Cambridge Cluster

Calling all purveyors of exotic fish and exotic fish tanks; all purveyors of designer office furniture; all purveyors of fancy cars and all purveyors of highly qualified people.  Go North! Go North!

Lord Mandelson, with an eye to the elections next year, has pushed through the expansion of OneNorthEast’s (the regional development agency) plans for a £125m (could be up to £150m) venture capital fund that will be invested by a local fund manager in businesses in the region.  The money comes from the EU. According to Richard Tyler writing in the Daily Telegraph “Further ‘super funds’ are planned for the North West and Yorkshire and Humberside”.  The total of the funds could exceed £500million.  Local VCs will be retained to make the investments and show the southerners how to build companies north of the Wash.

Working on the usual VC take of 2% and 20% (2% management fee and 20% of the winnings), some £10m will be set aside for management fees.  Assuming that each company will need new offices, furniture, cars and people let us guess that there will be some 10% of the funds spent available to the purveyors of choice, a juicy £50million or so.

But not all the fees will be spent “up North” as OneNorthEast has retained Robert Drummond from his Surrey and London base.  Worthy names are on the board but no one from the Cambridge Cluster.  After all, as said in a recent report funded by NESTA, the success of the Cambridge Cluster was “serendipitous”.

Even more surprising is these comments in the article by Richard Tyler on OneNorthEast “The agency expects the fund will seek to invest all the money within five years and reinvest its profits. It estimated that “up to 850 small to medium-sized companies” could receive investment”.

At a recent NESTA event, one of the great movers of the Cambridge Cluster, Herman Hauser said that he and Amadeus Capital tracked 1,000 VC funded companies in the UK.  So Drummond proposes to nearly equal that figure within five years.  If the other “super funds” invest at a similar rate and scale, the UK is set for an explosion of VC funded companies.

Companies have always flourished in clusters with the Cambridge Cluster being all about technical companies with a connection with the University of Cambridge.  Clusters need lots of skilled people and successful entrepreneurs sharing their knowledge and experience – it takes time to build a cluster.

Perhaps we should encourage our two Laurences – John and Garrett (of Amadeus and 3i) to manage a fund(s) north of the Wash to be the purveyors of the skills of our cluster?  What riches might flow back to Cambridge?  What new names for Cambridge Colleges?

Lord Mandelson is keen to get the economy moving again and is championing regional super funds – VC funds run by the regional development agencies.  Of course this appeals to a politician who wants to get big numbers into the headlines and can rely on the agencies to invest the money in a plausible way.

Chris Rowlands, a former director of private equity group 3i , may be wasting his time preparing a report on the financing of smaller, high growth companies as his boss is already making the decision by signing off one £125million fund proposed by OneNorthEast with the North West to follow soon.

Even the name gives it all away, very competent and very nice people thinking that by coming up with good, catch names they will be able to show the VC world the way to do it.

I used to work for 3i in the late 70′s and have the highest regard for all they have achieved.  A few years at 3i was essential training for the private equity world.  But when you look at 3i and the private equity world, they make their money by clever financing schemes such as Management Buy Outs and Ins which involve complex financial instruments and lots and lots of leverage and debt.

But that is not the financial structure used by the successful VCs of high technology companies.  They invest in equity and as Chris Dixon and Fred Wilson make clear in their blogs, clever financing does not a successful high technology company make.  In fact, using a business plan resource such as Equity Fingerprint, you can see that good companies have simple financial structures.

I hope that Chris Rowlands’ report will make it clear that if we want to build successful private equity companies then promote a better understanding of complex financial structures.  If you want to promote successful high tech companies, you need to get entrepreneurs working in clusters; provide greater tax incentives to encourage entrepreneurs to risk more of their money by investing in start-ups and protecting their capital gains from too much taxation.

The trouble is that the politicians do not have time to spare, they have an election in the next year; so let us invest in a few plausible ideas and talk big numbers.  One key feature of these companies is that the founders will have a very small shareholding and will be well paid.  Again very different from an entrepreneurial run company in which the founders will have a significant share of the company.  The best entrepreneurs will pay themselves as little as possible to stretch the resources between funding rounds.

I wonder if Chris Rowlands reads the blogs of Fred and Chris?  I could not find his own blog but perhaps he does not use social networks.  Can we comment on his work for the report?