Seven Spires Investments
Investment Process

Description of the Fund

Seven Spires Investments Ltd. is an 'angel' investment fund established in 2003 with £25m of private money. It seeks to invest in early-stage, high-tech companies in the United Kingdom, such as university and industrial spinouts, start-up ventures etc. We like to work with world-class scientists and to see strong intellectual property in our investee companies. Often this will in the form of patents, but not necessarily so; we are aware that patent protection is not always to best route to defend a technology.

We are looking for the companies that could scale to a market valuation of $100m and we will often prefer the higher risk but higher reward type of investments over smaller but more secure ones. We prefer, when possible, to be the sole or major external investor.

The £25m fund will invest up to £5 million per year over a five-year period. We have no formal minimum level of investment, though we do have a self-imposed maximum of £1 million per year for any one company; thus, 'follow-on' is explicitly part of our model. We are prepared to consider even extremely early stage investments - pre-revenue, perhaps even pre-prototype.

We have no particular technology sector focus, except that we would generally not expect to pursue drug-discovery opportunities. Seven Spires has a very small staff and can be very responsive as there are no tiers of management or investment committees to consult. As sole investor, we do not charge management fees, or take director's fees, preferring that any money we invest is solely directed to growing the business. Notwithstanding this, we will not disadvantage ourselves with respect to co-investors on these or other points.

The manager recommending investments to the Directors of Seven Spires Investments is Ian Page (Visiting Professor Imperial College and Founder of Oxford University spinout Celoxica Ltd). He is based in Oxford.

Investment Process

The initial contact with potential investee companies may come to us in many ways, perhaps through one of the organized 'angel' groups (such as OION in Oxford), or the tech-transfer office of a university, through support companies (fund-raisers, accelerators, incubators, accountants etc.), and increasingly through a direct approach to Seven Spires by the company themselves.

Since our remit is a fairly tight one, we have found with experience that about 1% of the leads we have actually turn into investments. A direct consequence of this ratio is that we have to make quick 'no' decisions about a large percentage of these leads. In practice the reasons for excluding a deal from further consideration is often based on one or more of the following criteria: i) lack of believable growth to a $100m company, ii) lack of defensible IP, iii) valuation or amount sought being too high.

Our first step will normally be to read the Business Plan or Executive Summary of the company. In common with most VCs and some angels, we prefer not to sign NDA agreements at this stage. For one person's view on why investors and NDAs don't mix, see the article at www.thechilli.com/articles/misc/027_investorNDA.asp. We do take seriously the need to protect any information passed to us by potential investees otherwise our deal flow would very soon dry up. We will sign an NDA if necessary, and at the right stage, but strongly prefer not to do this in order to do the first-pass examination of an investment proposition.

If the Business Plan indicates that a proposition might fit our investment remit, then a meeting with the key personnel is usually arranged quite soon afterwards. This may be in Oxford or on company premises depending on the situation. It is always true that the management of a company are an absolutely vital part of the equation, and that is especially true for an investment fund like Seven Spires, which is essentially 'money only'. We do not have the staff or resources to 'add value' to our investments by supplying candidates or even by interviewing for senior management posts. For a company to be ready for Seven Spires investment implies that the management is already in place that can take the company forward to at least the next major stage of growth. If there are gaps in the team, there must be a clearly defined and inherently executable plan to bring a full management team together.

The work to this stage is mainly undertaken by myself, Ian Page. I have a background in commercial and academic science, primarily in the computing, electronics and general engineering fields. I will perform as much of the 'technical due diligence' as I am able to at this early stage.

For a company that has passed these 'internal' due diligence hurdles, we would next seek to agree a deal. We generally prefer equity-only investments. We would expect to invest either all or a substantial proportion of the cash being raised for a given percentage of the equity (on a fully-diluted basis). The Seven Spires 'Standard Documents' (Shareholder's Agreement, Articles, Term Sheet etc.) can be made available to potential investee companies at this stage so that the general structure of our deals can be fully understood.

Only at the point at which we have verbal agreement on a deal will we issue a term sheet and start to spend money on an investment. The term sheet, if agreed and signed, will normally specify a one-month 'closed period' in which the investee company agrees to negotiate only with Seven Spires. There will be an indicated day on which we will expect to sign an investment agreement.

Financial, legal and technical due diligence will be initiated at this point. All our legal work and some of the due diligence work is handled for us by Olswang in London. Technical due diligence will normally be sought from a recognised, independent expert in the appropriate field. We would normally seek some guidance from the company on experts that might satisfy our criteria, but we will in the end make our own judgement on who should be retained. We would expect the key company personnel to make at least one full day available to this expert.

The major reasons why deals sometimes take longer than necessary are, in our experience: i) the company not being 'investment ready', ii) the difficulty of finding or recruiting the appropriate due diligence expert(s), iii) the complexities of dealing with co-investors or previous investors who may have different ideas of the terms of a deal, and iv) delays with investee company lawyers. Our fastest investment to date has been ten weeks from first contact to the investment money being in the company bank account. There is in fact no reason why this could not be even shorter, if everything we require is already in place.

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