Investor Q&A: Sion Evans from VenCap

Tell us a little bit about yourself, your background and the path you took on the way to working for VenCap?

I grew up in North Wales and I'm a fluent Welsh speaker. Growing up I always wanted to work in a VC fund of funds… I joke, It was actually a bit of a random path for me. I went to university to study mathematics which was great but really I didn’t know what I wanted to do like most that study broad degrees. I thought something in finance and numbers related could be good as long as it was interesting: I met loads of people that went into different parts of financial services and left after a few years so I wanted to make sure that was not me.

I then saw a really vaguely worded article for technology investing, based in Oxford with some international travel and thought that sounded great. As it happens this was the same summer my brother graduated from Oxford University so we kept the Evans family coverage in Oxford. I took the opportunity and ran headfirst into it. I knew a little bit about venture but not an awful lot and definitely didn’t know what funds of funds was but the more I understood and progressed in the interview process the more interested I became.

This was 8 years ago and I’ve been with VenCap ever since. We’re a small firm with 25 people all in and have been operating for about 35 years all in. There is a big culture of investing in people and promoting within, our CEO and Investment Director joined in the early to mid 90’s and have come up through the firm since.

How has your role at VenCap evolved since joining and what is your day-to-day like for those that may not know about fund of funds investing?

I joined as an Investment Analyst originally and then over the years gained my CFA qualification, earned a few promotions and am now a Senior Investment Manager. What we do at VenCap is invest into venture funds and we do that globally. Everyone is a bit of a generalist in the team so you might be looking at growth stage funds in Europe or specialist funds in the US and everyone is exposed to all of that. On the day-to-day the investment team is looking at investments previously made, we have a portfolio that goes back over 30 years and there is a lot of information there that needs monitoring.

Our investment process is a little different because we are quite concentrated in what we do so where we look to have an investment it will be a very targeted outbound approach from our side. Due to this we spend a lot of time looking at the market and our own proprietary data to think who will be a really good fit to add into the portfolio. Then because the managers at these funds are generally access constrained it becomes a question of how do we get in rather than saying come and pitch to us.

With that in mind, how competitive are the investment opportunities you look for?

It depends on the segment of the market you are targeting and people do it in different ways. For us it is very very competitive, not to mean it’s sharp elbows between people and we are friends with lots of our peers. With that said when you have a fund raising £500m and there is £7bn of supply it becomes hard to win that allocation and if we want to increase our allocation in a subsequent fund, that is something we strategize as to how can we be the best partner. We think, why would people want to take our money as opposed to another. This is similar to the venture side; it's often a case where lots of people are chasing a deal and the company has to pick the investor of choice. That very much is the case in fund of funds.

Going deeper on that point, what do you think sets VenCap apart from competitors in the space?

I think the important thing for the fund we work with is that we’re specialists and have been doing this for a very long time. It sounds obvious but there are a lot of people that do not understand venture but invest into the asset class. For example you see funds that are four or five years old that have not seen any returns and start to ask what is going on. That is not the sort of conversation fund managers want to be having, we want to be having useful conversations where we add value rather than being hand held through the basics of how the industry works.

I mentioned our database earlier that gives us insights into a normally opaque industry. If you want to know what the portfolio of the very best funds over the last 30 years look like, we have that data and we turn that data into useful insights for our funds. Even such basic areas such as benchmarking is incredibly useful for our fund managers.

Also we try to be light touch in terms of what we demand. For example we can get the answers to most of our questions ourselves as we are experts rather than peppering our managers with random data requests every quarter for the sake of it. It sounds simple but when you have the choice of who to work with it goes a long way.

Since 2021 we’ve seen a big shift in the venture market, how does this affect fund of funds investing?

I think we do get a knock-on effect absolutely. One obvious way is investment pace, this has been very high with lots of people raising lots of money and putting that money to work quicker than in previous years. As a result our investment pace increased. When we raise a fund of funds we want to deploy that money over three years ideally. We’ve seen it in the past that if you put that money to work in one year it can be a very bad sign for returns.

We do try and manage this the best we can. One way we do that is to not be aggressive with increasing our allocations even with managers we have conviction in. Also by saying no to some longer standing relationships as again having diversification over time is very important and there are limited leavers to manage this.

Where do you see the greatest returns coming from for VenCap over the next three to five years?

I think the best way to answer that is to take a step back and talk about our approach to venture and our strategy which will feed into this. All we do is invest into venture funds and exclusively target technology funds. People are increasingly spending their free time through technology whatever method that takes and it’s staying at the forefront of everything we do from drug discovery through to SpaceX rocket launches. Technology is a great place to be and venture is a great way to access that technological innovation.

If you look at the source data of companies that are going public at the moment they tend to be much more mature and developed entities than those from 10 or 20 years ago. What this means is that an increased amount of value is being captured in the private markets that are accessed by venture funds. If you look at the ‘Power Law’ you see that in the start-up space a small number of companies drive the vast majority of returns at an industry level. We look at this through exits as this is where you get the real cash back, and if you look at any given year the top 1% of exits drive the majority of value. So it’s these 1% of companies that drive returns and if you look at who backs these companies there is also a ‘Power Law’. There is a large number of venture managers but a small number who consistently back these at the early stage. What we want to do is invest with these managers and then not do anything else.

It is that second bit that differentiates us from some of our peers because access is very difficult but for the established fund of funds who do have good access yet want to grow your AUM it becomes a challenging strategy. This is because there are not a lot of tier one names and if you diversify to the next ten best managers you will rapidly see a fall off in quality and therefore this does not scale in the asset management business. However by sticking to this we ensure we get the best returns rather than trying to raise the biggest fund and generate the biggest management fees.

That’s really where we have got to and to be candid it is a result of many years of experience and mistakes. We had a much broader portfolio 15 years ago but what we were seeing was that the returns from the top funds were diluted somewhat by the other end of the funnel. So by really being strict and reducing the number of managers we back we really improved performance and if you look at our current portfolio of 14 managers, around 90% of our capital has gone to those names. We would say they’re the best in the business, there are others but they’re not available for us to access for one reason or another.

Geographically, around 70% of our investments are US based with the remaining split across Europe, China and India. These have been great places for venture and we’ve been in Asia since around 2006 and you’re seeing those top 1% companies such as ByteDance or Flipkart emerge from those areas. It’s really about backing those managers that can back the top 1% across the globe. Ultimately we’re diversified at stage and geographically but concentrated in terms of manger and we feel that’s the right way to run it.

Bringing it back round to the question on the next five years the answer is we have no idea. It’s a little glib but we joke that if it’s obvious to us as LP’s then we’re probably a few years too late. So we choose to trust our managers with where they spend their time and leave those decisions in their hands.

For the final few questions are hopefully a little easier to answer and we’re borrowing them from ‘Desert Island Discs’.

• What's the one album you have with you and why?

I am a big rock and metal fan so I would go with ‘Ride the Lightning by Metallica’. When I first saw them live at 16 they opened up with ‘Creeping Death’ and it still gives me chills when I hear it.

• What one book would you have with you and why?

I would bring ‘Catch 22 by Joseph Heller’ which is one of my favorite books and it’s one of those books that every time you re-read it you find different things within it despite knowing what will happen.

• Which luxury item would you take to the island?
  

I wear my dad’s watch which is very important to me but also will be good to count the time down until I am rescued. It also happens to be mechanical and so will last as long as I do.