Earlier this week, Cambridge Consultants, a UK-based technology design and development company, announced its plans to reactivate its spinout business with the creation of a new venture fund.
Cambridge Consultants initially invests pre-seed capital into a new idea, which is sourced internally, in order to assess the feasibility of the technology and potential market. If the idea reaches the incubation stage, the firm then tries to secure the intellectual property, before building prototypes and a team, if necessary, before spinning the venture out as an independently managed company looking to attract venture financing.
Headquartered in Cambridge Science Park at the heart of what is known as ‘Silicon Fen’ – comprising a cluster of over 1,000 high tech companies in and around Cambridge – Cambridge Consultants started its spin-off operation in the mid-1970s and has carried out more than 20 spinouts since then, including five that have gone on to achieve a listing on the London Stock Exchange: Domino, Xaar, Prelude Trust, CSR and Vivid.
The firm has also notched up several trade sales, including Alphamosaic, a fabless semiconductor which was sold to Broadcom for $123 million (€102 million) in September 2004; and Inca, which was sold to Dainippon Screen for €43.8 million in June 2005.
According to Ray Edgson, venture partner at Cambridge Consultants, spinouts to date have generated an IRR of over 40 percent for the firm. However, after the bursting of the dotcom bubble, market sentiment towards technology ventures have changed.
“After the bubble, follow-on funding such as C round financing was difficult to get and we came to the conclusion that there was no point pushing ventures out into the market only to have them flounder,” says Edgson. “Like a number of venture capital firms at the time, we decided to focus on the more mature companies in our portfolio.”
European venture capital investing has seen moderate growth in the past year, however. According to recent figures published by the EVCA, venture activity in 2005 increased in value from €10.3 billion in 2004 to €11.4 billion in 2005.
“We feel the time is right again and more money is available,” says Edgson. “Partnering with an investor also means that there is a greater degree of security for follow-on funding for the next generation of ventures.”
The venture fund will be created jointly by Cambridge Consultants and an investment partner with the aim of having it established by the summer of 2006. Previously, the firm invested from its own balance sheet.
The new vehicle, which Edgson estimates will be between £3 million and £10 million in size, will fund all ventures within a four-year period. Cambridge Consultants expects to complete one spinout venture every two years with the first venture expected by 2007, says Edgson.
“We think that that’s the ideal rate, based on our experience,” he says. “We learnt a lot about creating new ventures in the late 90s and early part of this decade, including the effects that creating spin-outs can have on a business of our size, so we’re taking a controlled approach that still generates a significant return on investment. Ventures take time and resources and are sporadic by nature. You can’t bang them out like a sausage factory.”
The aim of the fund is to invest exclusively in ventures that come from Cambridge Consultants, which also has a Boston office. The firm generally takes minority stakes in ventures as an incentive for attracting high quality management. “If you give talented people an opportunity to share in the value in a significant way, that’s a terrific motivator,” says Edgson.
Given Cambridge Consultants’ track record and a healthier technology investing environment for launching new ventures, there may well be a number of new firms arising from the Silicon Fen in the coming years.