Investment

A heady mix of a novel venture structure, Cambridge, and a fourth generation owned family business

Venture capital has raised its game of late, but it is still a sector where investors are well-advised not to fall too deeply in love with a war story. 

The chances of VC investors backing a winner are little better than 2.5%, according to UK-based manager SyndicateRoom (SR). 

People investing in a portfolio of 20 stocks are just as likely to generate annual returns of 5% as 50%. 

SR’s diversified approach harks back to ETFs which match an index by investing in all its constituents and outperforming more discriminating active managers most years

SR started in Cambridge, England in 2013, believes it has found a more consistent way to generate returns by putting its money into a far larger set of diversified opportunities.

It is backed by Martlet Capital, owned by the Marshall family, who also own the Marshall Group, which learned to diversify its business interests across aerospace, defence, motor dealerships, and Cambridge real estate covering 900 acres, since its inception in 1909. The group, which is privately owned by the family, has annual revenues of more than £2 billion. 

Martlet, led by Robert Marshall, a fourth-generation member of the family business owners,  invests in 50 ventures typically involving deep tech and life sciences. 

SR wants to raise £30 million from family offices and institutions for its own idea – the Access fund – after failing to progress a crowdfunding initiative. It is targeting a 3.5 times return for clients over 10 years.

Rather than striving to find a select group of winners, SR sets out to invest in a sufficient number of deals to dilute its exposure to duds.

The size of the fund is relatively small, but those family offices which investors can expect pre-emptive rights to invest in specific portfolio companies which catch their eye at a later stage. Talks with investors, including family offices and institutions, are proceeding.

The Access annual fee is 1.5% plus 10% of performance once a return of 110% has been achieved.  The fund qualifies for EIS tax relief in the UK.

SR’s co-founder is Tom Britton who started his career in football, before deciding VC was a better bet than life in Scotland’s lower football leagues. His chief executive, Graham Schwikkard, has a management consulting background. Portfolio manager Edward Hume-Kendall is the son of Rupert Hume-Kendall, a renowned Merrill Lynch investment banker prior to his retirement in 2015. 

SR’s diversified approach harks back to ETFs which match an index by investing in all its constituents and outperforming more discriminating active managers most years. 

The firm, founded seven years ago, developed its thinking by analysing the price of shares issued by thousands of new companies filed at UK-based Companies House.  

During the time periods following 2011,  2012, 2013 and 2014, the group found their annual VC growth rates were 28%, 26%, 24% and 23%, providing a good platform for a diversified approach. 

In contrast, research by the British Business Bank has discovered that returns for VC managers over the years averaged out at 18% due to their narrow focus and high fee structure.  

Their search for super growth meant VC managers overlooked VC companies which offered a solid, potentially compelling, story further down the line, but they were not immune to duds. 

The Access fund plans to invest in 50 companies in each of the next three years. This will produce an uncommonly large VC portfolio of 150 bets where valuation extremes are muted and performances can average 30% a year.

The fund will be biased towards tech-driven opportunities but SR aims to balance its exposures in an attempt to avoid sector bias and problematic governance. 

It says: “When 50 deals are combined across three years we find the probability of losing capital is significantly minimised while the odds of returning three times the cash invested is higher than 50%.” 

To maximise the spread of opportunities, SR invests a fixed sum in each company rather than a percentage stake.

To tilt returns further in its favour, SR has conducted an analysis of angel investors who play a key role in offering VC firms their opportunities.

It has discovered that super angels have achieved an average portfolio growth of 42%, while 20% is closer to the norm. SR invests alongside 50-plus super angels. Their top ten performers have achieved an average IRR of 80% thanks to the prominence of super stocks like Zoopla, the UK real estate platform. 

The super angels include individuals like Jonathan Milner, founder of life sciences researcher Abcam. 

According to Britton: “Many of our super angels are entrepreneurs who completely understand how to build a business.”  But he adds that SR vets their suggestions, to make sure their plans are in line with their experiences.

SR gets offers from super-angels by providing them with a reasonably certain route to capital at an early stage along with opportunities to network. On occasion, SR offers its super-angels a chance to pick up ideas that come to its attention.

It will typically invest in deals of between £400,000 and £5 million. Access has already invested in 42 startups including Neurofenix (stroke rehab); Metadataworks (data hygiene); HubBox (click and collect); Oxwash (laundry); Apexx (payments as a service platform); Just Move In (house moving concierge) ; Powervault (smart energy storage) and Rotageek (work scheduling).

Britton believes the UK can compete in key areas of tech, particularly fintech: “It’s not the same as in the US. But it’s strong. Certainly stronger than the rest of Europe. Germany is the only country which is remotely close.” 

Entry prices tend to be lower than in the US but this also tends to be the case for exit multiples.

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