Twenty-five years ago, Calculus Capital opened its doors with a simple belief, that the new Enterprise Investment Scheme could help grow the UK economy and, at the same time, deliver real value for our investors. Over the years we have learnt that growing small businesses into large enterprises takes more than just capital, but when a founder’s vision can be blended with mentorship, trust and finance, great things can happen.

We have learnt a great deal over the last quarter century, both from our successes and our missteps, but throughout that time we have maintained the same strategy and vision – find and back the best management teams, support them with our expertise, experience and capital and help them to build industry leading companies.

Here we speak to Richard Moore, Co-Head of Investments, on the key lessons learned and how that informs our investment strategy in the technology space.

Growth but with Economic Moats

The EIS and VCT schemes are the cornerstone of the UK venture capital industry.  They provide vital Government support to early stage, high growth companies whilst outsourcing the question of “which companies to back” to fund managers. To qualify companies must use the new capital internally, for the growth and development of the business.  The reality of this requirement is that companies who are not loss making are unlikely to qualify.   As a result, for an EIS/VCT investment to be successful, the company selected must be capable of significant growth, likely three or four hundred per cent over the hold period of the investment. 

Knowing that your portfolio companies need to grow at this rate, it can be tempting to make rapid growth your primary, or even only, filter.  However, over the years we have learnt that rapid growth alone is not enough.  To create real value, you need to be able to grow your business to a significant size and subsequently defend the position when competitors recognise the potential of what you have built.

Over recent years there have been several D2C platforms launched that deliver a variety of products to the consumer’s home address.  Food boxes, flowers, flea medicine etc.  These businesses have been able to achieve exceptional rates of growth, but with no barriers to entry beyond brand loyalty.  As a result, they struggle to defend any market position that is created.  The digital marketing bill grows inexorably as new entrants join the race, competing away market share and any hope of profit.

At Calculus we are not perfect (we regretted an experiment with D2C razor blades), but our core thesis, refined over many years, is that businesses must have intellectual property, IP, at their centre if they are to create real value for investors.  This thesis is at the heart of our three target sectors, technology, healthcare and the creative industries.  The nature of the IP each sector creates is very different, but the benefit it delivers is the same – a moat to protect its revenues from competitors.

Companies in a Technology Disguise

Another form of business we are wary of is one that uses technology inside its own business to enhance its service offering.  This use of technology is certainly good business practice, but it does not make the provider a “tech” business.  These companies are often presented as technology companies, but a digitally enabled laundry business with an attractive consumer app is, ultimately, just a laundry business.  The product being sold is clean clothes, not software. 

An interesting example of this sort of business is Purple Bricks, the online estate agent.  We had the opportunity to invest in Purple Bricks before it launched in 2014.  It had an impressive management team, a clear strategy and had developed an attractive proposition.  But despite the impressive digital front end our assessment was that it was, in essence, an estate agent.  We passed on the opportunity to invest, Purple Bricks launched very successfully and IPO’d on AIM in December 2015.  The company’s valuation peaked at over a £1 billion, however the business struggled financially and ultimately it was bought by a competitor for just £1.

Were we right to pass on the opportunity to invest in Purple Bricks?  If we had, it is not clear whether we could have got out before the crash.  If we had managed an early exit, we might have made very strong returns, but if not, we would have lost the entire investment.  We will never know what “might have been”, however we do believe that, intellectually at least, we were right.  The ambition of the business, to take on the established UK estate agent market, was not supported by any true IP, just a modern front end and flat fee charging model. 

What we look for

A good example of our investment thesis in action is ActiveOps. ActiveOps provides hosted software to enterprise customers.  The software allows them to manage their clerical back-office workers (e.g. people processing mortgage applications) more effectively and efficiently.  The product is hosted (so highly scalable), protected by IP (both with respect to the code and the underlying science of team and worker management), had demonstrated product market fit by the time we invested and was led by a very impressive management team.  Our initial £5m investment helped the company to accelerate its growth, leading to an IPO on AIM and a 5.5x return on invested capital.

The Importance of Founders

The most important relationships we’ve built are with founders. It’s their courage, creativity, and resilience that drive this ecosystem forward.  Being in venture capital means wearing many hats – mentor, sparring partner, recruiter, therapist, cheerleader. But above all, it means being present. We’ve learned that showing up in the hard moments – when a key customer churns, when metrics stall, when a down round looms, matters more than the final exit.

Many of the founders we backed in our early days are now investors themselves. Some have become serial entrepreneurs.  Others advise or teach. Watching them evolve and give back is one of the most rewarding parts of this work.

Looking Ahead: The Next 25 Years

The venture capital landscape has changed dramatically since 1999, shaped by shifting economic, technological, cultural and regulatory factors.  Barriers to entry in all markets are lower. Capital is more abundant.  Global markets are more accessible.  AI, biotech, climate tech – today’s founders are tackling harder problems at faster speeds.

Going forward we will remain flexible in how we approach new opportunities and navigate this ever-changing landscape, but at the same time remain true to our core beliefs and investment thesis: that innovative businesses, protected by genuine IP, led by inspirational management and supported by our capital can grow very rapidly and deliver amazing results, for themselves, for the UK economy and for our investors.

Here’s to the next chapter, with open minds and the same restless curiosity that brought us here in the first place.