Molten Ventures — Forward Partners deal completed

Molten recently completed an all-share offer for the issued and to be issued share capital of Forward Partners, a listed VC investment company focused on early-stage tech businesses active in areas such as applied AI, digital marketplaces and eCommerce, among others (see Exhibit 1). Forward Partners held a well-diversified portfolio of 43 active holdings valued at £76.9m at end-June 2023, with the top 15 holdings making up 77.2% of its portfolio value, and well-balanced across Seed, Series A and Series B+ stages.

Molten’s management highlighted that it sees several high-quality assets in Forward Partners’ portfolio, which may continue outgrowing their respective markets to become market leaders in attractive niches. As a result, Molten believes these assets have the potential to enter its core portfolio in the medium term. These include applied AI businesses such as Robin, OutThink and Apexx, as well as other businesses that have already delivered considerable progress, such as the provider of 3D design software Gravity Sketch and the real-time experience platform Ably, see Exhibit 2. Forward Partners’ top 15 holdings delivered a 12-month weighted average revenue growth in H123 of 133% (144% in 2022).

Importantly, Forward Partners’ focus on early-stage investments (it initially invests between c £200k and £2m at pre-seed and seed stage) complements Molten’s core strategy, its ‘sweet spot’ being post-A series, in particular series B and C investments (see Exhibit 3). Therefore, it provides a broader pipeline of early-stage assets for follow-on investments, on top of Molten’s seed fund-of-fund programme and the Earlybird partnership. From Forward Partners’ perspective, the transaction (together with Molten’s recent equity raise, see below) will provide further capital support to its portfolio companies. It is worth noting that Molten has been a shareholder of Forward Partners since its IPO (holding a c 1.5% stake in the business before the acquisition) and that Forward Partners’ CEO and founder (Nic Brisbourne) was previously a partner at Molten. Molten’s management believes that the latter resulted in the similar investment processes of both entities, which should facilitate the business combination process. Moreover, Forward Partners was in the past part of Molten’s seed fund-of-fund programme, and therefore Molten’s management is familiar with the former’s portfolio holdings.

Shareholders of Forward Partners were offered one Molten share in exchange for every nine Forward Partners shares. Based on Molten’s closing price on 24 November 2023, this translated into 31.1p per Forward Partners share, a 6.6% premium to the three-month volume-weighted average price. Both Molten Ventures and Forward Partners were trading at significant discounts to the last reported NAV of 62% and 50% respectively at 24 November. Forward Partners’ NAV per share declined from 104p at end-December 2021 to 67.0p at end-June 2023 (though we note that it had gone up significantly in 2021 from 83.3p at end-December 2020 on a pro forma basis). Following the successful offer, and after reflecting Molten’s equity fund-raise in December 2023, the pro forma ownership of the enlarged group is as follows: earlier Molten shareholders (81%), investors participating in the recent equity raise (11.2%) and former shareholders of Forward Partners (7.8%).

In December, Molten completed an institutional placing via an accelerated book build, raising c £55.4m (net of fees) to bolster its firepower for new follow-on direct investments and secondary investments. As part of this fund-raising, Molten received a £20.8m investment from BlackRock (previously a c 70% shareholder of Forward Partners), as well as £10m from British Patient Capital. The institutional placing was accompanied by a £2.4m retail offering via PrimaryBid and an offer of up to 1,401,843 shares made available to the Forward Partners’ shareholders unable to participate in the placing. The combined institutional and retail fund-raising represent c 13.9% of Molten’s previous issued share capital. As a result of the equity raise and business combination with Forward Partners, Molten’s total liquidity (including cash and undrawn credit facility) reached £117m at end-March 2024, or c 8.5% of gross portfolio value. A further £66m is available for investment within Molten’s EIS/VCTs.

We note that the equity issue was conducted at price of 270.0p, which was a minor 3% discount to the closing price at the time of the announcement on 24 November, but a significant 63% discount to Molten’s then last reported NAV at end-September 2023 of 735p. We calculate that this resulted in a c 7.7% dilution of end-September 2023 NAV. That said, Molten’s management believes that a share issue at a discount to NAV is now justified as it seeks to seize attractive new investment opportunities (especially in secondary markets), which may only be available for a certain time (as Molten’s management already sees some signs of stabilisation in VC valuations).

Between its IPO in 2016 and end-2023, Molten has completed three major secondary transactions (Seedcamp, Earlybird and Earlybird Digital East) for £90m in aggregate at an average 19% discount to NAV, realising a 2.5x total return (defined as total value to paid-in capital, TVPI). Molten’s management believes its team has a good ability to convert these returns into cash (see the distributed to paid-in capital ratio in the Exhibit 4). While the discount to NAV at which Molten issued shares is much wider than the average discount at which it was historically able to acquire assets in the secondary market, we note that the current particularly tough environment for VC deals (see below) may potentially offer more attractive opportunities than in previous years. In 2023, the average discount in the VC secondaries market in 2023 was 32%, according to Jefferies. We note that the net asset values to which this discount was applied may have already seen meaningful downward adjustment since the 2021 peak. Molten will still have to be very disciplined in selecting these new investments to offset the dilutive impact of the share issue and deliver on its recently reiterated fair value growth target of 20% through the cycle.

In February 2024, the company announced the acquisition of a 19% secondary position in Seedcamp Fund III for €8.5m. This is a 2016 vintage fund with more than 80% of value held in six mature assets: the neobank Revolut (which Molten already has in its direct portfolio); Pleo (enterprise software); Grover (technology rental); WeFox (Insurtech); Thriva (healthcare tech); and Curve (payments technology). Molten did not disclose the discount/premium to NAV at which it acquired the secondary position.

Some of the newly raised capital may be spent on follow-on investments in the enlarged portfolio (ie after the acquisition of Forward Partners). In this context, we note that at end-March 2024, over 90% of Molten’s core portfolio (representing c 62% of its gross portfolio value at end-September 2023, last reported data) has a cash runway of more than 12 months, and over 50% of the core portfolio had a cash runway of more than 24 months (based on existing budgets). Molten’s management earlier reaffirmed during its investor webinar in March 2024 that it is on track to be below the £20m of funding requirements across its portfolio for FY24. We also note that more than 70% of Forward Partners’ top 15 holdings had a cash runway of at least 18 months at end-June 2023 or were funded through to profitability, according to Forward Partners’ management as at 21 September 2023. This may allow Molten to focus more on follow-on investments to fuel further growth of its most promising businesses rather than topping up companies that have run out of cash. Molten may also carry out selective new investments in early-stage companies by capitalising Forward Partners’ investment strategy and expertise.

Last year, deteriorating macroeconomic conditions, along with a de-rating of public equity markets and a normalisation of monetary policy after the ultra-low interest rate environment of previous years, have had an impact on both deal volumes and valuations in the VC market, given that VC-backed companies are long-duration assets and therefore more sensitive to a changing rate environment. As a result, VC markets were soft, with longer due diligence processes extending deal timelines (with time needed to complete a fund-raise now being around 3–6 months) and limiting exit activity. Because of this, Molten’s management has been initiating discussions around the next funding rounds of its portfolio companies earlier than in previous years.

European VC deal value declined sharply by c 46% y-o-y to €57.1bn in 2023 (with venture growth hit the hardest). That said, it is still higher than the levels seen before the exceptionally strong 2021/22 period (see Exhibit 5). European VC fund-raising stood at €17.2bn in 2023 compared to €28.2bn in 2022. PitchBook highlights that 2023 was the worst year in terms of European VC exits since 2013, with an exit value of just €11.8bn compared to €40.4bn in 2022 (see Exhibit 6). That said, we note some tentative signs of revival in the IPO markets (as illustrated by the listings of Arm, Reddit, Klaviyo and Instacart) as well as in private M&A markets. Reuters recently indicated that, citing Dealogic data, that Q124 global M&A volumes increased by 30% y-o-y to US$755.1m, mostly on the back of a pick-up in mega-cap deals. The recovery is assisted by stabilising interest rates and improving equity markets. Molten’s CEO also noted corporates’ emphasis on tech expenditures (eg on cybersecurity, operational efficiencies and supply chain innovation) as a potential tailwind going forward.

Moreover, recent fund-raising volumes, coupled with cautious capital deployment in 2023, left VC funds with a significant amount of dry powder (c €45bn as indicated by PitchBook in its 2023 European Private Capital Outlook: H1 follow-up report), which may support deal activity in 2024. Molten’s management highlighted in the FY24 trading update that FY25 is showing promise of delivering a more normalised level of realisations and expects divestment proceeds to be meaningfully higher than in the last two financial years. On 29 April, NASDAQ-listed Hologic announced it has signed a definitive agreement to acquire Endomag, one of Molten’s core portfolio holdings.

Given the weak exit environment and limited holding-level liquid resources before the fundraise, Molten focused on cash preservation and remained cautious in terms of new investments in the last financial year, with £17m deployed in H124 to end-September 2023 (below its £33m realisations in the period), with a further £35m invested by its managed EIS and VCT co-investment funds. Only £4m was invested in five new (£2m) and seven follow-on (£2m) investments in H124, with the remaining £13m deployed through fund of funds (£8m) and Earlybird (£5m). Molten also committed to four new seed funds via its fund-of-funds programme, bringing the overall fund-of-funds portfolio to 79 funds. Together with the acquisition of Forward Partners (£25m net of cash acquired) and the £8.5m secondary purchase of a position in Seedcamp Fund III (see below), Molten’s total FY24 investments stood at c £65m. A further £37m was invested in FY24 by the Molten-managed EIS and VCT co-investment strategies. In 2023, Molten launched its Irish fund, grew its VCT/EIS, and completed the first syndication of its fund-of-funds programme. Future third-party capital initiatives include an Eastern European fund, a climate fund and a secondary fund.

The FY24 investments compare with £39m of total cash proceeds from realisations in FY24, of which £33m in H124. The latter included £17m from the sale of direct investments, including the final exit from Trustpilot, which resulted in total realisation proceeds of £121m. A further £16m was realised from Earlybird and fund-of-funds. We understand that the H124 realisations also included c £13m proceeds from a secondary sale of 10% of Molten’s Earlybird Fund VI investment, as announced earlier.

Molten’s gross portfolio value (based on unaudited figures) reached £1,377m at end-March 2024 (vs £1,299m at end-March 2023), with the increase mostly driven by the Forward Partners acquisition and the Seedcamp Fund III secondary investment. Excluding the impact of these two transactions, Molten’s gross portfolio value remained broadly stable at constant currency in FY24 after rebounding from the H124 decline of 3.7%. Molten recognised a £24m negative fx impact from the weakening US dollar and euro during FY24. Molten reported a preliminary NAV per share of 661p at end-March 2024, which represents a c 15.3% decline from the end of March 2023 and includes the dilutive impact from Molten’s recent share issue.

Meanwhile, Molten’s portfolio performance remains resilient according to the management, with a good balance between growth (even if at a slower pace) and capital efficiency (with very limited exceptions). The value-weighted average revenue growth across Molten’s core portfolio in the calendar year 2023 reached 63% (above previous management guidance of 57%). At the time of the H124 results, Molten’s management expected the average revenue growth in 2024 to reach 50%.

We acknowledge that a persistent weak macroeconomic environment may put further pressure on the valuations of VC-backed companies as they approach the end of their cash runway and must return to the market for fresh funding during a less favourable market environment. This is illustrated by the pick-up in the share of down rounds in 2023 to 21% compared to 14% in 2022. This is still below the 26% seen in 2013 and 2014, and Molten’s CEO acknowledged that we may have not reached the bottom of the current cycle yet.

That said, in the 12 months to end-September 2023 (last available data), Molten’s portfolio companies raised £467m of capital (vs £2bn in the 12 months to end-September 2022), with over 85% of the funding rounds being flat or up rounds. Moreover, we note that Molten adopts a relatively conservative approach to portfolio valuation. Around 45% of its total portfolio at end-September 2023 was valued using the last funding round, which is calibrated to account for movements in the revenue multiples of public peers since the deal closure, as well as any subsequent technical/product milestones and the trading performance of the company compared to expectations at the time of the funding round. Molten’s aim is to reflect the current revenue trajectory in its carrying values (rather than the full prospective growth path, which normally determines valuations of funding rounds), as it prefers to gradually recognise the ‘success story’ of its portfolio winners. As a result, it applied a weighted average discount of 33% to 73% of its holdings valued based on the calibrated last funding round (vs 65% and 35% at end-March 2023 and 83% and 27% at end-September 2022, respectively; see Exhibits 9 and 10). Another 38% of the portfolio was valued using market comparables (up from 34% at end-March 2023 and 27% at end-September 2022), at a weighted average multiple of 7.4x versus 8.4x at end-March 2023 and 7.2x at end-September 2022.

In the context of Molten’s valuations, it is worth noting that, following the completion of the recently announced business combination of Vivup and Perkbox, Molten will exit its investment in the latter (which is a holding outside of its core portfolio) at a valuation modestly above its last carrying value. Furthermore, the recently announced Endomag deal (see above) also values the business at a modest uplift to its £35m carrying value.

During the recent capital markets day (CMD), Molten’s CFO summarised the company’s approach to portfolio valuations (see video below). Molten’s valuation process is carried out every six months by the finance team, based on inputs from the investment team; each one is subject to review by an external auditor (PwC) and the audit risk and valuation committee of Molten’s independent board. A further review is conducted by independent valuation specialists dependent on corporate activity. For instance, providers of Molten’s debt facility (JPMorgan and HSBC) have the right to request a validatory check by a third-party valuer. Moreover, Rule 29 of the UK Takeover Code requires an external valuation review (independent from Molten’s auditor), which for the purpose of the currently ongoing Forward Partners deal was carried out by Deloitte. Molten’s CFO also highlighted the downside protection achieved by investing via preference shares (97% of Molten’s portfolio at end-September 2023) and the fact that Molten normally has a seat on the investee’s boards.

It is also worth noting that 97% of Molten’s investments at end-September 2023 were structured via preference shares and therefore include downside protections such as liquidation preferences (c 46% of its portfolio by fair value at end-September 2023 was valued at levels triggering the preference stack protection). Based on our discussion with Molten’s management, we understand that around 75% of Forward Partners’ current investments also has some form of downside protection.

At its recent CMD, Molten Ventures highlighted the emphasis it puts on helping its portfolio companies to continue innovating while preserving cash. It also helps them shape their fundamentals to allow them to raise new capital at least at previous funding round valuation. Below we included the recordings of Molten’s CMD presentations covering a corporate update, valuations and AI.