Investment

Family offices should back angel networks, says Cambridge specialist

UK angel networks have been involved with a record 1,600 deals over the last decade and delivered some bumper gains from disruption and low interest rates. 

But Struan McDougall, chief executive of Cambridge Capital Group, is tired of their cottage industry tag: “We have come a long way in ten years. We need family offices and pseudo-institutional investors to take things forward.” 

My uncle had eleven friends, I had one, and we all bunged in £2,000, plus the money I’d made on Bookham. And I headed off to Cambridge in 2000 with two introductions

His corporate members include Milltrust International, a family investment business run by Simon Hopkins; early-stage investor Martlet Capital, led by Robert Marshall, and U-Blox, a Swiss tech company.

McDougall’s team has come across a series of deals that can serve his angels and offer further capacity to family offices. Many of them come from Cambridge in the UK, renowned for its commercial approach to scientific research. His challenge involves convincing family offices that the risks, and effort, involved in angel investing can produce sufficient rewards.

McDougall’s fascination with seed investing started with fibre-optic pioneer Bookham Technology, which he backed during the dotcom boom of the 1990s, alongside his uncle.

When Bookham listed its shares they spiralled to the point where they gained entry to the FTSE 100 index of leading stocks.  Its founder, Andrew Rickman, briefly became Britain’s first unicorn, owning shares worth £1.5 billion. But the boom became a crash, wiping out most of Rickman’s fortune. He compared the experience to a “nuclear winter”

But McDougall’s uncle timed his exit well: “He made 100x on his investment.  I made 10x in two years. But most of us didn’t sell all our shares which fell to 1% of their earlier value. Rickman later bounced back by raising $265 million for Rockley Photonics from investors, including Morningside, co-founded by Hong Kong’s Chan family.

The experience made McDougall sensitive to downside risks, but it didn’t put him off seed investing. He agreed to develop an angel business in Cambridge for his uncle, which set out to take a systematic approach to suggesting deals to angels, and a decent time to exit them.

“My uncle had eleven friends, I had one, and we all bunged in £2,000, plus the money I’d made on Bookham. And I headed off to Cambridge in 2000 with two introductions.”

McDougall was pleasantly surprised to find that people were happy to sit down and have a coffee with a potential investor. The market set back probably helped. 

Over the years, Cambridge Capital Group has built a network of 77 angels investing in 65 companies.

Every quarter, CCG might come across 100 deals. Following a screening process, it ends up with a shortlist of 20 to 30 companies which filters down to 2 or 3.

Each candidate has to jump several hurdles, including the novelty of an opportunity, its finances, sector, potential rivals and quality of technology. 

But leadership can matter even more: “If you haven’t got that, a great team can’t deliver good results. A great CEO will make a success out of an average idea, while a poor one won’t make anything out of even the most brilliant technology.” 

Angels also help companies to find new management, when required, or find ways to retain talented founders, possibly by diverting them into an advisory role. 

In seeking new investors, McDougall has run across the problems involved in calculating performance from deals, particularly those which have yet to exit.

Some deals may not exit for years – one of his earliest has only just managed a trivial return after 17 years. The dispersion in performance can be huge. 

But McDougall is satisfied with a failure rate of 25% against a UK average of 50%. “In tech investing companies are capitalised through several rounds, so some of them could be zombies. But, overall, it’s not a bad figure.”

The average return for CCG deals that have staged an exit range between 3x and 4x. But this is within a broad range of 1.5x to 15x. 

McDougall says: “It only takes one big success for your figures to be transformed. It’s your top decile which matters.”

CCG can point to some high-calibre exits. For example, SwiftKey a developer of predictive software for computer keyboards bought by Microsoft for $250 million in 2016, giving some CCG angels 20x returns. Other successes include Bango, a smartphone content provider; DanioLab, a breeder of zebrafish used in genetics research, and Expedeon, a life science firm. 

McDougall’s favourite is hydrogen manufacturer ITM Power which suffered a long wait to come good but now boasts a market value of $2.6 billion. He says: “I wish we’d all held our shares longer, but a lot of us exited with a 15x gain.” 

He adds that CCG sources deals for its circle of investors and hosts events, it is not an advisory firm: “People have to make their own decisions, although they do share their due diligence with each other.” 

This implies that family offices would also need to carry a time-consuming review of CCG’s findings. But its level of access is interesting and family offices led by principals with a taste for corporate deals could be prepared to take a view. 

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