Investing in VCTs in 2024: manager’s view

Manager’s view: 60 seconds with Karen McCormick, Chief Investment Officer of Beringea

Q: After a tough 2023 for venture capital, what do you think this year could hold for the industry? 

A: We expect the venture capital market to be more buoyant in 2024. We have already seen levels of fundraising and investment tick up across January and February, as investors and companies adjust to the economic environment.

Nonetheless, we expect companies will continue to focus on profitability and capital efficiency, as the fundraising environment for growth companies remains challenging. With a longstanding focus on capital-efficient businesses, Beringea and the ProVen VCTs should be well positioned for this. 

We are also seeing significant opportunities for companies expanding in the US, where the economic picture is more robust – and again we should be well placed to support this, thanks to our presence on both sides of the pond. 

And, let’s not forget, in previous economic cycles we saw the best vintage returns following a period of reset. For example, the ProVen VCTs first invested in Monica Vinader, the jewellery brand, in 2011 as the country was emerging from the financial crisis. The business was highly capital-efficient from the outset, driving sustainable growth throughout our investment, which ultimately delivered an 8x blended return on exit to Bridgepoint in 2023. As ever, past performance is not a guide to the future. 

Q: Where are you seeing the best opportunities? 

A: We are seeing opportunities across a range of emerging technologies and fast-growing industries.

Generative AI is an example, both as a tool for companies to use to drive efficiency, growth, and innovation, and for businesses to build products and services that enable this hugely exciting technology.

Sustainability has also been a promising area, particularly ‘climatetech’ and businesses that are driving the transition to net zero. Cyber security and privacy have also risen to the top of the agenda for many organisations, providing scope for innovation and growth.

Consumer will remain an area of interest for Beringea – our experience with the likes of Monica Vinader and Luxury Promise means many entrepreneurs and angels in the sector approach us directly. Moreover, entry valuations for investments in consumer remain lower and therefore potentially more attractive.

Q: The ProVen VCTs are probably best known for backing consumer businesses, but you look at other sectors too. Are there any common characteristics among the companies you back? 

A: The ProVen VCTs are generalist funds with a portfolio that spans emerging technologies and established industries. Roughly 40% of the portfolio by value is held in software-as-a-service (SaaS) companies, followed by roughly 35% in retail and consumer, with the rest held across tech-enabled services, healthcare, and marketplaces.

We always seek to back experienced founders with a proven track record in their sector. For example, we recently invested in EVIOS, a provider of home charging points for electric vehicles. The business is led by David Martell, whose previous business – Chargemaster – we backed through to its acquisition by BP in 2018. The depth of expertise that David brings to the business makes EVIOS an attractive proposition in our view.  

When evaluating prospective investments, we seek capital-efficient businesses, as well as companies operating in either growing markets or sectors with clear tailwinds which we believe have promising exit prospects. We will look for businesses with a tangible USP that we believe is sustainable and valuable.

Q: What makes ProVen VCTs attractive to founders in your view?

A: With our funds, network, and boots on the ground in the US, we find many entrepreneurs are keen to take investment from Beringea and the ProVen VCTs to support their international expansion. 

Another key factor is the experience of our investment team – particularly the Investment Committee, which offers more than 100 years of combined venture capital and private equity experience. The longstanding track record of the firm and our successful history of exits are also attractive to founders.

Q: What percentage of the companies you see end up getting investment? Are there any red flags you watch out for?

A: We typically invest in less than 1% of investment opportunities that we generate over the course of a year.

Each investment will go through a rigorous review process, leveraging internal commercial analysis, insights from industry experts, detailed financial modelling, and third-party due diligence from lawyers, accountants, and technical specialists. 

Common red flags include high rates of cash burn, unrealistic growth expectations, exits that are dependent on public markets or IPOs, and evidence of multiple ‘pivots’ where management has failed to find product-market fit after the initial strategy did not work. Management references also weigh heavily on our investment decisions.

Q: In a hypothetical portfolio of 10 investments, how many would you expect to be successes and how many to fail?

A: Hypothetically, in a portfolio of 10 investments, we’d expect one company to fail, one or two to produce a return somewhere greater than nil up to our initial investment cost, 5-6 returning over 1-5x our investment, with a few outliers getting to 10x+. Of course, these are rule of thumb figures, actual performance will be different and will vary over time.

Q: What’s the most important lesson you’ve learned, after years of investing?

A: The most important lesson learned is sticking to investing in capital-efficient businesses we would be happy to own for several years. Rapid growth does not guarantee future success: as investors, we must evaluate the opportunities and risks thoroughly and support investee companies through challenges as they arise.