Global venture capital trends with Seonaid Mackenzie

Episode Transcript:

Brandon Ashplant: Hello and welcome to the Guernsey Finance Podcast, where we bring you interviews with leaders from the global finance industry, as well as news and developments from Guernsey’s financial services sector. My name is Brandon Ashplant, and I am Head of Technical here at Guernsey Finance. For those who aren't familiar, Guernsey is a leading global finance centre. The success of the industry here is underpinned by economic substance, political stability and asset security, and we are committed to the cause of sustainable finance. To find out more about Guernsey's success in sustainable finance, tune into our sister podcast, the Sustainable Finance Guernsey Podcast. 

Today though, I am delighted to be joined by Seonaid Mackenzie, founder of Sturgeon Ventures LLP. On this episode, we'll be discussing the changing world of funds and the changes and challenges the industry is facing as we look to the future. So, without further ado, welcome Seonaid.

First of all, a very happy 26th birthday for Sturgeon earlier this year, so a big congratulations on that front. Just tell us a bit about yourself and the Sturgeon story for those who are less familiar with you and your work.

Seonaid Mackenzie: I started Sturgeon in 1998 originally as a single-family office for an American family, back in the day when people didn't know what a family office was. Prior to that, I was a US stockbroker for 16 years, based here in London, but effectively working for US firms, and over the last 26 years, we've pioneered two things.

1)      We act as what we call a regulatory incubator, which is now called a regulatory host for new ventures in financial services, whether they be venture funds launching, we can house single managed accounts, we can do corporate finance.

2)      Other areas we operate as schemes and funds in the UK.

BA: So, why did you decide to call the business Sturgeon Ventures?

SM: At the very beginning, when I was just doing the family office, we were very much focused on venture. Even back then, it was sort of a nascent industry, but it was very U.S., so we wanted a name that was synonymous with growth. So if you think of the sturgeon fish, it starts the size of a mustard seed, a little tiny caviar egg, it grows to 15 feet in length, it weighs a ton and it lives over 100 years; and back in the day, everyone used to call themselves acorns and oak trees, and I thought it was a nicer analogy to have a fish.

The extra thing is, the sturgeon is a bottom feeder, so it swims in the sea and in a river, and it's a member of the catfish family, so it has whiskers and it tastes it's food before it eats, which is due diligence. For us, we are predominantly a female team so one of the other things I developed over the years was hybrid working long before COVID, so we've been hybrid working for 20 years, and the female sturgeon obviously runs the nest.

BA: It's very fitting. So, you launched in 98 and no doubt, over the years since then, you've seen a lot of investment cycles, market trends and sort of asset classes come to the fore. Which asset classes have been the most consistent in terms of new funds you've worked on over the years?

SM: I would definitely say venture capital. So, bizarre for us, that was our roots at the very beginning, we, as a family office, invested predominantly in private companies and some public companies, but the private company side was the reason the family came to me in the beginning, because I love working with little companies and helping them watch them grow. Venture capital investing 26 years ago was quite nascent in the UK. It was a little bit of EIS or whatever the scheme was before, no one really talked about it. Then over the last probably decades and even the last five years, the asset class of venture has grown throughout the world, and I think now more than 40% of asset allocation is going into, of the alternative space, venture.

BA: And why do you think that that venture has been so compelling for managers and investors over these years?

SM: I think that people hadn't really had the experience of the sophistication of the growth of little companies. However, I also think that there's been a danger zone going on, because the last two or three years, the Americans invented this word ‘unicorn’, and we had, because of the development of tech, so many companies go from zero to hero. What investors often have got caught up with is thinking that every company is going to be a unicorn - that's a kind of magic thing and I think, in a sense, has come back to bite everybody.

The valuations in the last four or five years went mental: the Public Market ceased almost to exist and the exits for all those little companies, as they grew to the unicorns, the exit was to go public. That public market has gone away pretty much across the world. There have been 150 IPOs last year in that venture space was before it used to be thousands so, the exit has gone, therefore the valuations have tumbled. Now people are in that kind of panic stage, but venture will always be there.

I think now that the audience investors have become so much more sophisticated and open minded, I think it's there to stay, but valuations are less, and the people are much more conservative. But the new market, and then Guernsey is one of the areas that people are trying to develop is the secondary market in venture. I've seen projects over the last 10 years tried to develop that, but they seem to finally be getting legs.

BA: Interesting. You mentioned there, public markets falling out of favour and the last few years, without saying too much on it, have been tough fundraising and for managers bringing new funds to the market. Are you seeing new things sort of coming through? And if so, what sort of asset classes are you most busy with now?

SM: Venture has kept Sturgeon definitely with the lights on for when people all move to hedge funds and all that. We did a little bit of it. We didn't do lots. In the digital asset space, for the last few years, we took on a couple of digital asset funds, but they've all closed. I think it was funny - I was at a conference for last couple of days, and everyone talked about the ‘buzz years’ and you know, we've had digital assets, tokenization or that kind of thing, and all these themes do come through the venture side. Of course, right now, everyone's caught up with AI. And one of the themes that came very strongly through, both from public companies and private companies, is it's not necessarily the best thing to invest directly in AI, because actually, AI and that sector has been around for decades. It's now looking at how companies use AI to grow their own business, rather than directly investing in it.

An area that, actually, we've had quite a lot of funds come to us talk about it, but actually not launch, but I think it's definitely in the ether of it's coming, and it's an area of focus is defence, as we have all these wars around the world, and it's all becoming much more focused on the tech side of war. I think a lot of people are focusing on that sector, both cybercrime, military, defence, using technology and AI. So actually, I think that's a theme that maybe might come through more. It's very sophisticated, so I don't know if it's a high-net-worth type investment. It might be more an institutional name, but I think that's definitely a theme. The other theme that we haven't actually, I think we've had one group come to us that it didn't launch, is ‘femtech’. So as the world finally appreciates that 50% of the world is women, which sometimes makes us laugh, especially in Sturgeon, that is an area that money is finally going into, albeit the challenges the successful companies are run by men, which is a little bit odd, but I think that's a theme that I expect to grow. And of course, the other area that we are seeing a lot of is venture funds linked somehow to profit for purpose and ESG.

BA: Certainly been a theme that Guernsey sort of played a part in as well, and we'll come to that a little bit later, but it would you say this sort of workload is reflective of the wider market globally speaking?

SM: Yeah, I think so, because our competitors, or firms that have come into our space and compete with us now, as in what we call newer entries, many of them were focused on hedge funds because they were big money, and quite honestly, we didn't care about the size of the fund, we want to work with good people. We're going to deliver a return on investment to the investors so those type firms, without mentioning any names, wouldn't have touched the venture space even three years ago. Now that the hedge funds are out of favour, those competitors to us, are now coming in into the venture space. What's interesting, is we in Sturgeon, if we are the manager in the UK, we sit on the ambassador committees. Obviously, we'll talk about a little bit more about structure, but one of the reasons that we regularly recommend to use Guernsey is, you can have people from the project effectively, that's how we see it come and be part of a self-managed team, and they sit on the advisory with our monitoring. So, because we're in that ecosystem, and have been for decades, we know that all the parties, and I think that's a really big key, whereas our newer competitors are learning who those firms are.

BA: That's interesting. You touched on Guernsey there. From a Guernsey perspective, we've certainly seen quite a bit of activity with the new VC funds domiciling here on the island over the last couple of years and Proskauer, the International Law Firm, recently published a report which showed that the Channel Islands and Guernsey in particular, was considered to be the leading jurisdiction of choice for VC funds, which is sort of, perhaps what you're echoing there. We would you say that this is the case?

SM: I do, yeah. Venture funds from in the past was driven by American investors and then they were headquartered either in Delaware or Cayman. So those were the jurisdictions U.S. firms used. Now that the VC market has become bigger in both Europe, the US, Asia and the Middle East, everybody's comfortable that Guernsey is effectively linked to the UK, we're a good financial services jurisdiction, we have governance. I think that's a really big key point is both the FCA and the Guernsey regulator highlight the importance of governance, and I think that the world has now taken it on board that governance is key in the entire investment cycle; and therefore, if you have a regulatory framework that is set up on day one, then the investors are more likely to come into funds that have a regulatory governance framework and then that becomes a venue of choice. I think that the Channel Islands with Guernsey at the heart, has evidenced that on a global basis. We don't have to explain to people, which I have to say, maybe 20 years ago I did, ‘where is Guernsey?’ I mean, for Americans, a lot of islands in Europe, they don't understand where it is. But now, you don't have to explain it anymore.

BA: One of the key benefits that the report touches on is that, as you mentioned, that attractiveness for international investors to invest through Guernsey fund structures, because they seem to have that speed of market and actually is this point about sort of pragmatic regulatory approach to our offering as an island and with different, obviously, levels of regulation depending on the type of investors the manager is seeking to bring on board.

SM: Guernsey was a front runner in the PCC. So, one of the recommendations I quite often make to people is it's really hard to launch a fund as a first-time fund merger day one. So, the development of the PCC actually means that you can start to create a brand. You can have the projector sales structure, with your brand, so the advisor in the UK can be named ABC, then you can have the PCC named ABC-PCC, and instead of trying to raise 100 million day one, when no one knows who you are, you can do deal by deal in the PCC structure, as in each cell is a separate investment. On top of that, as long as you take them in the same cost, you can always make a larger cell, the fund, and then effectively link them to the other cells that evidence your track record. Other islands in the Channel Islands followed Guernsey, but it was Guernsey that started the PCC, and I think it's got the history of it that a lot of you know, other countries are beginning to learn, is a really good way to begin. And I think that's also really important in venture where you've got to get you know the exits can be 10 years. So even if everybody wants a ‘one child wonder’, if you can enter-exit in two years and have at least one, then the next seven-year J curve kind of thing is going to be easier to handle.

BA: Just sticking on that point about VC, what types of investors do you generally see coming into sort of VC funds? Is it family offices, pension funds, or is it sort of institutional capital?

SM: I would say it's a mixture. In the UK, from a marketing perspective is really different to overseas and other countries. In the U.S., you have an institutional investor or an accredited investor. Here in the UK, we have five different types of retail, which seems a bit of an overkill, but we have ordinary. We can't go to them as venture is obviously a liquid, we don't do restricted because that's also very close to a retail. So we can have three different levels of self-certified high net worths and in retirement, I had a grandfather who, right up to the age of 105 was investing in private companies. Why? Because they take an interest. So I think there's a lot more as we talk about the older population, and it's still the largest part of demographics, they've got the disposable income, they've run businesses, in many cases - they're interested. So I wouldn't say it has to be, you know, multi billionaires, but that investable community is growing and getting more educated, so they are number one.

Family offices, it's got a new brand, in a sense, and lots of people say, ‘what is a family office?’. On the whole, real family offices are, because there's lots of quasi ones that I don’t think are real, are usually either generations of families that have been in a business forever, or an exiting firm that has sold their business, and now you've got maybe two or three people that are sitting on money. I knew someone very well in in Guernsey, and I used to make this analogy with him, when people come into money, as in new money, having sold a business, they usually spend the first two years buying houses and toys. Then they think that they've run and sold a business, and now they can run and manage other people's businesses, but that's often not the case because they have no investment experience. That's where our framework is really useful because we've been doing it for years. They can join us, join an investment committee, launch a fund, and then they'll go to friends and family initially, then they'll go to other people they know the high net worth the VC industry doesn't tend to invest in other VCs until they've got a track record. So that first 50 million is a tough one.

The great thing about venture capital is fund two is easy, in a sense that you can invest for two or three years. Let's say you launch a fund of 10 million. Don't be over ambitious to do 100, do 10, invest all your money, invest 50% so you've got follow on money, and then you can do fund two with the evidence. You've got two years' experience now the VCs will listen. So, the fundraising cycle is very much about engagement with the investors. You've learnt business expertise and formed a committee with other people that can help you, and then you can do fun too quickly. With fun to a hedge fund could take years, if not never, because you've got to get to the magic 100 before you could do fund two. In VC, you can do it in 510, middle and you're in fund two. And I think perhaps really exciting for people to be able to launch a fund, even though it's small, have a track record get into fund to then start to build and we talk about venture is in investing in SMEs, growth money, some buyouts, because we can do buyouts at 10-20 million and still be growth money; and then you've got residents who are very well known already in Guernsey, who are the massive buy up funds, and they then, obviously, that's 28 year.

BA: Well, changing tracks slightly, although I think it sort of leans on to that sort of SME conversation that we're sort of starting to go towards, is obviously to set the scene of we've had a general election. With the Labor Party winning a rather large majority and the Conservatives dropping to the lowest number of seats since the Corn Laws, which is well before our respective times. What would you like to see from the next UK government, our Labor government?

SM: I'd like to see continued expansion in the tax break so that individual investors can invest more into a venture effectively. So we have in the UK the EIS. I'd love to see that grow and incentivize more people, and then, in essence, for the UK economy to grow, we need the SMEs to grow, and that is our future.

The other thing that I've also really focused on over the last couple of years is, it’s not all about London and the great thing about COVID was it encouraged hybrid working across the country. So, we are looking to develop a hub of VC, kind of the ecosystem later this year in Manchester, supported by local government, etc. The great thing that you have there, but you have it across the UK, which is beginning to get all traction is the integration with VC and the university, VC and the private clients, you know, pioneer work community, the corporate finance arena, and just really education. So if more could be done with education, and also these pots of kind of government money, I think work very well deployed in the last five years, because they put so many parameters around it. It never actually went to early stage investors. It went to people track records. So it was that kind of chicken and egg. Let's just hope that as a new government with lots of promises, the SME world is a focus.

The other thing that I think we really need back in the UK, is a focus on nuclear manufacturing as that was our core. 100 years ago, we were looked at as a manufacturing industry. Loads of businesses come here, but the grants have disappeared. I supported from Europe and so again, there may be more grants and innovation kind of growth boosts need to come. I think that's really the focus.

BA: What sort of tangible actions would you like from the government to encourage greater investment more generally across those other asset classes all those other sectors that are more and more glossed over?

SM: We in the UK, for centuries, have been a country of innovation and so I can list hundreds. My father spoke about all the innovation that came out of Scotland. We are very good at inventing things, but one of the things that we lack is continued investment in the SME cycle. Everyone goes to the U.S., and suddenly they're U.S. unicorns. They're not UK unicorns. So I think we need to encourage more companies to stay here, and then we need external investment to come to the UK, rather than us rushing off overseas.

At the day, we're still an island, we're bigger than Guernsey, but we're still an island, and we have a restriction of people. So if we could make it more tax efficient for foreign investors to come to the UK, rather than us running overseas to the Middle East, Singapore, etc. then I think that would bring more inward investment into so much - our universities here are exemplary in innovation. One of the people I heard two days ago was the head of Moorfields, the largest Eye Hospital with data about eye everything in the whole world. So while people coming here to basically invest in opthology and you've got Specsavers at the end of the day, it is the leading optician in the whole of the UK, and so those kind of private to public partnerships are also really important between very good entrepreneurs and the public sector and the investment community globally. So I think we are a centre of excellence in so many sectors.

I talk about manufacturing, we are very good at med tech, we're very good at drug development. At the end of the day, I think even in COVID, everybody thought the world would be led by American drug companies and at the end of the day, we did a lot of research and innovation. So Britain as a whole, Great Britain as a whole, is wonderful for innovation. We are leading the world in ESG, we're still a small piece of the whole world, and the UK leads in the financial services framework. You know, we're doing a lot and trying to push other people. So I think there's lots of benefit.

The other one, of course, is education tech, that's another area that's been driven a lot by our universities and that collaboration between universities, the public sector, not that so many public companies, but the larger companies and Treasury need to come together more and honestly, just need to use some brains. We just need to get onto it more, more actively, and that will boost the whole venture industry.

BA: Well, I know you do a lot to incubate and sort of nurture new fund managers, and Guernsey has historically been quite popular with those first-time fund managers coming here to sort of domicile. What is your most important piece of advice for those first timers and those emerging managers as they go on and launch their sort of first-time funds?

SM: The real key is to work with parties that know you know how to do it collaboratively. We work with UK lawyers who already know Guernsey lawyers. I reach out on a regular basis to the Guernsey lawyers and say, which are your current favourite London lawyers, and vice versa, so that we know we're mixing the pool all the time. The one area that is constantly developing, both in the Channel Islands and quite honestly, everywhere in the world, is administrators. There are always new ones popping up, people merging and of course, we act as the heart so that people get to work with administrators who are experienced.

One of the things that we've seen in Guernsey as well is you have all these acquisitions, as in the small become bigger, but then they all leave and break away so it's really important as an ecosystem, so we all keep in touch with each other, and those spin outs, so the legal community in the in Guernsey needs to tell us, ‘Look, these are the new spin outs. These are the new teams. They're really good at this particular sector,’. They need to tell us, so that we can tell the incoming new, new venture groups. Having experienced people basically to nurture those initial managers is really key, because otherwise, if you go to everyone that's kind of a beginner, then you'll end up being everyone's experiment. And it comes with costs and costs comes with time. So of course, everybody wants the money yesterday, both when you're a company raising money and when you're fund-raising money to deploy in those companies. The more experience the team are, the faster going to get time to market. I think that's the key.

BA: Guernsey recently hosted an innovation summit, and our annual sort of AI conference is making a return this year on September the 11th hearing here in Guernsey, and we have, or have had, some fascinating conversations about the deployment of technologies such as AI being used in the finance industry. You touched on that earlier, about the idea of AI and tech increasingly being used as a tool rather than an investable asset class in it, in and of itself, how do you see technology developing or changing the funds industry? How will AI in particular affect the various facets we've discussed today?

SM: So I've gone to lots of presentation, I think everybody is at the moment on AI, and what a few people have said to me is, Seonaid, you have all got the budget to spend millions on AI because it's so fast so you'll be able to buy a lot of this stuff out of a box. Just be patient, let the big firms do the spending and the experimentation. You'll be able to buy off the shelf in so many years’ time, I think we've all got to watch and learn what we can use as a tool to develop our own business and what you just don't want to waste money, because at the end, we're not an enormous business that we have to make things work for us.

Where I'm really fascinated in and it's out there already, but it's certainly developing faster, is taking the data that we have, and being able to manipulate it a bit so you get more angles on the same thing. One of the things that I've read a lot of studies on, is behavioural investing, as in, why do investors tend to go like sheep, into certain sectors? And how can we learn more from that, even down to how do you present your material? One of the big things in the UK has been consumer duty and as I'm of a certain age now and have to wear glasses. One of the main things I talk about is, literally, don't make your slides too busy, because when you're presenting to an investor, if the slides are super busy, they can't see. Make the font a big enough size, and don't print on grey paper, because, quite honestly, those grey boxes make it difficult. Well, with AI, AI will be able to I know this doesn't exist, but I keep asking about it. Can it ever be our eyes? Can it look for what people are actually, I know they do it with UX, how much time do you spend on a page and how much information comes up? But it'd be fascinated seeing a presentation. How quickly do people switch off? If you're presenting a fund, a private company, to an investor, you've got probably three or four minutes of engagement.

One of the things we talk a bit lot is about is the branding. Getting your message across in two slides, you asked me at the very beginning, the Sturgeon story, I can do the Sturgeon story on less than one slide. It tells you straight away, on the tin, kind of what we do. Too many people get really complicated, and so I made themselves so complicated, you get to the 10 slides and you've switched off. So that's a really big message for people - keep your message simple, especially in venture. If you get over complicated, you'll never get the investors.

But AI talking to all these big companies, like Moorfields said, ‘We are not investing in AI to do things that we already do, because that means you have to invest in new people to run it. It's better to use the resource that we have.’ Then how does AI make what we already do with the staff we already do to make it more efficient? And that's where AI is merging, really. And so I think we've got to focus on that blend, rather than just thinking we got billions on just new things, which actually might not be better than the old.