Deepbridge Capital is a world away from millennial venture capitalists drinking flat whites in East London. For a start, it’s based in unfashionable Cheshire city of Chester. Second, founder and managing partner Ian Warwick is an ex Royal Navy officer who has a no-nonsense northern attitude when it comes to raising money for tech-start-ups.
Given his oil rig engineer background, Warwick likes to roll his sleeves up and get under the bonnet of companies he invests in.
In that, it’s different from most EIS fund managers, who come purely from financial services.
“There’s an argument that you just invest in as many companies as possible and cross your fingers,” Warwick shrugs. “We don’t see ourselves as a typical fund manager per se but are more hands on, assisting management to build their companies. It was about helping companies commercialise.”
The appeal of Deepbridge Capital’s strategy can be seen in the exponential rise in the amount of money it has raised through the Enterprise Investment Scheme (EIS).
When Deepbridge launched its first EIS back in 2013, it raised just under £500,000 through the tax-efficient scheme.
This last 2020/21 financial year, it raised £29.4m deployed across 37 growth companies. This represents an increase from 2019/20 and 2018/19 in which £21m and £28m were deployed respectively.
What really changed was the government changing the rules for EIS fundraising in April 2020, driving investors towards knowledge-intensive investments, which was exactly Deepbridge’s sweet spot.
“The changes to move everything to growth-focused, IP-based, knowledge-intensive investing was a great day for Deepbridge,” says Warwick. “The rule changes that came through from government have been very good for us.
And it plans to raise £86m this current 2021/22 financial year.
Warwick says: “We intend to double down and go again. More investment income gives us more opportunity. There’s more we can do with more funds. It will give us the ability to write a bigger ticket and the opportunity to expand our portfolio.”
Some this coming year’s raise will be used to support Deepbridge’s existing investments. It recently arranged a Series B funding round for one of its portfolio companies.
However, for an initial funding round Deepbridge’s invests anything between £1m and £1.2m per company.
Deepbridge manages two separate EIS funds — the Deepbridge Technology Growth EIS and the Deepbridge Life Sciences EIS – and currently has 59 live companies on its website open for investment.
To drive investment towards both EIS funds, it has two investor funnels, one called Syndicate for high-net-worth investors and private offices and the other, Select, for retail investors.
To date, Deepbridge has invested in 130 companies with just two exits: Sky Medical Technology, which made a return for investors of between 2.4x and 6x ROI – depending at which stage investors put money in – and Resonant, sold to US firm iPipeline, which again made investors a return of between 3x and 6.5x ROI.
In the technology space, its investment is tied up for anything between five years and eight years, while in life sciences money is tied up for anything between six years and 10 years.
Warwick says: “It’s important that our investors are realistic about how long their money will be tied up for in these companies. Our goal is to have multiple funding rounds and ultimately exit.”
Warwick and his 60-plus team sift through around 1,000 investment opportunities a year but only invest in about 20 each year, a conversion rate of just 2 per cent.
As for sectors Deepbridge is open to investing in, it is especially interested in digital transformation, sustainability, cybersecurity and space technology.
“What we like to look at is the commercial reality for the product, which is a big element of what we do,” says Warwick.
Companies approaching Deepbridge for investment must be driven by their own IP, be disruptive in nature – either creating a new market or disrupting an existing market – be globally scalable and have a product applicable to lots of markets
Moreover, founders must have experience in the space they want to develop a product for, plus a concept with a high degree of commercial viability.
Valley of death
Given that most founders are used to the concepts of Seed funding, Series A and beyond, where does Warwick see EIS sitting?
Warwick sees EIS as sitting squarely in what the Americans call “the valley of death”, the funder gap where the founder has run out of his or her own money and lacks the potential to take a business up to the next level.
“We invest where most people fear to tread,” says Warwick. “We see what we do as mitigating risk. EIS should help companies accelerate from that good idea, develop some IP and get ready to go to market.
“Of course, every company needs funding. What is important for us is that the EIS benefits shouldn’t be driving the deal. We see EIS as a risk management tool for the investor, not the reason to invest.”
Warwick cheerfully admits that he’d never even heard the term EIS before people mentioned it to him, saying he should take advantage of the scheme when he first launched Deepbridge back in 2010.
When Deepbridge first went out into the EIS market in 2013, a lot of EIS money was either going into renewable energy or asset-backed businesses, such as pubs. Raising money for growth technology companies was difficult.
Separately, Deepbridge also has an estate planning service which has nothing to do with EIS, which creates bespoke investments in wind farms and renewable energy.
And Deepbridge is discussing raising more money in Australia, without any tax wrapper, while at the same time bringing Australian companies over to England and basing them in Chester.