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Why invest in start-up businesses?

Updated Thursday 9th February 2012

Entrepreneur and investor Richard Farleigh explains why people are sometimes more important than product when it comes to investing in start-up businesses and early ventures.

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Transcript

Richard Blundel:
Well Richard, thanks very much for talking to us. I know you’ve had a long illustrious career as an investor, and you’ve invested in all sorts of different types of commodities and derivatives and so on. Why invest in start up businesses and early stage ventures?

Richard Farleigh:
It happened by accident really. You know, I had a good career in finance and then took early retirement. I’m 51 now; I retired at 34, so 17 years ago. And my plan was to sort of do varying things. I wrote a book and learned to ski and things like that. And then gradually somehow I ended up getting involved in business.

One reason was I spent some time at Oxford University and I realised that the commercialisation of some of the stuff coming out of universities wasn’t really happening the same way that it was happening in the US. And because of that the valuations for that sort of investment were very low, so it was quite cheap as an investor with a little bit of cash to try to get some of those things to market. And then the other thing is I enjoyed it. After being in finance, which is not always a people business, it was much more people oriented being in business, and I enjoyed that side. And a little bit of enjoying the battle and the risk, not gambling but enjoying the risk and enjoying the unknown.

Richard Blundel:
Right, and what goes through your mind as you’re, I know you’re quite analytical in your approach to investments and you’ve written about this at length, I mean what goes through your mind as you start to size up a new venture?

Richard Farleigh:
I think over the years I realised at some point that the people are more important than the product. And I've seen plenty of products messed up with the wrong people, and I've messed up products. So I realised that actually it’s about management and management. So most of what I’m trying to do a lot of the time is trying to assess the person rather than the actual business idea. And if the person is half switched on then the business idea is normally quite reasonable anyway. And so then I’m just sort of thinking well can, is that the person who can drive the business to where we want to get to.

Richard Blundel:
And you say a person but quite often the venture is a team of people or there is more than one person in the venture. So would that be an issue as well looking at for instance the dynamics of the team, or is that the latest...?

Richard Farleigh:
Yeah, well you start with top guy obviously, and if he’s switched on and affable then normally the people around him will be good quality. And you might have a few difficult personalities in there, but he or she knows how to handle them. Also I have to decide if I can work with the people, because obviously I have a lot of involvement. And I always know before you invest that’s the nicest they’re ever going to be to you because after you’ve written the cheque it’s a bit easier to be a bit more. But, you know, I've always enjoyed the relationships I've had in business, never had really any enemies, it’s always been a lot of fun.

Richard Blundel:
And I know you’ve written about the due diligence that you have to do, and clearly with large corporates there’s a kind of process, but in small firm or a start up it’s rather different. The start up may not have a track record as yet, so what sort of, what kind of checking are you doing on these either start ups or early stage ventures?

Richard Farleigh:
Yeah, well once I've decided that the person is the right person who can take that business forward, occasionally I've invested in a business and sort of changed the person, not in a nasty way but I've changed the person who’s leading it because I thought it needed it. But assessing an opportunity is very difficult if it’s just an idea. You know, even if it’s a really high quality idea out of university, which is going to take some commercialisation, it’s really hard to put a value on it. I mean a typical way to value a company is obviously if it’s profitable, multiply the profit by some number and you get a value of the company.

But if a company has no profits, and sometimes in the sales, where do you go to, it’s really just a hunch. And a lot of people make the mistake though of if I could sell just one toothbrush to every Chinese person I’d be worth, you know, so there’s a lot of mistakes made with assumptions. But you do look at the size of the market, you look at whether it’s a brand new product or whether it’s competing with, you know, it’s going to be a number two player in the market. So you do that sort of thing, and you have a bit of a hunch. But what I have learned is not so much to try to figure out what it’s going to be worth at the end of the day, but how much to spend, which is less and less as time goes by. I've kind of learned that it’s a good idea to hold back on the expenditure.

Richard Blundel:
Spread your bets...

Richard Farleigh:
Well not just me as an investor. Companies are a bit like a house renovation, they always end up taking twice as long as costing twice as much. So you sort of, and business plans are a worthwhile exercise but I don’t think I've ever seen one hit out of 70 or 80 companies I've invested in, so you’ve just got to plan around a certain amount of cash being needed longer than you expected most of the time.

Richard Blundel:
And I think last year I questioned, I’m sure a lot of people like to ask is, from an entrepreneur’s perspective do you have any practical advice you would give to prospective entrepreneurs maybe trying to assemble a proposal?

Richard Farleigh:
You mean for a pitch or for?

Richard Blundel:
For a pitch yeah, I mean for finance.

Richard Farleigh:
Yeah, it’s quite fun to advise people about pitching. Because the first thing I say is listen investors have just a short of attention span as everybody else, and you switch off after the first 30 seconds unless it’s something that’s going to grab you. So you really, whether you’re on Dragon’s Den or whether you’re presenting to your local mate down at the pub, you’ve got to get that, whatever that unique exciting factor is, you’ve got to get it out in the first 30 seconds, and then almost leave some questions for them, that they want to know more. Often people will present to me or write to me and the first three pages is about what they did as a teenager and why they want to do it. But just tell me why it’s different, get that out very very quickly.

Richard Blundel:
So that’s what grabs them is it, grabs you rather, the thing that’s different about it or is there anything else that would particularly jump out?

Richard Farleigh:
No, I think it really is what they call unique selling point. And sometimes it’s not a unique selling point, sometimes it’s unique here in the UK, it’s already been done in the US but it’s an idea. And why that idea is special, I think that defines everything. And then over that presentation you then figure out if that person is the right person to execute the idea.

Richard Blundel:
Well thank you very much Richard.

Richard Farleigh:
Great, thank you Richard.

Ex-Dragon Richard was talking to Dr Richard Blundel after a recording of The Bottom Line.

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