Investing in Clusters

We’ve just closed three investments at London Seed Capital that revolve around a central theme: Children.

The first company is Fifth Dimension, a children’s video games publisher. They are responsible for the Teletubbies games you’ve suffered through 10,000 times.

The next one is Baby TV. The company currently has screens installed in 25% of all maternity wards in the UK. This puts advertising (and maternity information) in front of a captive, receptive audience.

The third company is mTrack, trading as KidsOK, which allows parents to check up on their child’s whereabouts via SMS. It’s not quite as Orwellian as it might initially sound.

As a VC, you invariably see similar, or related, businesses cross your desk in clusters. Months can pass without seeing any Enterprise Software, and then suddenly you’ll get five in a row. This is one of the real advantages of being a VC – each of those five businesses focus on explaining the market, technology and opportunity differently (and usually incompletely).

By piecing together the information, this is immensely helpful in getting to grips with a market and evaluating investment opportunities. It is even better when your investments build on and complement each other. This style of investing was championed by Kleiner Perkins Caufield & Byers, following the keiretsu philosophy.

I’ll go into why we invested in a later post, but the main investment case was built around the classic pillars of venture investing:

1. Management
2. Large Market
3. Sustainable Competitive Advantage

Enterprise Capital Funds

The SBS has announced that the bidding process for its Pathfinder Enterprise Capital Funds is now open. Up to £200 million will be made available via ECFs, which are designed to be commercial funds, investing in small high-growth businesses that are seeking up to £2 million of equity finance. Full documentation is available here.

Venture Index Reports 9% Rise

The latest news from Venture Index shows a 9% rise in investments for the past quarter. Surprisingly, the size of deal is decreasing: from £125,000 to £100,000. This trend appears to be the opposite of what we are seeing at London Business Angels- where funding rounds are continuing to rise. Modwenna Rees-Mogg of Venture Index suggests:

“We are monitoring this trend closely to establish whether the equity gap is still wide open in the £250k – £1m segment and it certainly looks as if the new Enterprise Capital Funds will be fulfilling a much needed role in plugging this gap.”

From our perspective, there is a clear case for Enterprise Capital Funds. We are seeing larger funding rounds and those entrepreneurs are finding it difficult to raise £500,000. London Seed Capital can only provide £100,000,leavng a gap of £400,000 to be filled by angels. An ECF could make a significant difference in securing funding for those businesses.