Private Equity Firms All Want the Same Thing: British Companies

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Why Draper Esprit doubled down on its status as a publicly listed VC

We cover a lot of venture capital news here at TechCrunch. New funds, partner changes, the funding rounds themselves — the list is long. Lately, we’ve had to touch on rolling funds, solo GPs and a faster-than-ever investing cadence that has rewritten the rules of venture investing. Gone are the days when investors can take weeks, let alone months, to get into a hot deal in today’s turbocharged private markets.

But there’s another venture capital trend worth discussing: venture capital firms going public. This July, for example, London-based Forward Partners went public on the AIM, a sub-market of the well-known London Stock Exchange. Augmentum Fintech is another example of a London-listed venture capital firm. The investing group focuses on European fintech.

Most recently, Draper Esprit, another British venture capital firm, moved from the AIM to the LSE proper, with a secondary listing on Euronext Dublin. TechCrunch has cited Esprit partners in our explorations of the European venture capital scene in the past, especially in our regular digs through the startup hub’s numbers.

To understand why Draper Esprit not only decided to stay public but doubled down on its structure by moving to the main boards in London and Dublin, we got on the horn with the firm’s co-founder, Stuart Chapman. What follows is an edited and condensed transcript of our call. Coming up, The Exchange has analysis and further interviews about whether the trend of floating venture capital firms may spread, and why other investing groups opted in. But first, highlights from our chat with Chapman.

TechCrunch: We have a bunch of questions about the change in listing, but let’s start with how long ago you began this transition.

Stuart Chapman: I co-founded Esprit with Simon Cook back in 2006, and after a 10-year journey of raising conventional funds, we were coming to the point of raising our fourth fund. But we were having frustrating meetings with limited partners who were trying to pigeonhole us, and at the same time, the London market was getting more and more frustrated that private companies were staying private longer and they would not have access to them. I think we were down to ARM as the last true bastion of tech companies on the London Exchange, so we were approached by a group of City funds to raise our fourth fund through a public market listing.

The junior market in London was very helpful for that, and we spent five happy years on AIM, raising money annually — until we crossed over the billion [sterling] capitalization mark. By then, it was quite obvious that if we want to fulfill the same ambition and growth over the next five years, we were going to need to step up onto a bigger market that was going to give us wider access to funds and [expand our] attraction to a much larger group of people. Part of our mission at Draper Esprit is to democratize venture capital, as Simon would say; and [being listed on the main market] increases that opportunity.

When we started out on the AIM, we raised capital from professional funds’ tech enthusiasts, who were positively biased. Unfortunately, there’s not very many of them, and once you have exhausted that, then you move down into the more general funds — maybe funds with an angle on the U.K., funds with an angle on technology. But by their very nature, they tend to be small-cap funds, and there’s not that many of them in the U.K. So, by stepping up, we enable ourselves to go into more generous funds as well as tech funds [that] have a minimum bar.

And should we now expect to see Draper Esprit raise more capital per annum?

In a perfect world, the answer is no, because realizations equal investments, so you are self-sustaining. The one thing I would say about Draper Esprit is that we are trying to be innovative. It shocks me that venture capital backs some of the most mind-blowing tech advances in our history over the last 70 years using the same legal structure as a 1958 property vehicle in New York. I don’t get it! Surely, we can reinvent and push ourselves forward as much as we push our entrepreneurs. So long story short, Simon and I never opted to rest. We always wanted to see if we could create the next thing that would help entrepreneurs be more successful.

Talking about innovation in venture capital models, what’s the main motivation for your use of retail investment platform PrimaryBid? Is it to open the door for more regular folks to invest, or is it a really material way to add capital to Draper Esprit?

It’s the former. If you go back to 2010, we launched our [Enterprise Investment Scheme] product — in the U.K., the EIS is a tax wrapper, where private individuals can invest into tech businesses and receive 30% tax credit; and then, if it goes well, it’s tax-free. It’s a great government initiative. However, whenever a government interferes in a market, it goes to the lowest denominator, and most people in the industry were using it to enable investors to gain tax credit. Whereas we said: That’s silly; you should use it to enable people to back the best possible businesses, and then the tax credit is just a bonus.

So what we did back in 2010 [was] we enabled X entrepreneurs, X people in the tech ecosystem, to participate in the Draper Esprit EIS program to be part of this democratizing equity. Today, that’s about £150 million in the EIS vehicle, and about £50 million in the VCT, which is another U.K. tax-related vehicle where you get the same benefits — so it’s now over £200 million from small individuals. The idea for us is to extend our ecosystem out into influential people.

How do you feel about having opened the way for other funds to go public?

Personally, and at Draper Esprit, we are big supporters of innovation, so we have helped Mark Boggett at Seraphim [and shared information and] our path. And then Nic Brisbourne … was an ex-colleague of mine and Simon’s, so we actually helped Nic, but we also invested in Forward Partners as a way of showing our support to what he was doing through our fund of funds program.

I think where we are very different is where we get confused with the more technology transfer shops. IP Group [for example is] a great model and it’s got real longevity [and has been] in the market much longer than us. But that’s not what we do. They’re looking to back computer science from an early stage in universities. And so, yes, we’re supportive of others following in our footsteps and we will be big fans of having much wider diversity.

Why are you investing in other funds, and does it open up your capital’s geographic footprint?

Two reasons, to be very honest with you. One is consistent with the previous point, which is [that] Europe wins when it has a really strong ecosystem. And, historically, Europe has founded seed funds in a haphazard way. Finland, for example, had 80 programs to raise early-stage capital. Regions were granted seed funds, but they had no follow-on capital.

No one realized that venture capital was an escalator, and unless you could pass the baton to the next person, [startups] have to do it themselves. But if you have to do it yourself, you don’t create an ecosystem.

The first point was how do we build an ecosystem, consistent with how we get more people into venture capital. If you have a solid ecosystem, then you bring in headhunters, you bring in talent, you bring in bankers, lawyers, you bring in advisers, you bring in the geniuses.

The second reason is that venture capital is quite constrained. If you raise a fund, it is very, very rarely permissible to invest it in other funds. Going back to Simon and I and our quest to be innovative, [we asked] well, why can’t we invest in early-stage funds, and work with them as partners, and [be their] go-to Series A, Series B fund.

[TechCrunch note: The firm then drew up a 2×2 matrix, with geography on one side, and skillset on the other. Draper Esprit divided the world into niches where it was strong and weak, and geographies where it was strong and weak. Where it was weak twice, it would partner with other funds, perhaps investing in them. This helped ensure ready deal flow.]

By partnering, we put ourselves into an area where we could benefit from their talent [and geographic focus], and they benefit from our capital, and it has been a phenomenal success. We are now in about 42 funds across Europe. The first commitment was with £75 [million] and we’ve just committed a second £75 [million] to the program. So, we’re at £150 million, [making us] one of the largest private commercial investors.

What’s your take on Ireland, and do you see it as more than a gateway to Europe?

The Irish story has a very long heritage. They always used to be our largest shareholder, the Irish government, through the Ireland Strategic Investment Fund. They might be the second or third largest shareholder that we still have, but there is a very long relationship between Simon and I and the investment group over there.

And Ireland is renowned for great education, whether that be in the south through Trinity and UCD [in Dublin], or whether that be the north through Queen’s [University Belfast]. So, there’s been a great education system, great engineering infrastructure. They have greatly benefited from the Facebooks of the world, and the Googles of the world having [offices] in Ireland. That’s all the positives, and we have two investors in Ireland.

The downside is that it is relatively small. The numbers of Series A and later-stage growth deals that come out of Ireland are still a lot less than other cities. So we are fans of Ireland; the talent there is fantastic, but it’s a part of an ecosystem instead of another London or another Berlin.

Where is Draper Esprit hoping to find the next great startups? Is there a sector or two that you find particularly exciting?

In fintech, we’re taking an unfashionable approach. You have large incumbents with very outdated systems, but a very loyal and a very high degree of trust customer base. And then you have the regulators in Europe which are very positive towards innovation and incumbents and challengers. I hear my American colleagues are less complimentary about the SEC.

You’re in an environment where people are being encouraged to challenge the big banks. But they don’t have trust, and they don’t have the balance sheet. So, where we are currently attacking — we genuinely believe that the big guys need to update these legacy systems, and they’re not going to throw them away. And so, the only way you can update is you have to take off slivers of your book, of your market, and update it bit by bit. These projects are, if not tens, hundreds of millions [of pounds]. [It’s a] lucrative customer base that needs to adopt technology.

But updating that old tech would likely require fintech startups?

Yeah, that’s our strategy. The reason why I say it is not fashionable is because it doesn’t touch the consumer. It’s quite dull, and [it has] very long sales cycles. When you look at the genius within the teams that we’re backing, it’s that very in-depth [knowledge] where the sector views them as experts, the sector views and as the go-to people. So it’s a very high barrier to entry, which is why I think Europe does very well compared to [the U.S.] in this area because to actually try and attack those European startups from an overseas perspective is quite difficult.

More to come shortly; stay tuned.

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