The following is the manager report for the six months to March 2023 provided to investors in DSW Ventures portfolio companies. Please email firstname.lastname@example.org for further information.
We continue to live in interesting times, with a fully-fledged bank run narrowly averted only by the largesse of the public purse. Investor confidence deteriorated further in the quarter with venture capital investment falling yet again. This matters to us as we often require co-investors or follow-on investment.
Valuations are in flux: whilst quoted tech stocks started to recover in the quarter after heavy falls in 2022, unquoted portfolios will inevitably be marked down slowly and begrudgingly which will weigh further on confidence. The following review of venture capital investment values across Europe gives some idea of what we are having to manage, particularly in sourcing follow-on finance for the portfolio.
As a result, we remain focussed on sensibly-priced investments in companies that are relatively capital efficient and have the capability of proving their worth quickly, in order to crystallise third party investment. Equally, we are managing the portfolio companies with a close eye on their solvency, and very actively initiate and support their fundraising activities. So far so good, but we perceive a continuing need for more active investors in the regions at the pre- and series-A stage. The risk-off attitude of many of our fellow early-stage investors has been a deep disappointment. Perhaps one day we will fill that gap, but we already have plenty to do with our early-stage investments.
We completed the Hike SEO investment in the quarter, exited Avanite (at a substantial loss), and spent a significant amount of time managing the portfolio. Our direct FCA authorisation went live, and we were accepted on Innovate UK’s Investor Partnerships programme. We also launched our first fund, the DSW Ventures 2023–24 Seed EIS Fund which we expect to give us up to £1.9m of investment capacity, on top of our ongoing EIS portfolio investments.
We’ve certainly worked hard: importantly, the overall portfolio performance suggests we might even be doing the right things but you, our investors, are the judge of that.
- There has been a lot of positive activity in the portfolio in the last few months – exits, trade approaches, funding activities, rebuilding management teams. As a result, the portfolio performance has been sound, whilst we have some concerns about under-performance in a minority, and (as always) we note that these companies are very fragile,.
- All of our trading businesses made progress in the quarter, in most cases materially increasing revenues. Our two university spinout companies also made good progress in getting commercial traction and validation of their technologies.
- We have been involved in re-jigging management in a couple of cases and the companies are both already showing significant improvements.
- Several of the portfolio companies are raising third party monies, two being in due diligence and two others in the marketing phase. We may participate selectively in following our money in one or more cases.
- One of the portfolio received a trade approach from a large corporate. After negotiation and long debate between us and the other shareholders, it was rejected as inadequate – we agreed with this decision.
Portfolio returns and valuation in the six months ended 31 March 2023
- We reviewed portfolio valuations at 31 March 2023. Individual investors’ holdings will be revalued where relevant in the portfolio area of investors.dsw.vc in coming days.
- We have valued the portfolio at £10.5 million versus cost of £7.7 million – this implies a current IRR of 32% after tax relief (15% before reliefs) and a net cash-on-cash return of 1.7x. We are very happy with progress.
New investments and deal-flow
We closed one investment in the quarter, an initial investment of £616,000 into Hike SEO.
We have plenty of work-in-progress at present, with several termsheets under negotiation or signed and we expect to either complete or to have significantly advanced some new-to-firm and follow-on investments during what remains of the current quarter. The first cohort of Seed EIS investments may slip into Q3 due to procedural matters with the Innovate UK partnership.
Our team have been exceptionally busy in sourcing and assessing new applicants. The outcome has been a further increase in the volume of applicants shown in the chart below.
In the first quarter we reviewed 749 applicants versus 633 in the same quarter in 2022.
Founder valuation expectations seem to be falling, and we are finding it slightly easier to secure reasonable pricing and investment terms.
- The DSW Ventures executive team remains unchanged, although we are pleased to witness Ellie Boardman and Emma Cassidy maturing in their roles and developing strong personal profiles in the regional venture capital market.
- Following the successful raise of the Seed EIS fund, we will be actively recruiting to supplement the team – focusing on the administration, marketing and origination areas of the firm.
Alignment of interests and transparency of fees
- The cumulative investment by partners and staff of the DSW group has so far amounted to 21% of the aggregate investment by individual investors. Our collective commitment to the Seed EIS Fund amounts to 24% of individual commitments.
- We aim to protect the relationship between us and our investors by clearly disclosing fees earned as investment manager as well as any fees earned by DSW advisory businesses. Specific fees on each investment are detailed in the investment circulars as well as in the datasheets for each investment.
We have now had a very successful and speedy exit, and one that was both long-drawn-out and unsuccessful. We’ve had five years of interesting times. All-in-all, though, our portfolio is performing well, we are showing decent returns, and other VCs and corporates are showing an interest.
We thank our investors for their continuing support throughout the various ups and downs of early stage investing through DSW Ventures.
DSW Ventures, 10 May 2023