European VC firm Octopus Ventures launches £83M growth fund

Octopus Ventures, the European venture capital firm that’s part of Octopus Group, is launching an £83 million growth fund to further invest in its most promising portfolio companies.

The new fund, which is backed by a number of undisclosed institutional investors rather than individual investors, brings the total Octopus Ventures’ various funds has under management to over £1 billion. Taken as a whole, it also means the VC firm now invests between £250,000 and £20 million in startups at various stages of growth.

Headquartered in London and New York, but with Venture Partners also in San Francisco, Shanghai and Singapore, Octopus Ventures has backed over 100 companies to date. They include allplants, Elvie, Depop, Big Health, Graze.com, Eve, Magic Pony, Secret Escapes, Sofar Sounds, Swiftkey, Swoon Editions, tails.com and Zoopla Property Group.

Meanwhile, the new growth fund coincides with a new strategy for Octopus Ventures more broadly, and will see the VC focus on three key areas: fintech, health tech, and industry 4.0.

In the firm’s own words:

• The Future of Money: Seeking pioneering entrepreneurs who want to improve the way society interacts with money and risk by building products that will transform payments, investments, markets and insurance.

• The Future of Health: Healthcare will soon be the world’s biggest industry and we back the teams revolutionising health and wellness through patient-driven medicine, clinical decision tools, digital health and disease prevention technologies.

• The Future of Industry: Focused on the bleeding edge technologies that will drive the next industrial revolution. These include advanced manufacturing, materials, Internet of Things, robotics and artificial intelligence, as well as those technologies which will keep a fully digitally connected society secure.

Below follows an email Q&A with Alliott Cole, CEO of Octopus Ventures, where we discuss the growth fund’s premise and timing, the new investment focus for Octopus Ventures, industrial competition in Europe, America and China, and — of course — the thorny issue of Brexit.

TC: What’s the thinking behind raising a dedicated later-stage fund and why now?

AC: We have been fortunate to back some really talented entrepreneurs who have gone on to build sizeable, successful companies in recent years. Companies like Zoopla, Secret Escapes, Swiftkey, Tails.com, Cazoo, Big Health require capital to build teams and to accelerate growth, and so it makes perfect sense to us for continue to back them as they progress through the initial stages of company formation to the later stages of growth.

TC: Is this new dedicated follow on fund also a sign of how high European valuations are right now, in the sense that it is designed to ensure Octopus Ventures doesn’t get too diluted in future rounds?

AC: We manage around £800m in an evergreen venture fund which invests close to £200m a year into Seed and Series A, with a focus on the future of money, health and industry. This makes Octopus one of the most active venture investors in Europe.

Because this fund is evergreen it is a great vehicle to take a very long-term view on investing and can be far more patient than a more traditional limited life venture fund which normally will invest for 3-4 years and then look to exit in the next 4-6 years.

Our latest growth fund will invest in the best performing companies out of this venture fund when the founders are comfortable with their product market fit, and are ready to scale to the next level.

TC: Did Brexit come into your thinking here or complicate things with regards to raising this new fund?

AC: You can’t ignore Brexit entirely, clearly, but I wouldn’t say it was a significant hurdle. We are backing genuinely pioneering entrepreneurs with the talent and ambition to radically disrupt their industries. That’s where we see the big opportunity for this fund, and I don’t think Brexit changes that.

For the most part, entrepreneurs we are investing in are looking to make their own “dent in the Universe” and while they are starting their journey in London and the U.K., their ambitions will lead them to build for an international audience. This is why we have an office in New York, and Venture Partners on the ground in Silicon Valley, Singapore and Beijing.

TC: More broadly, what would be your favoured outcome for the U.K. and Brexit?

AC: When you speak to the entrepreneurs and founders in our portfolio, it’s clear that availability of talent is one of the critical issues. So from that perspective, while I’m sure members of our team have their own views, we are agnostic in terms of the outcome so long as our portfolio companies continue to have access to the talent they need to grow and scale. That said, I wholeheartedly believe the U.K. and London will continue to be a global leader in innovation and entrepreneurship regardless of the outcome.

TC: Looking at “the future of money” aspect of Octopus Ventures’ new strategy, what specific opportunities do you see left in fintech? It seems that we are mainly past the first phase where various financial services have been unbundled from the banks and made more consumer friendly, while there are a number of platform plays, including some neo banks or banking appS, seeking to re-bundle these services in a more consumer-centric way. So, what’s left or next?

AC: The opportunities in financial technology are many and diverse. It is certainly true that we have seen the start of consumer banking services being unbundled, but whether we have reached a new point at which this market will re-integrate is by no means clear to me.

Outside of consumer banking, we are really excited by the opportunity in the insurance sector. Despite it being ten times the size of the banking sector it has only received one tenth of the funding. It’s an area where incumbents are paralysed by regulation, legacy technology and bureaucracy meaning they are unable to effectively tackle emerging opportunities themselves, so we see a huge opportunity in this space. As we invest in teams like Bought By Many, DeadHappy and ByMiles, we’re starting to go deeper and learn more about these industries.

TC: The second aspect is “the future of health”. What do you see as the biggest obstacles in this space (e.g. regulation, the different way healthcare is funded etc.) and also the biggest opportunities?

AC: Innovation in health, quite rightly, has a number of unique constraints which can make it more challenging for companies to start and scale quickly. These are both regulatory and commercial in nature – for instance a medical commissioning group can introduce the best digital health therapeutic but if the nurses on the front line in a GP surgery are unaware of the benefits, then these businesses may be overlooked and a great product will struggle to find its way into the hands of the patients.

Some of the biggest opportunities lie in areas where there is far-reaching demand, but this demand is simply not being filled due to stigma or taboo. Take Elvie for example, it is brilliant to see a fem-tech company designing and distributing pelvic floor trainers and breast pumps. The impact it has made in the market in such a short time is remarkable. Equally Big Health, with its initial focus on insomnia, will have a broader application to anxiety, depression and stress – all linked to mental wellbeing.

TC: Lastly, “the future of industry” — or industry 4.0 — is an increasingly common theme within VC and arguably a European strength. Do you think that is true, and if so, why?

AC: Europe, despite what people may think, still boasts a strong manufacturing hub. In fact, the European Union ranks second in the world in manufacturing output, secondly only to China, and ahead of the U.S., according to data from the World Bank. European manufacturing is also relatively high-tech compared to other countries. When you combine this with its ability to educate top talent – we produce more PhDs per capita than any other country in the world – it provides a fuel that drives development and productivity improvements in the industrial sector.

Having the perfect crucible of manufacturing expertise, experience, and existing business combined with top technical talent, results in a combination which naturally leads to Europe being considered a place to look at for ‘the’ Future of Industry. What we’ve historically lacked is the funds to back the emerging winners in this space – but things are changing here.

We have also enjoyed investing in some harder technologies – early on we backed William T-P at True Knowledge, which was acquired by Amazon and now has become the backbone of Alexa, the machine learning and artificial intelligence companies Swiftkey (acquired by Microsoft) and Magic Pony (acquired by Twitter).

TC: With that said, are we more likely to see multibillion dollar industry 4.0 companies coming out of Europe, America or China?

AC: Looking ahead, this is very hard to call, as in reality, industry is blooming across all three areas, and it is likely that we will see multibillion-dollar industry 4.0 companies from Europe, America and China.

In Europe, London leads the way in unicorns, hosting 17 start-ups that have broken the $1bn valuation barrier since 2010. We expect to see many more from London, and indeed the rest of Europe as they expand and grow across the continent. That being said, we cannot ignore the huge potential China offers in this space. According to the World Bank, China are the world leaders in manufacturing output, with a huge 40% of their GDP coming from manufacturing in 2017. Chinese companies have been setting themselves to take Industry 4.0 by storm for a while now, so to ignore the market potential of China would be nothing short of naïve. The same, however, could be said for the U.S. With the likes of American companies Apple and Amazon becoming the first trillion-dollar businesses last year, they too cannot be ruled out.

The truth is that increasing numbers of companies across the globe are heading for that multibillion-dollar status, and I think industry 4.0 is likely to boom across the three continents sooner than we expect.