Molten Ventures — High emphasis on capital preservation

After a strong 37% net growth in fair value in FY22 (to end-March 2022), Molten posted an NAV total return (TR) decline of 11% in H123 (ended September 2022), with gross portfolio value (GPV) down by £82m or 12% (see Exhibit 1). The value of Molten’s ‘Core’ portfolio (21 companies, which made up 64% of GDV at end-September 2022) declined during H123 by c £200m before currency movements, while the fall in its ‘Emerging’ portfolio was less pronounced at c £60m, due to both a lower share in total GDV and a more limited fall in valuations of early-stage VC compared to later-stage VC across the broader market. The latter is because (1) late-stage VC valuations (especially for pre-IPO candidates) were more inflated in 2020–21; (2) late-stage VC companies are more often valued based on revenue multiples versus public peers; and (3) early-stage VC-backed companies are further away from a VC exit, thus having more time to realise their valuation potential. The portfolio value decline in local currency was partly offset by a positive foreign exchange effect of £82.8m (mostly US dollar appreciation vs sterling), excluding which Molten’s GPV would have fallen by 17%. We note that after the sell-off since last year, Molten’s listed holdings included in its ‘Core’ portfolio (Trustpilot, UiPath and Cazoo) represented only 1.6% of GPV at end-September 2022, with a carrying value of £23.2m. This compares with £169.6m of proceeds Molten has realised so far from Trustpilot and UiPath, corresponding to realised multiples of invested capital of at least 2.5x and 6.0x, respectively (Molten has not made any realisations from Cazoo so far).

Molten adopts a relatively conservative approach to portfolio valuation. It predominantly relies on the last funding round (62% of the private portfolio, of which 79% completed the funding round in the last 12 months), which is calibrated to account for movements in the revenue multiples of public peers since the deal closure, as well as any subsequent technical/product milestones and the trading performance of the company compared to expectations at the time of the funding round. Molten’s aim is to reflect the current revenue trajectory in its carrying values (rather than the full prospective growth path, which normally determines valuations of funding rounds), as it prefers to gradually recognise the ‘success story’ of its portfolio winners. As a result, Molten applied a valuation discount to 83% of the holdings valued based on last funding round, ranging from 4% to 82%, with a weighted average discount of 27%. Given that Molten’s shares currently trade c 56% below its last reported NAV, the above-mentioned discount reflected in the carrying values of Molten’s holdings translates into a look-through discount of c 63% to recent funding round valuations.

A further 20% of the private portfolio was valued relative to peers based on forward revenue multiples, which in the case of interim valuations are based on the blended revenue of the current and coming year. Here, the weighted average revenue multiple declined to 6.9x at end-September 2022 from 7.8x at end-March 2022. The remaining 17% of the private portfolio represents Molten’s fund-of-fund investments, valued based on net asset values provided by general partners (GPs).

Overall, valuations calibrated to reflect public market peers resulted in a reduction in EVs in Molten’s ‘Core’ portfolio of c 35% on average. The fall in portfolio value was less pronounced than the downturn in public high-growth tech companies, partially due to Molten’s exposure to disruptive tech and enterprise software rather than consumer-reliant businesses. On top of that, 90% of Molten’s direct investments (81% of total portfolio fair value) are structured as preference shares (carrying a liquidation preference). This has limited the carrying value decline for 45% of them. Molten’s portfolio valuations were also supported by the continued good top-line performance of portfolio companies, with Molten’s management expecting the average ‘Core’ portfolio revenues to grow by 62% to US$271m in 2022 (only slightly down from the 77% expected at the time of FY22 results release) and by 78% to US$483m in 2023.

We consider Molten’s valuation approach as prudent. While valuations are prepared internally, they follow the International Private Equity and Venture Capital Valuation (IPEV) guidelines, which is the main VC/PE industry standard. We also note that these valuations are subject to the review of the Audit, Risk and Valuations Committee of Molten’s independent board, as well as external audits performed twice a year (currently carried out by PwC). Finally, they were recently subject to a third-party review at end-June 2022 as part of the arrangement of Molten’s new credit facility (going forward, lenders may commission quarterly independent valuations of the investment portfolio).

Following a particularly high investment pace in FY22 of £311m, Molten invested a sizeable amount of £112m in H123, of which £56m was spent on five primary investments (agreed in the previous fiscal year):

We note that all of these are early-stage VC investments, while Molten’s general investment approach is to make most direct investments into later-stage companies (Series B and later). Another £31m was provided to existing portfolio companies as follow-on investments, with the ratio of Molten’s primary to follow-on investments in H123 being consistent with recent years (see Exhibit 2). The balance of Molten’s H123 investments was related to drawdowns from the seed fund-of-funds (£19.4m) and the seed/Series A Earlybird funds (EB, £6.2m). A further £17m was invested by Molten-managed enterprise investment schemes (EIS) and venture capital trusts (VCTs) on behalf of third-party investors.

While the company’s investment pace in the first half of FY23 was relatively high, management expects it to slow materially in H223, with an FY23 target of £150m (broadly in line with its targeted normalised average rate going forward). In November 2022, Molten made some minor follow-on investments in Series B rounds of BeZero (hardware & deeptech) and Aktiia (digital health & wellness), bringing its year-to-date investment to £117m. Management also expects EIS/VCT capital deployment to be relatively flat throughout H223 versus H123. The EIS and VCTs had £57.8m available cash to invest (broadly in line with the £60.5m at end-March 2022). As the secular enterprise technology theme remains intact, management continues to seek the best companies to leverage this trend. It also highlighted that, except for selected pockets of ‘hot’ companies, it already sees a normalisation of valuations for potential new investments (when compared to levels from 12–18 months ago). On the other hand, management highlights that during global downturns new innovative businesses emerge to create efficiencies where the economy has left a vacuum, which was the case in dot-com bubble, global financial crisis and the COVID-19 pandemic.

Molten’s cash realisations were rather limited at £12.9m (vs £67m in H122) and came mostly from the partial sale of UiPath (£11.2m, remaining stake valued at £1.2m at end-H123), as well as Minit. After the reporting date, Molten sold Roomex (a European online B2B accommodation platform) to Fleetcore Technologies at an undisclosed (but positive) uplift to its last carrying value.

We believe that the limited realisations reflect the broader trends in the European VC markets, where exits fell by 95.3% y-o-y and 81.7% q-o-q to €2.8bn in Q322, the lowest quarter since Q120, according to PitchBook. This brought the year-to-date decline to 70.4% y-o-y, though we note that this is from a very high base in 2021 and PitchBook believes that with 878 exits in the year to end-September 2022 could be the second-best year in terms of exit count.

Unsurprisingly, exits through public listings fell the most with only seven transactions completed in Q322 across Europe. Here, we note that 70% of Molten’s exits historically were executed through a trade sale rather than initial public offering (IPO), which makes the company well-placed to benefit from a rebound in the M&A market (even if IPO activity does not pick up to the same extent). We also note that software exits remained quite resilient and represented 51% of VC exit value in Europe in 2022 to end-September, according to PitchBook. Enterprise tech is the largest sub-sector within Molten’s portfolio with 42% at end-September 2022, followed by hardware & deeptech (28%), consumer tech (21%) and digital health & wellness (9%). Looking at the broader context of the European VC market, it is worth noting that it has been gradually reducing the gap in terms of deal volumes to the US VC market, with European VC deal value at c 39% of US in 2022 to date (based on Dealroom data as at October).

Molten’s total liquidity at end-September 2022 stood at c £88.5m (vs £113.1m at end-March 2022), with £28.5m in cash (FY22: £78.1m) and £60m in an undrawn revolving credit facility (FY22: £35m). The company recently expanded its debt facility from £65m to £150m (bearing an interest rate of SONIA plus 5.5% pa on drawn amounts), with £90m (in the form of a term loan) drawn as at end-September 2022. After the reporting date, Molten also received £6.4m cash proceeds from the disposal of Roomex (with further escrow monies expected). Furthermore, it recently decided to syndicate part of its fund-of-funds programme, with Castlegate Investments acquiring a proportion of Molten’s existing seed portfolio for €15m (c £13m) and making another €15m of commitments for future investments. We calculate that all the above brings Molten’s pro-forma cash at end-September 2022 to more than £108m (see Exhibit 4). Finally, additional potential liquidity (if needed, subject to any lockups) comes from the company’s listed holdings (£23.2m as at end-September 2022).

In the event the subdued exit environment persists in the coming quarters, the above-mentioned liquidity would have to largely cover (1) new primary and follow-on investments, including capital calls from the funds Molten has outstanding commitments to; (2) operating expenses (net of fee income); and (3) interest on the drawn part of its debt facility.

In terms of its direct VC investments, Molten has the flexibility to adjust capital deployment as it deems fit (subject to any deals it has agreed to but not yet closed). Having said that, Molten also needs to preserve capital in case it needs to help extend the cash runway of some of its holdings through follow-on rounds. Management highlighted that, at present, over 75% of its ‘Core’ portfolio has more than 18 months of cash runway based on existing growth plans (vs 80% being fully funded until exit or having a cash runway of over 24 months at the time of FY22 results). The company also had £80.7m of outstanding commitments within its fund-of-fund investments (including Earlybird), though these are likely to be drawn gradually over a several quarters or years. As a result, absent any major pick-up in exit activity, we would expect Molten to make relatively few new direct primary investments in the near term and do not expect it to embark on any share buybacks despite the wide discount to NAV. Molten’s management expects H223 investments to come in at c £38m.

The company’s operating costs stood at £12.7m in H123 (H122: £15.7m), which were largely covered by its £11.4m fee income (management and director fees) from managing third-party capital through its EIS and VCTs (representing assets under management of c £0.3bn at end-September 2022). Consequently, its net operating expenses continue to be significantly below Molten’s target of 1% of period-end NAV. Over time, Molten intends to increase its fee income above its operating costs, though we assume that its earlier plan to launch a growth (ie Series B+) co-investment fund has been put on hold for now given the less favourable market environment.