How to raise £110m in 3 days

Last week, Draper Esprit, the Venture Capital shop where I run Marketing, raised £110m in a public fundraise. This was unusual and has interesting implications for the VC industry. Below I explain why. Please note that none of the following should be construed as a financial promotion, and you should seek the advice of a qualified investment advisor before making investment decisions.

Ok, I’ll admit, VCs talking about VC is possibly the world’s worst literary genre. So it’s with some trepidation that I steal some of your attention. But please hear me out. I hope by the time you get to the end, you’ll find this interesting.

How VCs Normally Raise Capital

If you’re reasonably familiar with venture capital, you’ll be aware of how VCs raise money — they build an investment thesis, assemble a pitch deck and seek investment from investors. So far, not that different from being a startup.

But unlike a startup, which is probably trying to raise enough to last 12–24 months, VC’s typically have a fund life of 10 years. So finding investors willing to commit their money for 10 years in what is seen as a risky asset class, is often, you may imagine, very hard. Also, these investors (known as Limited Partners) aren’t famous for making snap decisions, they require A LOT of evidence and reassurance.

As a consequence, VCs can take years to raise their first fund, and even VCs with a track record can spend many, many months raising their next fund. Given VCs typically try to raise a new fund every three years or so, this is a huge commitment of time and effort, which can distract from a VC’s core business of chasing deals and supporting their portfolio companies.

You would think that this situation can cause a lot of angst both for VCs and their portfolio. And you would be right. Yet despite this, the idea of a 10-year fund cycle for VC has remained the orthodoxy more or less unchallenged for decades. It is true that this model is very successful, but it does have its challenges and there is another way.

Draper Esprit is Publicly Listed

In 2016 Draper Esprit did something quite radical for a VC fund — we IPOd ourselves on London Stock Exchange and Euronext Dublin. This effectively switched us from having a 10-year fund cycle to becoming a balance sheet investor. There were many reasons for doing so — accessing new types of investors, shifting to a new permanent model of VC, enabling greater liquidity — but one of the main reasons was the sheer speed of access to capital. With good reason, the IPO process itself is long and difficult, but few appreciate that once you’re listed, raising capital can be incredibly fast. This has some rather interesting implications for a listed VC like us.

How Do You Raise Capital on Public Markets?

At this point it’s probably worth explaining the process we undertook last week. There’s lots of jargon and it’s really easy to get into the weeds, but I’ll try to keep it brief:

One Month Out — Assessing the Market Opportunity

Over the last few weeks, our finance team, working with our brokers, lawyers and other advisors, assessed that the fundraising opportunity looked positive, and assembled a pitch presentation we could take to the markets.

Four Days Out — Monday — Go/No Go Decision

At a board meeting on Monday last week, our executive team judged it was an opportune time to approach the market and we pushed the button.

Three Days Out — Tuesday — “Wall-crossing”

From Tuesday morning, our brokers began a process called ‘wall-crossing’ — conversations with institutional investors (typically large asset managers), in confidence, to assess their interest in taking a pitch meeting with our CEO and CFO. Wall-crossing allows investors to know there’s a deal in the offing, but effectively forbids those investors from trading on the ‘inside’ information they now possess.

Two Days Out — Wednesday — “Book-Building”

As wall-crossing continued between Tuesday and Thursday last week, our brokers were book-building. The ‘book’ being ‘built’ is the list of investors seeking to buy these new shares and how many they want to buy (aka their ‘demand’). Ideally in this situation you want to have more interest in shares than you have shares to sell (aka ‘oversubscription’). It’s during this period that the management team of Draper Esprit and our brokers assessed how many shares we could sell and at what price. Note: the size of the deal may change depending on demand.

One Day Out — Thursday — Notifying the Market

Just after market closed on Thursday — 4.35pm to be precise — we posted a message on RNS (the Regulated News Service hosted by London Stock Exchange) detailing our intention to place new shares so that broader market participants who had not been wall-crossed, including existing shareholders, have an opportunity to submit an order.

Overnight — Thursday — Closing the Book

As all orders were received on Thursday evening, our brokers finalised the orders and announced the allocations to investors. Sounds simple enough? Of course not! The allocations process began late on Thursday night. It required our CFO to review the Book and consider distributions while trying to balance a lot of different interests: the rights of our existing investors; new cornerstone investors naturally want to get more involved; some investors like hedge funds will turn over stock quickly, but that can be useful in creating liquidity; and finally after all this, we aim to ensure there’s enough demand still in the market. Once allocations were complete, we closed the Book.

Before Market Open — Friday — Notifying the Market

Before the market opened on Friday, we issued another notice via RNS, announcing we had successfully secured funding commitments as well as the price of the issuance and other information. In the case of this raise, Draper Esprit was able to successfully secure £110m, more than we’d initially planned, we were oversubscribed and shares were sold at a premium to the mid-market price on Thursday.

Following Up — Review with Shareholders

The final part of this process happens in a few weeks’ time when we will meet with our shareholders via a general meeting during which we hope to formalise the recent funding round. Notification of this meeting was announced via, yes you guessed it, another RNS.

Why does it matter?

As you can see, this is a vastly different undertaking to a typical VC fundraise. Most of this happened in three days. The process is stressful and frenetic but incredibly exciting. It is also remarkably efficient. Although our executive team, finance, marketing and legal were heavily engaged, our investment team were not. Our investment partners were able to fully focus on their efforts on their existing portfolio and new deals.

This also matters because, including this latest fundraising, in the last four years Draper Esprit has raised over £425m this way. I’ll leave it to you to project what this could look like as classic 10 year VC ‘fund’. This is a genuinely different approach to venture capital. It doesn’t signal the death of the 10-year fund, of course, but there’s definitely something here. It’s at this point I refer you back to my opening sentence — VCs talking VC is achingly dull. But…

At Draper Esprit we are very conscious that ultimately entrepreneurs don’t think too much on where our money comes from — this is as it should be, they make the future and capital is fuel. But we do. We do because our unusual model means our investment team remain focused on their portfolio companies and have more time to get into the details of tomorrows leaders. At the same time, public market investors gain access to some of Europe’s best private tech companies as they scale into the future.

We think that’s maybe a little interesting, maybe you will too.