Investing in early-stage companies should be considered as high risk, but utilising the potential tax reliefs available under the Government’s Enterprise Investment Scheme (EIS) can make such investments particularly appealing.
Firstly, Deepbridge’s EIS funds invest in companies in two specific areas – technology and life sciences - what excites you about them?
Adrian Neilan (AN): Technology is a very broad term and I think people can get confused about different kinds of tech. The key thing is that you focus in on sectors where you feel you can contribute. I know everyone gets excited about the huge listings that we see for multiplebillion dollars, but they are few and far between – although it’s great if you get one. It’s about focusing in on disruptive technologies that you can develop and exit.
Dr Savvas Neophytou (SN): Life Sciences is also broad, and you have to put it into sub-sectors in order to describe the attributes of each one, in terms of investment opportunities. In general historic terms, about 10% of GDP is spent on healthcare – it’s much more in the US, up towards 20%. Certainly, if you have disruptive technologies coming and taking part in that, it’s very easy to see how you could potentially make some good returns.
Where does Deepbridge find its investee companies from?
SN: What makes a good investment house is having that proprietary pipeline. Now we have built a pipeline and a lot of investment opportunities come and find us. We get about a thousand opportunities within any given year. So, for example, we’ll get warm recommendations from people we’ve already worked with and been successful with. We’ve broadened our reach – we have a network ‘scouting’ for opportunities not just here but in the US, in Australia, Poland, Germany, for example.
AN: When we talk about deal-flow, we should remain agnostic in terms of relationships, in that we don’t want to be tied, or take a deal, from a particular institution because they feel we should, and we feel obliged to.
What are the key criteria you look for in investee companies?
SN: One of the first things we look at is the management team, are they knowledgeable and strong. We also look at the areas that they are focusing on, which need to be scalable opportunities. Intellectual property (IP) is also important – it could be existing IP that can be spun out of academia, etc., or IP we think the Company can generate. The product or service the Company is working on needs to be about providing a solution to an existing problem or disrupting an existing marketplace.
AN: There must be a degree of commercial reality in terms of what you’re trying to achieve. Ultimately, we’re about generating returns on investment, so we wouldn’t get involved with a service for a particular parochial area or region, or a medical area which only has 1,000 people who suffer from that problem. We have to leave that to others. The global scalability and the potential to move into multiple vertical markets will drive a more significant valuation ultimately.
And what do you think Deepbridge offers that other EIS investment managers don’t?
AN: We recognise that for a lot of companies, with the stage they’re at, it’s not just about receiving the funding. I think what drives a lot of companies to Deepbridge is that we are actively involved in assisting them in building their businesses. They value the fact that we are a team of experts which can provide the help to leverage their businesses. If you just put the money in, you’ve got a reasonable chance you’re going to lose your money.
SN: Young businesses need hands-on, operational experience and that’s what we provide. They know that they have our support and we help them overcome many problems they may have. We have open communication with all our companies. We operate in terms of the three P’s in terms of communication – they tell us what progress they’ve made, what problems they have, and the plans in place.
AN: A good example would be a company we invested in called AlgaeCytes. AlgaeCytes is a company whose proprietary technology creates Omega 3 from fresh water algae, compared to historic Omega 3 production being predominantly sourced from fish stocks. The Company has excellent technology and scientific research but was struggling to commercialise as quickly as we would like, or to the scale we wanted. We therefore have worked closely with the senior management team to restructure the business and team in order to accelerate commercialisation. The Company is now working on its first largescale production site and has largely pre-sold the first year’s production. Significant interest from blue-chip clients add considerable validation to our approach and we look forward to the exciting next steps. A passive investment manager would likely have missed that opportunity and not been able to assist the Company.
What are the key attributes that you look for, or that you think make, a good entrepreneur?
AN: I like to see business founders who have experienced success during their career, who are diligent, who are willing to go the extra mile and put everything on the line to achieve what they want to achieve. You can’t educate someone to be an entrepreneur; you’re either an entrepreneur or you’re not.
SN: Early-stage businesses don’t move in a straight line, so you need the team to have adaptive intelligence. So, for example, it can be very difficult to move from academia to a commercial set-up – again, this could be where a hands-on manager such as ourselves is imperative.
And what about your thoughts on the UK EIS market in general?
AN: The rule changes that were made (following the Patient Capital Review) were significant and something we’d advocated. We completely buy-in to the concept that a pound invested is a pound at risk, and that there should be a focus on ‘knowledge intensive’ companies. Without necessarily wishing to be, we’ve been thrust to the forefront of the market, with our focus having always been on the inherently knowledge intensive tech and life sciences sectors. EIS, managed well, is an exceptional product. Indeed, the EU’s review of such schemes around the globe, in 2017, was that of the top four tax-efficient products on the planet, three of them were VCT, EIS and SEIS, which is quite remarkable for a country our size. There’s a dynamic environment in the UK which has been created over the past 20 years. There are incubators in every town in the UK, almost every university has a commercialisation department. We are seeing a greater interest in overseas companies coming to the UK because of the access to funding.
I guess the not-so-little elephant in the room is the Coronavirus pandemic?
AN: There’s no getting away from the fact that the pandemic has affected everyone in some way. EIS fundraising naturally suffered a dip during the early days of lockdown, but on the whole we are pleased to see investors continuing to support early stage companies, which is probably down to two reason; the first being that they still have a tax bill they wish to reduce and secondly, they see the opportunities which innovative early-stage companies are able to take advantage of. Ultimately, our investment criteria mean that our technology and life sciences companies are expected to be highly innovative and therefore we believe there should remain a genuine need for their research, development and/or products. We remain in unprecedented times but I am reassured that Deepbridge’s investment style of providing hands-on support to investee companies will stand us in good stead and has never been more important.
SN: In the life sciences sector, there are opportunities for innovative companies to support the healthcare effort and thereby take great steps forward as a business. Where there are companies that don’t have the same positive opportunities then, as Adrian alluded to, it is our hands-on approach that allows us to work proactively with investees to help them best manage their business through difficult times.
And, finally what about the future, post Brexit?
AN: The UK Government will have to find ways of filling the gaps left by the funding which has traditionally come from the EU. They won’t necessarily want to find that out of their own pockets so they will continue to provide incentives for individuals to provide funding for the kind of businesses we invest in – EIS and SEIS will continue to be increasingly important and relevant.
SN: We need to be aware that there are going to be some structural changes that are going to take place and one area we don’t know about yet is what will happen to funding at universities? Is that going to slow down? These are relevant but we are confident as a business that we can find the innovators starting businesses wherever they might be.