Review - Downing Ventures EIS
Downing LLP is a well-established manager of VCTs, EIS and IHT products. The majority of its investment strategies have been more conservative. The Downing Ventures EIS, previously named Downing Growth EIS Fund 4, is a departure from this.
- Early-stage high-growth EIS portfolio
- Software related companies
- Mix of corporate and consumer focused businesses
For investors wanting the excitement and growth potential of early-stage technology companies, and prepared to take the associated risks, the Downing Ventures EIS could just fit the bill. Matt Penneycard, who joined Downing in 2014, is the lead manager. He has been analysing and investing in this sector since 2002. His career started in the UK, then took him to New York in 2008 to manage a technology venture capital fund where he invested about $20 million in very early-stage software companies, mainly enterprise software. Mr Penneycard is supported by a full-time analyst and Downing’s extensive management team.
According to Mr Penneycard, ten years ago it took $15 million to bring a software company to the point of product launch. Today the equivalent is $200,000. He thinks a typical software company needs in the region of £5 million to enable an exit. Downing will look to invest about £3 million over the life of its involvement, normally with a first round of £500,000. Mr Penneycard’s strategy is to then help companies receive further rounds of funding from US-based early-stage and seed funds. His expertise in the US market is invaluable here.
The power of software is what Downing Ventures invests in. Mr Penneycard seeks companies with technology he understands that can make a business more efficient or replace a manual process. For instance, a previous investment (within the Growth EIS fund 4) was in Wetrack, which developed software to project manage events used by clients including The View from the Shard, the Ryder Cup (2014) and the BMW Championship .
The manager thinks there will be a rough split between consumer-related software and enterprise (i.e. business) software. In Downing’s view, a software company’s success depends almost entirely 80% on its management team. This is why Mr Penneycard’s team aims to always back teams they consider great entrepreneurs.
Downing receives approximately 100 new deals a month that fit the early-stage software criteria. They come from a mix of sources including tech incubators. In total Mr Penneycard meets about 50-100 companies a year and invests in a handful. Every deal has to be signed off by Downing’s investment committee. Investors will get exposure to between five and ten companies.
In assessing a deal Mr Penneycard follows a seven-stage process. He looks at the background to the business, what problem it is trying to solve, the potential market size and routes to exit.
Although there is no specific return target, Mr Pennycard believes if successful, individual companies could return significant multiples of the original investment. But please bear in mind the age of companies targeted means there’s a significant risk of failure.
According to Mr Penneycard, if you are going to take early-stage technology venture capital seriously you need to have strong connections within the US markets as that’s where the only real buyers are. As well as working there for five years, Mr Penneycard makes regular trips to nurture his relationships. These are long-term holdings and although there might be a quick win, the likelihood is these will be five year plus investments.
As this is early stage investing, there will undoubtedly be failures in the portfolio. The manager aims to back long-term winners and cut losers quickly. Due to the nature of the investments, these should be considered as very long term investments.
The initial charge is 4%. The annual charge is 2.5% (plus VAT). There is a performance fee of 20% of the exit proceeds between £1.00 and £1.10 and 30% thereafter (in respect of each £1.00 subscribed). Arrangement fees of up to 2% will be paid by investee companies to Downing and non-executive director fees of between £5,000 and £10,000.
This is a high-risk EIS option investing in early-stage technology and software focused businesses. The lead manager is highly experienced including five years working in the pivotal US technology market. Whilst this is an interesting offer, we do think the team is slightly under resourced currently and would prefer to see the management team strengthened. We believe Downing are in the process of doing this.