Love and Venture Capital Investing

Geoffrey Love has been making venture commitments for almost 13 years after he says he was thrown into the deep end when he first started at London-based Wellcome Trust in 1998.

Love, who now heads up venture and equity deals for Wellcome’s Investment Division, recently spoke to VCJ about his experiences over the years, dealing with funds at the “sex and violence” end of the risk spectrum, as his CIO Danny Truell like to describe venture capital.

Love says that Wellcome’s venture strategy has evolved over the years, peaking at more than 50 funds in the portfolio in the boom years of the late ‘90s. Love has spent the last decade reducing the portfolio to the low-teens in number.

Love also spoke to VCJ about the challenges that Europe faces, compared to the U.S. venture environment and explains that the European venture community suffers from issues that will take decades, not just years, to resolve before it can hope to rival the United States.

Q: How did you get started at Wellcome?A: I started at Wellcome in 1998 just after the Trust had completed the sale of the remainder of its stake to Glaxo to create Glaxo Wellcome. As a result, there had been a huge infusion of cash, meaning the Investment Division was going through a period of rapid growth and sophistication.

I had no experience previously of private equity, and my very first task at Wellcome was to negotiate a limited partner agreement for a venture capital fund. I’ve never quite gotten over the shock to my system. To begin with, we were all generalists, and, initially, I had responsibility for public equity managers as well as VCs and buyout funds. After a couple of years, we all specialized, and I became a part of the alternative assets team.

Q: What is Wellcome’s allocation to private equity funds?A: Over the past five or six years, we have made a conscious effort to move away from strategic asset allocation frameworks and instead structure our efforts in a more absolute-return focused approach. This means we are forced to view the whole Wellcome portfolio as one portfolio, and not an aggregation of smaller, diversified sub-portfolios.

In my experience, this is a unique approach among our peers, but has had a markedly positive influence on how we work together, our performance and the concentration of our underlying investments. As a result, we don’t allocate to sector, stage or region. Instead, we look at everything as a competition for our scarce resource—investment capital.

We have a longer time horizon than many. We aim to exist in perpetuity. So we can tolerate a higher degree of illiquidity and volatility. Unlike many other investors in private equity, we are never over-exposed to the asset class and we remain very committed and active in private equity.

Q: What are the names of the venture funds in your portfolio in Europe and the United States?A: I’m afraid we don’t discuss who we are invested in.

Q: How many investment professionals on the venture team? A: There are seven of us who look at private equity and venture capital. In my group, there are three of us focused on venture, though we have a vacancy as one of my team has moved to do direct investments at Wellcome. That feels about the right number.

We also have operations and legal teams that manage all the reporting, cash flows and handle legal documentation, leaving us to work on manager relations, due diligence, investment monitoring and finding new funds.

Q: How have you seen the industry evolve? A: In many ways. I have seen the level of investor interest in VC rise to stratospheric levels, and now almost evaporate. I have seen the influence of consultants and funds of funds in the space also wax and wane over the last 12 years.

People had utterly unrealistic expectations of what venture capital could deliver as an asset class, which it isn’t, and who could deliver it. This led to too much money trying to find a way into venture, and too much of this finding its way to managers who had no business calling themselves VCs. I believe this had its roots in the very thing we have moved away from—strategic asset allocation. You cannot allocate to a style of investing that is dependent for success on limited amounts of capital and high levels of individual talent.

Fortunately, after 10 years of, frankly, fairly disappointing performance, enthusiasm for venture has cooled and we seem to be entering a period of more rational expectations and investment levels.

Q: What do you look for in a venture fund manager and how do you go about selection?A: It’s very difficult to define what it is we look for in a manager. Certainly, operational or entrepreneurial expertise has got to be a good thing in a VC, as has a background in finance. But look at some of the most successful VCs out there. There is no pattern.

Michael Moritz [of Sequoia Capital] was a journalist, Bruce Dunlevie [of Benchmark Capital] was a Goldman Sachs banker and Brook Byers [of Kleiner Perkins Caufield & Byers] became a VC after leaving Stanford University. So how do you tell? I guess it is a mix of intuition and pattern recognition, mixed with a heavy measure of reference checking and due diligence.

We travel a lot, but thankfully a lot less than I used to. For a couple of years I had gold status on two different airlines. We don’t have a presence in the United States. All of our team is based in London. This means more travel than we might otherwise do, but leads to a very strong culture and better inter-disciplinary team communications.

Q: Do you back first-time funds? A: The answer is, ‘No, except…’ Over the years we’ve invested in a handful of first time funds, and we’ve had a fairly mixed experience to date, some as the result of performance and some because of bad GP behavior.

However, we did recently support a new life science group in Boston which has taken a very different, almost radical, approach to creating companies in a space that few have prospered in. It is too early to tell, but we have high hopes. We might do one first time fund every two to four years.

Q: Have you ever made any decisions you regret?A: My biggest regret is allowing the venture portfolio to become too over-diversified in the late 1990s and around 2000. At the time, we were very consultant-led, and a bit naïve.

We had been investing in venture since 1994 and had a good track record. We can still demonstrate a 65% IRR from inception. Unfortunately, this led us, our investment committee and our consultants to try to put too much money into venture over that time. It is the very thing I have criticized others for still doing. This meant we had a plethora of VC relationships, peaking at more than 50, and none of them meaningful in size. We have spent the period since then reducing this to the low-teens, with each investment becoming much larger.

Q: What is your view on the European and U.S. venture industries at the moment? A: As I said before, we don’t tend to prefer one region over another. We are looking for talented managers with some sort of defensible ‘edge’ on a global basis. That said, there is something about the environment in the United State, and only in certain areas in the U.S. market at that, that fosters startups better than we’ve seen in Europe.

I think Europe suffers from issues that will take decades, not just years, to resolve before it can hope to rival the United States. These include societal factors, such as acceptance of failure, acceptance of success, legal, financial, entrepreneurial, managerial factors and of course a properly functioning IPO market.

Everyone respects European technology innovation. It is frustrating that this hasn’t translated into a robust venture environment. That said, we have backed a small number of high quality VCs in Europe, and expect them to generate performance to rival that of any of our U.S. managers.

PROFILE: Wellcome TrustHeadquarters: London

Description of group: Medical research foundation

Number of employees: 500, with 30 in Investments

Assets under management: £14 billion ($20.7 billion).

Allocation to PE: About 25%

PE allocation to geography: No segregation. “We invest in the best managers globally,” Love says.

PE allocation by stage: About 10% to venture, including direct investments; about 10% to buyouts; and the remainder in specialist sector or distressed debt funds

BIO: Geoffrey LoveHead of Venture Capital and Equity Long/Short InvestmentsBirthplace: Belfast, Northern Ireland

Age: 40

Education: MA (Hons) Economics, University of Edinburgh, 1992

Work history: Before joining Wellcome, was a private client investment manager

Last book read: “Return to the Little Kingdom” by Michael Moritz

Did you know? Love has amassed a huge collection of vinyl LPs, which he says earns him zero credibility from younger colleagues. “Just blank stares.”

Source: VCJ reporting