In an extremely rare move for a venture capital (VC) firm, Draper Esprit went public on the London Stock Exchange Wednesday, raising some £103 million ($146.1 million) – and giving retail investors access to investing in high-tech start-ups.
Shares were issued at 300 pence and hit highs of 312 pence in early trade.
Traditionally, VC firms work on a limited partnership (LP) model, which involves investors such as fund managers putting their money into a fund managed by a VC firm. The LPs would have no direct say in where the VCs invest the money but would reap the returns that the fund gets.
But the problem, according to Simon Cook, chief executive and co-founder of Draper Esprit, is that retail investors are shut out from the fast-growing tech start-up space. Crowdfunding platform such as Seedrs or Crowdcube have been on the rise and allow retail investors to get in on seed rounds for fast-growing companies. However, later stage rounds have been shut for these investors, something Draper Esprit is hoping to change.
“LPs are specialist categories. Not many institutions and very few retail investors invest there,” Cook told CNBC in a phone interview on Wednesday.
“A year ago, on the back of the wave of crowdfunding, we felt wouldn’t it be amazing to launch a listed vehicle and there is a big gap in the stock market for people to invest in growing tech companies past the risky seed stage.”
When investors buy shares in Draper Esprit, they are essentially getting exposure to its portfolio companies which include Graze, which delivers healthy snack boxes to your desk or door, and Lyst, an online fashion marketplace. In total, Draper Esprit owns minority interest in 24 companies which as of December 31, 2015, had an aggregate value of £74.8 million.
Major institutional investors including Woodford Investment Management, the Ireland Strategic Investment Fund, China Huarong International Holdings and Baillie Gifford are among Draper Esprit’s initial investors.
$1 billion market cap?
An initial public offering (IPO) for a VC firm is very rare. Cook said it’s following the path of investment funds that have come from universities. For example, IP Group and Imperial Innovations, both born out of universities are public.
Cook explains that VC funds typically work on a five-year investment horizon and then a five-year exit period, which in his view is too short to build a sustainable business.
“Having a five year hold on the companies doesn’t maximize the opportunity. We are not forced to exit, we can hold the estate. We will have better returns because we can hold the biggest and best companies for a lot longer,” Cook told CNBC.
Currently the firm has a market capitalization of £122 million with the aim of $1 billion “in the next couple of years”, Cook said. The CEO also said that the company is likely to have to raise more capital as it’s in the “growth phase”, but will eventually become “big enough to get enough assets to become self-sustaining”.