Tuesday, 6 October 2015

Sell-side M&A

Know your buyer - how to strike the right note on your big deal

Exits are the most rewarding stage of your company's growth journey, in more ways than one. The planning process for your exit starts at the very earliest stages, and will continue if you take on third party investment, as you seek to demonstrate to potential backers that there is a realistic prospect of a lucrative exit in reward for the faith required of them.

When you do come to start a more proactive marketing and sale process, it is critical that you have a good understanding of how your potential buyer will approach its decision making process. You should be looking to put yourself in their shoes so you can pre-empt any concerns they may have, and tailor your approach to negotiations to ensure that you get the best deal.

A key differential, if a broad one, is that some buyers will be trade buyers and some will be institutional investors who will be buying your company as a financial investment.

Trade Buyers can offer a great fit
  • The classic trade buyer is a company which is looking to make acquisitions in its own industry. Commonly, trade buyers are motivated by the prospect of synergies which can give rise to economies of scale. However, synergies can extend to other strategic objectives, including the need to enter new marketplaces, the need to grow market share and other subtler synergies such as complimentary intellectual property. These tend to be longer term goals than those of purely financial buyers.
  • Trade buyers will often have a deep practical knowledge of your business, arising from its own activities. This means that they may place less of an emphasis on retaining and incentivising an existing management team. Trade buyers will also make thorough plans for integrating your business into an existing outfit. 
  • From a valuation perspective, the trade buyer will need to get comfortable that their agreed valuation reflects the value of identified synergies less integration costs. Their diligence will tend to reflect this.
  • If your most likely exit route will be to a trade buyer, you should focus in your planning on how you can make their deal easier. You need to show them how your business can be transplanted as seamlessly as possible into theirs - shared culture, functional systems and management, and a dovetailing between your strengths and their weaknesses.

Financial Buyers can offer great firepower
  •  Financial buyers will need to see growth potential in your business as it stands. They will also generally be attracted to targets with the strong annuity revenues required to support leveraged finance and where they have a good prospect of a short to medium term profitable divestment. If it essentially an MBO deal or variant which is proposed, then there will be a strong focus on the management team of their target. Unsurprisingly then, a financial buyer will focus much of its diligence on revenues and on management.
  • Increasingly, private equity houses are able to finance their deals from more sophisticated funding products on a global basis via multiple sources. By contrast, trade buyers without the benefit of a cash war chest for acquisitions may find it much harder to access finance for their acquisitions.
  • In recent years, trade buyers have powered the M&A market in the wake of private equity retrenchment since 2009 in the aftermath of the credit crunch . However, PE is well and truly back on the scene. It is likely that PE buyers will take back their place at the head of the M&A market: as confidence amongst institutional investors continues to grow and the availability of finance continues to improve, trade buyers will struggle to match PE valuations.
  • If your most likely exit route will be a private equity buyer, you need to show strong cashflows, long term contracts with the "stickiness" necessary to underpin revenue forecasts. You should also consider how to help them plan their own exit - what are the areas for organic growth? Your PE buyer will need to see something left for them in terms of hot future prospects for the business.

Hybrid buyers can offer fit plus firepower
  • Increasingly we are seeing buyers who are part-trade, part-financial entering the market. Essentially, these buyers are pursuing variants of the "buy and build" model. Activity amongst hybrid buyers is a particularly noticeable trend in capital-intensive sectors where PE players can see a case for investing in economies of scale synergies. There are more and more PE-backed investors who are specialising in this approach and targeting highly focused niches.
  • Hybrid buyers will often seek to make acquisitions on the strength of their own balance sheet. However, you should be aware that some hybrid buyers will be negotiating with their own financiers  concurrently with closing the deal with you. In these circumstances, it is especially important that timetables are adhered to such that your buyer can in turn progress its own financing transaction.
  • Hybrid buyers are particularly noticeable in certain IT sub-sectors at present. However, it would be no surprise to see this trend on the increase in other capital-intensive sectors, such as cleantech and biotech.
As a seller, you do need to recognise the nature of the buyer or buyers you are dealing with. If you are running a competitive process with both trade and PE buyers, you will be struck by the difference in their approach. Ultimately, if you and your deal team have this level of strategic understanding of the drivers behind buy-side behaviour, this will translate to tangible value. Once you know where your buyer's buttons are, you can start to push them!

Thursday, 11 June 2015

Why SAFEs are increasingly being entered into the UK…

Increasingly, founders of tech start-ups in the US are issuing simple agreements for future equity (“SAFEs”) as an interim equity fundraising instrument. In turn, we are starting to see these instruments creeping into the UK start-up scene. So what are these SAFEs, and why would you use one?

All too often, I am witness to painful valuation discussions at pre-Series A stages which distract founders and can taint their relationship with the early investors. In the right circumstances, SAFEs provide a useful alternative.

SAFEs are simple equity subscription commitments which are used instead of conventional seed equity issues or convertible loan notes. They are a helpful tool in that, unlike convertible loan notes (which commonly carry an interest rate and a redemption mechanism for the period that the notes remain unconverted), they are contracts for pure equity. The key benefit over a share issue though, is that the valuation need not be fixed at the time the SAFE is put in place; rather it is commuted into the next funding round when the equity committed by the SAFE is actually issued, potentially with a discount or cap on valuation attached. SAFEs contain basic reps and warranties, and provide for the SAFE holder to get customary investor protection in proportion to that offered to future investors. As a result, SAFEs tend to be much quicker to negotiate and close than the alternatives.

In the UK, while we have seen a number of SAFE proposals in recent months, they have not quite entered the mainstream. We do have something similar, in that the practice has developed for SEIS/EIS investors who need to provide ad hoc financing to companies to enter into “advance subscription” commitments with companies. These advance subscriptions developed as a practice owing to the restrictions in the SEIS/EIS legislation on use of convertible loans. So effectively, the advance subscriptions are irrevocable commitments for future equity. They are not always simple (compared to a SAFE agreement which can be just 5-6 pages long) but they operate in a similar way.

So, as the funding environment remains strong in the UK, I predict that we will see more and more of the hottest early stage companies deferring difficult valuation discussions during seed stages, and instead doing SAFE financings, which can be structured in such a way as to take advantages of the sought after SEIS and EIS tax reliefs.

Investors who may be tempted to agree to a SAFE will need to get comfortable that the Company is in good shape, and that matters like founder vesting/ leaver provisions and other basic protections have been provided for by the Company. While the funding climate is strong at present, a five page SAFE will rarely by itself give enough comfort to first time investors. Either (i) the SAFE needs to be put in place alongside a customary governance regime containing typical investor protections; or (ii) SAFEs will be used more as emergency or bridge financing where a conventional round has already taken place.

However, as long as the funding climate remains strong, we will surely be seeing more of these.

Sunday, 2 February 2014

How can anyone say there is "a little less tech luster in Cambridge" right now?

Last week, the New York Times ran a blog by Mark Scott entitled "A Little Less Tech Luster in Cambridge" New York Times Blogpost 26th January, the gist of which is that Cambridge is losing out to Tech City in East London. The post reports that "Despite the city’s established pedigree, analysts say Cambridge is starting to lose some of its shine compared with London’s tech industry". As a legal advisor to multiple tech businesses, many of which are based in Cambridge and many of which are based in London, my view is that these unnamed analysts could not be more wrong... the outlook for Cambridge has never been better.

Tech City has been a great success as a brand for East London, and there are many exciting businesses operating in the wider Tech City community. Its principle focus is on digital media, internet commerce and mobile, with other distinct more specialised communities, such as fintech and adtech. However "tech" in Cambridge has distinct characteristics to the "Tech" of Tech City. It is not as simple as 'Cambridge for hard tech, Tech City for soft tech', but I often hear this sentiment and can understand why. These intrinsic differences in the nature of activity in the two clusters have been highlighted by venture capital funding trends after 2009. VCs were becoming more risk averse - they tended to focus on Tech City start-ups because they were less capital intensive, and the rounds which did take place in Cambridge tended to be later stage, less ambitious, more de-risked propositions.

So the two clusters are massively different in composition and focus. However they are also highly symbiotic - both clusters can and do learn a great deal from one another.

But leaving aside the issues with any Cambridge/ Tech City comparison, here are just a few reasons why Cambridge is burgeoning and will continue to do so:
  • Global tech players are still choosing Cambridge. Not only did Microsoft Research choose Cambridge for their European Research Lab, but in 2013 AstraZeneca announced that their new global R&D centre and corporate HQ would be in Cambridge, situated on the new Biomedical Campus. The reason for this is Cambridge's human capital - its overall pool of technical skills and talent is unrivalled.  
  • Cambridge has a proven ability to grow global companies. So ARM is the poster boy for Cambridge at present, but don't forget Autonomy's rise to tech stardom (notwithstanding the unfortunate aftermath). In total, Cambridge has produced Cambridge 11 tech companies worth over $1bn - a few more than Tech City's Silicon Roundabout to date!
  • Cambridge University attracts and supports the best. The global league tables speak for themselves. However there is also a fantastic framework for entrepreneurship. The University's commercialisation and spinouts arm, Cambridge Enterprise saw its best ever return in its 2013 annual results. The University is also supporting a really exciting new venture fund, Cambridge Innovation Capital, with a targeted mission and long term investment strategy - yet more great news for Cambridge. And just in case you wondered, Oxford is doing well, but its entrepreneurial community is still playing catch-up.
  • Cambridge is sorting out its infrastructure issues. One of the criticisms levelled at Cambridge in the past has been the constraints to growth imposed by local planning policy, transport and infrastructure links. This is changing very rapidly. Not only is a major expansion of the city underway in terms of house building, but its infrastructure is finally getting the attention it needs (e.g. a state of the art guided busway and a new railway station for North Cambridge).
  • Cambridge has great communities for tech. The Cambridge ecosystem is mature and there are plenty of support networks. Great examples include Cambridge Wireless, Cambridge Network and One Nucleus. There are also some fantastic science and research parks in the area, too many to list in fact. Also, there is a well established investment community in the city, including angels, corporate venture funds, vcs and growth capital providers. The tech consultancies of Cambridge have international renown, and have their own great spin-out success stories.
  • Cambridge's pipeline is in rude health. Cambridge has a great pipeline of up and coming companies too. Check out the Killer 50, and a selection recently covered by the Observer. Also, the Cambridge Cluster Map makes for pretty inspiring reading. Many of the most exciting Cambridge companies are helmed by seasoned entrepreneurs, some of which remain entirely self-funded. As these star prospects grow, they will not all find themselves under pressure from VCs to exit early (as has often been the complaint) - those in the know will tell you that there are some highly scalable Cambridge-grown technology companies which are flying pretty much under the radar. My firm is currently compiling its disclosable deal stats for the whole of 2013 - early indications are that we have acted on around 30-40 funding rounds for Cambridge tech companies in 2013. We are so proud of our stable of Cambridge companies, and confident that it will produce some spectacular winners in the years ahead.
So all told, I could not be more excited about the prospects for Cambridge's tech scene. It is very different to Tech City in its sector focus. Maybe Cambridge has not garnered the sort of coverage and policy focus that sexy Tech City has, but what Cambridge lacks in style it more than makes up for in substance. The unnamed analysts should pay Cambridge a visit some time...

Wednesday, 18 December 2013

Why entrepreneur-led early collaboration and consolidation makes sense for small biotech...

Try boiling one potato in a whole saucepan full of water - it takes ages, is wasteful and, as economists would say is highly inefficient. There are two solutions. You can tip out most of the water and try to find the perfect amount to boil one potato (try modelling that!) or you can throw in a few more spuds. That is the obvious solution and it is why the single-product small biotech company is an extravagance that will rarely provide a sustainable model, either for investors (who generally recognise this) or for entrepreneurs (many of whom do not)!

For some time the investment climate for UK small biotech has been changeable at best and at worst it has been downright chilly. It is increasingly noticeable that this mixed climate has been reflected in not just on the investor side (i.e. in terms of the nature of investment activity and identity of investors), but also increasingly in the organisation of small biotech start-up companies, and the outlook of the entrepreneurs behind them.

It has been commonly accepted for over a decade that consolidation is required. However, it is time we started seeing consolidation taking place at the earliest stage and being entrepreneur-led rather than corporate or investor-led.

Changing nature of investment activity

By way of context to the pressures on small biotech, here are some key investment trends that have been reported (and I have observed first hand) in recent years:
  • Fundamental challenges with small biotech investment include that:
    • it is capital intensive;
    • short to medium returns are unlikely owing to the timescale of development; and
    • is it inherent risky, and that risk is binary - sooner or later start-ups can be marked as a success or a failure, and there is rarely any middle ground.
  • It is no surprise then that there has been an ongoing retrenchment by venture capitalist activity in biotech - the biotech development model and the VC investment model has for some time been in danger of looking irreconcilable.
  • The exit data corroborates this retrenchment rationale. In 2012, the average period for VC-backed companies to reach an exit was averaging approximately 9 years - this is just not compatible with the VC fund management model.
  • This in turn had led to a growing unease amongst big pharma companies, who look to biotech for their pipeline of future blockbuster drugs (against a looming backdrop of various cash cow blockbusters coming off patent), which in turn has spawned increased levels of corporate venturing and bio-pharma collaboration activity in recent years.
  • In medium to large biotech, the trend of the last decade has been one of consolidation. Biotechnology M&A has served to grow the product portfolios of the most successful companies, for some has been an integral path in the journey to becoming a fully integrated biopharmaceutical company (the so-called "FIBCO") and/or to exploit more mundane synergies of cost and management.

So how does the consolidation trend fit in?

The corporate venturing has been noticeable and welcome. However, a key element of the above snapshot  for small biotech companies is the recognition of fundamental efficiency drivers which can mitigate against their intrinsically capital intensive nature.

Now, as any business school grad will be able to tell you, efficiency is the key tenet of the mainstream theory of the firm. The neo-classical economic analysis of Ronald Coase reaches the conclusion that the reason that people group together into collective economic units is to minimise the transactional costs amongst one another that they would otherwise incur in doing business, and thereby maximise their collective profits. A firm should therefore continue to grow in size as an economic unit until it becomes so bloated that the costs of doing business internally are greater than those prevailing in the wider market. The original Coase analysis has been subjected to sustained challenge since its arrival in the 1960s, including from those who point out that managers will often pursue personal utility instead of maximising profit (including salary, security, power). So while, in its purest form, the theory of the firm mitigates against the small start-up, in fact start-ups can thrive where they operate in a more efficient way than larger rivals (because of market imperfections, brought about by innovation, a disparity of knowledge/ skills, and other competitive advantages, including the super-human abilities of many entrepreneurs to leverage their waking hours!). When you add to this the attention that investors in start-ups pay to aligning their (long-term profit making) objectives with the founders interests, start-ups start to defy Coase's perfect market analysis and revisionist theories of the firm start to ring true.

Despite the fact that the revisionist theory of the firm has been the staple diet of the education of many C-level executives in venture, PE, banking and the corporate development/ M&A world, the imperfect markets in which we operate can defy traditional analysis. Even the most nimble start-up will struggle to defy the bigger is better analysis where barriers to market entry and fixed costs are high.

The overall consolidation trend is in evidence in a number of ways-
  • Popularity of research campuses which can bring great synergies amongst occupants (e.g.  Babraham Research Campus)
  • Apparent Investor appetite for Biotech Exchange traded funds
  • Buy and Build strategies
  • "Stabling" of biotech companies by CVCs
This is not the "consolidation" seen in the early 2000s, when many biotech companies were bought solely to be asset stripped and have their failing development programs shelved. This is genuine constructive consolidation, grounded on a very practical economic basis.

In this context, it is hard to see why the trend to consolidation should not continue. I predict increasing activity amongst buy and build merchants in the small biotech sector over the next few years, not to mention a continuing emphasis on biotech communities rather than biotech clusters.

What form should entrepreneur-led consolidation take?

Many seasoned biotech entrepreneurs have been running various companies in parallel on a portfolio basis for years for this very reason. However, the time is ripe for a more organised approach amongst entrepreneurs - the benefits of a shared base of both cost and human capital plus an ability to benefit from a genuine product portfolio should rightly be overwhelming. More biotech start-ups should be joining forces!

If a research scientist wishes to develop and commercialise a piece of research, instead of starting a single purpose company, wouldn't it make more sense if possible to join forces in a single economic unit with people developing similar but distinct technology from day 1? Thus, when it has become clear after some development that any given idea is a non-runner, all efforts could be focused on the most promising avenue(s), and the spoils shared.

If I were a biotech entrepreneur, I would be looking around for any available opportunity to join forces with others in the same position as me from the earliest stage. This is not so much a cost case, but is about the benefits - it is about increasing the chances of getting a reasonable reward for the personal financial, emotional and time investment involved with a start-up. The loss or sharing of control would not be a problem for me - if the company takes off, there is a good chance that an external management team would need to be hired in any case.

It is therefore not just investors that should be driving portfolio theory, but also entrepreneurs who are pragmatic enough to realise that boiling just one potato is unlikely to make sense for them...


Sunday, 15 September 2013

Venture capital in Scotland - here's my take...

I had a very enjoyable trip to Edinburgh last week to take part in the “Building an Entrepreneurial Company” programme of Entrepreneurship Masterclasses, delivered in a partnership between Scottish Enterprise and Highlands and Island Enterprise (HIE). Edinburgh is a fantastic city and it takes no time to get into the centre of town from the Airport (potentially even less imminently as the much awaited and somewhat beset tramline is due to be completed next summer).

On various occasions, I have acted for Scottish companies on their funding rounds. I have also acted on several M&A deals involving Scottish companies. I guess I had always seen the Scottish scene as a fully integrated part of the overall UK venture capital market. However, I had not fully appreciated some of the Scotland-specific challenges and opportunities and my visit left me chewing on the distinct character of the venture funding ecosystem in Scotland.

What is so distinct about it, I hear you ask. Here are some of the takeaways I drew from the most recent report on the Risk Capital Market in Scotland, as prepared for Scottish Enterprise by the Young Finance Company:

- Investment levels in Scotland are resilient. By comparison to the London-centric venture capital market, risk capital investments in Scotland held up pretty well during recent years of economic uncertainty, especially in the deal band size of £100k - £2m. Whereas many of us experienced deal flow in England dropping off a cliff in 2009, activity in Scotland proved to be more resilient, and indeed 2010 was a record year for risk capital investment in Scotland;

- Institutional VC/ growth capital investment activity is curtailed north of the border. The available evidence suggests that Scottish companies find it harder to secure large investments from VC houses. VC houses investing in Scotland tend not to do so on a regular basis - there are not too many formalised links between Scottish companies/ angel investors and VC/growth capital investors (which tend to be London-based);

- Scottish angels are a force to be reckoned with. Scottish angel investment activity is in rude health. The angel market has matured nicely and is benefiting from the SEIS and EIS reforms;

 - Scottish Universities deliver spin-outs. Scottish Universities remain excellent from a research perspective, but also create proportionally more spin-outs than universities in other parts of the UK;

- Intervention is coherent and responsive. Government intervention in the risk capital market seems to be to be well thought out, proactive and ambitious in a good way. The agencies, such as Scottish Enterprise and HIE, are nimble and constantly looking to develop opportunities for Scottish companies. Speaking with their delegates in Edinburgh, I was struck by their passion for the companies and entrepreneurs they work with - they look after the interests of their clients as if they were their own and are genuinely striving to "walk in their shoes". This impression was supported by what I have since read about the approach of these agencies, which seems to be marked by responsiveness to trends and a determination to remain "fit for purpose". No doubt this culture of iteration is one of the reasons why the Scottish Co-investment fund remains a torchbearer internationally and many other countries have set up their own similar institutions seeking to replicate the "Scottish model";

- There is genuine sector strength in life sciences and renewables. Scottish venture funding is squarely focused in particular on life sciences and renewables. While there are pockets of excellence in digital media (such as the Dundee computer gaming hub which was catapulted to global prominence with the success of Grand Theft Auto) and the Oil and Gas industry around Aberdeen has spawned opportunities, it is really those two industry sectors that characterise the asset class in Scotland; and

- Exit data is underwhelming though. The exit climate for Scottish companies has been challenging: in 2011 the average age of an investment at exit was 10 years.

What might this mean in practical terms then? Here's my take on this:

- Things are different in Scotland. The Scottish market is segmented from rest of UK. In my view it has become a quite distinct market. Since my visit to Edinburgh, I traded some perpsectives with some VC clients who had made some investments in Scottish companies. Their view was that the distance to Scotland was not a barrier in their investment appraisal process, although as it happened their Scottish investments had produced underwhelming returns and for that reason there was a barely stifled groan when the geography was mentioned!;

- VCs should ensure they have good links with the Scottish market to ensure they are not missing out. Researchers suggest from their discussions with Scottish investors that "the chances that good businesses are being rejected are slim" but I am not so sure - indeed the recent efforts by the public agencies to propogate links to non-Scottish sources of finance suggest that the profile of Scottish investment opportunities needs raising in the wider market. It is a real boon to the Scottish market that the Business Growth Fund HQ is in Edinburgh and I suspect that they will be at the forefront of a reawakening of institutional risk investment in Scotland. In particular, it seems to me that better links between Scottish angels and English-based VCs would create considerable mutual benefits (not to mention transatlantic links, building on the fantastic links and shared heritage between Scotland and the US - if there is not already a showcase of Scottish technology and investment opportunities at the Open golf championships, this would seem to me to be quite a low-hanging fruit to pick);

- The distinct sector focus is both a strength and a challenge. The sector focus on both life sciences and renewables means that opportunities in Scotland tend to be at the capital intensive end of the venture investment spectrum, while the UK-wide trend has been to move towards less capital intensive opportunities amidst disappointing venture returns in recent years. This tentative conclusion is supported by the exit data - VCs want a 3-5 year timeframe to exit. An average 10 year investment age will draw a shudder from many institutional investors but should not be surprising given the nature of the sector focus. Also, given this really clear sector focus, it would make sense for the Scots to follow the lead of London's "Tech City" and consider whether some geographical branding could help raise the profile of one or more clusters of excellence (watch this space for Edinburgh as Cell City!!); and

- Crowdfunding may be big in Scotland. Alternative funding mechanisms (which are geographically agnostic e.g. crowdfunding) can work well for Scottish companies. Is it a function of the distinctive Scottish funding market, I wonder, that Edinburgh craft brewery Brewdog recently spurned VCs et al to raise £3m in a crowdfunding offer in the space of just two months?

All told then my visit was a real eye opener. I am very keen to maintain links with my new contacts, and I will be keeping an eye out for opportunities to help others to understand a bit more about the risk capital investment scene noth of the border.

Thursday, 15 August 2013

Alumni-focused venturing in UK institutions

I'm seeing increasing levels of alumni involvement with University venture activity and expect this trend to continue. Here's my take on this...

In recent years, UK universities have been working hard to develop their alumni networks with a view to raising their endowments. They have had to do so in order to mitigate the very real risk of losing ground to competitors in the United States and elsewhere amid a gulf in funding levels. At the same time, they have also had to develop their corporate relations, and this in turn has brought about improved and more systematic links between universities and industry.

One very positive by-product of this backdrop of reform is increased levels of more formalised involvement of alumni in University venture activity. The great benefit of this type of activity is that it allows multiple objectives to be achieved in terms of broader alumni and corporate engagement.

The outstanding example in Cambridge is the University of Cambridge Enterprise fund, which was launched in May 2012 to allow alumni and friends of the University to invest in new companies while benefitting from the attractive SEIS and EIS tax reliefs. In doing so, Cambridge was the first university to launch its own SEIS fund, and the first to combine the SEIS with the more established EIS. The fund is managed by London-based investment firm Parkwalk Advisors, and invests in new companies supported by Cambridge Enterprise.

 Another example of alumni venturing in Cambridge comes from the Cambridge 800th Anniversary Campaign. The University of Cambridge Discovery Fund, launched in 2008, is an evergreen fund making proof of concept, pre-licence, pre-seed and seed investments, enabling young companies based on Cambridge research to succeed. This fund was launched as a means for philanthropic support, from corporations and individuals, for the very early high risk stages of new company formation. It is essentially benevolent seed money which in the past would have come from central funds.

In Cambridge, the Judge Business School is on trend, having established “Accelerate Cambridge” as a start-up accelerator in May 2012, as a valuable new part of the ecosystem of support for entrepreneurs in Cambridge. With less of an emphasis on funding, the program draws on the JBS network to focus on venture creation by teams with a structured combination of coaching and mentoring.

Oxford too provides some great examples, including The Saïd Business School Venture Fund. This is a student-led organisation which provides investments to Oxford-related companies. The Saïd Fund was started in 2006 with donations from Sir Phillip Green and David Bonderman. The Fund is currently in the process of expansion with a view to making investments in excess of £1million. Saïd Fund investments are made in the same manner as made by institutional investors, and also invests alongside venture capital and impact investment funds in club deals and syndicates. Student members of the committee are responsible for all parts of the investment process and work collaboratively on investment decisions and portfolio management. By working with investment professionals, student members of the committee have a unique opportunity to interact with leaders in their fields and refine their investment knowledge and acumen. What a great way to leverage MBA talent and networks at every level and bring through the next generation of leaders in venture capital.

 A similar model to the Saïd Fund has been set up by Cass Business School. The Cass Entrepreneurship Fund is a £10 million venture capital fund, providing growth equity to start-up and early stage companies. The Cass Entrepreneurship Fund finances a number of high-growth young businesses across the Cass Business School community, as well as providing general support and incubation facilities. The Fund was established in 2010 with the support of Peter Cullum CBE, one of Cass' most successful entrepreneurs and the Founder of Towergate Insurance. In contrast to the Saïd Fund, it is not student-run as such but it does look to leverage the Cass talent network similarly.

In the same vein, Sussex Place Ventures invests in earlier stage technology businesses using the London Business School alumni network. Sussex Place Ventures draws on the knowledge, expertise and experience it sees in the London Business School alumni network to help find, validate and invest in technology businesses looking to grow. Its stated goal is straightforward: to create business wealth for entrepreneurs, superior risk-adjusted returns for investors and benefits for the London Business School, which shares in the fruits of the investors’ success.

There are other various other great examples of alumni-focused venturing across the UK in addition to those set out above, like the University of Herts enterprise fund and the seed investment clubs which are being fostered within the alumni communities of forward thinking Oxbridge colleges (e.g. Downing Enterprise).

In this way, university investment activity in the UK, in many cases led by the business schools, has increasingly adopted an approach that goes beyond pure tech transfer and commercialisation of research. It is a means for institutions to engage with their alumni and provide them with investment opportunities/ sources of funding at the same time.

This approach is not without challenges, including that these venture funds increasingly find themselves competing with angel and institutional investors whose outlooks have been buoyed by the SEIS and EIS tax reliefs. However, to put the trend in international context, in 2012, the Shanghai-based China Europe International Business School (CEIBS) launched CEIBS-CHENGWEI Venture Capital, a venture capital fund of US$100 million which will only invest in early or growth stage businesses founded or managed by CEIBS alumni. In the face of this kind of heavy hitting approach elsewhere, we will surely see more from this relatively new investor class in future.

This is a highly positive development, given the retrenchment in the mainstream institutional VC sector in recent years, and the need for Universities to find new ways to extract value from their networks. I hope to see the trend develop.

In the Taylor Vinters team, we work on a diverse range of venture capital, early stage investment, technology transfer and University spin-out transactions. We worked on 25% of all University spin-outs reported in the most recent PraxisUnico Spinouts UK survey. In doing so, we encounter the various different spin-out approaches adopted by the institutions who are most frequently carrying out venture activity.

A version of this post was first published by me in Business Weekly - http://www.businessweekly.co.uk/ on 15th August 2013.

Thursday, 8 August 2013

Luis Suarez, Liverpool and the dangers of soft obligations in contracts

It was reported today in the Daily Telegraph that Liverpool striker Luis Suarez has been ordered to train alone for several weeks after being accused by manager Brendan Rogers of showing "a total lack of respect" to his club with his public demand to join Arsenal.

Clearly, this represents a breakdown in relationships. It is also the culmination of the saga of Suarez's posturing for a transfer. It's an unfortunate situation for the club and the player.

While football transfers can be the type of deals that really put the ego in negotiations at the best of times, the situation seems to have been fuelled in part by the wording of the Suarez contract, an excerpt of which was quoted by Gordon Taylor, the PFA chief executive who is seeking to mediate between the player and the club on this matter, reported as follows:

"There is a clause in there that if Liverpool do not qualify for the Champions League and then they do receive a minimum offer of £40 million, then the parties will 'agree in good faith to discuss and negotiate in good faith' and see what transpires".

When the contract was originally negotiated, this provision will no doubt have seemed like a good alternative to a difficult discussion. In effect though, it counts for little and had the effect of kicking the issue of the circumstances in which the player can talk to other clubs into the long grass. The trouble is that now, with the parties up to their knees in the long grass, they seem to be finding that as any 12 year old on the rec would tell you, this is not a good place to be...

I am often asked to include these type of soft obligations (to consult, or negotiate, or hold future discussions, or use reasonable endeavours to do something) in contracts. Usually I would counsel strongly against them. Aside from the fact that they are often used as a means of avoiding difficult discussions up front, they can give rise to significant problems of interpretation where the wording used is not specific enough to be meaningful.

In this example, there are some obvious problems, including:
  • Under English law, it is a longstanding principle that so-called "agreements to agree" are generally unenforceable. So saying an obligation is subject to future agreement can effectively make that obligation meaningless;
  • There is no certain meaning to "good faith" in these circumstances. The only way to get certainty on this in the absence of agreement would be to go to court and have the judge decide how this obligation should be interpreted; and
  • Having an obligation to "discuss and negotiate" again brings an unclear meaning. This could be a very short discussion and negotiation indeed, and explains why Liverpool seem to have given short shrift to offers below their own valuation.
This is a classic example of where it would have been better for all concerned to have thrashed out a more certain position, and a more specific mechanic as to what should happen in the event of a >£40m offer, at the time of signing. The media wrangling and bad blood that has been evident in recent weeks could and, with the benefit of hindsight, should have been avoided with a more transparent and specific approach to papering the player's terms. All too often, negotiations focus on the contract deliverables - an orderly approach to what happens if the deal does not work out should never be sidelined in the excitement of signing a trophy contract.