‘Patient Capital’ and why Draper Esprit chose to IPO
Our UK-based member fund Draper Esprit will go public this month on the London (AIM) and Dublin (ESM) Stock Exchanges. The move will allow them to raise ‘permanent capital’ that they can invest into companies for the long-term, perhaps a more suitable timeframe for liquidating today’s tech investments. It will also enable wider access to these investments (“an IPO is just a very large crowdfund”), helping individual and small-cap investors reap the benefits of private companies’ growth. This is a bold move by one of our more prominent member funds, and their rationale — as copied below — is fascinating and raises important raises questions on the product-market fit of the current VC model.
From the founding team of Draper Esprit plc (originally published on TechCrunch 6/24/16):
Why IPO a venture firm? Like the entrepreneurs we support, we have always seen the world a little differently and believe that, just because there’s a way it’s always been done, it doesn’t always have to be that way. The current popular VC structure, the Limited Partnership (LP) was first used nearly 60 years ago by our very own Tim Draper’s grandfather, General William Henry Draper, who moved to Palo Alto and started the first private VC limited partnership: Draper, Gaither and Andersen.
Whilst the 5+5 year LP model has been largely unchanged since 1957, and it clearly works for many successful VC funds, there are some interesting new “patient capital” models emerging here in Europe. Europe and especially the UK lead the way globally in innovation in financial technology. From crowdfunding to currency exchange, the environment for innovation here sometimes challenges the USA and has driven the “Fintech” revolution to its recent highs. We are pleased to join a number of successful “patient capital”, non-LP VC firms already developing this new model in Europe, providing long term permanent capital to technology companies; firms such as as Imperial Innovations plc, IP Group plc, BGF Ventures, Malin plc, Eight Roads and Octopus Ventures.
Having a different view is risky. As every entrepreneur who has had that “eureka!” moment appreciates, you learn that others often don’t see things the same way immediately; many will disagree, and the pull of the status quo is formidable. Like the visionary teams we back, we are doing what feels right to us, we believe in the model and we are 100% committed.
Our motivations for evolving our VC business model were threefold and we want to share these with you.
INVESTING FOR THE LONGER TERM
First, we wanted to be able to invest for much longer in our winning companies than a typical 5+5 year LP fund allows, and to be able to build bigger stakes as companies remain private for longer periods. The pressure to show returns in Europe continues to force funds to sell out early after just a few years, and we believe the best global technology businesses take much longer to build to their maximum potential. We’ve gone public so our portfolio companies don’t have to until they are ready.
Europe has different capital markets from the US, and we are fortunate to have supportive long term shareholders including Woodford Investment Management, the Irish Strategic Investment Fund, China Huarong Asset Management, Ballie Gifford and several other city institutions and successful entrepreneurs and family offices, many of whom have active later stage and IPO investment activities. This will allow us to complement our series A and B rounds with larger growth capital rounds later. As highlighted by many respected firms such as Atomico, growth capital remains the main funding gap in Europe for technology companies. We are pleased to be able to help address this gap by bringing major equity investors into the technology VC market, who don’t typically invest in Limited Partnerships.
DEMOCRATISING VC ROUNDS
The second motivation was to further democratise funding for entrepreneurs. Draper Esprit has joined the revolution for early stage investing with our EIS angel network and our investments in crowdfunding platforms: Crowdcube, Unbound, and Seedrs. We wanted to extend this openness to all investors through series A, B and later VC rounds. At present individual investors can access seed deals through crowd platforms, but after that traditionally the VC LP model has restricted who can invest in VC LP funds. So, rounds from series A onward are often unavailable to ordinary investors, restricted to large family offices and LP focused institutions. Many exciting technology companies are not accessible for investment by individuals until their IPO or even later. Now everyone can participate in the growth of VC — backed companies from their earliest stages through series A, B and beyond in the later stages up to and including their IPO. In some ways and we love being able to open up our investments to the wider community.
LONG TERM CULTURE
Our third motivation was to add depth to our culture — to help Draper Esprit become a more permanent business, moving away from the risks of only being as good as our last fund, creating a vision for a firm that will be here in 20 years’ time or longer.
Like our best portfolio companies we can look beyond our next fund raise, and that will allow us to invest more in our business: we can invest for the long term in our people, our services; we can build our brand alongside the ever inspiring Tim Draper; we can create a deeper training programme and career path for our staff; and we can build the services provided to our portfolio via our membership in the Global Draper Venture Network, particularly global expansion, recruitment and IPO/M&A/business development support. Culture is vitally important in any business and a long-term vision will strengthen our firm and make us a better partner. After all, what better way to understand how to help entrepreneurs to build and IPO great businesses than to do it ourselves?
KICKSTARTING THE MODEL
To get started, we have transferred our existing portfolio company investments on to our balance sheet and are very excited to have such an amazing portfolio for our shareholders to invest in today. Great companies such as Trustpilot, Graze, Movidius, Sportpursuit, Conversocial and Lyst, among many others, will underpin our portfolio growth from day one. We look forward to be able to continue to work with their management teams to build these exciting global leaders for many years to come, sharing that growth with our shareholders. We appreciate short-term share price movements will be impacted by daily sentiment on the health of the technology industry or global economy, and we are prepared for that; our broad, growing portfolio will help. As Mark Andresen and Ben Horowitz found with the IPO and growth of Opsware, value ultimately comes down to building a good company over the long term, and investors recognise that. We take inspiration from the $1 billion+ market cap listed UK university IP investment firms, such as Imperial Innovations plc and IP Group plc, who have operated in these conditions for many years, and who have been credited with transforming university technology commercialisation in the UK. We hope to do the same for digital entrepreneurs, wherever in Europe we find them.
Of course, we will be actively looking to add many new entrepreneurial companies to our portfolio and we will continue to invest £500k to £30m+ in series A, B, C and beyond rounds across Europe. Our day job will remain as it has been for the last 10 years: helping to build global companies starting in Europe but with potential in the US, Asia and globally, with the aim to create global across consumer, enterprise, hardware and digital health.
We welcome our new PLC board members chaired by Karen Slatford, and our new capital markets advisors at Numis, Goodbody and Zeus, who will help us to grow further over the coming years.
Thank you for your support and sharing our adventure over the last 10 years. We hope you will join us in our next evolution as we transform our VC model in Europe, and accompany us for many years to come as a publicly listed company.
Our mission is simple: the right amount of capital as you need it, for as long as you need it, from whoever wants to invest in you at any stage.
