With a steady stream of opportunity flowing from what is regarded as one of the hotspots in the UK for high tech investment, Cambridge is seeing a boom in newly founded companies and is witnessing a shift from high tech manufacturing to R&D services in technology-related sectors.
While other regions are experiencing a lull in investment opportunities, VC’s in the technology field are still witnessing a strong deal flow from the Cambridge region. Indeed, players such as technology-focused incubator, Brainspark are taking advantage of the hype by setting up a second incubator in Cambridge, dedicated to creating and growing technology companies focused on Internet and mobile phone applications and infrastructure.
Key elements of this incubator will be strong investor partnerships to share in the set-up costs, attract a good flow of investment opportunities and provide for subsequent funding rounds. The Brainspark team based in Cambridge will comprise a small group of experts from the research and business communities. In December, Kirsten Brann was appointed venture director, playing an integral part in the development of the incubator in Cambridge.
Stewart Dodd, Brainspark’s chief executive officer, said: “In less than one year in our first Incubator, located in Clerkenwell, London, we have kick-started 16 businesses whose primary focus is on e-commerce applications of Internet and mobile technology. We now intend to build on this success and create similar growth in the enabling technologies themselves.” He describes Cambridge as a centre for creation of high technology companies and expects to attract ideas from right across the UK and possibly further afield.
Alisdair Warren of technology venture capital firm, nCoTec says the company is looking at Cambridge with interest. “It is still early days, but we are cultivating relationships. There is a huge pool of very bright, academically-based talent and experienced industry-based talent that is growing up in that area. It has become a key area in the UK. Any high tech players investing in the UK want to get out there and start networking to build up contacts.”
A well-established player in the region that has enjoyed several success stories over the past year is Prelude Trust, the investment trust that specialises in high growth technology based businesses with a particular emphasis on specialist chip companies, 3G and mobile phone service companies.
Based in Cambridge, Prelude doesn’t focus exclusively on the region, although 50 per cent of investments are made in Cambridge and most are UK-based, spread out where the top universities are based. Andy Allars, a partner at Prelude, comments on the state of play at the moment: “Cambridge is not what many people believe it to be – that is, a town with a plethora of investors waiting to commit their money. There are a growing number of funds that claim to invest in early stage, but in reality, there are very few that commit to seed and start-ups, preferring to play it safe by targeting later round investments.”
He adds, “A lot of new players have homed in on the scene because it is regarded as a hot sector”. However, when these players fail to make fast money, they go away and return to more traditional sectors. Such examples may be gleamed from the burst of the dot.com bubble, that left many players discouraged when it comes to high tech investments. Last year, a number of deals that didn’t deserve financing, got it and as a result, VC’s have learned their lesson and are now concentrating on funding their portfolio companies, rather than spreading themselves too thinly and jumping into new investments.
Recent funding rounds from Prelude include a further GBP1.7 million in Cambridge Positioning systems (CPS) as part of a $32 million third round funding. This brings Prelude’s total investment in CPS to GBP4.6 million. CPS specialises in the provision of mobile location systems and services for mobile phone users. It currently has two product streams to its business. A high accuracy location technology called Cursor and Coverge, a wide range of location-based applications for corporate and consumer use. Ericsson Holding International BV and Intel Capital are new investors joining Prelude, 3i, Alta Berkeley, Argo global, CRIL, Infineon, Mustang Ventures and Sofipa International, who have all increased their investment in CPS in this funding round.
Another company from Prelude’s portfolio, Adprotech Limited secured GBP13 million in its third round of fundraising from existing investors, including 3i, Prelude Technology Investments, Alta Berkeley and MB Venture Capital. The company has recently signed a research agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation, to evaluate Adprotech’s Immudaptino technology for potential use in WL’s vaccine development programme.
One of the reasons for this noticeable growth of interest in the region is the emergence of an increased involvement from universities. The growing community of technology consultants in the region are also contributing to the increasing levels of investment activity. Consultants such as PA Technology, Cambridge Consultants, The Technology Partnership, Scientific Generics and Plextek have been spinning out a lot of opportunities for VC’s.
Although Cambridge is geared more towards the IT sector, opportunities are improving in the life science sector. When compared to Oxford, Cambridge has been the leader in the past, but Oxford is fast catching up in terms of biotech deals. Hermann Hauser, partner at Cambridge-based Amadeus, says that the quality of deals is improving. “The quality of business plans we are getting through the door is much better than three years ago.”
There has also been a change of sector focus from Internet to deep technology such as optical components and wireless technology. The optical components sector is particularly big in Southhampton. When focusing on such technical investments, it is helpful to have high class universities with R&D facilities nearby. A few examples of such involvement is Southhampton Photonics, an Amadeus investment from a year ago, set up by Professor David Paine and a recent investment in start-up Plastic Logic, set up in Cambridge by Professor Richard Friend.
Also making the most of opportunities that are spinning out of universities, VC firm, Cross Atlantic Capital Partners (XACP) and incubator Brainspark have set up Launchit2001. The competition is looking to unlock the innovation hidden in Britain’s university campuses with a view to discovering Britain’s next big name in the IT and telecoms industries. Launchit2001 is offering a total prize funding of GBP1 million and will provide finance and a serious investment of time, management guidance, and incubation services to the winner. Selected entrants will be notified by March 12 and will have until 30 April to submit their full business plan.
Martin Rigby, executive director of ETCapital, comments on the current investment climate in Cambridge. There is plenty of activity out there, however it is getting harder to find people who are willing to back Internet-related companies, after the hype of the last year. Investors are also worried that there may be a slow-down in wireless. Rigby maintains that wireless investment is the beginning of a revolution that will continue to get bigger: “The wireless sector will become increasingly important. Wireless is a big market. We still see plenty of room for innovation within the sector.”
Recent ETC Partners investments include a GBP1.5 million investment with Cambridge Gateway fund in Cyan Technology Limited, a spin-out from Cambridge Consultants Limited. Also, a GBP500,000 investment in Cambridge technology firm, Bango.net, that allows Internet users to access web pages with numbers (Bango numbers) as an alternative to conventional web addresses (URLs); and a GBP100,000 commitment in Signify, the Internet authentication service.
Looking at exit opportunities, Rigby adds that trade sales in Cambridge are going to become a much more important exit route than floating on the stock market over the coming year. “There is no longer a bull market. Prices paid are not going to be as fancy as they once were.” Andy Allars of Prelude agrees: “The state of the stock markets is too fragmented for IT.” He is hopeful that this will eventually change if the likes of AIM, Techmark, Easdaq and the Neuer Markt combine to create one pan-European tech market.
Element 14 was a Cambridge success story of last year, providing an exit opportunity for co-leaders Atlas Venture and Bessemer Venture Partners, and other participants in the round, Amadeus Capital Partners, NIF Ventures, TTP Ventures and Sofinnova Partners. The original combined investment was $13 million. Element 14 is a leading developer of high port density, low power digital subscriber line (DSL) chipsets, software and communications processor technology. The company was sold to Nasdaq-listed Broadcom for a consideration of $594 million, satisfied in shares.
With a steady flow of deals and exit opportunities, the future looks bright in Cambridge, even for players who are newcomers to the region. As Leo Dee of Mercury Private Equity says: “There is a huge diversity of interesting technology companies out there with real talent and some really bright people. We will certainly be targeting Cambridge in the coming year.”