Simon Cook is the founder and CEO of Draper Esprit PLC. Simon has been investing in European high growth technology companies since 1995 and co-founded Draper Esprit in 2005. Over the last 25 years he has invested in a number of Europe’s most successful high growth companies including Lovefilm, Cambridge Silicon Radio, Virata, nCipher, and KVS, currently he is an active board member of Trustpilot, Graze, Crowdcube, Revolut, Ledger, Perkbox and Podpoint. Previously Simon was a partner with Cazenove Private Eq-uity, which Draper Esprit acquired in 2006; a partner at Elderstreet Investments, which Draper Esprit acquired in 2016; and an Investment Director of 3i Technology Europe, which Draper Esprit acquired in 2009. Simon is a Computer Science graduate of the University of Manchester Institute of Science and Technology (UMIST).
Simon, we have known each other since 1998 when we had just launched Kreos Capital and you were at 3i in Cambridge. The history of your journey to get to where you are now today with Draper Esprit is very special and shows a lot of clever decisions and perseverance. Could you please remind us how it all got started for you and Draper Esprit?
Yes. We have done so many deals with Kreos over the last 20 years I can’t even begin to remember them all. Going back to the start, my co-founder Stuart Chapman and I met at 3i in the 1990s when the tech investment scene was very different in Europe. There were a few small funds and there was the giant FTSE100 company 3i which dominated Venture and Private Equity in the UK, peaking at over 900 deals a year. 3i was a significant institution with huge pedigree and was known as the university of tech investment. I worked in Cambridge and had the honour of investing alongside tech visionaries such as Hermann Hauser of Amadeus and Neil Rimer of Index Ventures, even before their first fund. I was very fortunate to be able to invest and join the boards of leading companies such as Virata and Cambridge Silicon Radio. Stuart was based with 3i in London and then he went out to set up 3i in Silicon Valley for 4 years from 1999, and he added the crucial Silicon Valley level of ambition to our story which he brought back with him from the USA. One of the first things we did when we started Esprit in 2006 was to tie up with a leading Silicon Valley firm Draper Fisher Jurvetson (DFJ), now shortened to Draper, built on Stuart’s USA experiences.
We always saw the strengths of the 3i platform: its long-term view, their depth of business skills and networks. But also it had some limitations specifically regarding their many different activities such as management buy-outs and infrastructure causing some challenges with technology investing. In fact, we were often telling our bosses at 3i we would run it differently, much to their annoyance; so it was rewarding to be able to buy their European venture and growth business in 2009 for about £170m and add that to the Draper Esprit platform. We have always been acquisitive as a firm and have acquired numerous portfolios and firms since we founded Draper Esprit 12 years ago: in fact, we have acquired every tech investment business where we worked at previously with our acquisitions of Cazenove Private Equity (2006), Prelude (taken private in 2007), 3i (2009), and Elderstreet (2016). These secondary transactions have given us unique expertise to do these secondaries alongside our main primary strategy to add interesting high growth companies to our portfolio. We see the end result is the same whether primary or secondary: we just build a great portfolio of amazing companies that we build and exit over time regardless of how we get in. This has resulted in us doing secondary deals like Top Technology Portfolio (2012), Seedcamp Funds 1 and 2 (2017) and Earlybird Fund 6 (2018). For the entrepreneurs it’s also key to have us come on board whatever stage: being able to provide liquidity to early investors is part of our strategy to enable companies to grow over the long term.
Today, Draper Esprit is one of the very few publicly traded tech investing funds in the UK. Explain the thesis behind this move and what are the strengths of this model?
We think of our Draper Esprit listed model as part of the Fintech revolution in its own right. Today you may have invested in a pension fund which may have hired a private equity advisor who might have steered some of this capital into a venture or growth fund, but you might not know it, and there are many layers of fees and advisors. With our model anyone, individual or institutional fund, can be a tech investor directly by buying our stock, reducing layers of fees and adding transparency. In fact many entrepreneurs and funds have now have become small shareholders with us and we answer to them as much as they answer to us. This democratisation of the tech growth investing model is very much another part of the model which drives us. We are proud to have grown our market cap for our large and small investors from £120m to over £600m in 2 years, with a doubling of the share price in 2 years. In some ways what we are building now is taken from the best of a large permanent capital listed balance sheet like 3i but applied purely to high growth technology companies with global potential. Rather than providing equity capital across a wide range of all types of companies, we provide all stages of capital from seed to pre-IPO to a very specific set of high growth companies with global potential who are starved of such capital in Europe. The capital markets are hungry for access to technology growth companies; and we grow as we perform, adding great companies to our portfolio and having regular exits to good buyers or via their own IPOs.
We aim to invest 70% in later stage deals and thus 70%+ of our portfolio value (NAV) is in our top 10-15 companies which are growing at 30%+. We have exited some amazing companies since our IPO such as Movidius, Grapeshot and Tails and have also added many new exciting names to that core group such as Transferwise, Graphcore, Ledger and Revolut. We only disclose the combined performance of that core group collectively as a portfolio so the privacy of our individual portfolio companies is maintained.
Draper recently did a deal with Earlybird and has some other fund-of-fund investments in other managers? This is very unique. Can you please explain this side of your platform strategy?
Most funds raise a 5+5 year LP fund with a very specific strategy: eg early stage in Spain, or late stage in Biotech, and have only 5 years to invest and 5 years to exit. This inflexibility and fragmentation causes Europe’s best entrepreneurs to be starved of capital, especially at the later stages where real risk-based growth capital is really needed in Europe. We have total flexibility to invest in high growth companies at any stage, in any technology area (outside Biotech), in primary or secondary deals or via funds of funds and across all of Europe. If Warren Buffett could only invest in public company capital raises and only hold for 5 years, like most tech investors, then I expect his returns might suffer. Our 66% return on portfolio value last year demonstrated this flexible approach working.
Seed funds are relatively short of capital in Europe so we set up our $100m seed funds of funds programme to steer some capital into this part of the market and allow us to get to know the emerging winners from these seed funds as they appear at an early stage.
With our flexibility, occasionally an interesting opportunity comes along with potential at multiple levels such as with Earlybird. Here we were able to combine both a purchase into their latest fund with a secondary, but also provide them with some capital as our partner for our series A deals in Germany and the surrounding regions. With €700m invested by Earlybird in some of the greatest European companies such as Peak Games, N26 and UIpath we expect to be able to find a series of further opportunities to invest together.
With fresh capital available, you are obviously very active in the direct investment market and recently did a few big deals like Revolut. What is the current direct investment strategy of Draper Esprit, and what type of companies and situations are you looking for?
There are approx. 400 deals a year in Europe that raise $5m+, growing by 100 deals a year and we aim to see all of them across all industries and European geographies, and we aim to invest in those with the most potential to be global leaders.
We actively balance our portfolio for over a decade with 25% in deep tech and hardware, 25% in digital health and 25% in B2C and 25% in B2B and enterprise. This long term focus on deep tech and digital health has stood us well over the decades and we wryly notice the rush back into these unfashionable areas by many investors today.
What are your thoughts on the state of the European growth stage ecosystem in Europe over the next 5-10 years (compared to the US for example)?
A few years ago I noted that the data from Silicon Valley in the mid 1990s for deals was exactly the same as Europe in the mid 2010s. The $40bn mature US tech investing industry went from 1000 small deals and only a few hundred large deals, to about 2000 small deals (<$5m) and 2000 larger deals today and has been like that for a decade, with all the growth in the pre- IPO stages. Interestingly 50% of all capital in the USA is raised by about 20 funds who have largely been around since the mid 1990s. Europe is growing at 20% a year from 1000 small deals and 400 growth deals last year, so in 5 years the European industry will have doubked to $20bn+ with 1000+ small deals and 1000+ growth deals, with 10-20 funds dominating. We aim to be one of those top funds over the next 5-20+ years as the European growth ecosystem matures. We are investing €150-200m a year at the moment which makes the equivalent of a €1bn+ LP fund, one of Europe’s largest.
What do you think is Draper’s key role and value add in backing its growth companies?
Our main role is to increase European entrepreneurs’ levels of ambition and provide significant risk capital at the growth stage to help them capture that global potential, from series A to pre-IPO. We supercharge what the companies are doing so that we can help open doors for business partners and potential acquirers, help recruit key senior staff, and help internationalise the business to build the most exciting company possible. We are grown up enough to help maximise the timing but also help advise when the market dynamics have changed to ensure we get the best result for everyone.
Do you have some favourite moments or funny stories that you could share with us from your time as an investor?
One deal that stands out for me is when we led the £6m series B for Lovefilm with a further £6m of growth debt from Kreos which allowed Lovefilm (then Video Island) to break out from the competitive pack. The creativity shown by Kreos to lend to a high growth business alongside us as lead investors in the £12m B round was transformational. A year later, Simon Calver, the Lovefilm CEO called me on the weekend to tell me the business was “on fire”. “I’ve seen the 100% monthly growth, yes it’s amazing”, I told him. “No,” he said, “the warehouse is actually on fire!”. There are many risks in investing but this was a new one! Needless to say Kreos, as astute as ever, had secured against the DVDs which were mostly out in customers’ homes, so all we had to do was rebuild the warehouse over the weekend and all the DVDs would be returned in the post on Monday. The company, under Simon’s leadership alongside William Reeve, did an amazing job and all was back to business as normal in a day or two.
