it’s who you are more than your money that matters

Posted by in Investing, Opinions

The longer I spend with young companies the more it reinforces my view that angel investing/venture capital/private equity (etc… etc…) should be much less about ‘financial products’ and much more about people based service industry with a strong financial overlay.

When I originally joined the private equity industry (now left) my employer at the time took the view that you should recruit people with strong domain knowledge and experience as you can teach anyone with enough common sense how to structure an investment financially. I agreed at the time (as I would given I was coming over from the car industry!) but I wholeheartedly agree now.

The truth is that we all have a £1 in our pocket. Which is worth £1. We can all invest that £1 and try to make a return from it in a number of ways. However what will increase the likelihood of the £1 generating a return for the investor (and the recipient of the £1) is if the investor understands the nature of the business he/she is investing in, can support that investment with ‘softer’ investment of his/her knowledge and moreover understands the risk of that investment.

I know nothing about Bio Tech, Energy, Travel (read long list of other areas) and my £1 would be worth no more than that, £1. If anything, my lack of understanding would diminish its’ value as the cost of getting me up to speed/reassuring me and my constant education requirements would absorb management time (and therefore cost).

What has brought this all back into stark focus for me is working with a series of small companies, all of whom need capital and support in equal measure. But this time I’ve been doing it all from the native side of the table, i.e. within the company.

As we meet potential interested investors there is a huge contrast between the ‘interested investors’ and the ‘knowledgable investors’. Whilst on day one their capital is of equal weight (they both have a £1) it is undoubtedly their knowledge that is of most interest (assuming of course we can get the £1 we need from either). When knowledge is at the forefront of the reason to engage, the structuring piece tends to fits in neatly behind. In many ways there are strong arguments to flex terms to accommodate such knowledge.

So bringing it all back full-circle to my opening statement. For me the stand-out incubators/VCs/Angels etc…. are those that put their team before their capital, their engagement before their structure and invest off the back of genuine knowledge and risk appreciation. In other words the team composition (or the individual’s knowledge) is such that the structuring of the investment is secondary (subject to reasonableness of course). At it’s heart a people based service industry that just happens to know how to structure equity deals (financial overlay’). An industry that is differenuated by those who de-risk a high-risk space by investing as much of their time into companies as they do their capital. Supporting.

My strong encouragement to all entrepreneurs and business owners is to consider the value of knowledge/understanding on at least as equal terms as the importance placed on the financial structure/investment terms. That knowledge is worth its weight in gold, means you will all start from the same place and, going forward, you will not be encumbered by a lack of understanding but will instead benefit from very real support that will enhance the chances of success for all parties. An absolute focus on %’s and £’s in isolation is short sighted and can be more costly than you’d think. We have some great value-add partners amongst those involved in our businesses. Sure their capital was/is useful but it is their engagement that has really moved the needle.