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London Co-Investment Fund

Surviving (Thriving) Under The Pandemic

We have completed our bi-annual portfolio review of the London Co-Investment Fund (LCIF), the results of which should be broadly reflective of the wider early stage/ VC funded ecosystem.

LCIF Profile

Just as a reminder, LCIF invested £23M in 150 businesses from 2015-2019 alongside 14 selected co-investment partners representing all categories of early stage investors from Angel Syndicates, (S)EIS (tax incentivised small annual funds) Fund Managers, to institutional VCs and Crowdfunding Platforms.

The fund was supported by the Mayor of London and its investees have created an estimated 3,000+ new high value jobs in the London economy.

Average initial investment by the fund was c.£150K in Rounds of £500K – £1.5M. The average pre-money valuation was just under £3M. There is a broad sector spread as per the graphic below.

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 Covid Impact

At the time of our last review Covid had just struck and there was significant concern over the health of early stage businesses, that are so reliant on investor funding until they scaleup. We developed a four-pronged framework to assess as objectively as possible, the impact of the pandemic on individual businesses. This included impact on near term revenues, cash position, on teams and on their long-term relevance in the new Covid world.

Now that some time has lapsed and the businesses have had time to adjust, the emerging picture is that of resilience and in some cases improved outlook.

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Vast majority of the businesses have reported minimal or moderate impact on revenues. The aggregate revenues across the portfolio are actually up 50% since March 2020.
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And courtesy of the significant investment support made available to the sector, over 75% of the portfolio now has at least 6 months’ worth of cash.

Over 50 of our 125 live businesses collectively raised in excess of £200M in funding during the period, half of the raises in convertible loan notes, but the rest (majority of the amount raised) in equity rounds, most with valuations at or significantly above their previous rounds.

If LCIF reflects the wider sector, it is safe to say that the sector has borne this pandemic not too badly.

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These are young, hungry, agile businesses creating disruptive business models. It should then not be surprising that the vast majority (bar some prop-tech and travel/ leisure) of the businesses do not see any impact on their long term relevance. Some actually see their services very positively impacted by the pandemic.

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Of course, hiring plans were pushed out and several cuts were made where the immediate value added by the roles could not be justified, especially against the backdrop of perceived difficult fund-raising environment.

Valuation profile

So, what does the portfolio look like, nearly six years on from the fund launch and nine months since the pandemic struck? Remember, this was an early seed stage portfolio with average team size of under 10 and zero revenues at initial investment.

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The number of companies dead or written off have increased, as have those impaired due to underperformance. However, nearly half of the impairments due to Covid could no longer be justified and have had to be reversed. As is not atypical of early stage VC portfolios, the ones outperforming, comfortably cover the losses. The aggregate valuation is up 10%, back to the level about a year ago. Overall fund now stands at 1.5x the initial corpus.

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Sector performance also shows confirmatory trends, in that Fin-techs, Big data/ AI/ ML first businesses have been the winners. Subscription based digital/ mobile, direct to consumer models have also benefitted. Digital health businesses have also done well, but the longer lead times to solutions, mean that the valuation impacts are not immediately apparent. Business services have been subdued as large corporates have been slower to recommence their innovation projects.

Musings on the Outlook

  1. As with listed equity markets, digital/ tech businesses have provided a defensive profile. Listed equity markets, however have seen a recent trend in rotation out of big tech back to value stocks. It needs to be seen if that might manifest early stage VC investing too.
  2. Institutional VC fund raisings have not been discouraging, but angel/ EIS raises have certainly been subdued this year, which will impact the earlier end of the funnel in the coming year.
  3. Support from investors has shielded the businesses from the most significant risks for this stage. Thanks to government programmes and portfolio focus of institutional investors, this has not been the car crash most had feared at the onset of the pandemic.
  4. Nevertheless, risks remain. Especially for the large number of convertible raises, which will have diluted effect on current holdings, unless the businesses’ performance is able to attract substantial new capital at higher valuations commensurate with their growth.
  5. As we hopefully look to the roll out of mass vaccination and impending demise of Covid in 2021, more of the affected sub-sectors will come back and those parts of the portfolio will show renewed performance.

Like most colleagues, we cannot wait to get back to more natural ways of interacting, Zoom fatigue is definitely setting in. Here’s looking forward to a more benign and hopeful new year and in the interim, wishing everyone well, especially our investee founders and teams and co-investors.

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London Co-Investment Fund

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