Readying the ship for choppy waters

With hindsight, CY21 was the top of the technology cycle, with a raft of initial public offerings, special purpose acquisition companies and realisation events across the technology sector. More experienced venture capitalists (VCs) took advantage of this market enthusiasm to exit momentum-driven investments, to ensure their remaining portfolio was well-funded and to raise additional capital at the parent level to allow them to continue to fund their portfolios through a potential downturn.

Molten delivered 56% growth in gross portfolio value (GPV), which rose to £1.53bn (31 March 2021: £0.98bn), with a net fair value uplift of 37%. Net assets increased by 39% to £1.43bn (31 March 2021: £1.03bn), with NAV per share rising 26% to 937p as at 31 March 2022 (FY21: 743p). Net portfolio value rose to 92% of GPV (FY21: 88%), within management’s 10% range, as external carry normalised after higher levels of pay-out in FY20 and FY21.

Income principally comprised £329.4m of investment gains (FY21: £276.3m), together with fee income from management fees and directors’ fees of £21.8m (FY21: £12.5m). FY22 G&A costs rose to £19.5m (FY21: £13.8m) with the growth of Molten’s team and investment in supporting infrastructure. This is expected to be a one-off step-change in cost base and cost growth is expected to slow substantially in FY23. Net operating costs fell to £4.7m, or 0.3% of NAV, comfortably below management’s target of 1% of NAV, comprising gross costs of £24.2m (less exceptional costs of £2.4m relating to Molten’s move to the Main Market), net of management fees. In FY23, with the launch of the growth fund and a potential syndication of the fund-of-funds strategy, net costs are expected to fall further and/or even move towards a net contribution to profitability.

As at 31 March 2022, Molten Ventures held plc cash of £78m (including £2.3m of restricted cash) (31 March 2021: £161m), with £35m of undrawn revolving credit facility, making £113m of undrawn liquidity. Post period-end, Molten invested a further £74m in new and existing opportunities, leaving liquidity as at 13 June 2022 of c £39m (ignoring 10 weeks of net operating costs). In FY23, in what is likely to be a slower year for investment than FY22, we expect management to extend its debt facilities further to supplement liquidity, as well as benefiting from any additional realisations.

FY22 realisations of £126m were materially lower than FY21 (£206m), but this was still the second highest year of exits on record, with realisations representing 13% of GPV, comfortably within management’s 10–15% target range. FY22 saw record investments of £311m, 42% of which went towards follow-on rounds for existing portfolio companies, with 36% into new primary investments. The remainder was split between Earlybird, fund-of-funds investments and special purpose vehicle co-investments with seed fund managers.

Molten’s core portfolio increased from 17 companies in FY21 to 21 in FY22. New entrants to the 21-strong core portfolio included: CoachHub, Form3, ICEYE, N26, Isar Aerospace and PrimaryBid. Perkbox dropped below the threshold for inclusion and Molten exited its investment in SportPursuit. The total portfolio comprised 69 companies, with the core portfolio representing 68% of GPV.

Molten’s portfolio continued to perform strongly during the year, with average revenue growth in the core portfolio above 66% during CY21. The largest contributors to the FY22 unrealised fair value gains were Revolut (£76m), Thought Machine (£65m), Aiven (£60m) and CoachHub (£59m).

Molten invests across four principal sectors: consumer technology; enterprise technology; hardware & deeptech; and digital health & wellness. It is worth noting that consumer technology represents only 24% of the value of Molten’s direct holdings in FY22, with digital health & wellness another 4%. This means that the more resilient B2B model is the group’s dominant business model. Molten’s quoted holdings (Cazoo, Trustpilot and UiPath) represented only 4% of FY22 fair value and, allowing for the share price falls to 8 June 2022, adjusted NAV per share stands at c 925p. The core portfolio is well-funded, with over 80% of portfolio companies either funded to exit or with over 24 months cash runway on budgeted projections. Management maintains that tier one assets continue to attract investment interest despite the challenging market environment. This is confirmed by the recent rounds for Aiven (May 2022), Thought Machine (March 2022) and most recently CoachHub (June 2022), which have all delivered substantial valuation uplifts. However, latest dealroom data suggest that European VC activity is slowing, with US and Asian investors starting to pull back from the market.

As highlighted in Exhibit 4, Molten invests in Series A+ funding rounds across four principal sectors: consumer technology; enterprise technology; hardware & deeptech; and digital health & wellness. However, within these broad categories, management continually tries to identify specific future investment themes. These include:

Molten’s thesis-driven investment approach has remained constant, despite a continually evolving view of likely winners. The group’s investment methodology is to identify sectors and future themes of interest, in which management thinks Molten will have relative advantage. The investment team then sets about identifying companies with these themes that are capable of becoming future market leaders. Even at an early-stage, companies will need to be delivering revenue traction as proof of the model. Molten’s fund-of-funds model is an integral part of the process and delivers insight, specific sector expertise and ultimately a filtered pipeline of investment opportunities that allows the investment team to develop a relationship with potential investee companies ahead of a potential future funding round.

Molten continued to invest in the fund-of-funds strategy, investing in a further 22 seed funds over the course of FY22, with a total commitment to the strategy of £110m as at 31 March 2022, of which £52.5m had been drawn by year end. This strategy delivers visibility on a macro-portfolio of 1,200 companies, in each of which Molten has an average indirect look-through stake of 0.4%. So far as we are aware, no other VC offers a similar fund strategy at such scale.

This strategy gives Molten visibility across Europe, without the need for offices, infrastructure and staffing across the breadth of the continent. Within the broader European marketplace, the group’s core geographies include the UK, DACH (Germany, Austria and Switzerland), the Nordics, France, Ireland and Spain.

Molten is continually looking to identify new themes and geographies from which to deliver competitive advantage. Climate technology is a recent theme that Molten has been backing and management believes that it offers great potential over the next few years. Additionally, management has identified Eastern Europe as a region where the group is keen to establish a stronger foothold, seeing the realignment of investors and teams in the region as creating an attractive emerging technology ecosystem that Molten would be keen to support.

In its FY22 annual report and accounts, management sets out Molten’s detailed ESG strategy (pages 48–-71), including the successful achievement of its targets for FY22.

For FY23, Molten has proposed the following as its core targets:

Further detail can be found in Molten’s FY22 annual report and accounts.

Management remains cautious in terms of outlook, seeing little sign of a marked improvement in the funding environment in CY22. As a result of this uncertainty, management chose not to provide guidance for portfolio fair value growth in FY23, although the group’s guidance for 20% annual fair value growth across the cycle and annual cash realisations at 10% of GPV still stand.

In tandem with its cautious outlook, and having already committed £73.7m in investment in H123, management expects the rate of investment to slow for the remainder of the year, with annual deployment in FY23 in the region of £150m and realisations in line with management’s 10% target. The core portfolio is already well funded, with 80% of the core portfolio either funded to exit or else for 24 months.

Molten offers a broad-based portfolio of leading technology companies, weighted towards the more resilient B2B business model. The core portfolio continues to deliver impressive revenue growth, having delivered 66% revenue growth in CY21, with 77% growth budgeted by Molten for CY22.

In FY23, management is looking to increase fee income (potentially achieving a profit contribution net of costs) by building fee-earning third-party funds under management. As well as the EIS and VCT businesses, this would also include the growth fund and a potential syndication of the fund-of-funds strategy. Although there was no detailed update, plans ‘remain on track’ for the launch of the growth fund in FY23. Management also made passing reference to syndicating the fund-of-funds programme (details of which are as yet unclear), with Molten having already committed capital to double the size of the fund-of-funds proposition over the next three years.

Investors should take significant comfort from the fact that, following a record year for fund-raising in FY22, over 80% of Molten’s core portfolio is either fully funded to exit or has over 24 months of cash runway based on its budgeted projections. In addition, 77% of Molten’s portfolio fair value is based on assets in which Molten holds preference shares, offering protection to Molten in the case of down-rounds.

Exhibit 8 summarises the proportion of Molten’s portfolio valued by reference to:

The remaining holdings are valued at NAV (for fund investments as part of the fund-of-funds strategy) (16% by fair value), or at market for directly quoted companies (only 4% of portfolio value as at 31 March 2022 and 3% as at 8 June 2022).

Valuations of the direct technology investors are typically struck relative to NAV, with the shares trading at either a premium (rarely) or discount (more usually) to the latest reported NAV per share. Although this is investors’ principal valuation approach, management teams see a net asset-based valuation as a conservative methodology, as most companies (prudently) carry assets on the balance sheet at a discount to fair value, with the majority of assets recognising a gain on disposal.

Asset values are only reported semi-annually, or quarterly at most, meaning that due to the reporting time lag, portfolio company valuations are historical even before they are announced. Valuations for fast-growing private company portfolios, such as the 77% prospective revenue growth for Molten’s core portfolio, are therefore struck relative to a prudent view of NAV per share (initial discount), based on a historical NAV (further discount). As can be seen in Molten’s track record (set out in A core tech holding through the cycle), investors should take comfort from the fact that valuations are prudent and realistic, even in a downturn.

Despite Molten’s impressive track record (26% rise in NAV/share in FY22, five-year NAV/share CAGR FY17–22 of 22%) (Exhibit 1), its shares trade at 0.44x FY22 NAV, a discount to the broader sector, trading on an average 0.64x NAV.