ReSolve spent a couple of hours in the company of serial angel investor Richard Hargreaves to discuss his perspective on the nature of investing. Richard’s specific expertise is in the technology space, focusing on B2B markets.
What follows are some fascinating insights into the mindset required to make good business investment decisions. Areas covered include the importance of people, what could be deemed a successful investment hit rate, whether it is worthwhile investing in unquoted markets, and exit timing.
ReSolve (R): What made you decide to be an angel investor?
Richard Hargreaves (RH): I have been an investor in unquoted companies for many years starting with a career in what is now 3i plc. Much of that career was spent investing funds rather than my own money. However, over time I started to invest my own money because I was free to invest in what I chose and had no exit timescale restrictions. I now only invest my own money though usually alongside other people who, like me, are making their own decisions. I admit to being addicted to the thrills of investing in, and mentoring, young technology businesses a few of whom become big and satisfying successes.
R: You often talk about investments with reference to people rather than product and processes. Is it people that drive your decision making?
RH: People are critical but businesses usually need different people at different stages of their development. For example, when looking at early stage angel investments you usually find a CEO who is both a visionary and a great salesperson. At some stage, however, that CEO needs to be able to hand off the sales process and focus on other critical, more operational, factors in growing the business to the next level. I want to understand whether the first CEO can make that transition. And then of course you need to find a good salesperson to fill the void – probably the hardest recruitment job to do. There is such a great deal at stake, yet when you execute it, it will be a binary decision, the right hire or the wrong hire, which you have to track closely and be confident enough to back it or move on.
If you make the wrong hire the risk is you can lose your entire investment.
R: Everyone wants to know what is a good hit rate for successful investments. You’re quite straightforward about that. How come?
RH: I’m just realistic. When you invest in the unquoted early stage market as I do, then there can be no guarantee of a return. There is no ability to sell your shares at any time and so you can’t run a portfolio of carefully managed risk levels. If you have a serious success in more than one out of ten early stage investments you are doing well. However, this means I wouldn’t look at an investment unless I can see a reasonable possibility of at least a 10x return to pay for the losses and make an overall profit.
I ideally like to be investing in businesses that have little competition and are not innovating in a space everyone wants to be in. The business successes I seek out have found a niche that has not been noticed and can harness technology to solve a business problem. It helps if the market itself looks likely to explode.
Boku, now on AIM, found that opportunity in providing the technology to enable payments for purchases to be charged direct to the phone bill rather than a credit card. It’s a genuine back office function that consumers see benefit in but the businesses they interact with pay for the technology. The opportunity is greatest in Far East markets where the penetration of credit cards is much lower than in the West. The company is growing very fast indeed as you can see if you look at its first trading statement published on 23rd January.
Even the businesses that seem like safe bets now weren’t that at early stages – Jeff Bezos acknowledges he won the lottery with Amazon. He got lucky and had a few ‘near-death’ experiences on the way. Me too, I’ve been investing as an angel for 20 years and am still learning.
R: Should an investor pay as much attention to the timing of an exit opportunity as to the potential success of an investment?
RH: It is unlikely you will be able to plan the timing of an exit with any precision if at all. In fact, such a plan may be counter to the successful development of the business itself. I have been investing in businesses for over ten years. The opportunity to cash-in usually only arises when the company is sold (and all shareholders exit) or, less commonly, goes public (when the brokers may restrict shareholders ability to sell for a period of perhaps 12 months). The less pressure you have on seeking an exit, the more chance there is you can make a bigger return over your investment period.
R: You talked about the importance of perseverance in an entrepreneur and being prepared to be challenged. What do you mean by that?
RH: Both as an investor myself and also working with entrepreneurs, I don’t expect to hear a positive response to every investment proposal. Often the easiest reaction to a complex investment decision is to reject it. Whether that investment is at the start of a business’s life or later when there is a shortage of cash, no is always the easy decision as it avoids the risk of loss.
Raising more money when a business has not yet achieved the plan it presented to investors can be very difficult. And failure to raise the money will mean the business fails. However, if the entrepreneur can present a case that the further money will see his venture through to success he will raise it – albeit at a price he may not like. In such circumstances perseverance is needed as investors are naturally shy of investing good money after bad. I have seen businesses where the lessons learnt from the threat of failure have led to later success.
I mentioned Boku earlier. On its flotation late last year the chairman (a founder) reminded the team that the company had had five near death experiences in its life. It is now worth more than £180m on AIM. Learning from failure or near failure is very important as there are far more failures than successes despite what you might conclude from the media. I heard one of the PayPal founders say in a radio interview that Silicon Valley is more about failure not success. His first seven ventures failed and PayPal would have done so if thay had not changed the strategy at the end of the first year. In the UK we do have a tendency to write somebody off if he or she has failed rather than to believe they have learnt valuable lessons which can be applied in the next venture.
R: Have you found any ways of stacking the odds on your side when investing?
RH: I’m a serial investor. So whilst each individual investment involves high risk you can mitigate the risk by building a portfolio of investments. If you follow a rule of seeking a potential high but realistic return and are flexible on exit, then you can stack the odds in your favour. Also it helps to claim EIS tax reliefs wherever possible as these reduce losses and can lead to tax free gains thus increasing the return.
I personally seek out businesses that have a significant technology component. But I avoid consumer plays as many entrepreneurs have similar visions, the consumer is fickle and very well funded ventures tend to win. My businesses tend to operate in markets that are highly regulated and may be a bit uninteresting on the face of it – in fact they typically do things where other people have not spotted the opportunity. For example, this may be a neglected problem that sits in the back office. As a result they attract less competition and may achieve considerable growth before the world wakes up.
My best success of that type is Blue Prism Group which is now an AIM star. It uses software “robots” to automate repetitive tasks which were previously done manually. The company was backed as a start-up in 2006 and went public in 2016. At the first funding round it was valued at £4m and is now valued at £800m by the market. In the early days there were many challenges, not least with investors, and I was pleased to help overcome some of them.
You can also decrease the chances of failure by taking an active interest in the business. Most startups fail because of management issues and not because of the market. If you support them with insight and experience, it may be the difference that keeps them going through critical challenges.
Thanks Richard. Finally, if you had to pick one key thing as a stand out that has helped make you a successful professional technology B2B angel, what would it be?