Review: The British Robotics Seed Fund 2
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
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 2, in conjunction with Sapphire Capital Partners LLP, is one of the first SEIS and EIS funds 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 in its second year; the first fund has deployed capital but there is no track record of exits. 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.
- Hybrid SEIS / EIS offer targeting 3x return, not including tax relief (returns not guaranteed)
- A portfolio of around five early stage robotics companies
- Fast growing sector, capitalising on Britain’s strength in robotics development
- Fund 2 will invest in the 2018/19 tax year
- Exit targeted in three to eight years (not guaranteed)
- Pay no initial charge through Wealth Club
- Minimum investment £10,000
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The fund is the brainchild of Dominic Keen, a successful British technology entrepreneur who holds a Masters in Engineering from Cambridge University. His company, High Growth Robotics, sources deals for the fund. He began his career in venture capital and in 2006 founded software business mPorium. This floated on AIM in 2013 and has a current market cap of £46 million (Feb 18). So, Dominic has experience both in robotics and in developing early-stage businesses.
Investors can expect a portfolio of around five early-stage robotics companies. The majority will be invested in new SEIS qualifying opportunities, with the remainder used to provide scale-up funding to companies under EIS, within the first fund’s portfolio or other eligible EIS-qualifying companies.
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 fund will aim to make investments in the 2018-19 tax year, so please note it is not likely to be available for carry back to 2016-17. The fund aims to deploy between £25,000 to £150,000 per investment. Note also the hybrid nature of the fund means the tax relief is likely to be a blend of mainly SEIS but some EIS relief.
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 1,000 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.
- Intuitive Surgical. Intuitive Surgical develops, amongst others, the da Vinci Surgical System. The system allows surgery to be performed via robotic manipulators.
Fees are charged to the underlying companies, not directly to the investor. There is an initial fee of up to 3.9%. The investee companies contribute towards the recurrent annual charges relating to fund management, which are made up of a £12,000 annual fee and £4,000 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.
Please see the Information Memorandum for full details.
The usual risks with smaller companies exist with this SEIS/EIS offer. For instance, SEIS and EIS 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 five companies, one might do very well (although there are no guarantees), but the others – or even all of them – might fail.
- 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 could 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.
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 08.02.18
The British Robotics Seed Fund 2
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