Interview with Capital for Enterprise’s Rory Earley

Capital for Enterprise CEO Rory Earley reveals in a Q&A how the LP fits in with the government’s current financial initiatives, how he selects funds to invest in and the plans for the Business Angel Co Investment Fund.


Capital for Enterprise CEO Rory Earley reveals in a Q&A how the LP fits in with the government’s current financial initiatives, how he selects funds to invest in and the plans for the Business Angel Co Investment Fund.

Capital for Enterprise’s Rory Earley reveals to GrowthBusiness in a Q&A how the LP fits in with the government’s current portfolio of financial initiatives, how he selects funds to invest in and the plans for the Business Angel Co Investment Fund.

Earley was appointed chief executive and chief investment officer of Capital for Enterprise in April 2008 following four years of advising the UK Government on the development and implementation of its venture capital programmes.

The Enterprise for Capital Fund programme aims to address the lack of risk capital available for small and medium-sized enterprises (SMEs) in the UK, namely the gap in investment of under £2 million.

Capital for Enterprise, which started trading in April 2008 and is wholly owned by UK Government through the Department for Business, Innovation and Skills, is an asset management business for SMEs. It is the largest single investor in UK early-stage venture capital funds and manages guarantee programmes to support bank lending.

There are a number of government-backed initiatives currently seeking to improve the severe lack of supply in finance for SMEs. How does Capital for Enterprise differ from the others, notably the newly launched Business Growth Fund?

“Business Growth Fund is all funded by the banks and provides development capital, which can be patient because it has its own balance sheet it can invest in. They will almost inevitably grow the market for that because a lot of growth businesses were dependent, probably over dependent on bank finance in the past.

“In the past, poorly structured balance sheets with too much debt actually could have benefited from more capital, but the banks were very willingly to lend and businesses wanted to borrow.

“The world has changed, it’s moved on since 2008, and I think there is a real market opportunity for the Business Growth Fund and as it starts its activities, it will grow the market as more businesses realise actually, here is an opportunity to better capitalise the business, and somebody is not going to come along and rip me off.

“It’s different from what we do. We focus on the early stage technology equity gap, which is not what they do, and we are also different from the mid market buy-out houses.”  

How are you finding your niche, the early-stage technology sector?

‘We do venture, predominately early stage technology venture. We do some small development capital of sub-£2 million as well, but most of it is focused on early-stage tech.

“The market has shifted. Institutional investors are much less willing than they used to be to invest in early-stage capital funds. There is a real scarcity of capital, so there is more and more demand for what we do.

“We have about £500 million of commitments existing in funds. We have a budget of £200 million over the next three and a half years to make new commitments to new enterprise capital funds.

“I could easily put half of that to work this year because of the quality of investment opportunities in terms of new funds that are available to us. This is due to the quality of the business opportunities that they can invest in. There are lots of good early-stage tech businesses looking for money at the moment and not enough going around.”

A lot of your money appears to be directed to funds set up by business angels, is this deliberate?

“We only invest in hybrid funds, where there are other private investors, so the majority of private investors in these funds will be angels or high net worth individuals.

“Passion Capital is one, Panoramic Growth Equity has some institutional investors, MNC is largely angels, Oxford Technology has got some institutional investors and angels, Dawn Capital is high-net worth individuals, Amadeus Capital is angels, Sustainable Technology Fund is high net worth/angels.” 

What do you look for in the funds before you invest in them?

“We have a mantra when we are looking for funds. We invest in stable, competent, well-motivated teams, whose interests are aligned with us, and that sounds fairly simple. But because we enter into agreements with them that last 12 years, you have to make sure that team is going to stick together for 12 years – now that’s longer than most marriages.

“They have to be stable. We also want to have worked together before, if not the whole team, as least part of it, or at least demonstrate they can work together.

“Competency is really important. If they have been really successful venture capital fund managers in the past, they don’t need our money because they would be off doing something else.

“They have to demonstrate competency, so as individuals they have to be able to show that they have made structured investments, managed and added value to investments – because good venture is about adding value as well.

“We also massively check their references. We talk to boards of the companies they have invested in, and the employees and ex-employees, in particularly, and get a feel for how they operate.

“I’m particularly interested in what motivates them, finding out why are they doing it.

“It is not just about money, this isn’t just a job, you don’t go into venture for just a job, so why are they doing it and what is actually driving theses people? Do they get a kick out of helping these businesses grow, can they really add value, or are they just looking for a decent business of which to become the financial director or managing director? That is a really difficult test.”

“They have to operate as a team. There is no one individual who is sufficiently brilliant to do all this themselves. Good team based decisions are better than individual based decisions, always.

“We want good early-stage technology businesses, well-financed, well-supported, and developed and grown, and if that is what they want and our interests are aligned, and they’ve got no conflicts of interest, then that’s beginning to look like something we can invest in.”

What is your role in the Business Angel Co Investment Fund, which successfully won a £50 million bid from the government’s Regional Growth Fund? And what stage is the fund at?

“It is not our fund. The bid is led by a number of business angel syndicates and we are helping them co-ordinate and administer it for them.

“I’d say we are at the ‘heads of terms’ stage. This is because the money from the Regional Growth Fund is very much grants for a significant period of time and what we are trying to do is to create a vehicle, in the most commercial way possible, that will work alongside business angels and business angels syndicates to better fund small businesses.

“There are some interesting nuances there. It is government money for grants, so it has got to be spent by a certain period of time, but if you are investing in small businesses than that is nonsense. This is because you might make a first round investment, but in two years time you might need to put some more money in and a year after that more money in, but if you haven’t got that money, then you might as well not have invested in the first place.

“In light of that we need to structure something with the big partners to ensure that we make sensible commercial investment out of this Regional Growth Fund money, and I think we are getting there. Not as quickly as we would like to, but these things take time to sort out.”

Todd Cardy

Adelbert Swaniawski

Todd was Editor of GrowthBusiness.co.uk between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital. Connect with...

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