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NEW: Octopus Titan VCT – Venture Capital Trust manager interview with Will Gibbs, Octopus Ventures

NEW: Octopus Titan VCT – Venture Capital Trust manager interview with Will Gibbs, Octopus Ventures

Hello, I’m Alex Davies,
founder of Wealth Club. Today I’m with Will Gibbs
of Octopus Ventures to talk about the
Octopus Titan VCT. [Music] Will, tell me about
Octopus Titan. Certainly, so Octopus Titan VCT is the largest VCT in the market, so it has just over £825 million under management and has about 19,000 investors within Titan. In terms of what Titan actually
looks to do for investors – so Titan invests in a portfolio of
high-growth UK-based technology companies where we believe we could make
10, 20, 30 times our money on these really high growth
companies if they’re successful. And across our portfolio now of
over 70+ companies we’d hope that that performance across the portfolio will then
translate to an individual shareholder return of about 5p a year regular dividend, plus
special dividends. So all of it comes down to the growth of that underlying
portfolio of high-growth companies. Before we talk about the companies
you invest in, give me some background about Octopus Ventures
and your role there. So within the team there’s
about 35 of us in Octopus Ventures, based between London and New York,
but the headquarters is in London. And in terms of the genesis of the team, so
we started off first really as an angel investor, an angel investing group, and then have
morphed and gradually kind of grown into now one of the largest institutional investors
in Europe, so we manage about £1.2 billion and have had the privilege to
back some of the most successful technology companies
coming out of Europe – so the likes of SwiftKey, which
we sold to Microsoft, companies like Evi which
we sold to Amazon and companies like Zoopla which IPOd on the
London Stock Exchange. And actually in terms of the team and their background, so there is a
strong entrepreneurial background and flair which I think is really important for
investing into these types of companies, but there isn’t really one single pattern
in background. So we’ve got, I think, four PhDs in the team, we’ve got
ex-accountants, ex-hedge fund traders, and that breadth for us really means that
we can look at a diverse number of opportunities with very different
questions and interests. In terms of my background, I’ve been part
of the team for coming up to 7 years. Before that I was an entrepreneur myself,
and currently, most of my time is spent looking after nine of our portfolio companies
as well as coordinating all of our new investments
into the health sector. What do you mean when you say
you were an entrepreneur? So I’ve done a bunch of things before Octopus
but I had an organic spirits business, based in Essex, which we grew, and then
I left that business to join Octopus. So what sort of companies
are you investing in? And if I invest today,
where will my money go? So our number one criteria we look for is:
is this business pioneering? And for us we’re really looking for
businesses that can fundamentally change markets or create entirely new markets, and so that
pioneering test is something that’s very front of mind. We also look for very strong revenue growth
rates, so typically companies growing at one two three four hundred percent year-on-year,
which is a very specific type of company. We’re also looking for strong
entrepreneurial background and calibre. So one of our most recent investments
is into a company called Cazoo, which is the next business from Alex Chesterman,
the ex-CEO of Zoopla, which he took from zero to being worth £2.4 billion,
and this is his next business, aimed at the second-hand car market.
And so, for us, backing serial entrepreneurs is also really exciting for us because these are
teams that have been there and done it before, and Alex is probably one of the most
high-calibre entrepreneurs in Europe. So for us – just to recap – it is
pioneering companies, strong growth potential,
and calibre of team. So you mentioned Cazoo – what other
new investments have you made? I think one company that that really speaks to
the type of asset that Titan looks to invest into is a company called Bought By Many. So this
company operates in the insurance space, it is now the UK’s fastest-growing pet insurer,
and unlike many other legacy insurers that haven’t really innovated in a meaningful
way over the last 5-10 years, Bought By Many has looked to
build an insurer from the ground up, so with a very strong team with strong credentials in
the insurance and financial services market has now built a business that puts
the customer at the centre. So unlike other insurers they acquire new customers
through digital channels, through social media, and I think now they have about
9,000 five-star reviews on their website, which is unlike any
other pet insurer. I think they also innovate in
other areas, so they’ve partnered with a company called First Vet, which means that,
unlike many other insurers where if you have a problem with your pet you have to go and
see a vet, you can actually use tele-health, so actually videoconferencing
with a vet, which is now becoming far more common in human health,
but actually trying to transplant some of that
innovation we’re seeing elsewhere into what is a pretty stagnant
industry otherwise. OK, and any other
examples of recent investments? Yes, so we’re also very excited to be
an investor in Elvie, which is a business operating
in the female health space, and so their latest product is
a silent breast pump and if you compare that to a lot of the other
incumbent and legacy products, where there’s low innovation and definitely doesn’t make
the customer feel valued or kind of special, this is a business that has looked to build
a silent breast pump and really break down the taboos associated with
motherhood and female health. And so by making really strong statements
with how it’s fine actually to pump milk in public, and they have customers actually sharing
pictures, and have built a very loyal following. In the US, they have about
45,000 people on their waiting list and so for us it’s a really great situation
where demand for the product is huge and it’s a matter of funding that business
to fulfill that demand. I think another investment that we have made
in the last 12 months is a company called Depop, which is a social marketplace,
so think “eBay meets Instagram”. And when we first invested in that business they
were generating tens of millions of revenue – that business is now generating
hundreds of millions of revenue. And most recently we brought in
General Atlantic, which is one of the world’s tier-one consumer investors,
to lead a £40 million investment. And, I suppose for context, General Atlantic has
invested in other companies like Uber, Airbnb, Slack, which really speaks to the long term ambition
for these types of companies, to be valued in the hundreds of millions,
or billions, in a short period of time. And some of the more established
companies you’ve got in the portfolio, do you want to
talk about them? I think that’s really important because whilst there
are maybe 70+ companies in the portfolio, we’ve now got over 20 companies that we’ve
been invested into for over five years. So the core of the portfolio is actually in
established and more mature companies. So companies like Secret Escapes –
we first invested when they had a spreadsheet, that’s all they had – is now
the European category leader in discounted
luxury holidays. » Secret Escapes hand-pick their hotels,
and guarantee their members the best rates. » Who are you talking to, darling? » Er, no-one… Shh, quick, go! Go! » Join the worst-kept secret in luxury travel. For us, that’s probably one of
the best case studies of a company where we invested
a small amount initially and have grown our exposure as that company
has hit its milestones, and so now is about
6p in the pound for us. And I think as a manager that’s really the
challenge of keep our exposure small to companies where maybe we have questions
or it’s early on in their journey, and really double down on companies
where they’ve hit their milestones and we’re really more confident
about the long-term outlook. It’s quite risky all of this
– what can go wrong? So I think we’re very open that
these are high-risk early-stage companies. I think one thing to note is that
on a portfolio basis, that does change
the profile somewhat. So across 75+ companies there’s a range of sectors, stages and geographies, so about 65 percent of our companies have material revenues overseas or actually have overseas offices,
so from a diversification perspective that’s something that we take very seriously.
But I think given that we’re investing in early-stage companies, we expect
a portion of those to fail. Normally they fail quite early on in the process
– the most obvious and common reasons are that it’s the wrong team to scale the business,
changes in the market, or fundamentally the product doesn’t
do what they expect it to do. But actually on a portfolio basis
we’ll expect some to fail, but we expect the big success stories
to far outweigh the failures, and that’s really what drives the performance.
But I suppose a more recent example, we invested in a company called Kabbee,
which aggregated mini-cab fleets. The founding team had run
their own mini-cab fleet, it was a large market, so
for us it was pioneering, but also the team had strong credentials.
But I think at that point there was a small West Coast startup called Uber
that we had really no visibility on, and very shortly after investing into Kabbee,
Uber decided that it was looking to dominate Europe. And so that was a company where actually
the potential for it to hit its returns expectation wasn’t fulfilled, and we looked to sell down
our stake at a loss and recycle that money elsewhere. So I think we are cognisant that there are risks,
but for us the really important part is not putting good money after bad,
and if those companies look like they’re failing, trying to recycle that capital
and deploy it elsewhere where we can make our
10x, 20x, 30x returns. And of course it’s quite big now
isn’t it, Titan – in fact, it’s extremely big. What effect is that
going to have on returns? So Titan is the largest VCT in the market,
it’s the eighth largest [VC] fund in the market, and we typically compare ourselves to
other VCs rather than VCTs. For us there isn’t really… Post this fundraise
we expect Titan to be valued at about £1 billion. For us, actually, that’s a great thing for us
in terms of new deals, but also enabling us to back our existing
portfolio. So for any money we raise we expect to deploy 60 to 70% of that into
the existing portfolio companies. It’s really important that we build
meaningful stakes in companies we think are going to be successful, so actually it’s
important that we continue to raise money to back those winners. And I think,
when we think about performance – and we discuss this
very actively with the board that sits above us as a team
and manages the Titan VCT – we are solving for medium to long term returns
and that is the profile in which investors are holding their shares, so it’s correct that
we raise more money, it’s correct that we continue to invest in new companies, and it’s
correct that we solve for that long, medium to long term returns. If we were to
solve for short-term returns I think that would change a lot of our decisions,
but I think it’s also worth noting the actual opportunity in the UK and Europe
in the – I think, over the last five years in Europe we’ve gone from having about 40 companies
valued at $1 billion, kind of technology companies, to now having about 85 in a very short
period of time. And the UK is actually the best market across all of Europe
by a considerable margin for building these types of technology companies,
so actually for us a big driver is the opportunity in the portfolio,
and the opportunity for new deals is a really key driver in us looking to
raise more money as part of this fundraise. So where do you get
all your deals from? So our deal flow comes
from a number of sources. Our best quality deal flow
comes from existing relationships, so this might be from CEOs that
we kind of know, and perhaps it’s another entrepreneur from their network. So
Cazoo, which was the second-hand car business that Alex Chesterman is launching –
we’d backed Alex before, so he knew us. So serial entrepreneurs are
right at the top of our list. We have other companies,
so we invested in a business, so Bought By Many, that was
a warm relationship that we had nurtured. So network and relationship is really key to us,
and it’s worth saying that we’ve been investing in this type of asset
for over ten years, so we’ve built a strong track record
with entrepreneurs, and actually our brand is well known
in the entrepreneurial world. And so warm relationships are
a key part, but we also see thousands of businesses each year,
most of which actually come to us as
inbound opportunities. Are you getting much competition,
then, for those deals? So for the best deals
there is competition… And who is your competition? Is it
other Venture Capital Trusts, or is it…? So, a really good question. For us, our
core competitor set are tier-one global VCs, so the likes of Accel and Index
who invest in LinkedIn, kind of, Amazon and those type of very well-known
global technology companies. I think the competitor set that
we see less are other VCTs, in that the way that we have structured the team, and
our proposition to entrepreneurs and track record is quite different to other VCTs.
Last year we did a data collection exercise across all of our most recent investments
and asked them “do you recognise any of these
top ten VCT managers?” And I think over 80% of our CEOs said
they didn’t even recognise them. So we do, we do see other VCTs,
I think we will see more competition from other VCTs,
but actually the track record, the performance and our offering to
entrepreneurs of how we look to help them actually sets us apart
in quite a distinct way. You mentioned the number of £1 billion
or $1 billion companies suddenly around – are you finding that everything’s
rather overvalued? There’s a lot of deals at the moment
where I think if you scrutinised the price it can be hard to justify. But I would say that
we’re in a position where we’re not in any rush to make new investments, so if we
don’t think we can make our return profile we’re very happy walking away from those deals.
So we’ll see thousands of businesses a year, we’ll look to make probably
15 new investments a year, so that’s under 1% conversion rate from opportunity
to investment, so we can be very selective. I think the other nuance is
where we are typically investing very early on in a company’s life, in a company‘s growth trajectory,
it means that even if we are perhaps overpaying at times by 10%, 20%, 30% and
that business is valued at maybe £10 million, if that business is ultimately successful
in being worth £1 billion, that is still an incredible return for us.
So the earlier you go, the less sensitivity there is, potentially,
to other market pressures. Obviously the other thing about size,
which we sort of touched on, is that now to get some really good returns
as you had in the past, you need some really big winners to
get through the size of the fund. Yes. So I would say that
historically we have had big winners, so the likes of Zoopla which went from very low in value to being valued at over £1 billion, SwiftKey, which we sold to Microsoft, Magic Pony, which we sold to Twitter so there is a track record there of backing companies that subsequently
go on to be very valuable. But I think for us the piece about
as the fund grows, it makes it even more important that,
when we’re investing in companies, that we are taking significant
ownership stakes. So for us we look to drive to a place where we’re
typically owning maybe 10 to 20 percent of an individual portfolio company,
and so if that company is successful and is valued at £1 billion
or in the hundreds of millions, it means that actually the
impact on Titan is significant. And so for companies like
Bought By Many or Depop, if they are successful in doing
what they are looking to do – and at the moment they’re very much
on track – these companies can still deliver both regular dividends to Titan
but in those situations where we have very large exits then we’d also look to
be in a position to pay special dividends, albeit they’re very difficult to
predict both in terms of size and timing. You’ve talked about the large,
the high-profile exits – have you had any recent
exits over the last year? So we first invested in a business,
Graze, which sold healthy snack boxes and then we’ve tracked that as a
significant investor in that business, have been part of the journey as the
business has become a category leader in terms of UK and kind of
subscription healthy snacks. And then as that business
then launched in the US and then we were fortunate enough to sell
that business to Unilever earlier this year. Looking back slightly further, we were also
an investor in a business called Tails, which was a subscription dog food company,
very successful in its specific field, which we then sold to Nestlé. And so
I think whilst there’s been some recent exits and that’s against our longer term backdrop
of selling companies to some of the largest technology companies globally. We have
a strong track record, I think for us it’s really important that we continue to
drive exits going forward, in that that’s where the liquidity comes from in the fund, and
that’s where we look to pay dividends from. And so for us a really big portfolio strategy
that we’re driving is what we refer to as ‘raise and return’, and that’s where we think
we can have one of the most meaningful impacts on the fund, is how do we help our portfolio
companies raise more capital as well as how do we facilitate those exit conversations
and being proactive about driving those. Stepping back slightly – how involved
do you get in these companies? Very, I think, is probably the short answer.
Making the investments is probably the easier part of the process – I think
what actually really drives performance is building stakes in the most successful
companies as well as trying to help those companies avoid common pitfalls and risks
that maybe other companies have been caught in to, which means that for entrepreneurs we’d hope that
if they take our money we can actually help them accelerate their growth trajectory.
So for us it’s a material commitment, so we have an office in New York which is
there purely to help our European companies think about how to launch in the US. We also have a
group of what we refer to as operating Venture Partners, and so these are best-in-class operators,
for want of another word. And so we’ve got people in there like Howard Bell, who was
ex-head of product for PayPal, we have another venture partner called
John Hamm who’s a CEO coach, who’s also a CEO coach to many of
the senior leadership at Netflix and LinkedIn so these really are the best of the best
and leaders in their field. And we look to actually bring those individuals
and actually surround our portfolio and our CEOs with these types of individuals,
with the intention that it will help our companies grow faster, as well as
also allow them to gain other risks. So Will, if someone’s looking to
put some money into VCTs this year, why should they
invest with you? So Titan is the largest VCT in the market
– we have a strong track record of backing some of the most successful
tech companies in Europe. We have very strong underlying health within
the portfolio, so I think in aggregate the portfolio revenue grew about 45%
last year, which is pretty incredible. And so the fund is also managed
by an experienced team, many of which have been investing from Titan over
the last 10 years, and I think off the back of the exciting opportunities
for new investments in the broader market as well as in the portfolio, plus the
performance, plus the team and the opportunity we see in the next 5+ years,
we’re very excited to be raising more capital as part
of this year’s fundraise. Will Gibbs, of Octopus Titan VCT
– thank you very much. Thanks Alex. [Music]

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