Three new candidates for Enterprise Capital Funds
The Department for Business, Enterprise and Regulatory Reform (DBERR), previously known as the UK government’s DTI, has announced three new candidates for its second round of Enterprise Capital Funds (ECF). On cue, as many of the previous nine regional venture capital funds (RVCF) are coming to the end of their investment life cycle and on of the first anniversary of the first ECF funds, this new announcement will boost the total number of ECF funds to eight and UK government’s commitment to ECF to £141 million. We describe more about the three ECFs, their background and provide The Chilli Perspective below.
Advertisement
Total contribution rises to £141 million
Last year the UK Government’s contribution to ECF was a £81.2m commitment of public funds to five groups to fund high growth businesses. ECFs are the UK equivalent of the US style SBIC funds, whereby every one pound of private angel or investor money is matched by £2 of government money, creating a total leverage of £3. This second round of funding will add three new groups with an extra £60 million of public funds. This brings the total government commitment to this programme to more than £141 million so far in eight ECF funds.
Six months to bed it down
Each of the three groups that have received enterprise capital fund commitment must first raise £10 million in private funds before they begin investing in SMEs and start-ups. The approval of these enterprise capital funds is subject to contract, and each group is required to raise the full amount of private capital (£10 million) within next six months.
Three new groups
Speaking at the recent launch of Enterprise Week, secretary of state for business, enterprise and regulatory reform John Hutton said, “Almost 80 percent of small businesses seeking finance obtain it on their first attempt, but a small number still face difficulties, particularly companies seeking investment to grow.”
Many people would find this kind of bold statement incredulous, were it a true reflection of what is actually happening in the real world of early stage, high growth start-up finance.
The Dawn Capital Fund first appeared in our first round, second tranche announcement last year.
It was initially featured in the first round as raising a total of £37.5 million fund which included £25 million of government funding; however the fund voluntarily withdrew from the first round and re-entered in the second series round. It is now the same size as most other ECFs at £30m. Dawn Capital has a very interesting group of industry seasoned mangers and battle hardened mentors, ranging from healthcare, media and web 2.0 to financial services software. This will strike a chord with many tech entrepreneurs.
The Dawn Capital Fund is a £30 million fund which will invest in traditional sectors where there is scope to make improvements through the use of technology.
The other two funds are MMC Ventures Limited and Oxford Technology ECF.
MMC Ventures is a £30 million fund which will be invested across the UK, targeting businesses in the healthcare, technology and financial services sectors. MMC Ventures is an experienced VC investor with a strong science base. It operates with a syndicate of angel investors who provide both strategic as well as mentor capital.
It has previously invested £30 million in 17 deals, with two profitable exits. According to Bruce McFarlane, director and founder of MMC, “We expect to close the new ECF before end of Q1 next year and we see the new ECF fund as continuation of the work we already carry out everyday. It will provide us with extra investment capacity and enable us to do more deals across different sectors and stages; however, we would prefer companies with customer traction and revenues, although we would look at pre revenue deals.”
Oxford Technology ECF is a £30 million fund operated by an established fund management team. It will operate out of Oxford targeting early stage companies in the science, engineering and technology sectors.
Oxford Technology Management (OTM) was founded by Lucuis Carey in 1983, and is well known and connected around Oxford’s technology belt. OTM is highly knowledgeable about UK early stage investments and has a very wide extensive portfolio ranging from engineering, life science, and software to computing. It also has a history of some long term investments and has produced some stellar exits as a result – for example, in November 1997, it invested £270k in Valid Information System, which exited in Oct 2006 at £2,520,255.
Formation of new single ‘Capital for Enterprise Limited’
In order to group together the numerous, sometimes confusing, publicly funded and supported schemes, Mr. Hutton also announced the creation of ‘Capital for Enterprise Limited’, which will manage the ECF and other government funds from 1 April 2008. Capital for Enterprise will be managed by an independent board, chaired by David Quysner (current chair of the advisory capital for enterprise board) and accountable to the secretary of state.
The new body will take charge of a number of current government programmes including UK high technology fund, regional venture capital funds, early growth funds, small firms loan guarantee scheme, and now the enterprise capital fund.
David Quysner said, “These new funds will be positive additions to the ECF portfolio. They demonstrate that the model is attractive to good quality fund managers and, just as importantly, to the private investors willing to back them. These funds will target the equity gap, making investments in small, innovative companies that can produce good returns but which would otherwise struggle to get funded.”
The Chilli perspective
The Chilli has been championing and campaigning for such publicly leveraged funds since 2002, after seeing the success of this model in the US market via the SBIC backed funds. We are very pleased with the progress so far, albeit with a few reservations, naturally. On the first anniversary of the ECF fund, we will be publishing a more in depth report on how ECF is faring so far, and its impact on early stage capital access – with the usual perspective and analysis in the coming weeks.
The current limit to help SMEs with high growth potential with equity finance up to £2 million may limit the type of sectors that can benefit from such a low threshold; but it is expected that each of the ECF funds will co-syndicate with other specialist sector or regional VC funds in order to increase the total overall capacity of funding for SMEs beyond the ECF pool and hence the amount invested in each individual deal.
The other aspect, which must be solved soon, is that most government backed funds are very poor at marketing themselves outside their immediate circle of contacts. They must be encouraged to do more than just pretty websites and reach out to a much diverse community of entrepreneurs and management teams, who should also be the target of these publicly supported funds.
Many of them are getting confused with a whole plethora of funds under different schemes and acronyms. From HTF, UCF, EGF, RVCF, SFLG and now ECF, the new Capital for Enterprise Limited must ensure that each of the different fund managers and lenders clearly identify these funds and loan programmes with the correct sub-text, i.e. indigo-ECF or evergreen-EGF, so as to guide both existing and new sets of entrepreneurs and the public at large to the right type of products and place, without having to go through a whole new set of middlemen to do the translation exercise.
Surely this is the minimum we can expect from publicly supported funds. In any case, it would set a good example for the investee companies in the SAMBiDS culture on which we will be carrying out more research in the future.
Comments on this story? Send an email to the editor: address - editor [@] thechilli.com
