3 July 2020
You started your career as a banker at Société Générale and Goldman Sachs. How did you make the jump to running your own angel investment portfolio?
I started investing in start-up businesses while working at Société Générale and Goldman Sachs, so it wasn’t a jump so to speak. It was more like a gradual shift. I had always been interested in building and scaling businesses but my day job stopped me from focussing my energy in that direction. I was spending my day tracking the commodities markets – I was Vice President of the Precious Metal Division at Goldman Sachs at the time – so angel investing seemed like the best way to get involved in the entrepreneurial community.
Looking back, this was a very valuable experience; it allowed me to dip my toe in the world of angel investment without feeling like everything was on the line. It allowed me to make mistakes and learn valuable lessons without jeopardising a salary. The first businesses I invested in were a couple of small start-ups; one in Seattle and one in Wimbledon. One of those businesses succeeded and one failed, but despite that I really enjoyed being part of a company’s growth journey. I wanted to build something tangible as opposed to structuring commodity derivative hedging products.
After those first early investments, I left Goldman Sachs in 2000 to start ARC InterCapital. Taking angel investing full-time was made a lot easier by the fact that I felt I could return to Goldman Sachs if something went wrong. I remember feeling very sad to leave so many good friends and a great firm, but I felt I had little to lose.
From day one, I was keen for ARC to invest in a diverse range of companies across a spread of given sectors and industries – I wanted to build a broad portfolio rather than tagging onto one industry or trend. In the first year, working with my good friend and business partner at the time, Robin Tombs, we invested in four different businesses Infinitesima, TISS, Gamesys and Optical Revolution. I’m pleased to say that three of those four businesses are still trading twenty years later.
Looking back, I think our timing was particularly fortuitous – we were investing in the middle of a recession. Recessions are often the most opportune times for entrepreneurs to start new businesses: there is less competition; established companies are pausing marketing spending, leaving room for new upstarts to break through; and incumbents are laying off staff, which not only means there is ample talent in the market, but there are lots of ambitious and talented entrepreneurs who are also looking to launch a business.
How has the COVID crisis affected your investment activities?
It has made me look at the market with fresh eyes. In my experience, some of the best businesses emerge from the most challenging markets. A difficult market often forces teams to rethink their approach to problems and ask themselves whether these problems can be solved in new and more efficient ways. Founders are forced to be think creatively, especially when it comes to allocating precious capital.
On the other hand, as I experienced when investing during the financial crisis, you suddenly see lots of amazing talent leaving bigger companies and corporates. Many of these people will want to use this opportunity to found exciting new businesses; others are extremely talented technologists, engineers and designers who are attracted by the idea of joining a start-up.
As a result, I have been more active as an investor over the last few months. I am looking for the new ambitious companies that will go on to become the big business successes in five, 10 or 20 years; I am certain they exist. When other investors pull back from the market, I generally take that as a cue to look a lot more closely and find great businesses that others might be missing.
What do you look for as an angel investor in a business?
I like to invest in sectors and industries that are growing. If the size of the pie is growing, then there are more opportunities for new entrants to build successful and profitable businesses. I much prefer to see a start-up targeting an emerging sector with a growing audience than cannibalising a market that is already well serviced; this tends to end up with profit margins being squeezed.
But perhaps more than anything else I look for a strong, credible team. I need to see a blend of skills, integrity and ambition in a founder and the wider management team. They need to have the skills to build and scale a business; the integrity to be honest about the progress or challenges facing the start-up, and the ambition to see the bigger picture and drive towards that. I have always believed that a good founder, and his or her team, can take a weak business forward while the wrong person may struggle with even the best idea.
How do you seek to add value as an investor?
My involvement very much differs depending on the company and the needs of the individual founder and founding team. For example, I am Chairman of Infinitesima, which means that I am more involved in the business, including helping with board hires, client engagement and key negotiations. But this is not always the case. I am very comfortable allowing the management team to focus on hitting their milestones without an overbearing investor hanging over them.
Particularly active investors can end up creating more problems for their investments rather than solving them. For example, I have seen some investors demand extensive reports from their companies. It can mean that the management team spends their time keeping their investors happy as opposed to building the business and creating shareholder value. Investors need to be wary of requesting reports for reports’ sake. I prefer to receive management accounts and meet quarterly to discuss strategy and resource allocation with my portfolio companies.
What have you learned during these unprecedented times?
It has reinforced my view that a team makes or breaks a company. A team needs to have trust and integrity; you need a team that can look problems and challenges in the eye, like the ones we are experiencing now, and tell their investors and teams about their difficulties transparently without having to hide, shelter or bend the truth; this will only damage the company in the long term. A company’s team or investors must not be under the impression that a business is meeting its targets and driving growth, when it is not. It is more important than ever for companies to see challenges with clear eyes.
The last few months have also strengthened my belief that founders need a particular blend of skills: tenacity, prioritisation skills, vision and the bravery to do things differently. These founders are always able to see the potential positives of a difficult situation; they are able to see creative ways forward when times are tough and challenging. Of course, the team must get along as well; I have seen a few good businesses destroyed by internal politics, infighting and wasted energy on personal friction. Founders must also have the ability to understand macro trends whilst having high levels of attention to detail.
How are you helping companies from your portfolio survive the crisis?
It has been all hands on deck over the last few months. It is in difficult environments that investors must provide the most support to their portfolio companies. As investors, we have seen the markets rise and fall before and we know the necessity of making difficult, painful decisions as well as staying strong as a business, so you can recover as quickly as possible after the market hopefully rebounds in the coming months.
I have been on calls from dawn to dusk with the management teams of my portfolio companies working through revenue and cashflow forecasts, and this has meant having difficult discussions around cost saving, salary sacrifice and cash management. While difficult, it is one of my roles as an investor to be a critical friend and tell the management team the unvarnished truth as I see it in the best long-term interests of the company.
I have also played a very active role in helping companies in my portfolio understand the different government support schemes in which they may be able to participate. I sat down with founders to get our heads around the furlough scheme as well as how the Coronavirus Business Interruption Loan Scheme (CBILS) and the Future Fund might apply to our businesses; what they mean and whether it makes sense to potentially take part.
What are driving forces behind the most successful start-ups?
I love working with entrepreneurs who look at problem sets differently. A fresh set of eyes can mean a different approach and an unorthodox solution to the problem. I also often find that a business manager who has an extensive background in a particular industry finds it difficult to question established ways of operating. Academic qualifications are often not particularly helpful – and in some cases may actually limit success.
Too much emphasis is put on the management credentials of founders; I do not believe that company founders need to have years of experience managing big teams. In fact, that can be actively harmful as the founder can end up falling into the management trap. Entrepreneurs are leaders and they are generally best to leave the management to the management. As a rule, I believe that entrepreneurs have the vision to know where we should be going, while managers help us get there.
What is your advice for a founder looking to raise funds in a post-COVID world?
In this environment, it will be easiest to raise investment from existing investors – rather than bringing in new investors, potentially at a substantial haircut to valuations. As a result, it has never been more important for founders to build good, open relationships with their current investors.
There is no doubt, however, that these challenging times will test the founder-investor relationship in ways it may not have been tested before, especially if the company has grown reliably over the last few years. There needs to be empathy and mutual understanding on both sides. Entrepreneurs need to understand what their investors are looking for in terms of success and growth, and investors need to appreciate and understand the challenges of growing an early-stage business. That level of mutual understanding will allow investors and entrepreneurs to communicate openly, discuss strategy, problems and, most important of all, find solutions.
I also think founders need to closely look at why they are raising investment, and whether there are other options, such as government-backed loan schemes like CBILS or Future Fund, that may be a better fit. Founders need to ask themselves honestly whether the capital-crunch they may be facing was genuinely bought on by coronavirus or whether, even before the crisis, there were more fundamental problems with the business.
In particular, businesses should not raise investment to just stave off inevitable business failure. Failure is something I have always tried to actively embrace as an investor at ARC InterCapital. On the portfolio part of our website, we list not only the companies that we have successfully exited but also the companies that have failed – failure is part of the journey. As a founder, one of the greatest challenges is recognising a failing business because, by nature, entrepreneurs and business angels are optimists. It does not make sense for founders, investors and teams to continue investing their scarce time, energy and capital in a failing business. This is not always easy to recognise at the time.
What is your investment outlook for the next 12 months and beyond?
Over the long-term I remain bullish about London and the UK. London is a melting pot of ideas with people who think differently and, as a result, will approach problems from different perspectives. I have always believed that great businesses are born out of people seeing things differently – and coming up with new, diverse and creative approaches to problems. There are also practical reasons that London and the UK have good long-term prospects – foremost among them is having a pool of talented, ambitious and hardworking people on your doorstep.
Finally, I started ARC InterCapital in a recession and, as I look back now, I see that our best returns as a company have all been during challenging economic times, such as 2000-02 and 2008-10. A challenging economic environment forces everyone to think differently; it forces us to question the fundamental tenets of good business; and, ultimately, I have found that it leads to renewed creative energy which, if funnelled, into the right opportunities can lead to the growth of very successful businesses. This is a difficult time for the country, but I’m feeling optimistic that we will find a way through and entrepreneurs will be an important part of the recovery.