Molten Ventures — A core tech holding through the cycle

Molten Ventures invests in high-growth companies across the UK and Europe and has built a direct investment portfolio of c 72 companies, across four technology sectors: consumer, enterprise, hardware and deeptech, and digital health and wellness. Its core portfolio comprises its 17 largest holdings, representing 68% of portfolio value at 30 September 2021

The company has a proven track record of delivering successful investments, having deployed over £810m of capital since its IPO in 2016 and realised almost £420m of investments. Its portfolio was valued at £1.35bn (GPV) at the end of H122, with a NAV of £1.36bn, equating to a NAV per share of 887p. The group has delivered a 20.3% NAV/share CAGR from H117–H122, recording 19% growth in H122.

The factors that help differentiate Molten Ventures from competing investment propositions are:

Management has largely delivered on its FY22 priorities for the business, including participation in (and increasingly leading) larger funding rounds, as well as further investment in follow-on opportunities, the next Earlybird fund and the fund-of-funds programme. The launch of the co-investment fund for growth stage (Series B+) dealflow remains outstanding business for CY22, although we understand the preparatory work has been completed. In FY22, management expects to meet its core targets for the business: 20% annual growth in GPV through the economic cycle (FY21 40%, management guidance of 35% for FY22); 10–15% realisations as a percentage of GPV through the economic cycle (FY21 29%, first 10 months of FY22 11%); £150m+ of annual investment from FY22 (first 10 months of FY22 £259m); and operating costs (net of fee income) below 1% of NAV (FY21 0.4%, H122 0.8%). In addition, management expects to maintain 12–18 months of cash resources, sustain quality dealflow and achieve the company’s four key environmental, social and governance (ESG) targets set out in its FY21 report and accounts (see ESG section).

As at end of January 2022 (first 10 months of FY22), Molten Ventures had invested £259m, of which c £106m had been committed to 12 new investments and £153m to follow-ons. Net investment YTD rose to £149m, with cash proceeds from realisations reaching £110m (11% of GPV). Molten’s portfolio companies saw strong revenue growth in CY21, which management forecasts to continue for CY22, with a healthy pipeline of investment opportunities ahead.

As a people-based business, Molten draws on its senior investment team (with over 100 years of combined experience) and the team’s market reputation to attract the best entrepreneurs and invest in the most sought-after businesses. Once invested, Molten relies on efficient recycling of capital, with realisations supporting reinvestment. Realisations are dependent on the state of the technology market, the valuations of quoted peers and continuing investor appetite for technology companies at IPO or by way of a trade sale.

Noting that valuations of private technology companies have a relatively low correlation to listed equity markets, even if the vehicle is publicly traded, Molten Ventures offers what we believe to be market-leading access to private European technology start-ups, a high-growth asset class that is otherwise largely inaccessible to the public market investor. Molten has built a portfolio of investments at different stages of maturity and a track record of exits that has delivered 20.3% H117–H122 NAV/share growth. Management also has a roadmap to a self-financing business model through scaling its fund management business. With the company trading at 0.82x H122 NAV. Catalysts for a re-rating include growth in third-party fee income with the launch of the growth fund, further scaling of the business and the potential for material upside from Molten’s portfolio through funding rounds, successful exits or IPOs.

Molten held its annual investor day on 3 March 2022, showcasing the range of companies in which it invests. Presenters included founders and CEOs across a range of c 15 companies and funds, from early-stage seed funded start-ups, to Graphcore, a Series E stage market-leader and Molten’s second largest holding at H122).

Graphcore, a UK chip designer, announced the launch of a new machine-learning computer, based around its intelligent processing unit (IPU), capable of 10 exaflops (10^18 calculations per second), with 4 petabytes (PB) (10^15 bytes) of memory and bandwidth of over 10PB/s. The ‘Good’ computer (named in honour of British mathematician, Jack Good), based on the Bow IPU, is expected to be able to handle neural networks with 500tn parameters, and can be trained 5x faster than the leading NVIDIA chip at half the cost, so offers a 10x cost advantage. Graphcore will be one of the first users of 3nm wafers, working with TSMC in Korea to deliver its first ‘Good’ computers in 2024, at an individual cost of US$120m per unit. This is a step on Graphcore’s road to ultra-intelligent ‘brain scale’ computers.

Highlighting the range of investee companies, other presentations ranged from Clue, a female health app, to Form3, a real-time, cloud-based payment technology platform, ICEYE the owner and operator of the largest constellation of synthetic aperture radar (SAR) satellites, Lyst, a leading fashion shopping website and Aktiia, a digital health company monitoring blood pressure and hypertension, to allplants, a leading brand in vegetarian ready meals, with its new Walthamstow kitchen, the largest vegetarian kitchen in Europe.

In his introduction, Molten’s CEO, Martin Davis highlighted that although there has been some softening of valuations following falls in the public markets, hot assets remain in demand with valuations for leading technology companies largely holding up. The European venture capital market remains a competitive market, with a surplus of cash, so investment opportunities are largely decided on relationships, brand and track record, rather than price, which surprisingly tends not to be a key decision factor.

Molten’s portfolio remains well funded, with companies having topped up their cash reserves through fund raises in 2021, meaning most are funded for at least the next 12 months. As 2021 was such a strong year for seed funding, Molten’s forward pipeline for FY23 also looks robust. The company will remain selective about where it invests, only targeting segments of relative advantage, and choosing not to invest in areas including battery technology and robotics, amongst others.

Management’s approach to the carrying value of portfolio companies is highly conservative, with exits having all been realised at a premium to historical carrying value. In this respect, the widening discount to Molten’s NAV seen in Q122, on top of conservative carrying values, does not appear justified. The carrying value of Molten’s assets already allows for a discount to the market price.

Despite the European venture technology market having developed to the point where it is able to stand up against the US market, Martin Davis highlighted that a tangible valuation gap still exists between the US and Europe in earlier-stage Series A/B funding rounds, but this gap has almost entirely closed in (the more international) later-stage Series C/D rounds. For now, European investors see the potential for better returns than their US counterparts from earlier-stage investment.

The co-investment growth fund that management is intending to launch in CY22 (c £400m fund targeted) would allow Molten to stay invested in companies for longer, increasing the group’s influence over, and its ability to lead, later-stage rounds.

Looking ahead, the European technology market remains buoyant and, despite inflation concerns, the rotation out of technology and the war in Ukraine, Europe offers a deeper investment pipeline than ever before, presenting a great opportunity for the European ecosystem to catch-up with the US over the next three to five years. There is no reason why European venture capital returns should not hold up, with Molten on track to deliver targeted NAV growth, cash realisations and PBT in FY22.

Molten Ventures is a VC company dual-listed on the main market of the London Stock Exchange (FTSE 250) and on Euronext Dublin, with c 50 employees based in offices in London and Dublin. Founded in 2006 as Esprit Capital, the company was renamed Draper Esprit in 2015, after joining the Draper Venture Network (an international alliance of VC firms) before becoming the first European VC firm to list in 2016. Management then changed the firm’s name to Molten Ventures in November 2021, in recognition of the firm’s growth, its evolution and inclusion in the FTSE 250.

Molten’s core focus is on Series A+ funding for leading European start-ups from its own balance sheet, with the majority of capital targeted at later-stage rounds. However, the group also comprises other technology investment vehicles, including tax-advantaged EIS and VCT funds, as well as a strategic partnership with Earlybird Digital, a seed and Series A investor based in Germany.

From the thousands of companies the investment team meets each year, it only invests in c 15–30, including follow-on investments, which it believes have the potential to become market leaders.

Molten Ventures sources investment opportunities through three principal channels:

Together, these channels deliver a strong pipeline of deals to ensure Molten Ventures has a market-wide view of the European technology investment landscape.

Molten Ventures invests in high-growth companies with global ambitions and has built a direct investment portfolio of c 72 companies across four technology segments:

At the end of H122, Molten’s core portfolio was weighted towards enterprise technology (39% of the core portfolio by value) and hardware and deeptech (29% by value), with consumer (27% by value) and digital health and wellness representing the remaining 5% (Exhibit 5).

Although Molten’s investments all fall within the broader technology sector, these four segments still provide a degree of diversification across the economic cycle, with Molten able to commit capital to segments with lower valuations, while simultaneously realising late-stage investments in segments where demand and valuations are higher.

Molten’s investment approach is more entrepreneur-friendly than the typical US VC model, which sifts potential winners from losers and aggressively cuts underperforming investments. Molten prioritises using resources on its more successful investments, but still devotes time and effort towards its lower-performing companies to help them achieve exits where possible and release value back to Molten’s portfolio. As a rule of thumb, Molten’s management expects 30% of its investments to deliver strong returns, 60% to deliver returns of 0.5–2.0x money invested and only 10% to be write-offs.

Molten’s fund-of-funds strategy is a significant differentiator from its peers. It launched this strategy in October 2017 and has invested in 47 specialist seed funds across the UK and Europe (as at 30 September 2021). By investing in seed funds, Molten can identify and secure privileged access to a pipeline of attractive early-stage opportunities, ahead of core Series A and B investment rounds. Molten benefits from the expertise of sector-specific funds and an expanded European sourcing network. This strategy also helps Molten Ventures identify and invest in emerging investment trends ahead of its competition, allowing Molten to build relationships with, and providing preferential access to, investee companies.

In return, the seed funds receive additional capital to deploy in their core markets and a direct and deep relationship with Molten Ventures, helping ensure promising investee companies have a natural port of call for follow-on rounds as they develop, scale up and need later-stage capital.

At 30 September 2021, Molten had committed £90m to this strategy (of which £39m had been drawn), with a further £75m pledge with its H122 results to be deployed over the next five years.

As part of this strategy, Molten has built a sizeable body of impact funds, including Icebreaker, Seaya Ventures, byFounders and Join Capital (both follow-on funds), Stride, Five Seasons Ventures, Episode 1 and the Hardware Club. In addition, H122 fund commitments have included Atlantic Food Labs (sustainability, nutrition and health), Form Ventures (UK start-ups with public policy exposure) and Forward Partners (ecommerce and applied AI) for its IPO, as well as a follow-on fund for IQ Capital IV A.

The importance of Molten’s partnership with Earlybird cannot be overstated. At 30 September 2022, five of Molten’s core portfolio of 17 companies had emerged from Earlybird’s investment portfolio (Aiven, Isar Aerospace, N26, Smava, UiPath) and 18 of Molten’s 55-strong emerging portfolio. In total, 30% of Molten’s 72 direct investments have been sourced from Earlybird investments.

Earlybird invests from seed to Series A, with offices in Berlin, Munich and Istanbul. As with the fund-of-funds strategy, Molten’s strategic partnership with Earlybird not only extends Molten’s investment platform, but also offers access to a bespoke dealflow pipeline and a larger pool of specialist investment expertise.

In July 2018, Molten Ventures took an initial 50% stake in Earlybird Fund VI and then, in 2019, it acquired a 27% stake in Earlybird Fund IV for €63m and a 5% stake in Earlybird DEF for US$20m. In March 2021, Molten committed €17.5m into Earlybird Fund VII and €15m into Earlybird Growth Opportunities Fund. In H122, Molten invested £7.3m into Earlybird’s Digital East Fund I, Growth Opportunities Fund and Earlybird West’s Fund VI and VII.

Looking at Molten’s track record in terms of gross portfolio return (the increase in GPV, together with net realisations; Exhibit 8 highlights a positive return in every period since IPO, with a return of 27.3% in H122 and a five-year CAGR H117–H122 of 66%. The growth in portfolio value has driven a 57% five-year NAV CAGR, again with a positive return in every 12-month period since IPO, leading to 48% NAV per share growth over the 12 months to H122 and a sector-leading five-year NAV per share CAGR of 20.3% over the period H117–H122.

Along with other London-listed venture capital funds (eg Augmentum Fintech and Forward Partners), as well as Seraphim Space Investment Trust, which has yet to establish a public market track record, we would identify HgCapital Trust (25% five-year NAV per share total return, 18% 10-year total return), IP Group (11% NAV per share CAGR since its 2003 launch) and Oakley Capital (19% five-year NAV per share CAGR) as Molten’s principal technology sector peers.

Molten Ventures has invested in its portfolio in every period since IPO, but only realised its initial investments in 2016 and has realised investments in every subsequent reporting period. The steady cadence of exits provides investors with comfort that the value of Molten’s late-stage businesses will be realised and reinvested in new opportunities to build future value. The group expects to realise 10–15% of portfolio value annually through the economic cycle.

In H122, £67.5m of cash realisations included proceeds from the exits from SportPursuit, Decibel, Conversocial and PremFina, as well as selling shares (post-IPO) in Trustpilot and UiPath. To H122, Molten Ventures has realised over £380m of value from its portfolio (with an additional £40m of realisations in H222) with the majority of exits delivering attractive multiples, with an average money multiple of c 3.4x amounts invested.

Management remains confident in the outlook for European technology investment, seeing rising demand for late-stage rounds in leading companies. Molten recorded total liquidity of £221m (including £65m of undrawn credit facilities) as at 30 September 2021, with the option to sell-down post-IPO stakes in Trustpilot and UiPath, to provide additional investment capital. On this basis, management can identify at least 12–18 months of cash runway, including potential exits.

Looking ahead, management has continued to make good progress on preparatory work for the growth fund and remains focused on launching the Series B+ growth fund in CY22, targeting a £400m raise. The purpose of the co-investment fund would be to deploy third-party capital alongside Molten’s balance sheet, providing the group with a greater ability to lead deals and secure allocation in competitive funding rounds, in addition to generating third-party fee income.

Taking into consideration continued revenue growth within its portfolio, as well as financing rounds and exits, and a healthy pipeline of new investment opportunities, management anticipates FY22 fair value growth of around 35%, subject to wider market conditions.

The European technology sector has lagged the US and China for the past decade. Relative to both markets, Europe has few tech champions and a paucity of technology exposure on the public markets. However, Europe is finally starting to accelerate and catch-up, with a mature technology ecosystem delivering ever more successful businesses. Entrepreneurs are then reinvesting capital from successful exits to support the next generation of founders.

In this context, 2021 was a record year for VC investment globally, Dealroom estimates that over US$675bn was raised globally by start-ups (Exhibit 10), double the all-time high recorded in 2020. Europe led this surge in growth, growing faster than both the US and China, with 133% growth y-o-y, with total funds raised in 2021 of US$114bn.

The success and maturity of the European ecosystem can also be measured in terms of the number of ‘unicorns’ in Europe, private companies with a valuation above US$1bn. As can be seen in Exhibit 11, there was a surge in European unicorn numbers in 2021, increasing by 98 (over 40% growth year-on-year) to approximately 320 companies. Of the 98 new unicorns, 75 were VC-backed. Although the majority of unicorns are clustered in the UK, Germany, France and Scandinavia, unicorns are also becoming more dispersed, with the long tail to be found across 28 European countries, including Italy, Malta, Slovenia, Estonia and Cyprus.

The mobility of talent and the increasing ability for companies to be based anywhere in the region are significant factors behind the success of the European ecosystem.

The UK has led this success, with almost US$23bn raised in 2021 according to Beauhurst, a UK private funding data provider (Exhibit 12). These data include more than 2,600 announced deals, with an average deal size of £8.5m, up from £5.0m in 2020. Exhibit 13 highlights the growth of UK megadeals (£50m+ rounds), which leapt from 44 in 2020 to 112 in 2021 (with even more marked growth for £100m+ rounds), contributing to the significant y-o-y increase in average funding round size.

We would argue that factors highlighted above all play to Molten’s strengths and underpin the rationale for management to raise its targeted Series B+ co-investment fund. These factors are:

Molten Ventures, together with its listed VC and private equity peers, provides an attractive way to access private European technology companies and participate in the value they create through a diversified holding company, offering attractive liquidity to investors.

Direct European public market technology exposure remains limited, as software-as-a-service (SaaS) business models and digitalisation mean start-ups are far more capital efficient than they have been in the past. When coupled with better access to private capital in Europe, companies have not needed to list to access the capital required to drive growth. This means that companies can stay private for longer, avoiding the cost, governance issues and short-termism that can be found on the public markets. This has allowed private company investors (and entrepreneurs) to retain far more of the value created by Europe’s successful start-ups.

Molten’s holdings Cazoo, UiPath and Trustpilot were part of a wave of late-stage venture backed companies to IPO in 2021, although notably Trustpilot was the only one of the three to IPO in Europe (London).

Since March 2020, technology indices have soared, with the COVID-19 pandemic accelerating the digital transition as consumers and companies were forced to embrace new, online ways of working. This trend is particularly well captured by the performance of the BVP Nasdaq Emerging Cloud Index, a US index (given the wide range of quoted SaaS stocks in the US and the paucity in the UK and Europe) of pure SaaS businesses, which reflects the types of company that Molten invests in (Exhibit 14).

Having risen to 2.5x its 2020 starting point (and more than 3x the low point in March 2020), the cloud index rose fairly steadily to the end of 2021 (ignoring some valuation-driven jitters in Q221). Then from mid-November 2021, the index turned, losing a third of its value over the next three months, to a point where the performance of the cloud index is now broadly in line with the Nasdaq index since the start of 2020, although still up by c 61% from the beginning of 2020.

Molten Ventures and its quoted VC and private equity peers, provide technology exposure that is otherwise largely inaccessible to the public market investor. Valuations of private technology companies have a relatively low correlation to listed equity markets, supporting fund diversification and reducing the overall level of portfolio volatility. However, Molten Ventures, the investment vehicle itself, is publicly traded and, as has been seen at the start of 2022, is subject to wider public market technology valuation trends, suffering as investor appetite has moved to ‘risk-off’.

A joint report by Oliver Wyman and the British Business Bank (The Future of Defined Contribution Pensions, Enabling Access to Venture Capital and Growth Equity, September 2019) found that venture capital is likely to improve diversification in a multi-asset portfolio because, as an asset class, venture capital is relatively uncorrelated with listed markets. Although VC investments are exposed to broadly similar economic conditions to publicly listed equities, they are likely to be less affected by short-term swings in investor sentiment that lead to volatility in public markets. This partly reflects the time difference between asset valuations and reporting, as well as the illiquid nature of the underlying investments themselves.

The study found a positive 0.1x correlation between average global VC returns and MSCI World Index returns (1970-2016). However, independent estimates vary, with for example, Aberdeen Standard Investments (now abrdn) identifying a positive correlation of 0.42x between Global VC returns and US equities between 1990 and 2018.

The Economist (How unlisted startups’ valuations will adjust to falling share prices) highlighted another pillar of support for private company technology valuations, arguing that competition for leading assets, coupled with entrepreneurs using the valuations of other funding round as reference points, will help to support valuations. Even after the repricing of listed tech stocks, valuations are unlikely to fall immediately so long as new funds are being raised with continuing cash inflows into the sector.

Management is committed to building and developing its ESG approach and has already taken meaningful steps across multiple areas of its business. The group has identified four ESG KPIs for FY22:

Management has stated that it intends to use its platform to encourage and promote its values across its portfolio, as well as applying ESG considerations to develop best-in class technology companies and achieve strong investment returns. The group completed an initial portfolio mapping exercise in parallel with its H122 results, aligning its portfolio companies to the United Nations Sustainable Development Goals (UNSDGs), the summary of which is set out in Exhibit 15 below. This highlights that 19 portfolio companies were aligned to UNSDG 9 (Industry, innovation and infrastructure), with 17 companies aligned to UNSDG 8 (Decent work and economic growth) and 10 companies aligned to UNSDG 3 (Good health and well-being).

Full details of the UN’s Sustainable Development Goals can be found at www.sdgs.un.org/goals.

Molten has published the second iteration of its Annual Sustainability Report 2021, setting out its ESG roadmap. Published policies include ESG Policy March 2021 and a Modern Slavery and Human Trafficking Statement. Further details can be found on the group’s website.

The principal risk factors relating to Molten Ventures include:

After recent sector weakness, Molten’s shares have slipped from a premium to a discount to NAV and are trading at a meaningful discount to both the H122 NAV of 887p per share. This is despite continued strong portfolio performance and portfolio revenue growth.

GPV rose 37% in H122 to £1,350m (FY21 £984m), representing 27% growth in fair value, allowing for net investment. Management reconfirmed its expectation in February 2022 for c 35% fair value growth for FY22 ‘subject to wider market conditions’, from which we estimate a GPV of c £1,475m (9% growth in H222) and an FY22 NAV/share of c 929p (5% growth in H222). However, with the announcement on 9 March 2022 of a funding round for an unnamed portfolio company leading to a £76m fair value increase for Molten (c 50p per share pre-costs and carry), we now expect FY22 NAV to be considerably above this target.

H122 NAV per share increased to 887p (FY21 743p), a 19% rise. Plc cash at period end was £156m (FY21 £160m), including £16m of restricted cash, after investments of £165m in H122 (H121 £32m) and cash realisations of £67m (H121 £106m), together with net proceeds from the June 2021 funding round of £108m. Cash realisations included proceeds from the exits from SportPursuit, Conversocial, Decibel and PremFina, as well as post-IPO share sales in Trustpilot and UiPath. The group also has a £65m undrawn credit facility, meaning that total available liquidity at 30 September 2021 was £221m.

Net portfolio value rose to 91% of GPV in H122 from 88% in FY21, as external carry fell from 10% to 9% of GPV, largely due to a reduction in deferred tax from £20m in FY21 to a credit of £0.2m in H122. In H122, Molten Ventures benefited from foreign exchange gains (£13m profit), having suffered a £51m foreign exchange loss in FY21.

At the end of January 2022 (the first 10 months of FY22), Molten Ventures had invested £259m in portfolio companies, of which c £106m had been committed to 12 new investments and £153m to follow-ons. Net investment YTD rose to £149m from £98m as at 30 September 2021, with cash proceeds from realisations reaching £110m (11% of GPV). Portfolio companies saw strong revenue growth in 2021, which management forecast to continue for 2022, with a healthy pipeline of investment opportunities ahead.

New investments since the H122 results included Molten leading a US$10.8m seed round in an agtech company, Gardin (December 2021); a US$25m Series B funding round in MOSTLY AI (artificial intelligence, January 2022); and a US$45m Series A round in causaLens (artificial intelligence, January 2022). Molten also participated with a £20m investment in a US$200m Series C round for Thought Machine, a provider of cloud native core banking technology (November 2021) and sold its holding in Bright Computing to NVIDIA for a 1.6x return on invested capital (January 2022), having initially invested in 2014.

H122 income came from £252m of investment gains (H121 £56m), together with fee income from management fees and directors’ fees of £10m (H121 £6m). G&A costs rose substantially to £11.2m (H121 £6.6m) as Molten Ventures continued to invest in its team and infrastructure. Despite this, net operating costs of £5.7m (net of fee income) (H121 £1.3m), including £2.4m of exceptional costs relating to the move to the main market, when annualised stayed below management’s target of 1% of NAV. Net income was £218m (H120 £54m).

Molten Ventures’ most direct competitors are private European VC firms such as Accel Partners, Balderton Capital, Index Ventures, Northzone and Partech Partners. However, there is also a growing number of listed peers following the IPOs of Forward Partners and Seraphim Space Investment Trust in 2021 (Exhibit 16).

Sector valuations fell markedly in Q421/YTD, with renewed concerns over rising interest rates, high technology valuations and as part of a cyclical market rotation out of growth and towards value shares.

Molten’s NAV returns have a relatively low correlation to listed equity markets, as valuations of private technology companies take time to adjust to public market valuations, supporting portfolio diversification and reducing the overall level of portfolio volatility.

Molten Ventures offers a diversified technology investment portfolio that has delivered a consistent track record of growth and, after its strong performance in 2020 and 2021, management has demonstrated why we believe Molten warrants trading at a premium to its peer group as a mature and rapidly scaling leader in the technology VC sector. As technology valuations come under pressure, this will be the time for Molten Ventures to show it can offer NAV returns uncorrelated with the wider market. Molten Ventures trades on 0.82x H122 NAV (0.78x our estimate of FY22 NAV), in the top half of its peer group, recognising the group’s market-leading five-year NAV/share CAGR H117–H122 of 20%. In our view, the discount to NAV offers a potentially attractive entry point for investors.