Review: Oxford Capital Growth EIS

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

Many consider EIS appropriate for high-risk, high-growth opportunities. Technology companies seem to fit this area well as often they are not capital intensive businesses at launch, but need ongoing rounds of funding to get to market. Oxford Capital typically invest at the first round of institutional funding for these early-stage businesses.

Highlights

  • Early-stage technology focused EIS
  • Wide range of sectors covered
  • High growth opportunity
  • £25,000 minimum investment


The manager

Oxford Capital was founded in 1999 by Ted and David Mott as a venture capital investment company typically looking at early-stage opportunities coming out of Oxford University. The scope later widened to encompass UK-wide opportunities, whilst remaining true to the early stage high growth investing that launched the business. 

To start, Oxford Capital invested in the life sciences sector. It then rode the renewable energy wave (and still does) and delivered some excellent returns to their investors. 

In 2015 Tom Bradley joined as Managing Director to refocus Oxford’s growth strategy and to ensure it was investing in the right areas with the right expertise.

Investment style 

The new focus for growth deals is firmly on technology, specifically the Software, Ecommerce, Enterprise, Fin tech, Artificial intelligence, E-health, Gaming, and Retail Technology sectors. The ideal investment is in a UK company with the potential to compete globally. 

Oxford Capital typically invests at the Series A round of funding. It is the first institutional round of investing, after the entrepreneur has received friends, family and maybe grant based funding. Often the company has no revenue at that point.

Tom Bradley is Managing Director and leads the Growth Capital team of seven. Five of his team are “deal doers”, mostly with industry experience, although the latest recruit does have a technical background. 

The team looks at about 1,200–1,500 opportunities a year and generally has first round meeting with about 30-50 companies a month. Obviously not many pass the first round and only about 5-6 a month are looked at in more depth. Overall Oxford Capital makes about 5-6 new investments a year. 

A typical initial investment is £0.5 million, but it can be up to £2 million. Over time, with companies that succeed up to £9 million could be invested. Oxford Capital tries to provide companies with sufficient capital to last over 12-24 months so management can focus on running the business rather than having to raise capital constantly. 

Oxford likes starting with small investments and adding more to the successful ones over time. They are fully engaged “hands on” investors with early stage companies as that's when they believe they can have the most influence on a business’s success and it helps them decide whether management is any good.

In companies with high growth potential, a lot of the investment goes into R&D. However, in majority of companies it goes into widening out the product range, sales and marketing. The companies invested in often benefit from the wider knowledge-based EIS rules that allow a greater level of investment and into older companies than other more traditional EIS companies.

40-50% each year goes into new investments, and the balance into follow-on investments. Each investor will typical invest in 10-12 companies. The follow-on investments tend to be bigger investments. Presently Oxford has 20 active companies in their portfolio. Overall, Oxford is investing about £20 million a year into growth companies. 

Target return

Whilst there is no specific target return, Mr Bradley suggests early-stage venture capitalists should be looking at a potential ten times return on their first investment. Clearly there are no guarantees and some companies will fail.

Exit strategy

Oxford Capital has a specific team member whose role is to drive exits, Robin Lincoln. Last year’s refocusing of new investments means it is too early for exits under the new strategy. It is difficult to time exits, and as a company gets more mature, if it needs more funding Oxford typically uses its “co-invest” partners rather than EIS money so it is then not tied in for a further three years. Generally speaking, the majority of exits are expected to be a full sale of business to strategic buyers, typically in the US. 

Risks

These are early-stage technology businesses, so there will be a higher risk of failure than with later-stage, more mature businesses. It is also likely they will require multiple rounds of funding thus diluting the stakes of earlier investors. These are long-term investments. Oxford accepts this as the cost of investing in very early-stage companies, and focuses on trying to avoid a company failing after receiving multiple rounds of funding. 

Fees

Oxford’s initial fee is 2.5% and the annual management fee is 2%. The annual fee falls if the underlying companies fall in value, but doesn’t increase if they rise. There is an annual custodian fee of £50 plus VAT and a dealing fee of 0.35% each time a company is bought or sold. Deal arrangement and monitoring fees may be also be charged. Oxford Capital also charges £15 plus VAT for each EIS3 certificate. 10% of a subscription amount is kept back for fees, therefore only 90% is invested. Finally, a performance fee of 20% of any net profit, after the return of 100% of the original subscription is made.

Summary

Oxford Capital started life as an early-stage investor, reinvented itself as a renewable energy specialist and has returned to early-stage investing in technology. Some of the very early deals from its first iteration have been exited successfully, but none from the later reincarnation. This is a long-term investment in to a high growth, but higher-risk area.

See details of Oxford Capital Growth EIS

Oxford Capital Growth EIS

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