First-time success by a UK regional venture capital fund

The Capital Fund has become the first of the nine regional venture capital funds (RVCF) to profit from a successful exit via an acquisition. The Capital Fund has made a 30% internal rate of return (IRR) on its investment in UK Explorer within a very short period – less than a year. UK Explorer is a provider of wired and wireless internet access solutions for hotels and airports. The company had also boasted some blue chip clients including Compass Group, BAA, Holiday Inn Hotels and Travelex.

The Capital Fund is a £50 million regional venture capital fund (RVCF) which backs fast-growing, small and medium-sized enterprises in Greater London.

The Fund’s investment manager, Michael Kennedy, said, “We congratulate UK Explorer on completing a very successful trade sale to Spectrum Interactive. When The Capital Fund invested in UK Explorer in March 2004, we knew that the wi-fi and internet terminal market was a particularly dynamic one that could change dramatically as established and startup businesses received large amounts of funding from venture capitalists. The management team have built a profitable business and an impressive list of customers and locations since its foundation in 1998. We are the first regional venture capital fund to make a profitable exit – an important endorsement of our ability to identify, invest in, grow, and profitably exit from innovative new enterprises.”

Richard Stubbs, managing director of UK Explorer, said, “We are delighted to achieve the sale to Spectrum Interactive. We started out as a two-strong management team of first-time entrepreneurs, and have built a business that provides an effective solution for the thousands of travellers who need quick and easy access to the internet while passing through airports or staying in hotels. Our terminals are secure, reliable and strong enough to withstand heavy use at airports while also being elegant enough to suit the requirements of the modern hotel lobby. And our fully-automated wireless access points (wi-fi hotspots) provide seamless connection for laptops and PDAs.”

He also praised the RVCF, “The Capital Fund’s investment in March 2004 has played a vital role in our expansion, enabling us to realise a number of significant contract opportunities and double our internet access points in one year to over 800 across the UK. We have also attracted strong interest from the USA.”

Mark Lewarne, chief executive of Spectrum Interactive, said, “We were attracted by the opportunity to acquire UK Explorer because they have developed a proven and comprehensive solution, enabling travellers with or without PCs to access the internet quickly and conveniently, combined with first class customer service. UK Explorer is one of our key competitors in the UK marketplace, and we have always admired their entrepreneurial approach and excellent product offering. The combination of UK Explorer with Spectrum’s interactive services division will consolidate our group’s position as one of the largest providers of public fixed and wireless internet access terminals in the UK, with over 1,000 units in operation.”

The Chilli perspective
RVCFs have had mixed reactions from tech entrepreneurs, due to limits imposed on the amount of capital that a RVCF can invest in any one investee company. An RVCF normally invests amounts of up to £250k for the first instant and followed by another £250k if the investee company finds a matching fund. For some RVCFs, they make use of sister funds to do the matching, which can raise the total amount to £1 million. This cuts out a lot of tech companies, who need far in excess of this limit. Many software companies can get away with this level of funding but the criteria set upon RVCF limits the investments to companies who already are post product, ie Chilli R1 and preferably post Chilli R2, ie post revenue.

With such limitations, it is difficult to find many early high growth companies that can meet the criteria. Many RVCFs are sitting on their funds due to these difficulties. Having said that, The Capital Fund has done well to find the opportunity and provide a fairly short first exit for an RVCF. We hope this will spur other RVCFs to become a bit more adventurous and invest in more higher risk, technology companies. As they say, you cannot make an omelette without breaking a few eggs.

© Chilli Publishing Ltd 2004

15FEB2005