Funding London: the story of my first fund
Today, Funding London is seen as an expert in the deployment of funds to support the Economic Development Strategy for London. We have unrivalled expertise in the design, creation and implementation of successful financial instrument strategies.
However, back in 2010 this journey was just beginning for me. This is the story of the fund that cemented my credentials in this area and helped me transform Funding London into what it is today.
In the beginning…
For several years before coming to Funding London, when I was executing mid-market M&A deals, I witnessed the difficulties that innovative businesses faced every day in raising equity finance to pursue their strategies. I had been increasingly frustrated with the lack of a visible support system for early stage start-ups to sustain themselves and grow. So when I arrived at Funding London, I was very excited about the two early VC funds that I was inheriting and the great start-ups that they were investing in.
What greeted me was a rising tide of operational challenges and perception related issues that threatened the prospects of the evergreen investment firm that I had been recruited to create.
At the time, Funding London was operating as a Special Purpose Vehicle and its funds, whilst investing in great companies, were perceived as too small and cost inefficient. Our stakeholders had a different view of the return horizons and there was nobody championing the funds within the London Development Agency (LDA). We had no alignment of interests with our fund managers, and the performance of the portfolios had gone unchecked. In fact there was a huge amount of change happening at the LDA which meant that the objectives of the original funds had become completely misaligned with the political agenda.
My first two years were spent understanding our stakeholders, our funds, projecting returns, highlighting achievements to our stakeholders and reflecting on the sources of inefficiency.
These “lessons learned” as I now fondly label them, represented a set of barriers in the eyes of our stakeholders and the wider London finance sector that had to be overcome in order to secure the next fund. It should be mentioned that the work of those two years also provided valuable insights into the unique benefits that our portfolio companies derived from our funds and the gap that public sector funds were filling and continue to do so.
Research commissioned by the European Regional Development Fund (ERDF) had identified a market gap of £45m per annum across unmet demand for equity (£16m p/a) and loan finance (£29m p/a) by London SME’s. Eventually, only £9m was available through the LDA from the ERDF 2007-13 programme for London. By re-investing the available legacy from the initial funds we were able to increase this to approximately £14m, but this was insufficient to address the entire gap.
Given the limited funds (versus the need), I needed to determine where this amount could have meaningful impact. So I turned to the market participants for guidance. I spoke to a cross section of venture capital teams, funds and also commercial banks. Their feedback was consistent:
- Avoid fragmentation, so focus on one fund
- Carefully think about the size of the portfolio given that it needs to be sufficiently diversified, yet manageable by a small VC team to keep cost efficiency. The size of the portfolio also determines how far each company can be supported with limited funds
- The fund should be managed by an established team already managing other funds. The cost of setting up a new fund/team structure would be prohibitive.
- As public sector funds have to co-invest with the private sector, the chosen manager should demonstrate a track record of co-investment and the ability to secure syndication.
- Focus on Series A where there is a significant latent opportunity for job creation and where returns can be achieved within a portfolio holding period of 5 to 7 years.
Selecting the right manager within the constraints of public procurement
I wrote an investment fund strategy that reflected 100% of what I had learned through market feedback. Therefore, I avoided many of the turn offs that could have deterred a few bidders. The strategy was also quite specific about the importance of achieving a return on capital, which provided alignment with fund managers that may have worried about damaging their reputations by being seen to invest for the sake of achieving targets.
I engaged venture capital experts to help shortlist interested parties and eventually score the tenders received. They shortlisted only those interested parties that could demonstrate the best track records in respect of returns, investment activity and sector knowledge.
The scoring criteria were set up to give the most weight to the strategic priorities of co-investing in London, sector knowledge, due diligence and investment appraisal. We purposely gave a low weighting to cost proposals so that a substandard bid could not be won on price.
Managing public sector requirements in the context of private sector structures
Reporting and compliance with other public sector requirements can be tricky to navigate in the context of private sector fund managers whose investment and operational processes are not designed to accommodate the extra layer of administration. Having private sector expertise has helped significantly to bridge the gap between the public sector and the managers that we work with. Being upfront with fund managers about the extra requirements is essential to achieve the right outcomes. I found that by having an open minded dialogue with the fund manager we selected (as opposed to imposing our ideas), we were able to agree practical ways in which the various requirements could be incorporated into the manager’s existing processes.
In the end…
The MMC London Fund began investing in October 2012. Today, it has completed its investment period having assembled a portfolio of 19 companies in sectors that are strategic to London, and these companies are deploying technologies and disruptive business models on a global basis. The portfolio includes Gousto, Sky Futures, Masabi, Appear Here, Mastered, Somo and Home Swap, who regularly feature in early stage awards and in the press. The Fund has met all the job creation targets early and for every £1 invested by the fund another £6.5 has been invested by co-investors including other funds managed by MMC Ventures.
The learnings and insights acquired in this journey have been instrumental in delivering two more successful funds and we will continue this journey to develop new funds to support even more emerging businesses.