Episode 1 has announced a new £76 million fund to back early-stage innovators. With over twenty years of experience in pre-seed and seed investments, the fund will be used to back B2B innovators, as well as strengthening Episode 1’s reputation as the UK’s most innovative — and one of the most successful — early-stage investors. The fund includes a £20 million investment from British Patient Capital and the National Security Strategic Investment Fund.
Hector Mason, General Partner at Episode 1 spoke with TFN about what Episode 1 offers, as well as some of his thoughts on the current funding market.
An entrepreneurial fund for tomorrow’s successes
Mason says he has always had an entrepreneurial background, “since I was about 16 I always had enterprises,” he told us. “After I left university, I founded a couple of businesses, founded a tech platform, a marketplace business, a consultancy. And after that, I had a brief stint in management consulting, which I found very boring!”
That journey sparked his determination to get involved in venture capital, his break, he says, was down to his persistence securing him an interview with Episode 1. “That ultimately led to the job,” he said, “and it’s worked out for everyone. Two years ago, I was made a partner, then a year ago a general partner.” However, he has retained his entrepreneurial streak.
“Three years ago, I founded Focal, a demo-day business,” he explained. “We have about 4,000 companies apply each year, then the VC funds we partner with vote on the startups they like the look of the most, and the top 1% get to pitch at our virtual demo days.”
And he also fronts the Riding Unicorns podcast, which profiles founder and investors, many of whom are now investors in Episode 1’s latest fund.
Combined, they give Mason a good view of the state of funding in the UK. “There’s no shortage of capital at the very earliest stages, and there’s also no shortage of extraordinary talent,” he told us. “It’s a very buoyant market at the moment.”
However, he noted that those startups a little further along the process are paying the price for the inflated expectations of 2021. “There’s a little bit more difficulty at the later stages where the money has dried up a bit.” He explained, “Many companies that raised in the hype and bubble of 2021 are facing a harsh reality where the valuation is much lower than they previously raised, and that can make fundraising very difficult.”
Perhaps awareness of the hype of 2021 has left Mason cautious of the current hype surrounding AI. Two of the Episode 1 team have PhDs from their research into AI, he told us, “we’ve been investing in AI for a long time, but a lot of the hype is around generative AI. We’ve tended to avoid a lot of these startups; a lot of them have fairly thin use cases.”
Instead, Episode 1 is focused on the opportunities around AI. “Where we’re investing is in the picks and shovels to help enterprises adopt AI. Whether that’s help them with privacy around their AI, or help them identify areas in the business which could benefit from our AI,” Mason said. “Anything that makes it easier for companies to use AI efficiently and effectively, is really interesting for us.”
Identifying and supporting tomorrow’s talented startups
Episode 1 boasts an impressive track record. The portfolio includes Carwow, Huboo, CloudNC, Raft, RobinAI, Fatmap and Omnipresent. Just under three-quarters of their portfolio companies from previous funds have gone on to succeed in Series A rounds, a rate that’s around their times higher than the average pre-seed and seed graduation rate.
“We are focused on B2B software companies at pre-seed and seed, we’ll invest everything from £250,000 to about £3 million,” Mason said. But as well as his interest in the practical application of AI, he says Episode 1 also has their eyes out for a particular type of founder: “people building products and solving really, really hard problems using AI, and people who have experience and some unique insight that suggests that they can build a product that very few other people can.”
Diversity is also ‘very much front of mind’ for Episode 1, Mason says. “A large portion of our new fund has been invested in companies with founders from underrepresented backgrounds, which we’re really proud of.”
Episode 1 plans to make between ten and fifteen investments per year, and expand their focus beyond the UK. “10 to 20% of the investments we make will be outside the UK, and particularly in Europe,” says Mason.
“We’re always searching the market for great investment opportunities and when one comes up, we try to move as fast as we can,” says Mason. They have their own data tools that actively search for early-stage founders, providing about a quarter of their investments.
And companies that are hoping for investment from Episode 1 will find that things can happen quickly. “We usually make the first investment within one to three months of meeting a company for the first time. We won’t have met the companies that we’re going to invest in the second half of the year, for example.”
