NEW: Committed Capital Growth EIS Fund – manager interview with Steve Harris

February 28, 2020 0 By Kailee Schamberger


Hello I’m Alex Davies,
founder of Wealth Club. Today I’m with Steve Harris
of Committed Capital to talk about their
Growth EIS fund. [Music] Hello Steve.
// Good afternoon. First off, just give me a flavour –
what is the Committed Capital EIS? So Committed Capital
EIS is a growth stage, technology focused UK EIS fund, and classically what we’re trying to do is to provide investors with the ability to have exposure to
8–12 companies within the portfolio and we say within a period of twelve months
although historically we’ve deployed cash typically
in four and a half months. Tell me about Committed Capital, and also
a bit of background about yourself… Yes, so Committed Capital was founded in
2001 and I was part of the original team asked to manage that business.
And much of the team remains intact. And we’ve always done the same thing
which is growth stage technology investment in the UK markets. In the early days we did
some international business as well – it’s now purely focused on the UK.
In terms of my background, so I have, I was London Business School,
I’m ex-army, some time ago and worked for two investment banks – HSBC
and SocGen, corporate finance – consultancy where I headed the M&A business, PA consulting.
And I helped set up a company called Ant Factory, which was a $600 million investment vehicle
in ’99 for early stage tech investment. And I’ve been running
Committed Capital since leaving that. Tell me, what sort of characteristics is it,
the companies you’re looking to invest in? So at a very high level what we’re looking for
is encapsulated really as follows. So the first thing is, the underlying markets
the company may serve will be substantial and global and fast-growing
or changing in ways that we feel we can leverage – that’s the first thing.
Secondly, that the company itself has to have a product that is in the market
and proven, so we’re looking for companies with a turnover of at least £1 million
so we can look through the company talk to some of the underlying customers,
check the efficacy of the product, look for gaps, and so on. And then the
final bit is this difficult area of product market strategy. So having said
that, obviously we’re looking for an excellent team, and a team
that can deliver on the question of how best to get the product
into the market. Do you wat give me some examples
of recent investments you’ve made? Yes, so this year we’ve been unusually
active – so we’ve made 12 investments and we’ve done one EIS exit and
one exit out of convertibles. So one example would be
an edtech company called Kortext. And what Kortext does is
it provides a platform under which universities can receive digital textbooks so behind that there are something like 1,400 license agreements with individual publishers, from Pearson, McGraw-Hill at the top, all the way down to those small publishers with one or two publications. And so what Kortext does is
it provides universities with a complete suite of textbooks and analytics for the university professors to understand the performance of
their individual charges, the students. So we’ve done, so this year it’s
£6 million investment into Kortext— // What made you invest in it? Edtech obviously is a massive global
market, edtech materials probably is about $14–15 billion, something of that sort.
Interestingly enough, we looked at the UK market and discovered that for conventional
UK courses, university courses only 0.1 of 1% of those courses had
digital textbooks. And quite clearly the market is going in that direction –
students were saying, it was sort of a big student review in which the students,
92 percent of them, said: “Why am I carrying all these books around?”
– and we’re talking about 2014. So, absolutely outstanding team who have
created a very similar business in the US which has been hyper successful.
And so it’s that combination of big markets changing very fast, very
good underlying product, great team of technologists, and where we are today is,
having started with them in 2014-15 – you know, with really no traction in the UK market
– they’re now in, I think, 108 universities in the UK market. And in the UK there are
only 162 universities in total, so… Which then brings us onto another piece,
which is what we describe as ‘crossing the chasm’. So we like our companies to focus on
one geographic market or vertical before benefiting, if you like, from penetration of an international market. So they start from a firm base and then they use that to develop. And tell me about other
recent investments… One other company we invested in
at the beginning of the year, Q1, which if I’m being candid, was – needed
some cash, you know, fairly urgently. So we invested £3 million into
a company called Cloudhouse, which is a technology business
that provides the software for the virtualisation of computer applications.
And you’d think that was a market that’s well served, but the issue there is again
it’s a very substantial market, so we’re talking about globally it’s an $80 billion
market. But what they identified was that the existing suite of software out there
doesn’t allow, if you like, “troublesome” apps to be virtualised or pushed up into
the cloud. So the result of that might be, for example, a doctor going out to see a
patient and finding that he can’t download the patient’s records to his iPad
because he can’t – you know, in turn the NHS has been unable to upload those
details. So we invested in that company – as I say they were short of cash in Q1 –
successful fundraising, slight down round and they subsequently concluded a $24
million contract with a very substantial US technology business. And so,
you know, very successful outcome. How involved do you get
in these companies? Yes, that’s a great question. So
we’re called Committed Capital, so the idea behind that originally was that
the commitment largely related to support – to support, so in other words
outside of financial investment the support we gave to companies.
So I guess we are very, very involved in these businesses and there are lots of
different circumstances. So, the whole business of governance at the
outset – setting all that up in the documents – is relatively standard. We’ll then do an
additional piece of work, for example, on remuneration. So remuneration
is largely, in this sector, not logical or coherent. Very often small companies
take on one person on one set of terms another one on another set of terms,
and in the end you can’t manage that. So what we’ll do is work with them to
set the basis of salary, base remuneration bonus schemes, options, and tie them
back in to our collective view of the main levers for growth. And it
actually tends not to be that complicated, very often it’s units sold or it’s sales. So
that’s a piece of work. It was Paul Romer, so the Nobel prize-winning economist,
who said ‘never let a crisis go to waste’, which brings us then onto another piece,
which I think probably does distinguish us from other companies in the sector
So, what you find, which I guess you’ll know pretty well too,
is that from time to time these companies will, very often through
no fault of their own, run out of cash, and then there’s a crisis,
there’s a question over solvency, and the question for us is
what do you do at that point So what we tend to do is be absolutely
as supportive as we possibly can, go right out, if you like, backsides
over the transom, if that’s the right term to support these businesses. And so
what we’ve developed is a kind of four phase methodology for
turning companies around where there is a question over solvency. And
the phases essentially are one, analyse – understand what’s
happened, what’s gone wrong, and if there’s somebody responsible
does that person, should that person continue at the business? Then two –
cost review, because clearly part of it , part of this crisis, if it’s a cash crisis,
comes out of an imbalance between revenues and costs. And
the cost review may result in a reduction in overhead costs of
30%, 40% sometimes. Three – review of product market strategy. Clearly the
company hasn’t sold the products it should have done, and so we’ll work
through that. We often put together a paper on product market strategy with the team
and it’s iterative, as the market starts to reveal itself and unfold
that will change going forward. And finally, if all of that is fine and
ticked off, then we’ll infuse the company with more cash. What we’ve discovered
over a long time of doing this is that, having gone through that process, most
if not all of the companies that have been through that then suddenly have
a new lease of life and then take off and do some really good things.
And it’s quite key I think, because the most wasteful thing I think the
venture capital industry in the UK does is step back in a crisis. If you think
that your investment thesis is correct, even though there’s been a problem,
there’s no reason why you shouldn’t support that business and
see it hopefully go forward, develop, flower, and
make investors money. And what are the challenges
you have as a manager? Is it, for example, hard to get deals, is it,
are you having to pay too much? Yes, that’s a pretty good question.
I think there are various challenges. The market is just fascinating. I’ve been investing in tech since the 90s and I’ve never seen a market quite like this. Every year there are more verticals, you know, demanding
tech investment. There’s more going on. Technology has insinuated itself
into every company, every sector. More good young entrepreneurs coming through,
and more seasoned entrepreneurs. So I think that we see probably 700
deals a year, and the question is then winnowing them down to a manageable number
and then managing this business of follow-ons versus new investments, you
know, that’s key. So I think there are, and as the business develops, our business
develops, then one of the bottlenecks is just the hours in the day. I mean
last year clearly we were working hugely long hours to get everything done
And so growing it, that’s important. And then capital is the other thing. I think
one of the challenges from our perspective is that, you know, we do things slightly
differently and many of the people at Committed Capital have been there
– I’ve been there since 2004, some of my colleagues since 2004-2005
and so there’s a lot of ingrained knowledge around
the process we use, and so the challenge with bringing somebody in
and them quickly picking up the way we like to do things
and running with that. Have you have
many exits? Yes, we’ve done lots, so
we’ve done 33 EIS investments – 19 complete exits, 2 partial exits,
although by partial I probably mean we’ve sold 70 to 80 percent of our stock
and kept in a small line of stock as well and it’s been a good experience, I hope,
for our investors in that, you know, over time we’ve returned about 41% a year
gross, but not taking tax into account and it’s sort of 2.5 to 3 times your money
and the average hold period has been around about
4.5 years, something like that. OK, and failures? Depends how you define failure.
So we haven’t had any companies that have gone bust on us, for reasons I’ve just sort of outlined, I think. We had one exit where we exited at
below the aggregate value of investment and it was about 30 percent I think,
so to the extent that investors had availed themselves of EIS benefits then
they were in and out at the same price, so you know, we’re very happy with that.
And I think it is partly systemic, or rather driven by our philosophy,
the way we do things, which is that if we think a company is a sensible
investment at the outset, then probably one year hence or
two years hence, if there’s a problem, it still is a good investment, but it
might need some rejigging. Final question – I want
to put some money in an EIS fund this year,
why should I choose you? I think – so we are to an extent, say, boring
but I think focused is the… So we’ve only ever done one thing, which is to invest
in early and growth stage technology, UK businesses. And track record has been
very strong really, I mean ever since 2001 41 percent a year is sort of,
it is good enough, and we aim to get 25 percent a year.
But clearly that’s not a forecast. So I think the reason probably
for investing in us is not, it might – you know, track record will form part of it
but really what it is is systems, it’s the systemic aspect of what we do
in terms of the two areas – one being search and selection for companies
and two, the very important business of custodianship, and within that
adding value and hopefully preventing companies from falling over.
So I think, I think that’s it. Steve Harris of Committed Capital
thank you very much Thanks very much. [Music]