Investor Talk: Notion Capital’s Stephen Chandler
This week, Growing Business carried news that Notion Capital has completed the $100m first close of a new fund for cloud computing and software-as-a-service (SaaS) companies.
Notion has established a proven track record in this space. Founders Ben and Jos White developed and sold remote security provider MessageLabs, and their initial fund has helped disruptive start-ups such as Tradeshift, Brightpearl and eSellerPro achieve disruptive growth. Fund 2 is specifically tailored to build on this success.
The fund is supported by the European Investment Fund, together with a £40m Enterprise Capital Fund set up by the Department for Business, Innovation and Skills to invest in start-ups with high-growth potential.
GB caught up with Stephen Chandler, Notion’s managing partner and co-founder, to discuss the scope and implications of the new fund – and ask how British start-ups can benefit from it.
We read that “a number of rich individuals and investment offices for wealthy families” have contributed to this fund. Can you elaborate?
We’re not disclosing any names, but a number of the better-known European family offices are in there, with a bit of Middle Eastern money as well.
A number of tech entrepreneurs are also involved, representing a mixture of new and established tech companies, which is great for our network.
How many companies will you be targeting?
Our strategy is going to be very selective. We’re not going to invest indiscriminately, throwing muck against the wall to see what sticks. Our model is to be engaged and supportive, which doesn’t scale with lots of investments. We’ll probably be investing in around 25 different companies.
Can you give me a bit more background on the sort of companies you will be targeting?
The cloud breaks down into three layers: The infrastructure, platform-as-a-service, and the application layer, or SaaS. This final layer will be our main focus. That’s because companies in this bracket tend to be more capital-efficient than infrastructure businesses.
The sort of companies in this space can provide a number of different services, including business productivity apps, such as sales force automation; communication and collaboration companies including VoIP, and e-mail as a service; and security and content management.
In terms of the sectors our investees serve, we’re always looking at specific themes in the market. We’re interested in various areas right now including financial services, social media management, social networking for business, marketing automation and e-commerce integration. These kinds of services can be delivered over the internet and offered as a subscription-based service, and all are areas we’re excited about.
What specific attributes will you be looking for in your investees?
There are plenty of attributes. Some of the most important are a great founder team, an intuitive user interface as this is ‘the face of the product’ and a recurring revenue model.
I believe around 80% of the fund will go to companies in Europe – is this correct?
Yes. That’s what our fund model says, although we actually have flexibility around that. It’s a European-focused fund.
Regarding specific cities, the start-up scene is coalescing around two main hubs – Berlin and London. These will be our primary focus. There are some really, really interesting companies there.
Why have you chosen to focus on cloud computing and SaaS? Surely there are plenty of other promising tech sectors to focus on…
There are, but one of the things about our strategy is focusing on an area of expertise. Through MessageLabs, we have expertise in this area. All five of our partners were involved in managing and building MessageLabs, so they’re all specialists.
Our Fund 1 investments are all focused in cloud computing and SaaS, and they are are doing really well, so we aim to continue this strategy on a larger scale with Fund 2. Brightpearl, who deliver ERP as a web-based service, is a good example of a portfolio company doing really well.
We definitely have a pedigree. It’s in our DNA, for some of us it’s all we’ve known. The best way to add value to our investments is to focus on a market we’ve come from.
And what about the size of the market?
Well, it’s a very hot area, barely a day goes by without a newspaper focusing on the explosive growth of cloud computing. It’s a genuine mega-trend. And cloud computing will be evolving over the next 15 years.
Ultimately, we believe cloud computing is the biggest thing we’ve seen in the tech world since the rise of the PC in the 90s. It’s going to touch all corners of the market.
What direct involvement has the Enterprise Capital Fund and the European Investment Fund had in this fund?
We pitched to the ECF and EIF early on and got their support, we got them to work together which was great because they’ve never collaborated in this way before, once we did that it was clearly helpful to the overall process to know we had their support behind us. They didn’t play any direct role in the fundraising, but having their names behind us was a huge thing.
What lessons have you taken from your first fund?
When we set up fund 1 it was our own money, it was a proprietary fund. This is the first time we’ve managed third-party investors, and we’ve taken plenty of lessons from the first fund.
I think we’ve definitely refined our strategy in terms of what we’re doing. You need to learn to be a coach rather than a player as an investor, and I think we learned that in fund 1. We can help with connections, senior recruitment etc.
Also, we have far more resources, which will enable us to do more deals and follow our money with the most successful companies in the portfolio. Potentially we can put $15m into the two strongest companies in the portfolio, and follow them through the B and C rounds of funding.
When do you expect the fund to close?
We’ve done a first close, so we can make investments from today, but then we will do a second and final close up to the $150m which will be some point over the next six months. It could even happen in the next two or three months.
We have a number of irons in the fire – we’re already looking at four or five different companies, which may result in one or two deals. So things are already in progress.
European VC funding has fallen around 90% since 2000 – a sign that many VC firms are struggling. How do you plan to buck the trend?
We’ve already bucked the trend by raising the money to an extent. You’ve seen a number of venture funds not being active in the market, so it’s an opportunity for the few firms that do get funded. We can now make hay.
If you look at the VC market, we had an over-supply of money around the dotcom boom which performed badly because there was too much indiscriminate investing and the infrastructure wasn’t ready. Now I’d say there is an under-supply of money and this could work to our advantage.
We’re seen as a specialist in this area now, and if you’re an entrepreneur setting up a B2B cloud business in Europe, you’ll know about Notion and MessageLabs – we’re seen as entrepreneurial and empathic.
It’s been a case of ‘survival of the fittest’ – the ones that have got through since the dotcom crash are the strongest ones. We’ve got a more right-sized market now, and the funds that have got through will provide much better foundation for future success.
Do you plan to open a third fund?
Potentially yes. We see ourselves as long-term players in this industry, but we won’t be raising a third fund in parallel with our existing funds. The sector will be dependent on the opportunities we see at that time.