Review: Oxford Technology Combined Seed EIS and EIS fund
‘We have one general investment rule’ says Lucius Cary OBE of Oxford Technology. ‘And that is not to have any general rules.’ His comment is tongue in cheek but very much in line with the Oxford Technology Combined SEIS/EIS fund’s ethos.
The fund attempts to match academic technology developments with the more hard-nosed world of private equity. It’s a notoriously hard sector to crack. Patent risk, personnel problems and the danger of technology being usurped are inherent concerns, as is the risk of the investee company failing.
The fund is looking for businesses with the potential to deliver 10x to 20x return on investment. This is not guaranteed in any way: it’s the potential that is important. Not all will deliver, but the few that are successful can be hugely lucrative.
This is perhaps the epitome of high-risk high-reward investing. Oxford Technology have 30 years' experience of traversing these treacherous waters.
- Experienced early-stage manager with a long-standing network of Oxford contacts
- Technology-focused SEIS/EIS hybrid fund
- Access to innovative and disruptive businesses
- Low-cost in comparison to its peers
- Minimum investment £15,000
Lucius Cary has been investing in technology start-ups for more than 30 years and aims to invest in every deal personally. His co-manager Andrea Mica has been working in technology based businesses since 1992. Both have excellent academic credentials and a track record of adding substantial capital value to investee businesses. They are key in sourcing, evaluating, supporting and ultimately exiting investee companies. Oxford Technology is closely tied to the Oxford network of university alumni, staff and associates.
The Oxford Technology Combined Seed EIS and EIS Fund is a hybrid offer that invests predominantly in technology start-ups in the Oxford area. Investment in the fund is deployed over a three-year period. Oxford Technology intend to split the investment into three equal parts. The first will be invested under SEIS in year one with the balance invested in EIS in years two and three. This means investors should receive income tax relief of somewhere between 30-50%. An EIS investor could however opt to have their subscription invested solely in EIS opportunities over a 12-month period which can help with tax planning. Remember, tax rules change and benefits depend on circumstances.
Even by EIS standards, the Oxford Technology fund is a longer-term investment with an expected timeframe of 5-12 years. This seems to be prudent given the nature of the investments Oxford Technology will make. It is possible to achieve earlier exits from technology companies but the majority will take longer.
The staged funding process means investors will be able to follow their initial SEIS investment with subsequent EIS rounds as the investment is deployed over three years. The benefit is twofold. Investee companies will have greater capital to grow and investors will end up with larger stakes in companies that do well. The return profile of successful companies should be buoyed as a consequence.
This is unashamedly a high-risk high-reward offer. Lucius Cary argues it is better to have companies with the potential to deliver a 10x-20x return rather than lots of businesses offering up to 10% returns. Mr Cary has personally invested more than £100,000 into the fund on the same terms as investors.
In general, the investee companies need to be within one hour's drive of Oxford. Despite the limitation, Oxford Technology sees a lot of deals. They receive around 2,000 investment propositions per year. Of those, 100 or so are possible investments. From those, the team will select 5-6 for investment.
In Mr Cary’s experience, whilst the scientists or academics behind the innovation may be brilliant, they are largely inexperienced in operating a business. The one hour drive rule (perhaps a general investment rule after all) ensures Mr Cary and his team can be actively involved. They believe it is far more beneficial to have short meetings as little or as often as the management require rather than formal quarterly or monthly meetings.
An example Mr Cary cites is Designer Carbon Materials. When we interviewed him, he was about to head out to meet them. Professor Porfyrakis has developed an astonishing material that is believed to be the most expensive material on the planet In 2014 Designer Carbon Materials sold 200 micrograms for £22,000, a price of more than £100m per gram.
The material in question is [email protected], a sphere of 60 carbon atoms, like a football, with a single atom of nitrogen in the middle. This material is being used in a research project whose aim is to produce a precise atomic clock on a chip. This would enable GPS to be accurate to within about 1 millimetre. Current GPS technology is only accurate to around 2 metres. This development could have real application in driverless cars. Two metres doesn’t give enough leeway for two cars to pass each other unscathed on a narrow country lane or even some larger roads but one millimetre could do the trick.
The fund has been running since 2012. In that time, Oxford Technology has made 26 investments. Thus far, two have failed and three are going very well, according to Mr Cary. More failures and successes are anticipated. Past performance is not a guide to the future.
There have been no exits to date but this is no surprise given the age of the fund and its long time horizon.
Examples of holdings in the portfolio
We asked Mr Cary to provide details of an investment in the fund that is working well, one which is on track and a failure. These are detailed below.
Good: Combat Medical
Combat Medical develops and manufactures devices for the treatment of bladder cancers. It significantly improves patient outcomes and reduces recurrence. The cancer is the 7th most common and has a high recurrence rate of up to 78% within 5 years.
The business has developed an innovative way to deliver chemotherapy treatment. Traditionally, chemotherapy is delivered via a catheter at room temperature. It has been shown to be effective but due to the impermeable wall of the bladder the chemotherapy does not reach the root of the cancer. The distribution of the drug is also hard to control which leads to the possibility of recurrence.
Combat Medical has devised a system which warms the chemotherapy fluid and delivers it at a constant set temperature of 43 degrees centigrade. It does so via an innovative and patented aluminium heat exchanger. The chemotherapy is recirculated up to four times a minute around the bladder for an hour. This active delivery optimises the distribution of the treatment around the bladder and improves the penetration of the bladder.
The treatment is less painful and less expensive than surgery which is the current standard of care. The hope is that the Combat treatment will become the global standard of care. Each treatment uses a disposable piece of equipment which brings revenue to Combat.
Since the initial SEIS investment in 2013, Combat has come a long way and more than 17,000 treatments have now been carried out in 30 countries.
Oxford Technology has made multiple investments into Combat Medical since 2013.
On track: Animal Dynamics
Animal Dynamics is the brainchild of Dr Adrian Thomas. His expertise lies in understanding the ways in which animals and insects move through water and air and on land. His company, Animal Dynamics – an Oxford University spin out – aims to improve the efficiency of human travel by imitating and adapting animals’ and insects’ movements.
Since Oxford Technology’s investment in June 2015 the company has made strides with two programmes. The first is a human powered water craft called Malolo, inspired by the efficient way fish move through water. It’s hoped it will break the world speed record for a human-powered craft and ultimately lead to more efficient (and so lower fuel cost) propulsion for ships and more efficient tidal power generators.
Animal Dynamics is also developing a small drone based on a dragonfly.
Bad: Message Missile
Message Missile didn’t work out as planned. On paper, it is a compelling idea, and the brainchild of a teenager. Businesses could send text messages to customers based on their location. So, if a store had a surplus of an item they could run a flash sale – for instance hot croissants half price in the next ten minutes - and alert only those customers who were within 200 metres via text message. Tesco were interested in the business. However, the founder went to University and campus life proved too much of a draw for him to commit fully. Some progress was made in his second year but ultimately the company was closed.
Of the £41,000 investment, after all tax reliefs (for a 45% tax payer), the total cash loss was £11,275.
Oxford Technology’s S(EIS) fund is a relatively low cost fund. There is no initial fee levied on investors through Wealth Club. An annual management fee of 2% will be levied for the first three years. A fee of 1.5% is accrued for years 4-7 but only paid out of proceeds from exits. From year 8 onwards there is no annual management fee. A custodian fee of 0.175% is taken annually for year 1-7. Investee companies are charged a monitoring fee, and sometimes an arrangement fees for fundraising (but not on any investment from the fund).
As is usual with this type of SEIS or EIS there is a performance fee. If an investor puts £100,000 in the fund, the performance fee starts when, after the payment of all fees, the investor has received back £120,000 (including reductions of income tax). After this, the investor gets 80p of each extra £1 distributed. The fee is levied at a portfolio level which is welcome. However, including tax reliefs in the calculation is relatively uncommon and not particularly satisfactory.
Alongside all the usual risks of investing in smaller companies – illiquidity, risk of investment loss and a greater chance of failure – the risks are greater in this offer. Technology companies are prone to high failure rates and it is difficult to back them. The value of the business can often hinge on the success of a single product or idea. Moreover, this is not a deeply resourced team and there is key man risk with Lucius Cary and Andrea Mica.
It should be noted this is high risk growth fund. The fund actively expects, of around 10 investments, one might do extremely well and carry the others, which could fail or simply tick over.
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.
Oxford Technology is an experienced early-stage manager. It is one of the leaders in this type of investing and is well placed to exploit opportunities in and around the Oxford area. Technology lends itself to SEIS and EIS. For investors looking for a technology growth fund with all the risks – and potential gains – this brings, Oxford Technology is a worthy candidate for consideration.
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