Mark Boggett, CEO of Seraphim Capital

17 January 2018

What is venture capital and how does it differ between the US and Europe? How can Europe attract more investors in space activities?

At New Space Europe we spoke to Mark Boggett, Managing Director of Seraphim Capital that has introduced the world’s first venture fund dedicated to financing the growth of companies operating in the space ecosystem.

First of all, would you tell us a little about yourself and your background? How did you get into venture capital?

I did a degree in accountancy, a master’s in economics and then I went to work in the city of London as an analyst. I moved into quoted investment and I was investing into a whole range of quoted stocks, particularly technology stocks. That was great fun while the boom lasted but then the crash came and I became pretty disillusioned of buying and selling share prices rather than investing into companies. When you invest on the stock market you’re not investing into the company, you’re buying shares from someone who wants to sell them. After a number of months of sitting on my hands rather than making investments because the markets were in such turmoil I decided what I really needed to do was to move to venture capital as that gave me the opportunity to find interesting technology companies but then join the boards and support them going forward, which is exactly what I did.

How did Seraphim Capital come about? How did it become an investor in space?

Seraphim is a spin out from YFM Equity Partners. We wanted to do was raise a thematic fund that matched against our track record of investing in computer vision, artificial intelligence, sensor tech and new materials.

It was David Williams at Avanti Communications that we credit with being the brainchild of the Seraphim focus on space.

What makes space a particular interesting sector to invest in?

As a venture capitalist you’re always looking for the next long-term growth market. We saw space tech as the nexus of a number of converging trends. First there is significant disruption within the hardware sector for space. Starting at the smartphone, where components have been miniaturised at low cost and in high volume, manufactured to a high quality, robust standard. Many of these components such as the battery technology are finding their way into the space industry. The other thing is 3D printing is now a reality, which is lowering the cost of hardware. The other third element of hardware evolution is software-defined – where software is the smarts of the hardware and the hardware is being commoditised. All aspects of space hardware benefiting from a combination of these drivers. In addition, the launch market is changing thanks to the likes of Elon Musk and Jeff Bezos where reusable rockets are driving down the cost of access to space. Those two things added together means it’s cheaper to build satellites and is more cost-effective to launch them. Finally, thanks to cloud computing you can now cost effectively take significant amounts of data, store and process on platforms such as Amazon Web Services – these simply weren’t available before, which really opens up the door to use artificial intelligence. AI needs massive amount of data to learn from which has previously been cost-prohibitive. Brought together, these are the main reasons for our thesis for why we felt space was a very big opportunity for a venture fund focussed on this market.

On the point of launchers, it brings to mind Launch UK. Is this an area that Seraphim are investing in?

I have seen quite a few interesting launch opportunities that we have found attractive but we haven’t yet made investments. We’ve really not seen launchers as a driver for the fund, so we haven’t spent a lot of time on that activity in the UK.

What do you think would attract investors into launchers?

I think ultimately the market needs to grow to demonstrate there is a market for a breed of smaller launchers to cater for small satellites and constellations. While I’m a huge believer in these constellations, we’re still very much at the early stage – you’ve got Planet and Spire but then you quickly struggle to think of the next big ones after that. What we really need to see is a number of successful constellations in the market that will then bring other investors in to fund these constellations that will increase the demand and funding for them to buy the launch of these broader range of rockets. To invest into launch you’ve got to be a big believer that there’s going to be a great success and an exponential growth in the number of satellites that will be used at the smaller end of the market. According to the 30th Sept 2017 Seraphim Space Index, a quarterly review of the global VC transactions in the space sector, we’ve seen the launch sector attracting significant amount of equity capital. In the last 12 months we’ve seen SpaceX raise $350m and another 9 companies raise £205m equity capital .

How do you feel the risk culture compares between the U.S. and Europe? What can we do to overcome the fear of risk-taking in Europe?

There is already a change underway where Europeans are reassessing their attitude to risk, using the U.S. as a barometer. We’re sat here at this great event in Luxembourg – a great example of a government that is really out there staking their future through investments into the space sector. The UK Government itself has also done that recently. Even after we announced we’re leaving the European Union, the UK surprised ESA by significantly stepping its investment into the European Space Agency and there are big commitments in the UK to the sector. There are changes in attitudes to risk overall, not specific to the space sector. People are now seeing the excitement and the benefits from the new early-stage innovative companies and how they will affect the market going forward.

Do you think maybe that’s also a structural problem in the EU to spur on this much-need innovation?

Yes, well first, looking at it from the European Space Agency perspective they need to align their processes, reduce the red tape and the time to make decisions. Furthermore I question as to whether grants are the right mechanisms going forward. There are high-level conversations going on within ESA about how they can move to an equity or loan-based structure.

It’s often said Europe lacks venture capital. What can it do to attract more investors?

There is a structural problem in Europe with regards to venture capital, which comes back to the risk issue. The biggest investors in VC in the world are financial institutions, the pension funds and insurance companies. In the US they routinely have an allocation into venture as an asset class but in Europe they don’t. Those EU institutions that do invest in VC tend to allocate their funds to the US because the US companies have a stronger long-term track record. This is a problem that the EU governments need to collectively address – finding mechanisms to encourage institutions into the venture asset class.

The Seraphim Space Index highlights the stark differences between US and EU VC investment. The index demonstrates that within each sub-sector of the space tech ecosystem US based investors on average invest 2x the quantum than others investors. That statistic is true for seed and A series rounds. Its more alarming to see that in many cases, B and C rounds in space tech companies simply isn’t occurring outside of the US.

You suggested governments could put incentives in place to improve the situation of venture capital. What kind of incentives do you think they could implement?

There’s obviously tax-based solutions to encourage different levels of support. In the UK, a good example would be the enterprise investment scheme (EIS). The government has a tax structure to encourage investors to invest into early-stage companies and in doing so, if they make an investment into a qualifying early-stage company the investor gets 30% of their initial investment back in their tax return. Any returns that are subsequently made are not subject to capital gains tax. There’s also a loss relief element as well. This has really encouraged a huge growth of angel investing into private companies in the UK, which is working well. It is an example of government using tax policy to encourage risk taking and what’s required in order to address this on a bigger scale is some other tax incentive to enable institutions, pension funds, insurance companies to invest their allocation into European venture.

Finally, what advice would you give to a start-up seeking venture capital?

One of the problems, particularly around the space industry, is that many of the companies have initially financed themselves through grant funding from government sources. In order to access these grants they have to be very technically focused. It is all about the R&D and the functionality of the technology. The companies that have gone through this process and then approach VCs tend not to change their language, so they re still talking about the technological features and it is very much a technology led conversation. What they often fail to talk about in any meaningful way is the business proposition. How do they make money out of it? Why will they make money out of it? What is the addressable market? What is the competitive situation? Ninety-nine out of a hundred companies that approach us fall into that trap and the problem is if you approach a VC fund with your proposition which is not well baked, it’s very difficult to go back a quarter later and say ‘I’ve now polished my story and here it is’. You kind of close the door each time you do that, at least for a period of time. It is really important people are talking about a business rather than a technology.

There are a number of ways of doing this. One of things I always recommend is companies get a professional advisor to help you’re your fundraising activity. It’s in their interests to make sure that the proposition is polished. They understand what investors want to hear. They also have existing long term investor relationships to open the door with the VC community.

The other one is to go through an accelerator programme that helps start-ups to become investment ready. The folks running these programmes understand the language of how to talk to a venture capital fund and they’ll help structure the start-ups in such a way that when they do make that first engagement with a VC that the proposition is well articulated, business centric and compelling.

It’s worth noting that my firm is launching the Seraphim Space Camp Accelerator next year. We are looking for a cohort of 6 space tech companies to attend a three month programme in London in Q2 2018.


Lead image credit: Seraphim Capital