Investor Profile: Octopus Ventures

Octopus Ventures is among the UK’s busiest venture and growth capital investors. GBI sits down with partner Malcolm Ferguson to discuss the firm’s origination process, value-add strategy, and its views on the current venture landscape.

Octopus Ventures was established in 2008 and is part of the Octopus Group (perhaps best known among the general public for its Octopus Energy arm). It is now one of Europe’s largest venture capital teams, with £2bn of funds under management.

The firm mostly invests at the seed and series-A stages, deploying £1-10m per investment, with a sweet spot of £5m. The typical length of an investment is between 7-10 years. Octopus has backed the founding teams of over 160 companies since inception, with some of the best known examples including Zoopla, Secret Escapes, Elvie, Depop, ManyPets (previously BoughtbyMany), Sofar Sounds and Cazoo.

More recently, it broadened its scope beyond seed and series A by raising a £10m pre-seed fund, which invests in B2B software, fintech and health startups in Europe. Pre-seed rounds tend to range between £400k and £750k, with the fund making £100k investments as part of this. The fund has already backed 11 pre-seed startups, including wealthtech Bloom Money, fertility startup Béa Fertility and B2B SaaS platform Volunteero.

Recent activity highlights include a seed investment of $3.3m for Oto, a startup developing digital solutions to help with tinnitus, as well as leading a $9.5m round for fintech business Merge. On the exit side, Octopus sold its stake in Depop to Etsy last year in a $1.6bn deal, and also realised its investment in WaveOptics when the business was bought by SNAP for more than $500m.

Origination

With the firm managing a family of funds (including the two largest VCTs in the UK, Octopus Titan VCT plc and Octopus Apollo VCT plc; a series of Opportunities Funds; and the aforementioned Pre-Seed Fund, among others), its origination funnel is slightly broader than that of typical VC investors, explains partner Malcolm Ferguson: “We see anywhere between 3,000-5,000 business plans a year; we will go into the investment process with about 500 of these and ultimately end up investing in around 30 per year at the seed and series-A stage, and potentially dozens more at the pre-seed stage.” By comparison, a VC firm managing a single fund would usually aim to complete a similar number of investments over a full five-year investment period.

Octopus looks to back “very ambitious” management teams in large, sustainable markets. “That last part is crucial,” says Ferguson. “it doesn’t matter if you are growing at 100% per annum if you can’t sustain that over the longer term and still be around in a few years’ time.”

Finding these standout businesses is no small feat, and VC firms will typically vary in how they approach this conundrum. For Octopus, one key has been the development of specialist teams, Ferguson says: “The origination process is very different depending on where you are looking. In deep tech, for instance, a lot of time will be spent with the universities, building networks among the professors, who tend to recruit their best students when they start looking to commercialise the research they’ve been dedicating themselves to. In fintech, there is a thriving angel investing community, where successful entrepreneurs and professionals in that space want to back the next generation of businesses coming up, so we are looking to build relationships in these networks as it will translate to future dealflow.”

The network effect can certainly be a powerful tool for origination, and Ferguson says Octopus is now reaping the rewards of having been active in the UK venture space for 14 years: “Part of how we measure our success is how many repeat relationships we can build with entrepreneurs - you can think of it as our net promoter score. Some of the founders we backed in our first few investments are now on their fourth business, and being able to leverage this network is powerful.”

Value-add

Nevertheless, the market has become increasingly competitive, with more and more capital targeting the UK venture and growth capital space, and entrepreneurs themselves becoming more selective about who they want to partner with.

“The question of how much value we can add post-investment is one we always get, and we need to answer that authentically to stand out,” says Ferguson. “This is a big driver behind our sector-specialist approach across health, fintech, deep tech, consumer and B2B software. Entrepreneurs now expect that level of focus and specific value-add - every pitch tends to end with entrepreneurs asking ‘what can you do for me?’.”

For Octopus, the answer has increasingly to do with talent. “Talent really is what we see as having the biggest impact on the success of a business,” Ferguson explains. “The idea and the market are secondary to the quality of the team. With that in mind, we have built up a six-strong (and growing) talent function, to be able to make a meaningful contribution in supporting businesses as they accelerate their growth journey.”

The team spends six to eight weeks with new companies joining the portfolio, helping them with their people and talent strategy, Ferguson continues. This starts with an understanding of the current organisation and talent infrastructure; once this groundwork is done, projects typically include helping with the development of cultural values and behaviours; recruitment of key senior roles; implementation of key recruitment processes, including interview training with the team; and implementing competitive compensation and benefits structures.

Typical examples of this work include Octopus helping place a chief people officer at pet insurance provider BoughtbyMany around 18 months ago; after doing work with the team to identify the role as a key and necessary hire; as well as helping create an inclusive culture at LVNDR, a seed-stage health tech company focused on access to healthcare for the LGBTQ+ community.

Market outlook

With the market experiencing significant upheaval in 2022, Octopus is finding itself having to adapt to make the most of the changing conditions, Ferguson says: “Every stage in the cycle has both positive and negative aspects. The last two years have seen companies able to access incredibly low-cost capital - founders were able to raise large rounds at high valuations with relatively limited traction by historical standards. We had to adapt to that market, and one of the ways in which we did that was through skewing our activity more towards the seed stage, where valuations were more defendable. This market was also extremely fruitful for the success of our existing portfolio and the exit environment: 2021 was a record year for us on the exit front, which in turn returned capital ready to be redeployed into the ecosystem, backing the next generation of founders.”

The macroeconomic picture has worsened significantly in more recent months, and the firm is already seeing the effect on the funding landscape: “Interest rate changes are definitely having an impact - as a basic rule of thumb, every 1% increase in interest translates into a 10% decline in valuation multiple. Investment activity is down, and while it has been helpful in bringing valuations and round sizes back down to earth, it’s clearly not ideal for our existing portfolio raising later-stage rounds or when trying to sell a company.”

But Ferguson stresses that Octopus sees this environment as an opportunity to grow the firm and gear up for the new cycle: “In fact we have grown the investment team by 50% year-to-date; this is a point in the cycle where other investors may become risk-off, so we see it as a great time to step up. As part of that effort, we are looking at a range of different profiles: we like to recruit people coming from the startup area, as well as from backgrounds that tend to be underrepresented in our industry. We are not really looking to recruit investors - we can teach them that side of the job, but what we need are smart, low-ego people who are hungry to learn, and can understand what makes entrepreneurs tick.”