Draper Esprit and its CEO and co-founder, Simon Cook (above), aren’t strangers to testing times on the public market. The VC firm floated in June last year, raising £102 million. Exactly a week later, the UK voted to leave the EU, sending stocks tumbling. After closing its first day of trading around 307p, Draper dropped below 300p the day after the vote.
It has never been below that threshold since. The VC recently announced its results for the period ended 30 September, showing a 44% increase in portfolio value since 31 March to £162.8 million, with fair value rising 22%.
The decision by the firm to go public comes down in some part to raw numbers (see chart below). "A few years ago, we looked at every tech deal done in the UK and identified the source of capital to the VC fund which invested," Cook says. "One of the things we noticed is that, in the last few years, the amount of traditional LP investment is pretty small."
"Then we saw this much bigger source of investment that we like to call 'patient capital'—listed funds, mutual funds, and the like. That's when we started to think: 'Why are we and all the other GPs banging our heads trying to get money out of 10% of the market?'"
Aside from gaining access to a greater capital pool, Cook believes that leaving the LP structure is also a strategic necessity for the industry. "The five-plus-five model doesn't make any sense," he says.
"We're in a world now where tech businesses grow for much longer than five or even 10 years. Entrepreneurs are also looking for a partner who can stick with them for the long term, and who can continue to invest in them across their lifecycle. In that regard, we see this model as win-win."
UK tech deals by the VC's source of capital
Source: PitchBook/Draper Esprit
'The sweet spot'
As a public company, Draper Esprit is looking to be involved in companies for the long run. To help with this, the involvement of institutional shareholders such as Woodford and Baillie Gifford enables the VC to be with a startup throughout the investment lifecycle.
The firm structures its investments into 'emerging' and 'core' holdings, investing at the Series A stage in the emerging phase before transferring them to core as they grow. In its recent acquisition of two Seedcamp funds, for example, Draper acquired a stake in fintech unicorn TransferWise, which will now join its other 'core' companies such as Trustpilot, SportPursuit and Push Doctor. Additionally, the firm recently announced plans to invest in seed funds across Europe to the tune of £75 million.
"We are in the sweet spot," says Cook. "We invest in seed funds, then we do our own heavy lifting to grow them to 500 or so people, and in the next rounds we can bring in our shareholders for the pre-IPO phase, and ultimately they will go public. By taking a long-term view, we are able to get to know our companies—and that begins with our seed investments."
"The ability to write bigger cheques and take more risks in order to build a bigger upside has changed quite a lot in the Valley. And now, Europe is catching up quite fast." - Draper Esprit CEO Simon Cook
Yet being a public company isn't all plain sailing. Having shareholders means more scrutiny and more transparency, something Cook is well aware of. For him, it is about finding the right balance: "Our competitors said that we might have to disclose all of our metrics, but so far we haven't had pressure to do that. Instead, we show the aggregates—the top 10 companies' average revenues, gross margin and growth rate. We have to strike a balance."
Different rules over announcements can also be tricky. "When private, you can announce a deal when you want to, but as a public company, you have to announce the day after. It can be quite difficult when you have two or three VCs working on a big deal, and you have to be the guy saying, 'I have to tell people.'"
Although the idea of a public VC is rather novel, things haven't changed too much from Cook's perspective at the base level. "This is still a people business, and it's best sticking to try and figure out what can go right," he says. "If you want to work out what can go wrong, go and work in private equity."
What has changed, however, is the cheque sizes. "While $10 million Series As have been normal for a while, what haven't are the $50 million Series Bs," he says. "The ability to write bigger cheques and take more risks in order to build a bigger upside has changed quite a lot in the Valley. And now, Europe is catching up quite fast."
For Cook, going public has helped his firm bridge the gap to the bigger round sizes—something that he believes will help set Draper Esprit up for decades.
"The funds that can break out from $150 million to $500 million are going to become market leaders for a long time," he says. "Companies are looking to partner with big funds in Europe that will follow on in the later stage—and there's hardly anyone."
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Article by Sean Lightbown, PitchBook