An ambitious vision for deep tech
Podcast transcription - 18th September
Alan Cowley: Welcome to The Invested Investor podcast. This week, I'm sat next to Alexander Sleigh. With a background in economics and modern history, Alex is currently the investment director at Newable, a leading financial services provider to UK-based SMEs. Newable Private Investing, part of Newable, connects innovating, fast-growing technology companies to equity finance. So you've got a very economic focused CV. Does finance and investing run in the family?
Alex Sleigh: It's a funny story actually. My dad is a lawyer and he's a senior partner at a major law firm up in Glasgow. And I remember when I was younger, speaking to him about careers and where one goes after university. And my dad said to me, “Son, if you like fighting with clients every day, go into law. But I don't think that's you. So yeah, I think you're someone who is more entrepreneurial, who wants to be creative. And so have you thought about venture capital?” And, you know, I kind of looked into it and thought "that sounds very interesting." And I took it from there.
Alan Cowley: Oh, brilliant. So he was a big influence on your decision then, obviously.
Alex Sleigh: He was a big influence on my decision.
Alan Cowley: Did he have a financial background? Or he just said kind of explore the options?
Alex Sleigh: He had a number, of venture capital clients, and I would ask him about the ideas and entrepreneurs he was working with. I was always very enthused and interested in that particular subject. And so I guess it kind of went from there.
Alan Cowley: So how did you come about the common investment directory at the London Business Angels? Let's hear a little bit about the London Business Angels and how it transitioned to become what is now Newable.
Alex Sleigh: When I left university, I started off in the city as a T&T analyst. So I was one of the guys up at kind of seven o'clock in the morning doing research on all sorts of tech-related companies. At the time, Monetise was a big one. That was the darling of the city. So I knew lots about mobile payments, etc.
My then boss, who was a pretty well-known chap in the city, he'd been ex-head of research at Morgan Stanley. And about 18 months into my stint in the city, my then boss and I got talking about entrepreneurial ideas. We figured there was an issue within the provision of rural broadband because in 2011, you had 12 million homes without access to decent broadband. You know and as we know, broadband is kind of the fourth utility. And we figured we could do something about it. So, we set up a venture. And we tried to create financial packages that would allow communities to improve their broadband.
We did that for a period of time. The bank of mum and dad ran out of money relatively quickly. And I knew I wanted to combine my financial interests and my entrepreneurial interests. And in the process of trying to raise capital for that venture, I came across London Business Angels. And I met the CEO of London Business Angels. Had a great conversation, and I think serendipity is a big part of life. We got talking about my idea, and I think the thrust was, "Alex, I'm not sure if this is going to be a winner, but actually, you know, I'm looking for someone to come in alongside me and help grow this business." And I joined London Business Angels the back end of 2011, and over a period of time, we grew that business to become one of the leading, if not the leading Angel Investment Networks in the UK.
Alan Cowley: Okay, so how many angels did you have on the books?
Alex Sleigh: Whenever I get asked this question, there are kind of two answers. There are how many angels do you have in your database?
Alan Cowley: Yeah.
Alex Sleigh: And, you know, that was in the thousands.
Alan Cowley: Oh, okay.
Alex Sleigh: And then how many of those angels are active, seeking to make investments any one point in time? The answer was somewhere between four and five hundred, of which around 20 percent of those could be regarded as being really active. In the sense that they would come along to the pitch events, come along to all the syndication meetings. Were happy to go on the board of a company, and, in effect, leading investments.
Alan Cowley: Okay. What were the London Business Angels at that time investing in?
Alex Sleigh: London Business Angels has always had a generalist technology focus. So primarily, we looked at healthcare and life sciences. We looked at space technology, we looked at electronics, automation. We looked at various platforms, some eCommerce. And our general sectors of interest were determined by the composition of our investor base. You know, because we tried to find companies that, ultimately, that we thought could be of interest to that investor base.
Alan Cowley: So, when did Newable come along, and when was that transition?
Alex Sleigh: In September 2016, Anthony, my then boss and I were talking about ways in which we could grow London Business Angels. And we were very fortunate to engage with a chap called Hitesh Thakrar, who'd been one of our long-standing angel investors. But he'd seen an opportunity to bring more industrialisation, a more professional approach to angel investments. And he, in effect, joined our team and we went off to build what we call Scale-Up Fund 1, which was a fund aiming to invest in companies that had not registered their technology but needed some capital to scale up their commercial operations. And we put that together, but in December of 16, we kind of realised that to take the business to the next level, we needed more resource, more infrastructure, more investment. And, I guess me being a tight Scotsman, announced me being in charge of accounting, meant that we'd always run London Business Angels in a very prudent way. But, you know, in order for it to really realise its true growth potential, we knew we had to do something a little bit outside the box.
Alan Cowley: Yeah.
Alex Sleigh: In parallel to those conversations, we were talking to Newable about what more we could be doing with them, and it's like our conversations kind of morphed into, “Actually we quite like you. Would you like to be a part of the Newable stable?” And, “We think what you guys are doing is interesting." And, “We think we have the oomph, the kind of general size to take your business to the next level.” And so, it was a meeting of the minds in many ways. For a couple months, over February '17 until the end of march '17, it was pretty crazy because when you're approaching the end of tax year, trying to get a number of deals done, plus trying to sell a business, you don't get much sleep. But, you know, it was a great experience. And, I think, in hindsight it was absolutely the right thing to do.
Alan Cowley: London Business Angels then became Newable Private Investing.
Alex Sleigh: Yep.
Alan Cowley: Has it been quite a smooth transition? Is it just kind of followed on from what you were going, just with a bit more resources?
Alex Sleigh: In many ways London Business Angels was an entrepreneurial company. It was started in 2009, and it had grown organically. At the point of acquisition, I think we had five or so full-time employees. But we'd built quite a nice business. And, you know, were able to make it attractive enough for someone to actually acquire it.
Alex Sleigh: When you talk to entrepreneurs about going through an acquisition, what happens after, it's oddly exciting, but it takes a while for you to get into the rhythm of the new place. And I think what happened the first six months was a cultural shift, in the sense that you have to let go of certain things.
So, for example, you know, I used to look after the finances of the London Business Angels. And I had to learn to entrust the finance team to look after that, which is now great. You know, doing VAT returns was the bane of my life at one point in time. So, I'm perfectly happy about that. But we had to shift the mindset to one where we wanted to really focus on the bits that matter within our business. And that's about providing entrepreneurs with the capital and value you add and the services that go around that to get from where they are today to a series A ready point in a 12 to 18 month period.
Alan Cowley: Okay, that's quite a good lead onto what actually Newable Private Investing does. And like I asked of London Business Angels, who you invest in and what your key targets are.
Alex Sleigh: Where we focus on is post seed to pre-series A stage. And when I was at business school, there was a great book by a guy called Geoffrey Moore called Crossing the Chasm. And in that, Moore talks about the difference between early adopters and mainstream adopters, and how there is a chasm you have to cross to get from early adopters to mainstream adopters. And the same thing applies in the world of venture capital, where early adopters will try out your technology, are okay if there are flaws in it. It doesn't work, they'll accept that.
Alan Cowley: Yeah.
Alex Sleigh: But, you know, when you get to mainstream adopters, the product has to be absolutely right. Because you get one chance, and if it doesn't work, they're never going to come back to you. And, to get from that early adopter point to that mainstream adopter point, we think you need between one and a half million pounds to two million pounds of what we call validation capital. And that sum is generally too large for angels to bring to the party as a syndicate.
Alan Cowley: Yep.
Alex Sleigh: But the companies are too mature for series A funds to be able to invest with conviction. And so we provide accounts and services that enable companies across that chasm, if you like, and get from a perceived point to a series A point. And so my key metric at the moment is how many of the companies that we invest in have been able to get to a series A ready point. Doesn't mean they'll take series A capital, but if they wanted to take series A capital, how many of them could actually do that. And, you know, that's very much what we're looking for at the moment.
Alan Cowley: Are there any companies that we would have heard of that you've helped out?
Alex Sleigh: In terms of our portfolio, it's pretty big. We have 50 or so portfolio companies within our funds. We have another 20 or so K investments we look after on behalf of government K investment funds. And, you know, many of those are household names in the venture industry. So, for example, Hopster is a leading player in kids' gamification space. Benivo is a leading player in relocation space. Cognism is a leading player in the B2B marketing technology space.
Alex Sleigh: We have some companies that are pretty prominent in the venture capital industry within our stable at the moment.
Alan Cowley: How big is your portfolio, your personal one? Do you oversee a set number of these companies?
Alex Sleigh: Yep. So, our model has always been about investments apart from the syndicate.
Alan Cowley: Yeah.
Alex Sleigh: And so, to be on the board of 50 companies is not something my wife would like very much. So, you know, we rely very heavily on finding people with domain expertise to sit in these boards and effectively provide governance and controls that we as investors expect. But also to provide the value add that the companies need in terms of opening doors to customers, providing credibility when the companies are seeking further rounds of funding.
Alan Cowley: So, in your eyes, what is the ideal size portfolio for an investor or a company like yourselves?
Alex Sleigh: For a private angel investor looking to invest in looking to invest in class static, I always say two things to them. One is have a plan. Before you get carried away and excited by all the great ideas that you're seeing, think carefully about how many investments you want to make. How much capital you want to blow into those companies and over what period of time. And I would always say to invest or look into static class, make sure you have a portfolio of at least eight companies. If not, closer to ten. And make sure you have enough capacity to follow on in those investments. Generally, say, a kind of minimum one to two ratio. But ideally a one to three ratio. So for every pound you invest initially, hold back three pounds for following rounds.
Alan Cowley: Obviously, you've got a team here. But, still talking about that, how do you successfully manage such a large portfolio?
Alex Sleigh: Every six months, we have a big job of reporting on our portfolio companies to the investors in their various funds, and that requires us to meet all the lead investors on the companies, as well as the CEOs of the companies. We have quarterly information rights on almost all of our companies. So we do get the updates, etc, and we do get a sense of what's happening. And because at Newable, we can provide a range of services such as office space, grant funding, expert advice to the underlying portfolio companies, that means they have an interest in keeping those post marks happening going forwards.
And some of our seed investments, where they are at very early stage, and need a bit of guidance and support, we do have the right to point an observer onto the board.
Alan Cowley: Let's just move on to the entrepreneur. The founders. What are the key characteristics you look for when entrepreneurs are pitching?
Alex Sleigh: So, this is a great question. What's the key characteristics that make a successful entrepreneur. You know, I think there are many ingredients that make a successful entrepreneur. I think, to start with, they need to have a vision, needs to be resilient, needs to be inspiring, and needs to be able to get going when the times are tough. And actually need to be able to let go as well in the sense that the skill set you need to take a business from one to ten employees is entirely different from the skill set you need to take a business from 20 to 100 employees. And definitely getting from 100 to 1000 employees. And the best entrepreneurs are the ones that realise that and are able to step down or move aside at the right time.
Alan Cowley: Or maybe learn and kind of transition into the role. How often do you see that, though, with your companies. That they do have to step down for the good of the company?
Alex Sleigh: So, there's a great example of a company we have in our portfolio. It's a Welsh-based company in the collagen manufacturing space. They take jellyfish from Pembroke Bay and process that into novel, best-in-class collagen. Great company. And, you know, we made investments in that company initially three years ago. And the founder is, you know, a research machine. He is phenomenal in terms of thinking about ideas, in terms of novel concepts. And as part of the initial investments, we can invest alongside a lead investor from a pharma background who we felt would be able to guide the CEO and help him commercialise business.
About 18 months ago, we completed a second round. As part of that round, the lead investor actually stepped up to become CEO of the company.
Alan Cowley: Oh, wow.
Alex Sleigh: And the initial founder moved over to kind of CSO, CRO position. And that has worked wonderfully well. Because the commercialisation journey and the plans around that are very robust. And the amount of innovation now coming through because the CSO is now able to focus on that without having to worry about the perhaps more bureaucratic elements of running the business is great.
Alan Cowley: That's obviously a success story, but have you ever had any where the CEO has been extremely reluctant to do this?
Alex Sleigh: It happens all the time. And, you know, from an entrepreneur's perspective, they have to think long and hard about whether taking on external equity investment is right for them. Because when you take on that investment, the game changes. You're no longer just answerable to your better half. You're also answerable to external shareholders who have given you money and expect you to execute a plan with that money. And therefore there is significantly more pressure. And it means that you can't just run your business on the basis that it's a lifestyle business. It becomes something you have to grow from standing start to five, six-x or more.
Alan Cowley: Let's just talk about pitches. And you must see a lot of business plans, a lot of pitches, in the last few years. What's the most memorable pitch that you've seen? Not necessarily good, maybe bad. And just kind of why?
Alex Sleigh: Oof, that's a tough question. Because every year, we're seeing upwards of 2000 pitches per annum. And I'm always very empathetic to anyone who is an entrepreneur. Having had a brief stint myself, I know that there are trials and tribulations as a result, and it takes guts and courage to do that. So as a matter, of course, we always do try and look at pitch decks where possible. The ones that stand out are the ones that really understand the investor story and are able to get across their incredibility, get across the wow factor in their idea, get across the fact that "if you join me on this journey, there is potential for you to make a significant exit in the future".
Alan Cowley: What do you think the biggest challenges are that entrepreneurs face along the journey?
Alex Sleigh: Entrepreneurs by extension are optimists. They look at the world in a positive light, they want to change behaviours, change practises, disrupt industries. And the challenge they have is A, building a team of people around them. B, trying to convince others of the power of their idea, because ultimately investors like to invest with conviction. I think one of the most used phrases in the investment world is "it's too early for us," and the reality is everything is too early until it's too late. The phrase "too early" basically means "we like what you do, but there aren't enough prove points yet for us to be able to make a decision. And the biggest challenge for entrepreneurs is to be able to accept that rejection and keep moving on unperturbed.
Alan Cowley: Yeah, okay. And what about from investors? What are the biggest challenges that you've found as an investor?
Alex Sleigh: The challenge with investing in early stage companies is you have asymmetric information and you have incomplete information. A challenge is understanding exactly the risk you're taking. To use Donald Rumsfeld's infamous term, you have to know the "known unknowns" and be able to quantify and accept that risk. And that's ultimately a judgement call because at the early stage in particular, your investing in people, and you're investing in their ideas and their ability to execute their ideas.
Alan Cowley: Yeah. As a venture capitalist, you've just set up a new fund, for instance, hypothetically, and then you need to take that first plunge. How do you get past that risk?
Alex Sleigh: I think for any investor, you need to have A, a process and B, a clear remit. You have to be disciplined in your approach to ensuring that you stick to that remit. And so, a starting point for us is "what is it we're looking for?" Well, we're looking for companies that are in that perceived pre-series A stage. We're looking for companies that we think have the potential to get to that series A stage. We're looking for companies that can make venture style returns. There are lots of great companies here in the UK, but only a handful of them are able to make a 10, 20x plus return, or indeed become a unicorn.
Alan Cowley: Yeah.
Alex Sleigh: And so, for us, we spend a lot of time looking at opportunities, going out to events, meeting entrepreneurs, and then triaging those opportunities against our criteria. And when we like something in this case of doing DD, it's about getting that external validation. It's about speaking to customers. It's about speaking to people in the industry to understand if the solution being developed really solves a clear problem.
Alan Cowley: Do you think there's still an element of luck in there as well?
Alex Sleigh: There is a great saying by Gary Player who said, "the more I practice, the luckier I get." I think that is true in the investment industry. The more diligence you do, the more you're clear on what you're investing in and how you can help the companies, the more likely you are to make decent returns. I think there's an element of timing as well. I look at some of our portfolio companies. It's taking them six, seven years to really find their feet and product market fit, and the reality is that we invested ahead of the curve. It's taken a period of time for the curve to catch up and now those companies are in a prime position.
Alan Cowley: Let's just talk about failures. It's a massive part of the industry. It has happened to a lot of start-ups. You would've had your own. Just tell us a few, you don't need to talk about specific companies, but some stories about failure and why you thought that those companies failed.
Alex Sleigh: If I think about failure, there are a number, of reasons why companies fail, but they can generally be distilled, in my opinion, to three key factors. The first is the company failed to find product market fit. And what does that mean? It means that they didn't have enough cash to be able to hit certain prove points that would enable them to raise a further round of cash. I.e. investors got fatigues. I strongly believe that with infinite resource and an infinite amount of capital, anyone can ultimately find product market fit. But, we live in a society based on scarcity. Investors invest on the basis that their investment is going to lead to the company achieving certain milestones. And sometimes it just doesn't happen.
Alex Sleigh: There's a great example of a company based in Cambridge, in the air tech space. The founder was first-class. A great entrepreneur. And he worked his heart out to try and make the venture work, but he was just in a very difficult industry. One where there's a lot of inertia, lots of barriers to change, and ultimately we couldn't make that work. And that's one of those where you can accept that you made an investment, you knew the risks, it didn't work out. And these things happen.
The other two reasons are more to do with people. The first is where founding teams fall out. Where there's a difference in opinion. And early stage companies are fragile. And that means that you need the management teams to be fully in sync in rhythm and aligned. And where you have a misalignment between them, that leads to problems.
And the third reason is a similar one where entrepreneurs and investors fall out or have a misalignment of view and the trust breaks down between them.
Alan Cowley: It's difficult to hear, but obviously, it happens quite often.
Alex Sleigh: Yeah, I think lesson here, Alan, is that for an entrepreneur, when they take on an investment, it's not just up to the investor to conduct DD on the entrepreneur. It should be reciprocal. And the entrepreneur should be very [inaudible 00:24:20] on who they are taking into their company.
Alan Cowley: Do you often find entrepreneurs, some CEOs for example, that spend too much time chasing money? Chasing that next round?
Alex Sleigh: The reality is, the best way to fund your company is through revenue, secondly through grant funding, and then through finance instruments such as debt or equity. I think what happens is raising equity is seen as a kind of badge of honour in the industry. You see articles in TechCrunch or wherever about a company who is in five, ten million pounds. And that's great but that's the start of the next chapter of a journey. And what I see often is because entrepreneurs work so hard to raise the capital, when it does hit the bank, the next three months they draw a breath. So it's like they've been swimming really hard and then they need to come up for breath just to take in for a little bit. And then following that three-month hiatus, then things pick up again.
Alan Cowley: So, what does the future hold for both you and Newable?
Alex Sleigh: When we came on board the Newable ship two years ago, all of us, meaning both the Newable and London Business Angels team, took a view that the early stage of investment market is hugely fragmented, and actually entrepreneurs and investors could benefit from a more professionalised service offering. Two years on from that initial hypothesis, that still holds true. And we are on mission to become the preeminent provider of capital and value-added services to entrepreneurs that are effectively crossing that chasm that I alluded to earlier.
What does that mean? We are very much working with our angel investors to understand what more we could be doing for them to provide the best-in-class service that they demand from us. We are very much putting lots of time and effort into growing the size of our funds because we know that in order to support entrepreneurs more fully, in many ways, we could deploy more capital into their rounds. And we are working with a number of kind of, traditional investors to understand what they are looking for at a series A, which will, to some extent, dictate what we invest in. Because if we can understand what they are looking for now, it means that we can kind of guide the companies that we invest into to move in that direction.
Alan Cowley: I completely agree. Alex, it's been absolutely fantastic. Really insightful to hear from a lead in investment director in the UK and all the best for the future.
Alex Sleigh: Thank you.
Alan Cowley: Thanks very much.
Peter Cowley: Thanks for listening to another Invested Investor podcast. You can subscribe to all future podcasts via our website, investedinvestor.com or via a number of podcast platforms online. Remember you can order our book online, and be sure to follow us on Twitter, LinkedIn, and Facebook to ger the most up-to-date, interesting, and insightful content from the invested investor.
