Review: The British Robotics Seed Fund
You’ve probably had dealings with a robot recently. Whether it’s contacting your mobile phone provider, having an online order picked for you, or even getting a prescription dispensed from a pharmacy, chances are that a robot has been involved.
Across the globe, the robotics industry is reaching a tipping point. For the first time, it is becoming cheaper to own, operate and maintain a robotics system, than it is to use manual labour. Robots are expected to perform 25% of industrial work by 2025.
What’s bad news for workers could be good news for investors, especially for those prepared to take some risk.
That’s what Dominic Keen thinks. His recently launched British Robotics Seed Fund, in conjunction with Sapphire Capital Partners LLP, is the first SEIS fund to specialise in UK robotic start-ups. It aims to take advantage of the robotic revolution.
The UK – alongside Canada, Japan, South Korean and the US – is at the forefront of robotics. UK universities are home to some of the best robotics labs and incubators in the world. This is a new fund with no track record. However, it does afford investors exposure to a fast-growing sector that is otherwise hard to access. Much of the development in British robotics to date has happened within universities or large corporations.
- Growth investment targets 3x return, not including tax relief (returns not guaranteed)
- A portfolio of around five early stage robotics companies with SEIS advance assurance
- Focuses on “Frugal Robotics” or “Robots-as-a-Service” which require minimal capital outlay by the end-user
- Exit targeted in three to eight years
- Fast growing sector, capitalising on Britain’s strength in robotics development
- Minimum investment £10,000
- Professional or very experienced investors only
The fund is managed by Sapphire Capital Partners LLP and High Growth Robotics Limited (HGRL), who will be responsible for sourcing and managing the companies. Dominic Keen, CEO of HGRL, will lead on identifying and mentoring investee companies.
Dominic Keen is the key individual involved and investors must thus satisfy themselves on his expertise. Whilst there is no formal investment committee, each investment must be agreed between HGRL and Sapphire Capital Partners. Additionally, HGRL plans to add appropriate individual mentors as required to businesses to aid development. Sapphire Capital Partners LLP is an award winning firm that
specialises in managing SEIS and EIS funds.
Mr Keen is a successful British technology entrepreneur. He holds a Masters Degree in Engineering from Cambridge University and began his working career in Venture Capital. In 2006, he founded software business mPorium. The business floated on AIM in 2013 and has a current market cap of £65m. He has extensive experience with early stage businesses alongside an engineering background.
The fund will deploy between £50,000 to £150,000 as part of larger seed rounds of £300,000 - £400,000 representing 25-40% equity in investee companies. Most of the fund’s investments will be matched by a local enterprise partnership or corporate investor on the same terms. In the last Budget, Philip Hammond announced over £200 million is to be made available for investment in robotics across UK, which will mainly come to the companies in the form of R&D grants from Innovate UK and equity funding from local enterprise partnerships.
The fund will focus on market-ready concepts that have the potential to generate revenues within twelve months of the investment.
Investee companies will have an emphasis on Robotics as a Service (RaaS).
RaaS is a relatively new concept. Historically, robots were built to perform a single task such as welding a car door. The hardware was costly and the robots cannot develop beyond the task they were designed to perform. A company buys a robot, maintains and repairs the robot and is ultimately responsible for disposing of the equipment.
However, the introduction of cloud computing and global open source code allows developers to program and control robots remotely – which has brought about the concept of Robots as a Service. Instead of buying a robot or a fleet of robots, a company can now pay a monthly service fee or subscription to a robotics firm based on the output they need to accomplish. The customer does not suffer from a capital-intensive outlay and can develop their own automatic processes rather than relying on pre-built solutions.
Falling hardware costs (thanks to 3D printing and improved modelling) coupled with more advanced cognitive computing technology have begun to deliver RaaS as a reality.
The investment strategy can essentially be divided in three stages: pre-investment, post-investment and exit. Before investing, Mr Keen is looking for businesses with these four top level characteristics:
- Passionate, credible entrepreneurial management teams
- Credible business concepts and strategy
- A reasonable level of business risk
- Attractive potential for lucrative exits
The business model must have the potential to deliver at least 200% performance improvement versus existing solutions to the same problem.
Companies will be found mainly through the relationships Mr Keen has with over 14 universities, including Imperial College Dyson Robotics Laboratory, Oxford Robotics Research and Cambridge Computer Vision and Robotics. The arrangements they have are non-exclusive. Before finalising an investment, HGRL must be satisfied the company will require minimum capital investment from a prospective buyer. The business must be able to generate revenues within twelve months of the first investment and have a potential exit in mind within eight years.
The investee companies are likely to be spread across a range of activities: healthcare, farming and agriculture, logistics, construction and civil engineering and low-volume manufacturing.
After investing, HGRL will support and mentor the business, and help them with the commercial aspects of developing a business, allowing their technical skill and expertise to shine. A six-point plan aims to add extra value over and above the funding itself, giving investee companies the potential to thrive:
- Financial Discipline – the Company Mentor will review spending controls monthly alongside building realistic forecasts
- Efficient Operational Model – to ensure the start-up team is focused on its core area of advantage: non-core activities may be outsourced and debt can be introduced to maximise the business model
- Commercial Management – the mentor will help each company ‘go to market’ nationally and internationally and help negotiate commercial contracts and prospect for new leads
- Access to Networks –the mentor’s networks and connections should help to open doors for development
- Free Office Space and Workshops – if desired, the companies have access to free office space and well-resourced workshops via a technology incubator in the East of England
- Showcasing and PR – each robot will be presented in a virtual showcase with video demonstrations.
Businesses that fail will be wound up or HGRL will attempt to sell the IP. However, there is unlikely to be much value in the IP of the businesses which don’t pan out as expected.
The expectation is exits will be made via listing (Mr Keen has some experience here), trade sale or a sale of the entire portfolio.
As this is a new fund, there is no past performance. However, it’s worth highlighting some recent success stories within the sector. Note these are examples only and will not be held by the fund. They should not be regarded as an indication of the performance of future investments in the fund.
- Fastbrick Robotics. Australian Fastbrick Robotics have developed the Hadrian robot. The robot is capable of laying 1000 bricks per hour or 150 homes a year. It takes its instructions from a 3D CAD representation. The machine doesn’t sleep, eat or take breaks. It’s around 20 times faster than a human bricklayer. The business has a market cap of AUS$ 66.94 million.
- Intuitive Surgical. Intuitive Surgical develops, amongst others, the da Vinci Surgical System. The system allows surgery to be performed via robotic manipulators. As of May 2016, the business had a market capitalisation of $28.2bn and annual sales of $2.71bn.
Fees are charged to the underlying companies. There is an initial fee of 3.9%. Additional set up fees of up to £12,500 could also be levied against the investee companies if required to cover legal fees. The investee companies contribute towards the recurrent annual charges relating to fund management, which are made up of a £11,400 annual fee and £5,250 custodian fee for the whole portfolio.
There is a performance fee of 25% on returns over £1 per £1 invested. The performance fee is payable on an individual company basis, on exit.
With the individual company structure, if all but one of the investee companies fails but one makes money, a performance fee would still be payable on that one company. Whilst this structure is not ideal for investors, this is standard in the industry.
The usual risks with smaller companies exist with this SEIS offer. For instance, SEIS investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future. Specific risks with this offer are as follows:
- High risk of losing capital. By definition this is a high-risk investment which could result in a total loss, as well as having the potential to deliver high returns. In a portfolio of ten companies, one might do very well (although there are no guarantees), several could fail and the others might just tick along.
- No track record. As this a new offer, the team have not proven themselves capable of winding up a poor investment or capitalising on a good one. That said, the skill sets and resources at their disposal mitigate this concern to an extent.
- Follow on funding. Investments of this nature often require follow on funding. The additional funding rounds carry dilution risk for existing investors
- Key man risk. Whilst this may be a strength, the offer is heavily reliant on Dominic Keen. There is no investment committee so Sapphire Capital Partners must be able to scrutinise Dominic Keen’s work.
This is a fund which is very much in the spirit of SEIS. Investors are backing young, innovative UK companies which should help to fuel the wider economy. As a reward, they benefit from very generous tax reliefs and potentially some lucrative tax-free returns, providing they can tolerate the risks.
This is undoubtedly an exciting and fast growing space. We believe investors would be hard pressed to find opportunities elsewhere the sector especially in such a tax-efficient way. Dominic Keen is an experienced operator who is well placed to make the opportunity a success. The investment criteria appear well thought through and there have been some real success stories in robotics to date – although past performance is not a guide to the future.
This investment is only available to professional investors. You can apply to become an elective professional investor of Wealth Club.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment and read the provider’s documents carefully.