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07-07-2017 - - 0 comments
How 'Mammalian Investing' is taking the world of early tech investing by storm

How ‘Mammalian Investing’ is taking the world of early tech investing by storm.


It’s easy to see how early-stage tech VC investing can make arguably the largest returns. If you get it right investing in a disruptive business like WhatsApp or Alibaba can generate huge exits: a whopping $22Bn and $25Bn respectively (Sequoia Capital turned $60 million into $3 billion thanks to WhatsApp). And not just in The Valley: Skype was exited for €7.7Bn returning 317x the initial funds of €24m, and Cambridge Silicon Radio returned €2.0Bn from €15m, a 133x return.


But equally it can carry a lot of risk: market-timing, management capability, technology-fit, the business model are all crucial factors for investors to consider. And of course, that risk can quickly become expensive when, with so many tech startups, the signs are ‘nearly there’ and ‘just one more round of funding will do it’.


So what’s the best way to invest? The convention wisdom is to invest widely: At the 500 Startups PreMoney Conference, David Cohen (TechStars) said that you need to invest in 200 to 250 companies in order to find a “unicorn” i.e. a $1Bn business.


Conventionally you also need a lot of cash: Many of these success stories take a lot of funding, and arguably some of the biggest VCs in the world, especially in Silicon Valley, have the funding clout to help ‘make’ the market even if the product is not the best or unique. Uber is now on its 16th funding round, absorbing $12Bn. Whilst this is extreme, VentureSource Dow Jones shows that the average rounds is c. 4 whatever the economic cycle.


With this approach, returns are typically very concentrated on a minority of very successful investments. The failure rate depends on the specific analysis and many are rose-tinted. The VC industry cites a third as ‘successful’ (there are many ways to define, and it includes blended stages). Only 10% of all angel investments generate 90% of the returns. Tax breaks like EIS and SEIS can help the underlying investor to mitigate their losses, and whilst this is highly relevant and cited later on, the tax break should not be any consideration for any investment decision.


Many technology VC returns have been linked to economic cycles. Whilst the availability of follow-on capital is restricted in lean times, fundamentally I think that is a weak excuse for poor investment managers and reminds me of the saying: “a rising tide floats all boats … and when the tide is out you get to see who was wearing shorts!” Disruptive tech businesses shouldn’t need a boom cycle to succeed, indeed there is evidence that they might thrive better when they are needed most in a downturn and the success stories proving this are well documented. For example, of the 100 companies listed on the annual America’s Most Promising List, around a third were forged in the doom and gloom years of the global financial crisis. In a 2014 survey by Hiscox, of the 38pc that started during recession, 49pc reported a rise in profits over 12 months, compared with 42pc of older firms. In the UK, the gap is even wider – 49pc of recession start-ups increased earnings versus 40pc of other companies.


Then comes the alternative approach to institutional tech investing: crowdfunding and angel-funding. Whilst crowdfunding has boomed and overtaken VCs when it comes to early stage investment, it seems to some commentators that the model is a bubble at worst or at least frothy in parts at best. There’s rarely the scrutiny of due diligence or corporate governance that you’d normally expect, and more importantly there is often limited ability to carry out follow-on funding which seems to surprise amateur investors but is empirically crucial to success: We’ve seen that it take four rounds of funding to realise success which is rarely what amateur investors understand or prepare for. According to AltFi Data (November 2016) there were just five successful exits out of 955 funding rounds across 751 companies on six platforms. For angel investing there are of course many success stories and indeed many angel-funded businesses go on to be VC-funded anyway (WhatsApp included). The main challenges with angel-investing is that there are certain processes which require an organised approach and angels are by their nature amateur and ad-hoc.


So, what’s the alternative? Well, many of the more consistently successful VCs get cited because they have experienced investors, sometimes entrepreneurs themselves, and often with a focus and supporting processes. But this is really an obvious point and inherently damning to those many VCs that exist and don’t have this. Surely in any sector, good processes and team is vital? Is that it?


Enter stage right a new style of early stage tech investing: ‘mammalian’ investing.


Mammalian investment finds and embeds an appropriate executive into a start-up to support and nurture the management team. The executive is appointed to the board, e.g. as executive chairman. Crucially they invest alongside the VC on the same terms. The whole process, if done right, ticks a lot of different boxes: It adds domain expertise to a business to provide support as the business pivots. It allows the business to ‘hire’ people it could never otherwise afford to pay. It reduces the cash burn because the expert is investing themselves and making contacts which otherwise would cost a lot in sales and marketing. It also provides operational due diligence to the investor as the executive will spend some time with the entrepreneur before recommending investment (and investing themselves). Finally, it aligns everyone’s interests, a crucial aspect particularly for a business pivoting to establish its business model.


Mammalian investment is generically similar to the concept of ‘Venture Partner’ programs, where VCs sometimes find individuals to add value to a portfolio company but the differences are also stark: Venture Partner programmes are not mandatory, there is no process to help screen the investments, and often it is a privilege for the Venture Partners more than a need or process to develop the investee companies.


This approach has been adopted and developed by early stage investment company Boundary Capital in its AngelPlus EIS Fund. They call their value-added co-investors ‘Venturers’. One of Boundary’s key assets is the network of 300+ screened Venturers from different sectors which helps to be able to find the right match. Boundary Capital always appoints a director alongside the Venturer to maintain investor perspective and governance as it is often the case and almost expected for the Venturer to go ‘native’ partially in terms of helping the investee company.


As an example, Desktop Genetics is a genome-editing software company. Its technology helps research scientists to dramatically speed up their research and application for gene therapy using CRISPR technology. The business was founded by 3 entrepreneurs who met at and through Cambridge University. Whilst they had a good idea, the business model and routes to market were unclear. Boundary worked with them to appoint a Venturer Dr Darrin Disley, who is a highly successful serial entrepreneur in life sciences (and currently the CEO of a fast-growing life sciences company Horizon Discovery plc). Darrin helped mentor them even before Boundary’s first investment, and took on the role of executive chairman. He helped them to shape the proposition, introduce them to customers and partners and guide them on the other aspects of business development. As the model matured, Boundary led a follow-on investment round, bringing in other experienced and value-adding investors and strategic partners (e.g. Illumina who are a potential partner and acquirer co-invested). The business is poised to be one of the pre-eminent CRISPR software businesses in Europe.


The entrepreneurs themselves really like the model as much as investors as it means they get real help and it engenders a strong sense of trust and alignment between founders and investors, something which sadly is not always the case. Riley Doyle, the CEO of Desktop Genetics said: "We had a few sources of capital we could have turned to. What attracted us to Boundary was the alignment of the Venturer with the money and our business. Helpful informal advice and contacts have been valuable too along the way."


Other businesses who have looked to Boundary Capital with its Venturer model are a former professional kick boxer and entrepreneur Alex Oviawe who founded Precision Sports Technology (PST), creators of a wearable technology that alerts professional and amateur sportspeople to potential injuries whilst they train. Their Venturer, Mark Warrilow has relationships within premier rugby clubs, county cricket teams and professional sports bodies.


Carbon fibre high performance automotive wheel manufacturer (Dymag), life science Alzheimer’s therapy (Polyblok) and portable X-ray devices (Image Scan) are also choosing this model of investment with success.


Although nurturing the Venturer network and process can be intensive, the returns are strong both in terms of portfolio returns (25% IRR to date) and a much lower failure rate than other comparable early stage tech investors (only one ‘cheap’ failure out of 14 companies). And of course, because Boundary Capital’s AngelPlus Fund is SEIS and EIS-compliant, investors get even more benefit from the downside protection and boosted upside gains due to the tax breaks.


Instead of investing in technology companies using a ‘spray and pray’ approach to investing, there are alternative approaches to technology investing which investors can consider to mitigate risk and promote the chances of upside.



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