IFG: a fund for funds

Investeringsfonds Groningen (Groningen Investment Fund) is a public fund with a twist. Instead of investing directly in businesses in order to boost the economy of the region, IFG invests capital in other investment funds. Fund Manager Jan Martin Timmer discusses the fund’s objectives, the impact of the fund and future trends, as well as his experience with combining financial return with social return. 

IFG manages a total of € 60 million, making it one of the largest indirect funds in the Netherlands. Initiated and owned by the Province of Groningen and managed by NOM (the Investment and Development Agency for the Northern Netherlands), IFG has invested in 7 market funds. In total they have financed 46 companies, which in turn currently provide 193 full time jobs in the province of Groningen.  Jan Martin Timmer came on board in 2015, as IFG’s fund manager.

An investment fund investing in investment funds that invest their capital in small and medium-sized businesses. That sounds pretty complex. How does that work?

“Looking at the recent past will help explain the principle of fund-in-fund. Around 10 years ago, provincial governments were moving away from the more traditional subsidies and grants for entrepreneurs, due to tighter budgets as a result of the global financial crisis. In other words, they didn’t want to disburse funds ‘for free’ without having a degree of control over the manner in which the funds were used and the results of the investment. 

At this time, the first provincial funds were set up in the Northern Netherlands. Groningen decided on a different approach. Rather than investing directly in enterprises, we wanted to use the knowledge and expertise of specialized market funds and partner up with them. This approach also means that investors can mitigate their risks a little with our capital when we invest together. Our investments still end up in the hands of entrepreneurs, but through expert funds who know their market and see opportunities we might have missed.”

How do you decide which funds to work with?

“Our main goal is to serve entrepreneurs and provide them with access to capital, expertise and international networks. So we start by analyzing the so-called ‘funding gap’. In other words: in which lifecycle phase in which sector is it difficult for companies to attract investors or other means of finance? Next we look for existing funds that are open to collaboration or they contact us themselves through our network. After a thorough due diligence process and a positive conclusion we invest in the fund. From that moment this fund will start looking for investment opportunities in the Groningen region. Particular examples of such funds are Carduso Capital, NextGen Ventures II, Borski Fund, Dutch Security Techfund and Berk Partners Groeifonds.”

“G-Force Capital is somewhat of an exception. We noticed a lack of capital for digital startups in Groningen and at the time we couldn’t find any other market funds to partner with, so we decided to use our capital, as a proof of concept, to launch our own fund together with Marco de Jong. Marco adds his expertise and a strong network to our money. By doing this, we are building a track record in order to launch a second G-Force Capital together with market investors. And we help entrepreneurs at the same time.”

What are some key observations you’ve noticed over the past 5 years?

I think the most important observation is the lack of consistent and continuous capital for very early stage startups. There are and have been a few temporary funds and proof of concept funds, mostly from (semi)governmental sources. But in general we notice a funding gap for startups.  Private equity or venture capital funds are reluctant to invest due to the relatively high risk that is involved in early stage investments. We are currently working on setting up a larger proof-of-concept-fund together with regional partners. Another observation is that later stage startups with access to capital could really benefit from expertise combined with funding. For example, assistance with scaling up, international market introductions or strategic repositioning”

What, in your opinion, has been IFG’s biggest contribution to Groningen so far?

“Something that we didn’t expect when we started was that, in terms of access to national capital, Groningen wasn’t as connected to the rest of the country as we had thought. Many national investors we spoke to, had  trouble finding the right connections in the Groningen ecosystem. I guess that’s partly due to the more unassuming culture here. It has improved though in recent years, but I think our biggest contribution so far has been connecting our region to the rest of the country and in making sure money is invested in Groningen that might not have been otherwise.”

How does Groningen as an ecosystem or investment climate compare to the rest of the country and internationally?

“Groningen has an excellent reputation and track record with regards to life science activities and digital business, for example. We also see more and more cross-over initiatives in which both sectors are combined. But what’s really interesting, is looking at it from an international perspective. Let’s compare the Life Science industry in Boston (USA) to the Netherlands. Boston is a city and their cluster is as big as the entire Dutch cluster. So one way of looking at it, is seeing the Netherlands as a city and Groningen as one of the suburbs. As a country, compared to the US or UK, we have limited means when it comes to capital, but we’re taking steps in the right direction and gaining position. Big, international VCs are increasingly interested in Amsterdam and its surrounding areas, so it’s all about connecting Groningen to the rest of the country.”

As a public fund, IFG’s goal is to combine financial return with social return. How do you do that?

“Financial return is important in order to promote collaboration opportunities with market parties. A successful business climate will attract other investors with more capital. And we re-invest financial returns in our funds. Social return is about creating direct and indirect employment through those investments, but it’s also about strengthening the entire economic structure of the province.” 

“Our public funding also allows investors to take more risks and invest in startups that they feel have potential, but would normally be considered too risky to invest in. And when it comes to entrepreneurs, whether they’re SMEs or startups, we not only want to help them by providing access to both capital and expertise, but also by creating a strong ecosystem so that they have all they need to stay here in Groningen.”

IFG will run until 2035. What will the coming years look like for you?

“We’ll keep focusing on life sciences and the digital sector of course, but we’re also investigating new opportunities, such as green chemistry and cyber security, because we think they have great potential. We have a big chemistry cluster in the Chemport area and no one can deny the importance of sustainable chemical production. As for cyber security, there is an increasing number of companies doing great things in this field, and both the Hanze and Groningen universities are focusing on the sector in terms of research, so I think Groningen could be an ideal location for cyber security companies and Groningen is also in a position to take the lead in this field.”

How do you identify those trends and what’s the decision process like? As in, how do you choose which ones to capitalize on?

“You become aware of trends by maintaining close contact with your network and keeping yourself informed. Market funds will spot opportunities and will approach us with their investment proposals. It is our job to investigate these opportunities and also take the potential downside into consideration. A close look at the market, global trends, references from key-opinion leaders, Groningen’s assets and fund management’s track record will provide insights in the possible success rate. Also our local academic institutions can provide information to support our investment decisions.

Of course we look into the benefits for Groningen. What would the impact be if IFG invests in the fund? The estimated number of investments in Groningen and what would the social and financial return be? What is the long-term prognosis? We always try and find the right balance between risk and return.

We have a small investment team which consists of one of NOM’s investment analysts and myself. We go through the entire process together. After our due diligence has been completed, we present the investment proposal and our analyses to our investment committee. Then the decision is made whether to invest or not.