Draper Esprit – A Publicly Traded European VC Firm

You’ll often hear wantrepreneurs complain about how their genius is being held back by venture capitalists (VCs) who don’t throw money at them because of <INSERT PERCEIVED INJUSTICE HERE>. The truth is that venture capital investing is exceptionally risky. Harvard Business School senior lecturer Shikhar Ghosh’s research showed that 75% of startups never return cash to investors. If three out of four stocks you invest in might be worthless as soon as you click the buy button, you’d probably tread lightly too.

A family office recently asked us how to invest in startups. Not buying shares of startups on the secondary market, but actually being able to participate in funding rounds. Unless you’re someone whose name is recognizable in the startup world, that’s not going to happen. The next best alternative would be to invest alongside a venture capital firm. An HBR article on How Venture Capital Works talks about how venture capital firms typically work with large institutional investors only:

Investors in venture capital funds are typically very large institutions such as pension funds, financial firms, insurance companies, and university endowments—all of which put a small percentage of their total funds into high-risk investments. They expect a return of between 25% and 35% per year over the lifetime of the investment. 

These institutional investors aren’t investing in startups, they’re investing in firms and partners who are capable of selecting more winners than losers. The ability for a VC fund to weed out losers ensures the high returns investors seek. When a VC shows a track record of investing smartly, they don’t need to spend much time soliciting money from investors.

Now, think about how the above graph might change if a venture capital firm became a publicly traded company. Suddenly, you’re having to cater to regulators, shareholders, and all the other responsibilities that come with being a listed company.

Publicly Traded Venture Capital Firms

If you’re an accredited investor, check out Alumni Ventures Group (AVG), a firm that lets you invest in deals alongside some of the best venture capital firms out there. If you’re not accredited, you might think about investing in one or more publicly traded firms out there that provide exposure to startups.

In our previous piece on Investing in Publicly Traded Venture Capital Firms, we talked about firms like 180 Degree Capital and Trendlines Group which trade at a discount to their actual asset values. In other words, the combined value of all assets they hold is more than what the company is valued at. That’s because of the aforementioned startup failure rate. One exception to that rule is a publicly traded venture capital firm called Draper Esprit (GROW:LN).

About Draper Esprit Stock

The name Draper may ring a bell because of notable venture capital firm Draper Fisher Jurvetson (DFJ). Founded in 2006, U.K. venture capital firm Esprit renamed themselves to Draper Esprit in 2015 when they joined the Draper Venture Network and began working with Tim Draper of DFJ. The following year, they had an initial public offering (IPO) on the London Stock Exchange’s AIM market where they trade today with a market capitalization of just over $1.1 billion. (Given our readers hail from ‘Murica, all numbers that follow will be in greenbacks.)

Draper Esprit’s strategy is to make about 20 investments a year in high growth European technology startups with global potential. About 70% of their capital is for growth-stage rounds (Series B+). In order to scout potential winners, Draper Esprit makes around 200 seed investments a year through their partner fund-of-funds program where they’ve placed money with more than 20 of Europe’s most promising seed funds. Their current focus is on the four categories seen below (listed alongside current investment weightings):

Let’s talk about what a share in Draper Esprit actually gets you based on the below graph from The Draper Esprit Annual Report 2020 for year ended 31st March 2020.

Nearly 70% of their portfolio is around 16 core holdings. Some of these are names we’ve covered before.

• Graphcore – developing an artificial intelligence chip it calls an intelligence processing unit (IPU) that it claims is a better approximation of the human brain.
  $18 million invested, current valuation $114 million
• Revolut – a digital banking app and card with 12 million customers across 35 countries.
  $9.7 million invested, current valuation $28.5 million
• UiPath – a leader in robotic process automation (RPA) that’s now taking us to the next phase of RPA – hyperautomation.
  $14.5 million invested, current valuation $36.8 million
• Iceye – deploys satellites that use space radar to take images of the earth from space, even through clouds.
  $9.9 million invested, current valuation $18.3 million
• RavenPack – sells alternative datasets that are a must-have in the systematic trading space.
  $9.9 million invested, current valuation $40.6 million

If you’re an investor in Draper Esprit, it’s easy to see the value of your investment change over time as they exit investments to realize a profit or loss and make new investments which hopefully increase in value over time. On page four of their annual report, you’ll find net asset value (NAV) per share listed at 555 pence. (Shares in the U.K. are quoted differently than in the United States.) As of last close, Draper Esprit’s shares are trading at 625 pence. This means shares are actually trading at a premium to the NAV.

To Buy or Not to Buy

Compared to the other publicly traded VC firms we’ve looked at, Draper Esprit provides some concentrated exposure to growth-stage startups from a diversified number of industries. By investing in later stages, they minimize the risk of any startup blowing up and paying investors nothing. Contrast this to a firm like Scottish Mortgage Investment Trust which invests in a lot more exciting firms – think Ginkgo Bioworks, Tempus, and Grail – but their portfolio also contains lots of publicly traded names.

Perhaps the best part about holding Draper Esprit is how they break down each investment they’re holding and show you how valuations change over time. As we continue to progress down the pandemic path, alternative assets such as venture capital become more appealing because they’re less correlated to traditional asset classes such as stocks and bonds. For non-U.K. investors, you’re also getting some currency diversification because you’ll have to buy shares using British pounds.

The report goes on to talk about how the pandemic is changing the way venture capitalists invest. They’re now becoming more selective, and there’s a greater emphasis on follow-on investments. We’ll see greater competition for quality deals with a focus on revenue-generating business in sectors such as fintech and software-as-a–service (SaaS).

Conclusion

If you’re not an accredited investor, there aren’t many ways to get exposure to a portfolio of leading technology startups. Draper Esprit is one of a few options that give you exposure to a concentrated list of growth startups. Given their affiliation with DFJ, they have access to future deal flow as they continue to have exits and cycle their capital. With no pressure from outside investors, they can patiently wait for the opportune times to exit their positions.

There’s another lesser-known publicly traded European venture capital firm operating in the clean meat space. Find out who that is in The Nanalyze Disruptive Tech Portfolio Report, available now for Nanalyze Premium annual subscribers.