Have you ever considered how to make more of your investment portfolio? Or perhaps you have a business with big potential that needs investors? Kealan Doyle tells us all about venture capital investing and how a venture capital fund operates.
About Kealan Doyle
Kealan Doyle from Symvan Capital, an award-winning EIS/SEIS technology venture capital fund manager, joins The Next 100 Days Podcast to explain the potential to deliver exceptional investment returns from identifying start-up and scale-up high growth technology companies.
His father was from Dublin and his mother was born in England, he was born in England and grew up in Canada and has lived in London for the last 25 years.
His career started in investment banks and performed roles as an economist and running a global equity derivatives team. Alongside his business partner of 13 years Nic Nicolaides, he runs Symvan Capital. They focus on investing in growth companies. In particular, investing in technology companies.
Where does the word SYMVAN come from?
Symvan Capital was started as a corporate finance advisory company for technology businesses. In the last few years, it has morphed into an asset management company. In 2008, at a different company where Kealan and Nic worked, before the collapse of Lehman Brothers, oil was at a very high price and it was causing a lot of the budget airlines to have a real problem, because they hadn’t hedged their exposure. A lot of them were loss making.
There was a move to consolidate them all, which ended up not working, but they had to come up with a product, a bond that turned into an equity if an event happens. To cut a long story short, they were looking for a name for the product. They asked a Greek colleague how he would describe it. He used the word ‘symvan’. Almost like catalyst. It is something that causes something else to happen.
When they went to name their business, Kealan and Nic, felt Symvan had good connotations for them, and so named the firm Symvan Capital. They also wanted a name that wasn’t offensive in another language!
Venture Capital Investing in Technology Businesses – why it’s important to the UK?
This podcast is not offering investment advice, but what is interesting is understanding the processes and benefits of investing in technology businesses as part of a balanced investment portfolio.
Historically, at the time of the industrial revolution, Britain was the first country to move to the next stage of human economic development. It’s still true today. The UK, is a very innovative economy, always has been and probably always will be.
Example, from the FT’s research of the Top 1000 high growth firms in Europe, 24% of them are British. https://ig.ft.com/ft-1000/ 19% were from Italy and 14% were from France.
This is not a new phenomenon. But, according to Kealan, there is a lot of inventiveness in the UK without the necessary financial backing. So, on the one hand, you have the City of London, dominant in global finance. And then you have all these innovators, coming from places like Cambridge, Nottingham, Bath etc.
The environment has changed a lot, because technology has changed dramatically, but also it is a very global thing. So, there may be an English person working with French and Italian people to come up with something. The UK creates a great backdrop for them. It is much more business friendly than France and Italy etc.
It is a really fertile environment.
The Chancellor’s recent budget contained something called the Patient Capital Review https://www.gov.uk/government/publications/patient-capital-review which was profoundly positive for tax efficient investing.
Patient Capital Review
“Patient” in the sense that you don’t want to make an investment and cash-out in 6 months. For most people that is most people. Like your house. Kealan has been living in his home for over 20 years. Graham too.
It is not something you flip to and from. The Government are saying it is the same with growth businesses. They are risky, but they have the potential for high growth that dwarfs what you can get in more mainstream FTSE 100 shares.
For instance, if you were to buy shares in Tesco, you might lose 20% or gain 20%, but you are probably not going to lose all your money. And you are not going to make 10 times your money.
With Growth Capital, you can have that kind of return distribution.
What does the Patient Capital Review do?
There were rumours of major changes in the EIS (Enterprise Investment Scheme) market, that Symvan operates in. It became obvious that the Treasury was displeased with how a lot of this money was being spent.
With EIS, if you invest £100 you get £30 back. Any gains are tax free. If you hold for 2 years, you don’t pay inheritance tax. Also, if you do lose money, you get loss relief, which can be as much as 32%.
The Government has been very generous. Kealan contrasts this with his experience recently in California. One of his investee companies was in a Google Business Accelerator in Silicon Valley. There were a lot of Angel Investors there. Individuals who invest in individual companies. Over there, Angels couldn’t believe the tax breaks we enjoy in the UK.
Of course, a lot of these US angels have a Google, Facebook, Instagram in their portfolios that made them a ton of money. They are not totally phased by having some investments that don’t work out. They realise, some will be a Google and some will go nowhere.
That is what the Chancellor at the Treasury has been trying to do too. Trying to foster a similar environment in the UK.
Unfortunately, a lot of groups over the years have adopted an approach which is the antithesis of innovation. Groups have created ‘capital protection’ products, trying to make an equity investment look like a fixed income investment. Where the only reason you make the investment is to get your money back and get the tax break.
The Treasury hinted at the changes for well over a year. If you are not taking REAL risk, we are not giving you such generous tax breaks.
The California Investment Model
Invest in 10 companies. One is a success, several just return your money and a few lose you money. Overall, you make a very decent return.
It’s about a distribution of returns. Venture capital means you accept loses because you have the potential of finding a Google.
The Treasury would seriously like a major group like a Facebook or a Google come from the UK.
Zuckerberg, from Facebook, had numerous opportunities to sell his company for a $bn here and $bn there, but he wanted to conquer the world. Whereas, the criticism of growth firms in the UK is someone gets an offer of £20m and they take it and retire to the South of France.
Is this pushed by VCs themselves?
There is something to be said there.
Symvan Capital gets involved in Seed to Series A. They’d be quite happy to sell out at that point. It is where the most risk is, but also where the most return is.
Or, you could have a situation where the company goes public.
VCs can force a sub-optimal exit, because of their return profile. A typical VC fund is just 10 years old. There may be some companies that are promising, but are just not getting going.
What is stopping us finding a Google?
There is no real formula to venture capital. It makes it interesting. Oh, I could have spotted Google. Even the guys that backed Google in the early days, didn’t know exactly what they had on their hands.
Spotify is a unicorn company, $1bn or more valuation. They are doing well, despite very heavy competition. Not least from Apple.
A few years ago, there were none. Now there are 58 in Europe! That has changed in the last four or five years. Who are the best in Europe? https://www.cbinsights.com/research-unicorn-companies
Global Switch (UK), The Hut Group (UK), Deliveroo (UK), BrewDog (UK), Funding Circle (UK)
An interesting thing about Deliveroo, is they constantly try things out and quickly dispense with the ones that don’t work. They are very pragmatic. Nothing ventured, nothing gained. This is pivoting.
It’s about getting their head up to see where else their technology can assist.
How are Symvan Capital different from other competitors?
There are a number of competitors in the EIS market and the venture capital trust market. After the recent budget, Symvan Capital are in the Chancellor’s sweet spot. Commercialising technology.
A number of competitors work with Universities. It is one of the competitive advantages of this country. The UK punches well above its weight in terms of the quality of its universities.
Symvan finds, often the academic, the product becomes its baby. Symvan looks at it different. It’s a product. They aren’t there to save the world, but to start and profit from a business. That pragmatic approach characterises the Symvan Capital approach.
Symvan takes a board position when they invest in a technology growth company. They like to be hands-on. This is not welcomed by every single company. But Symvan works very positively with their investee companies. They bring a different skill set from the owners and that’s often why they are welcomed.
Choosing the right companies
Symvan spends time researching the company. They get in early at ‘seed’ stage, with SEIS investments. With seed, the tax breaks are even more generous, you get 50% of your money back.
The difference between European venture capitalists and them is the former would be looking for large revenues. Well, you are well on your way when you have done that. Technology changes so quickly that before you know it you can have a £1m in revenues. Symvan likes to get in at that very early stage. They do this in the US too. Everyone is looking for the next big thing. By being on the inside, Symvan can influence that. Maybe at the stage when they are just finishing their product or just starting their sales cycle.
They wouldn’t get in at concept stage. An idea on a powerpoint. That is more your friends and family stage.
- Symvan wants to get comfortable with the company. They make sure they are compatible.
- They look at the product, the strategy, the market fit, the size of the market, the potential growth of the market. Once they are satisfied that is good, they focus heavily on the people.
- They look for people who are ethical, honest and transparent.
- They want to understand their flexibility, for future strategy pivots.
“How do you learn how to become a good entrepreneur? By making mistakes and learning from them.”
One of the hardest things for young companies to get that initial momentum. Technical innovators might not necessarily have that market making skill, so Symvan help them identify people who can help them.
Kealan suggested they prefer young businesses with MORE THAN ONE FOUNDER. Ideally, with two or three people. A US study of companies reaching $1bn suggested the optimum is 2 or 3, followed by 4 and 5 then 1.
The reality is not everybody is good at everything. i.e. Two techie guys and commercial guy.
How do decide how much money is invested?
Depends. If it’s a growth business and it will change fundamentally business will happen. One of their investee companies operates in the human resources field. In an unbiased way, they help assess candidates for an employment position.
They have different needs. They like to set objectives to hit. If you hit this turnover, we’ll invest this amount of money more.
Companies are always weighing up how much money they need versus how much dilution they want.
e.g. 2 founders of a growth company. They own 50% of the company each. They approach Symvan for Seed investment. What do you need the money for? Well, to finish the product, or we are doing a POC (proof of concept) with Tesco. We need money to hire programmers.
Assuming they pass their due diligence, they would offer them the money. Followed by more money in a year’s time. If it worked with Tesco, they might need more money to fund growth through marketing, sales etc.
After a year, they have a good idea that they have a live one on their hands. They won’t promote someone from Seed to EIS, where the amount of investment can be significantly higher, unless they have demonstrated they deserve to be in the EIS camp.
By being involved at SEIS stage, Symvan are de-risking the EIS.
Dilution – they own 50%. They want £150k from Symvan’s SEIS fund, they provide a valuation is £850k, they give £150k so they own 15% of their company. They now no longer own 50% each, but 42.5%.
What distinguishes a really good technology investment?
It’s like saying what’s a great pop song. Some companies would be great for them, might not be for their competitor VCs. And vice versa.
- Someone who is bright, determined.
- They have a specific plan to change and disrupt a market.
- Symvan have to believe they have the stubbornness and real vision.
- A Steve Jobs character.
- Not take no for an answer.
- Peculiar to the entrepreneur in general.
How do Symvan get the money to invest in these technology businesses?
The wealth management market. That can be the top. UNS, Barclays, IFAs. The end client is always a high net worth individual. For knowledge-intensive businesses you can put up to £2m per year in as investment in EIS. Even £100k in EIS and VCTs per year, it means that’s a market for wealthy people.
If people are investing just to get the tax back. It is easy to paint EIS as a tax fiddle. The perception could have been something funny is happening.
The real change in the last few weeks has been to say we are fine as a UK Govt to give the rich tax breaks for risk AS LONG AS THEY ARE TAKING RISKS!
Which is exactly how Symvan is positioned.
They had found that some large groups like Barclays and St James’s Place were interested in something more conservative. It was the difference between saying:
- (SYMVAN) give us £1 and we’ll return £2.85 in 5 years, versus
- (OTHERS) give us a £1 and we’ll give you £1.05 back with lower risk.
Almost like a bond. Very low interest rate environment.
How do you make a return in the current market?
- Interest rates are starting to rise, but they are very low still. On a yield basis, you aren’t making very much.
- If interest rates rise, it is not good for the bond market or the equity markets.
- There is already a lot of good news priced into equities. Although, because of Brexit and the related uncertainty, that the UK market is cheaper compared to other European and American markets.
- In London and elsewhere, property is starting to trail off.
The great thing about technology investing is that it is non-correlated to all the other asset classes.
So, if interest rates rise dramatically, that doesn’t matter to Symvan, if they have picked the right guys, who have invented the product that everyone wants.
Learning by doing is how you become good at venture capital. That’s why High Net Worth individuals are sensible to use a company like Symvan Capital.
Which technology companies are Symvan Capital helping?
Not in bio-tech.
Their sweet-spot is business to business software. They focus on the entire digital tech market place.
- Human resources – Cognisess – see https://www.cognisess.com – how enterprises should hire employees – a revolutionary way of hiring people. By playing games.
- High performance computing
- Savy – https://savy.io how people use your data. Have a market place where you ask Sainsbury has to provide data so you can sell it to Tesco.
(THE SHOCKING TRUTH ABOUT FEES) Fees and the lack of performance in Investment
Fund managers were going with fixed income returns. Symvan being higher risk, takes time and research.
“Fees are the carbon monoxide of the investing world.”
Symvan don’t charge investors fees. Only a performance fee.
Competitors charge audit fees, exit fees, some they tell you about, some they are less explicit about. This kind of investing should be seen as what supplements your pension. This study looked at an investment that returned 6% per year over 40 years. It showed the effect on no annual management charge and of 1% and 2% annual management charges.
6% pa would turn £1,000 into over £10,000. However, a 1% annual management charge reduces that to under £7,000. And, 2% (industry standard) reduces that to £4,500. Less than 50% return. That’s just the annual management fees. Others charge upfront fees too.
Ask yourself the question? WHO SHOULD MAKE MORE OUT OF INVESTMENT – the fund manager or the investor. Symvan thinks it should be the investor.
Symvan makes money on performance – by taking money from returns. Their interests are aligned. They also charge companies their annual management fees – but they are working for the fees.
Hedge funds – is the game up? https://www.ft.com/content/291081ba-49df-11e7-a3f4-c742b9791d43
How would you advise the investee looking to raise money?
- Recognise there is a lot of competition
- Spend time getting to know people who can help you.
- Turn to friends and family.
- Then cultivate people like Symvan.
- Symvan get 100 investment decks per week. But they are often very poor.
- If someone is interested in augmented reality, surely it is worth getting to know investors who have invested in augmented reality.
Investment decks – advice
- 14 to 18 slides optimal
- Grasp an investor’s attention
- The investor needs to see QUICKLY that there really is an addressable market, that the market is broken, competitors and margins.
- Make your product interesting.
- Say this market is broken and has been for some time. Then explain how you are going to disrupt it!
How to get in touch with Symvan Capital
The Next 100 Days Podcast is brought to you by Graham Arrowsmith and Kevin Appleby