggest areas of opportunities for growth?
BD: If we look at the AR/VR sector, there are very different opportunities emerging in each. Within AR, we are finding two types of opportunity. The first is AR through mobile phone which tends to be around games, e-commerce and advertising. AR advertising is going to be a very large area on your phone in future.
The second type of AR opportunity is in AR Smart Glass technology – where you can see things through your glasses. That ultimately will impact in the consumer space in a few years’ time however there are currently big opportunities in industrial applications. There was an interesting report recently from Cap Gemini which shows it can deliver big productivity gains in different sectors – for example in aerospace. The classic example here is that technicians are wearing these Smart glasses when maintaining a piece of equipment so they can see the steps to perform and key information about the engine that is needed. It has very wide application in health and safety too. Another example that shows a very concrete application of AR Technology is Porsche dealerships using it to help them to service cars more efficiently.
The big area of opportunity in AR is in the mobile side, and it relates to advertising on most major platforms for eg. websites/apps. If you consider an advert for trainers for example, these new adverts using the technology allow you to push a button so you can see the trainer in augmented reality. What that means is you can actually to see what it looks like on your foot! It’s very powerful. Readers may have seen some examples which IKEA did using AR for furniture in this way, allowing the viewer to see it from all angles. Another one was Coca Cola, who used it to sell cabinets for the drinks to retailers. Overall there are so many opportunities but I think it’s in advertising that its biggest impact will be seen.
In the Internet of Things space, what we find is that sensors and software are being brought together to create productivity benefits in a variety of sectors – agriculture, industry 4.0, smart homes eg Nest.
IoT is an umbrella term but it is important to see which sectors are within it. We’re seeing big opportunities as it rolls out in a variety of industries. You can see examples on Amazon.com of a fully automated robot warehouse. This is more a proof of concept – for Amazon, it will take some time to roll that out. The vast majority of warehouses are run in the traditional way so a company we’re investing in which builds software and sensors will mean that we are one step on the road to fully autonomous warehouse. It may be the size of 10 football fields. They use sensors and software to automate the whole white goods tracking process and tracking within the warehouse, giving substantial productivity gains overall.
Up until now, IoT has been just generic platform development but now we’re starting to see real business applications giving companies real business traction and growth. This is an area we are very focused on and excited about.
In the fintech sector, we’re starting to focus on the use of artificial intelligence (AI) on finance and finance activities. We’ve have a number of such deals in our pipeline. It’s an area which can have a very big impact on financial services and we hope to announce some of those deals in early 2019.
A common theme through all of our areas is the impact of artificial intelligence. For example, in the AR/VR space we announced a deal last month with Artomatix. This automates a lot of the content creation processes used in animated movies, video games etc. Effectively you’re removing some of the drudgery involved in the process thereby reducing the costs of production by up to 85%. This is a classic example as it’s not about technology replacing people and jobs, because this is a sector where there are not enough people available and AI is needed to allow the sector to grow. These are great companies and it’s a real joy to do this kind of work.
A common theme through all of our areas is the impact of artificial intelligence
SW: How profitable are these businesses as investments?
BD: Of the four companies we invested in last year, two have already gone to IPO showing us substantial gains. One has a term sheet on the table for the next round – which will produce strong gains. The fourth is expected to do its next round in Q1 next year. These businesses have done very well for us and for our underlying investors.
The first company we invested in was Immersive VR education. This went through IPO to list on AIM back in March. We maintained our shares in the company and are showing an 8 times unrealised gain on our original holding. This just shows that if you can get in early as an investor in the right business helping to make it a success, even at the next round you can still make substantial amounts of money.
SW: What are the future plans for the trust?
BD: We have nine portfolio companies already announced with two more expected before Christmas. We would expect this to total 20 companies by this time next year and then reach 30 by this time in 2020.
We’re investing in new companies over the next two years. By 2020 we will also have some company sales (exits) under our belts. The focus will be to maintain a portfolio of around 30 high growth companies, selling some and bringing some new ones in too.
These areas for investment all offer high growth potential over the next five years. We are seeing some trends already on AR and AI. Even though the sectors will be the same, I think you’ll see more and more AI in the AR/VR/IoT/fintech deals we are doing.
In terms of our capital raising plans for the fund, we will continue to raise capital quarterly to continue to invest in these deals. We’ll probably start to see the odd deal outside the UK /Ireland next year too but our primary focus will remain on the UK and Ireland where we continue to see excellent prospects for continued growth and expansion for our investors for many years to come.
About Barry Downes
Barry Downes is CIO of Sure Ventures PLC, Managing Partner of Sure Valley Ventures and also Chairman of TSSG (previous CEO), a leading technology Research Institute, Incubator and Accelerator which has raised over €90 million to date. Previously, he was Founder of FeedHenry, which was acquired in 2014 for $82M by RedHat Inc. and also a Partner in SVG Global Inc. a leading Silicon Valley accelerator, VC and technology consulting firm. Barry was a co-founder of Phoenix Technology Group a high-growth Fintech company and Software Development Manager at Infinium Inc. in Hyannis, Massachusetts. Barry holds an MBA from Smurfit Business School UCD, a BSc in Applied Computing from WIT and has executive education qualifications from Haas School of Business at the University of California Berkeley (in VC) and also Harvard Law School. Barry was recently named one of the top Irish software superstars by Silicon Republic and he won the Enterprise Ireland ICT Commercialisation Award in 2007 and the Irish Software Association (ISA) Outstanding Achievement Award in 2014.