This article first appeared in The Spectator on 06 March 2015.
‘There’s definitely more money than talent out there.’ That’s the view of one seasoned London tech investor, and it presents an important truth to those looking to enter a market that is rapidly heating up. In a resurgent economy, siren voices promise fast money. But the wisdom of Warren Buffett deserves to be heeded: ‘Be fearful when others are greedy. Be greedy when others are fearful.’
Where professional money is flooding in, private investors can profitably follow — but this is a market that requires careful navigation. For insights into how to ride the wave, I spoke to three of London’s top investors — and learnt three key lessons: back the idea, trust the experts and choose your founders carefully.
First, the big idea. ‘I look for something that’s simple, the things that have the potential to be used nearly every day,’ says Frank Meehan, partner at SparkLabs Global Ventures and the discoverer of Nick D’Aloisio, the teenage developer who sold his app Summly to Yahoo! for £19 million in 2013. Meehan was also one of the first investors in artificial intelligence start-up DeepMind, bought last year by Google for £400 million, and has served on the boards of success stories from Spotify to Skype.
The power of ideas is also high on the agenda for Eileen Burbidge — founding partner at early-stageventure fund Passion Capital, which has funded start-ups such as business information service DueDil and analytics platform GoSquared — but it’s also a matter of judgements about people. ‘What we’re looking for are unique characteristics about the entrepreneurs themselves,’ she says.
If you’re not investing in a big idea, don’t expect a big return. But ideas alone are not enough for success. It’s a crowded, complex sector, for the most part populated by pioneers who really want to make a difference. But as in any frontier market, beware the snake-oil salesmen promising easy money. To avoid them, get to know the network and the people with the real know-how. ‘Everything I’ve ever been involved in has come from a referral,’ Meehan told me.
‘I wouldn’t be investing into real estate or mining, I know nothing about it… similarly with tech, you need to leave it to the people who know how to sniff out what’s going to work and what’s not, how to boost things and how to break things.’
Such expertise does not come quickly or easily. Manish Madhvani, co-founder and managing partner of GP Bullhound, told me about the exhaustive research process undertaken by his boutique investment bank in its hunt for ventures worth backing. ‘We adopt a very thematic investment and advisory approach, in that we choose a sector we think is ripe for disruption — a good example being digital music six or seven years ago. We thought streaming was going to be the prominent force, so we met 50 of the streaming companies across Europe, which we do for all of our sectors. Every time we do this, we meet one or two that are so clearly the standout companies to try to invest in.’
Given the level of research and expertise that spotting breakthrough companies requires, both Meehan and Madhvani are adamant that investing in a fund, or co-investing with experienced angels, is the way to go for novices. Too many first-timers have a tendency to back people with similar professional backgrounds to their own, Meehan says, rather than casting the net wide for the best opportunities. Put another way, a career in City pinstripes doesn’t mean you’ve earned your stripes as a tech investor. Many of the best investments today are in highly technical fields like big data, requiring deep skill sets in science: no place for those who are just playing at it.
If a nose for ideas and a belief in expertise can help you navigate the market, only the top talent can turn your investment into riches. The third leg of the stool is the team behind a business, particularly the founders. ‘Start-ups have to pivot three or four times to find the successful business model,’ Madhvani says, ‘and if you haven’t got a CEO who’s experienced and able to do that, your chances of success are massively reduced. If the jockey isn’t right, then we won’t do the investment.’
According to Meehan, two founders are generally better than one. ‘Co-founders who complement each other are critical. You need one person who can just focus on the product and articulate it over and over again, while the other is running round looking after investors.’ The team matters most of all because this sort of investment is a marathon and not a sprint. Many angel investors, Madhvani says, ‘go in thinking this is going to be a three-year play, when in reality, if you’re lucky enough to get into a King.com or a Spotify or Just Eat, it takes ten years plus to go on and build these billion-dollar companies.’
The billion-dollar valuation is the new barometer of tech success. Last year GP Bullhound found that there were 30 such ‘unicorn’ companies across Europe, a total Madhvani expects to be far exceeded this year. Some might say this is a sign of a market taking leave of its senses: valuations of early-stage businesses with tiny revenues and no profit can often be staggering. In many cases, an initial listing represents a high-water mark that will soon recede.
But that’s the nature of the sector. When the fast food chain Just Eat went public last year, its £1.47 billion valuation was more than 100 times 2013 earnings; within less than a year, that valuation is £2.25 billion. Some pundits predict an unhappy ending, but investors have made a fortune so far. The scent of such profits is driving a great deal of activity in pursuit of breakthrough ventures. According to London & Partners, venture capital investment in London’s tech sector increased twentyfold between 2010 and 2014. But while the unicorns are out there, they’re not easy to find and it’s never a quick buck: so be patient, be wary of pitfalls and back those who know the sector best.
Photograph credited to Yahoo UK Media Relations.