Molten Ventures — Let the good times keep rolling

Following two trading updates, one prior to the H122 period end and one post period end, there are few surprises in the H122 results. After recent sector weakness, Molten Ventures’ shares continue to trade at a reduced premium to the H122 net asset value (NAV) of 887p per share (see Valuation section). The portfolio has continued to perform strongly in H122 and the launch of a potential growth fund remains a focus for FY22. Cash realisations of £67m included proceeds from the exits from SportPursuit, Conversocial and PremFina, as well as selling shares (post-initial public offering (IPO)) in Trustpilot and UiPath.

The fair value of the portfolio rose 27% in H122 to £1,350m (FY21: £984m), with management reconfirming its expectation for 35% fair value growth for FY22 ‘subject to wider market conditions’. H122 NAV per share increased to 887p (FY21: 743p), a 19% increase. Plc cash at period end stood at £156m (FY21: £160m), including £16m of restricted cash, following investments of £165m in H122 (H121: £32m), ahead of the group’s target of over £150m for FY22, and cash realisations of £67m (H121: £106m), together with net proceeds from the June 2021 funding round of £108m. The group also has a £65m undrawn credit facility, meaning that total available liquidity as at 30 September 2021 was £221m.

Net portfolio value rose to 91% of gross portfolio value (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 (£12.6m profit), having suffered a £51.2m foreign exchange loss in FY21.

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, but nevertheless net operating costs of £5.7m (H122: £1.3m) (net of fee income), including £2.4m of exceptional costs relating to the move to the Main Market, remained comfortably below 1% of NAV (management’s target), with net income and NAV both rising in the period. The company reported net income of £218m (H120: £54m).

Post period-end, Molten Ventures committed a further £11m of net investment. Investment of £37m included a new investment in Satellite Vu (a £15m Series A round for a UK-based satellite scale-up led by Seraphim Space Investment Trust) and realised cash proceeds of £26m from further Trustpilot and UiPath share sales. As confirmed in November 2021, Draper Esprit changed its name to Molten Ventures – ‘recognising the company's transformation, accelerated growth and inclusion in the FTSE 250, as well as its unique role in the democratisation of venture capital’. Despite the change in name, we understand that Molten Ventures remains part of the Draper Venture Network.

Despite changes to the constituents of the core portfolio (holdings with a fair value above £20m) in H122 (four new entrants: CoachHub, Form3, ISAR Aerospace and N26; one exit: SportPursuit; and three holdings falling below the £20m threshold: Perkbox, Freetrade and Endomag), there remain 17 companies in the core portfolio, with 72 companies across the full portfolio. The value of the core portfolio remains at 68% of GPV (FY21: 68%), with the average core holding valued at £54m (FY21: £39m) and an average holding across the full portfolio of £19m (FY21: £14m).

These figures highlight the asset growth that Molten Ventures has enjoyed in FY21, with the average core holding rising in value by 36% over the H122 period. This also helps underline why management is looking to raise a growth fund in 2022. The growth fund will raise additional capital to invest at Series B+, allowing the company to continue to lead rounds with a larger commitment and hold investments for longer as round sizes grow and competition for leading UK and European businesses increases, in the face of increasing US investment.

As well as having a broad-based mix of assets, Molten Ventures’ portfolio is well distributed across four segments of the technology space: consumer technology; enterprise technology; hardware and deeptech; and digital health and wellness (Exhibit 2). The rationale is that this spread affords the group a degree of diversification, with each segment following slightly different cycles. This offers Molten Ventures the opportunity to be selling down in one sector, while simultaneously finding attractive investment opportunities in another.

In terms of diversification, the group’s funds programme is another key pillar of the business. Despite Molten Ventures seeing heightened competition with increasingly larger rounds for late-stage businesses, this same dynamic is not being seen for early-stage investment. Molten Ventures is increasingly being seen as a strategic partner of choice, receiving a rising number of incoming opportunities to participate in high-quality seed fund rounds, both as a knowledgeable investor and for the group’s ability to support the growth of seed companies in follow-on rounds.

Molten Ventures has committed a further £75m to this programme over the next five years, having already built a network of 47 funds, with a further 12 funds added in H122, in total covering 900 companies. Through its fund investments, Molten Ventures is able to identify and build relationships with a breadth of early-stage companies that it would not be able to source directly, positioning itself to participate and lead future, larger rounds as the fund investee companies mature. Added to this strategic benefit, fund investments have also delivered an attractive financial return, with 2x returns earned on investments to date.

GPV as at 30 September 2021 reached £1.35bn (31 March 2021: £984m), with cash proceeds from realisations (including escrows) of £68m during the period. Molten Ventures committed £165m of investment (£98m net investment), with a gross change in fair value of £269m, including a £13m foreign exchange gain. Molten Ventures targets 20% growth in GPV through the cycle (H122: 27%), as well as 10–15% realisations as a percentage of GPV through the cycle (H122: 7%).

Management remains confident in the outlook for European technology investment, seeing rising demand for late-stage rounds in leading companies. In H122, Molten Ventures committed £165m to investments, exceeding the company’s targeted £150m annual investment. With total liquidity of £221m at period end, the company is also able to sell-down post-IPO stakes in Trustpilot and UiPath, providing additional investment capital. On this basis, together with envisaged exits, management can identify at least 12–18 months of cash runway. Management believes that strong growth will continue over this timeframe and remains focused on launching its Series B+ growth fund in 2022 to capitalise on the opportunity.

Looking ahead, on the results call, management was keen to clarify that the group has continued to make good progress on preparatory work for the growth fund, which will be a continued focus in 2022. The proposed growth fund is a co-investment fund that would be able to deploy third-party capital alongside Molten Ventures’ balance sheet for Series B+ funding rounds, providing Molten Ventures with a greater ability to lead deals and secure allocation in competitive funding rounds.

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

Molten Ventures’ most direct competitors are private European VCs such as Accel Partners, Balderton Capital, Index Ventures, Northzone and Partech Partners. However, there is also now a growing list of peers on the public markets and we would identify the companies in Exhibit 5 as Molten Ventures’ closest quoted comparables and the most relevant valuation benchmarks.

As an investment company, Molten Ventures’ financial performance centres around its balance sheet, the growth in fair value of its investment portfolio (H122: 27%, FY22 c 35% growth expected by management), the resultant growth in net assets (H122: 31%) and NAV per share (H122: 19%, five-year CAGR of 20%), and the total liquidity available to the company (c £221m) to allow it to continue to invest in new assets as well as fund new portfolio companies to maturity and exit.

Sector valuations have fallen recently with renewed concerns over rising interest rates, high technology valuations and growing unease over the Omicron variant of COVID-19. 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, it has demonstrated why it warrants a premium rating 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 demonstrate that it can offer returns uncorrelated with the wider market. Molten Ventures trades on 1.04x H122 NAV, in the top half of our field of peers, which largely trade in a range between 0.8x and 1.2x NAV.

Molten Ventures continued to develop its environmental, social and governance (ESG) roadmap in H122. Management has started to collect annual carbon emissions data to feed into its Streamlined Energy and Carbon Reporting for FY22. Although, as a Chapter 15 company, Molten Ventures is not required to report on Task Force on Climate-Related Financial Disclosures project, it is doing so voluntarily. The group has also strengthened its board and governance, released its board diversity and inclusion policy and started to engage with its portfolio companies on ESG (Exhibit 6).