Moon Consulting talks to Julian Telling, a founder of Bristol Private Equity Club, about investment opportunities in the south west, the impact of Brexit on investor confidence and the next hot investment opportunity.
What led you to starting Bristol Private Equity Club?
If you own a growing, successful business and you’re seeking to raise £5m to £10m, there are various options available in the private equity sector. The issue is often for those who are looking to raise relatively small sums of between £150k to £500k because there hasn’t historically been anything in place - Banks are generally risk averse, private equity requires larger numbers.
This is why myself and five other investors established Bristol Private Equity Club, which has been very successful. In three years, we’ve built the club membership to 75 like-minded members who have a broad range of skills and industry backgrounds. We have invested over £3million pounds in 14 businesses. Members invest on a deal by deal basis and not everyone invests in each business, which is in part what makes us different from a VCT or Private Equity Fund.
Our members are generally people from the local area who are successful and now want to give something back by supporting entrepreneurs and using their experience but haven’t got the time or the infrastructure to try and find businesses to invest in themselves.
What makes a great idea an attractive investment?
Good ideas alone don’t necessarily make a great business, without the appropriate infrastructure such as financial management, distribution, marketing and sales your business is unlikely to succeed. You’ve got to look at whether it is scalable, is it easily replicated, will it be profitable, is it a life style business and the entrepreneurs have got to be investable - if the business owner and the investors don’t gel it’s a non-starter.
At Bristol Private Equity we replicate the Dragons Den type model. Our panel is made up of our members who come from a wide variety of backgrounds - legal and accountancy to financial services and high-tech. Every month we invite two businesses that we’ve already carried out light due-diligence on to come and present, following which the members get an opportunity to question the presenting businesses. At the end of the presentation the members will then discuss whether they believe it is worth taking it further.
As these businesses are usually in their infancy the amount of due-diligence that can be carried out is relatively little, however it is crucial to ensure the businesses have robust corporate governance structures such as share-holder agreements. We had one business fairly early on where we found that their original investors had a non-dilution clause, they wouldn’t change it, so we backed away.
You have to be pragmatic, not all businesses are going to be successful, however the ones that are should more than make up for the ones that fail.
Are there any sectors which are particularly hot right now?
The businesses we’ve invested in are looking at things in a different way, moving away from traditional distribution methods and using new disruptive technology. For example, we’ve recently invested in a company called Skin Analytics which uses artificial intelligence and algorithms to detect melanomas early. This is not to replace doctors but to assist them in early detection making this fast-growing area of cancer far easier to treat.
Disruptive technologies are certainly changing traditional methods and thinking, buying online is a typical example.
What challenges are you facing as an investor?
One of the regular challenges we face is valuation, vendor expectation can often be unrealistic. Traditionally businesses valuations have been based on a multiple of profits. However, everything has been turned on its head over the last few years. We have companies such as Amazon, who, despite years of not making a profit has been valued at billions. We have the world’s largest taxi company which doesn’t own a single taxi and has never made a profit yet is valued at circa $72 billion. While the world’s largest real estate company, Airbnb, which doesn’t own any properties, is also valued at phenomenal amounts of money.
The trouble is these sorts of valuations rub off on people who are setting up a small business. They want their business to be valued from outset on a similar valuation matrix. A lot of the time you start off with a large differential between vendor and investor expectation eventually negotiating something that hopefully satisfies both parties, but sometimes you just walk away because you can’t afford to invest given the valuation the vendors have placed on their business.
You’ve also got to get the capital investment balance right. You want enough in the business to make it attractive for you as an investor but you don’t want to demoralise the owner. For example, if you came to me with a brilliant idea seeking £1million and for that you’ll give me 10% of the company I probably wouldn’t invest. But on the other hand, if I said to you I want 80% then you, as the founder, would be completely demotivated - you’ve only got 20% of the action. It’s quite a juggling game.
What role do non-executive directors play in the companies you invest in?
As investors we usually insist that we have a non-executive on the board which is often seen “as an outsider meddling in my business”. As investors we want someone to represent us as shareholders who can help protect our investment, open doors, give the investee strategic advice and support them from a corporate governance point of view, which is increasingly more onerous these days. Non-executives should add value to the business and act as a sounding board to the executive team
For a business to succeed it needs to be well managed, have accurate financial information that everyone can understand, have cashflow projections and to know where it is every month in terms of revenue, profitability, losses, etc. The business will also need an appropriate business structure covering areas such as manufacturing, distribution, marketing, customer services and sales.
Investees can be naïve about what is required to make their business successful, non-executive directors will use their experience to give guidance and advice, it isn’t their job to interfere with the day to day running of the business.
Have you seen any slow-down in the market due to Brexit?
I think Brexit is a misnomer. I can see how it might affect businesses which trade in Europe because people don’t know quite what is going to happen, and it might affect investor confidence on a micro level but overall, from an investment point of view, I don’t see it being an issue.
However, when looking to invest you have got to find businesses that tick quite a lot of boxes and that isn’t always easy. Bristol is home to numerous incubators such as SETsquared and Engine Shed and we do a lot of work with those incubators because as an investment business we’re not there to help a business start-up, we provide the next level of funding. When the business gets to proof of concept and it needs to be rolled out and monetised, that’s when we’ll invest.
Our first investment is still pre-profit but it’s growing very fast. We’ll probably step aside at its next round of funding because that will be Private Equity and not only do we not have the financial fire power to compete, it’s not what we’re about. We may of course remain as investors if appropriate.
From my point of view the future of investment in Bristol looks rosy – Brexit or not!.
What do new to market investors need to be aware of?
Private equity investment certainly isn’t for everyone. Investors need to be prepared to lose their investment and understand that it can be totally illiquid until the business buys out the shareholder or it is sold. Tax incentives such as EIS mean that you need to hold the investment for a minimum of 3 years.
Since the financial crisis we have seen a big rise in crowd funding type investment, the problem is that many investors are putting money into companies without really understanding the risks associated. These crowdfunding platforms are not hugely regulated and sooner or later one of them will go under and everyone who’s invested will lose their money.
You could argue that what we’re doing with Bristol Private Equity is a type of crowdfunding but all our members invest on their own terms - they come from successful entrepreneurial backgrounds and can sift through the good and bad investments. They know that if they invest in five businesses, two are likely to fail, two will probably need additional funding and one might actually fly.
Anyone looking to invest needs to be relatively business savvy and not invest more than they can comfortably afford to lose.
At Moon Consulting we work with private equity backed businesses, building and sourcing highly effective management teams who are investor ready.
We understand all the different aspects of a deal; from sourcing an investor, to bringing in professional advisors, managing the operational reporting and then preparing for the future exit stage, and have worked with PE backed management teams, sourcing on an international basis across all leadership disciplines from the CEO, to Operations and Non-Exec Directors.
For more information on our work with private equity backed businesses, click here, or contact the team on 01275 371200.