Draper Esprit, the listed V.C

Draper Esprit is one of the more unusual companies we added to our universe in the last few weeks.

In fact, it’s a publicly listed European-focused venture capital firm, which happens to hold stakes in quite a few fintech firms.

Let’s dive into Draper Esprit.

Like, Tim Draper?

Sort of.

If you followed the Bitcoin saga or the Theranos scandal, you might have heard of this guy.

Powerful eyebrow game

The Drapers are one of California’s oldest venture capital families, almost silicon royalty. The first Draper firm was founded by Tim’s grandfather, William H. Draper Jr., way back in 1959. It was the first VC firm to use the modern limited partner structure used by almost every firm today.

Tim’s father continued the legacy, founding multiple firms and investing in companies like Skype and Activision through a very long career.

Now a Valley veteran too, Tim’s a flamboyant, sometimes controversial presence on the tech scene. He continues to back former Theranos CEO Elizabeth Holmes (personally if not financially) and bought a huge amount of seized bitcoin in a 2014 government auction.

Recently he backed the creation of a Draper Network of funds. Now there are VC firms across the world bearing the Draper name.

However while Tim Draper probably has some personal money in each and is variously listed as a partner or director, it doesn’t look like he has that much direct involvement with this fund.

It’s almost like a franchise agreement.

Publicly listed VC - how does that work?

On the face of it, it’s pretty simple. Draper Esprit issues shares to public and institutional investors and uses the money raised to invest in startups. If they want to raise more money that way, they have to issue new shares and find willing buyers.

However, Draper Esprit’s actual structure is complex. The public company holds investments directly. But it also manages a venture capital trust (like an investment trust but for early stage companies only) and an EIS (enterprise investment scheme) fund.

It also has stakes in other VC funds and seed funds, with a fund of funds strategy. Funds!

The venture capital trust and EIS fund work slightly differently in terms of their investment rules and structures. They have certain tax advantages but they can only invest at a restricted level and in certain companies (ones with genuinely high risk) to justify that tax advantage.

Draper Esprit plc can invest with more flexibility and at a greater size but doesn’t get the tax advantages. Since it’s not a traditional VC fund it also doesn’t have a ‘cycle’: a number of years for the fund to run and then return the money. They can manage their portfolio as they see fit without a lot of focus on timing.

The aim seems to be to diversify as much across the European VC market as possible and package it all up for retail investors to buy in easily.

On Freetrade, you can currently buy shares in Draper Esprit plc, the public company, not their venture capital trust or EIS fund.

What do they invest in?

Draper Esprit has a European focus and divides its attention across four areas:

  • Consumer tech
  • Enterprise tech/SaaS
  • Hardware and ‘deep tech’
  • Digital health & wellness

Consumer tech is probably where you’ll find the most familiar faces. Their well-known investments include Transferwise, Revolut, both Crowdcube (you might be familiar) and Seedrs (what a hedge) and Trustpilot. Plenty of financial tech exposure there.

They also have a stake in a mobile gaming company based out of Istanbul, which you might possibly have missed, and Lyst, a fashion search engine.

Consumer tech is obviously the flashiest area but there can also be interesting startups that have little public presence.

In enterprise tech, Draper Esprit hold stakes in brand analytics companies (Real Eyes, Socialbakers, Conversocial) and business tools (Perkbox, Nfon).

In hardware, they’ve invested in Metalysis, a company that makes powdered alloys to 3D print metal. Basically metal toner cartridges! Unfortunately, they recently went into administration.

They’ve also funded Lime Microsystems, an innovative component maker for wireless broadband; Hadean, a cloud-first operating system; and the only slightly Orwellian Iceye, a satellite imagery network which promises to help guide government policy with satellite photos.

They also have quite a few crypto companies.

Their digital health segment stretches from research-focused biotech companies like proteins-focused Fluidics and DNA synthesiser Evonetix to personal health tech like the Swedish nutrition app Lifesum and Manchester-based online appointment service Push Doctor.

These are just a few of their investments. The portfolio page lists 63 companies, all of which need a deep dive to properly understand them. That’s how venture capital is done: lots of spreading the risk with an assumption that many companies won’t make it.

A lot of current thinking about venture capital says that the majority of VC returns come from just a few big hits. Some companies do OK. And the rest fizzle out.

What does investing mean?

It’s effectively like buying shares of a holding company that happens to hold stakes of startups, almost like a unicorn-hunting Berkshire Hathaway.

If the companies increase in value either through profitable exits or new private valuations, then Draper Esprit should have more valuable assets. And your stake in Draper should grow too.

If the portfolio doesn’t pay off, the shares ought to fall.

That’s the idea anyway - however it’s worth being aware that the shares of Draper Esprit trade independently of the value of the underlying assets it owns. If the market gets enthusiastic about their ability to find winners, they could rise above them; pessimistic and they could drop below.

Another point to remember is that unlike most equity funds (like an S&P 500 ETF), the underlying assets aren’t being valued on the public markets.

The investments will often be valued by the worth placed by other VC firms in financing rounds. That’s not quite as secure a measure of value as a public equity.

While some of the investment opportunities might look similar, buying into a venture capital firm is not the same thing as crowdfunding its portfolio. You don’t have nearly as much visibility or control over your actual exposure to individual companies.

However, since Draper Esprit is public, you should get much more flexibility and liquidity as you can sell your shares in the same way as other listed stocks.

Regardless of whether and how you choose to invest in the startup sector, remember that venture investment tends to carry much more risk than standard public equity investing.

We know lots of our customers intersect into the tech, startup and crowdfunding worlds so I’m especially interested in your thoughts on this new stock.

We’ve also noted quite a few searches for non-public companies in the app, so maybe one you’re interested in is represented in the fund.

In any case, make sure to do some fulsome research and know exactly what you’re investing in if you opt to buy shares.

Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.

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They have some lesser known interesting companies in their Portfolio, like UI Path ( Romania’s first unicorn ) which is now worth $7 Billion. It’s one of those companies that flies under the radar but winds up powering a whole heap of stuff. Good revenues as well at $200m per/year. I think they have a lot of scope to grow still.