A young British fund has raised £60 million to invest in early stage startups

Episode 1 managing partner Simon MurdochEpisode 1

Episode 1 Ventures, the venture fund that was an early backer of Carwow, has raised £60 million for its second fund targeted at British early stage startups.

More than half of the money comes from the state-owned British Business Bank, which is contributing £36 million through its Enterprise Capital Fund.

Other backers include fund-of-funds Draper Esprit, Accelerated Digital Ventures, and wealthy individual investors.

Episode 1, founded in 2013, will use the money to focus on startups that are making the leap from seed stage to Series A, and aims to become the first institutional backer. Founding partner Simon Murdoch said Episode 1 would focus on sales-oriented software startups for its second fund. He believes this strategy, plus the fact the second fund is comparatively small, will give the firm an edge over bigger rivals who also want that first institutional investor spot.

Balderton Capital, which closed its £281 million sixth fund last week, has also claimed it wants to be the first institutional investor for early stage startups.

Online car marketplace Carwow is an Episode 1 success story.carwow

Murdoch said Episode 1’s cheques were likely to be between £800,000 and £900,000, compared to a larger fund’s £3 million initial cheques.

“Our differentiation is that we’re more likely to spend proper time with companies,” he said. “We have £60 million under management rather than [a few] million. It’s just much more feasible for us with our team.”

It’s a difficult year for venture capitalists in the UK to be raising money, with huge uncertainty over the country’s future after it exits the European Union.

Murdoch said of Brexit: “On a macroeconomic point of view, I’m not happy about it at all. It’s not good for the wider economy.”

He added that he was bullish, however, for the next “seven to 10 years” for the UK economy. “It’s a great time to be starting a software business,” he said. “It’s never been cheaper, there’s more finance around compared to five or ten years ago, and the sorts of businesses we invest in are in a great place.”

Murdoch said it was too early to comment on the performance of the first fund, which is only four years old, but he said of Episode 1’s 22 portfolio companies, only one has gone bust so far. It’s a common thesis that venture capitalists expect strong returns on one or two firms, middling returns on the bulk of the portfolio, and a few companies to go bust. “It’s a surprisingly low stat,” Murdoch said of the one startup failure. “You’d expect it to be more.”

As yet, Episode 1 hasn’t made any investments from its new fund.

Episode 1 shows that British-focused VCs may not need European money

Earlier this year, Murdoch told Business Insider what many London VCs believed — that an important source of EU venture capital funding had suddenly turned off the tap to British VC firms after the Brexit vote.

The reality has turned out to be more complicated, according to multiple sources. The European Investment Fund will commit funds to UK-based venture capitalists who invest a certain percentage into European rather than UK startups, and where it had already committed before the referendum. But several UK-focused funds which had been in talks with the EIF, were suddenly shut out.

Happily for those funds fighting for state money, the UK’s counterpart, the British Business Bank has stepped in. Chancellor Philip Hammond handed an additional £2.5 billion to the bank for “patient capital”, and committed to maintaining its £1.5 billion Enterprise Capital Fund programme.

It’s a positive outcome for Murdoch, whose firm (with others) lobbied the Treasury on this precise issue in October.

“The British Business Bank has been fantastic,” said Murdoch. “It’s hard to start a VC firm — you have to persuade lots of individuals, family offices, and fund-of-funds to bet on people who may not have invested before.

“A leg up with cornerstone funding, whether it’s the EIF or the British Business Bank, is very valuable. We’re really pleased with the British Business Bank.”

It’s also helpful, he added, that larger funds like Draper and ADV have begun to invest in firms like Episode 1.

Draper announced that it was putting £75 million into European seed funds to support the early stage ecosystem post-Brexit.