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Playing with Money – Scott Haughton on How to Raise Equity Investment

Hosted by Elizabeth Ü with Xero Gravity

The following extract is from the Xero Gravity Podcast

It took 18 years of corporate life for Scott Haughton to make the leap to entrepreneurship. Like most successes stories, the road to where he is today was unconventional. Inspired by an entrepreneur at a conference, Haughton realized it was time to pursue his own venture. Not knowing what that venture would be, he eventually set his sights on luxury indoor play facilities.

Haughton spent the next 18 months raising capital. This meant ticking boxes, and learning everything he could about startups. He quickly became a children’s soft play expert. However, the central London commercial property market was not on his side. Scott had raised an impressive amount of finance during this time. However, due to delays securing a location, the offers lapsed. Scott had to return all of his money to investors. Although this may sound like a familiar story of failure, it wasn’t that at all. Like all good entrepreneurs, Haughton was on the fringe of discovering his true calling. As one door closes, another door opens.

The frustrated entrepreneur

Haughton says he’d always been a “frustrated entrepreneur.” He was never quite sure what his venture would look like. Sure enough, after leaving Glaxosmithkline, Scott spotted a gap in the market and the cogs started to turn.

“My children were very small at the time and we were spending a lot of times at these indoor play facilities that were paradises for children, but a complete nightmare for parents. Parents were just cringing on plastic chairs with plastic cups of coffee.” Haughton says.

“I came up with the idea of combining a paradise for kids with a bit more luxury and quality for the parents. Looking at the people who would attend these places you had partners of law firms, bankers, city traders. These were affluent men and women, yet the offerings were very poor.”

There was a gaping hole just waiting to be filled and Haughton was going to be the man to do it. The idea later proved the easy part. Things became more difficult. Haughton’s inexperience with the finer points of entrepreneurship started to arise.

“I knew nothing about starting a business. I’d always had everything in the corporate world provided for me. I was also doing it on my own which was hard. My advice to anybody starting a business, try find a partner with complementary skills.”

He committed to putting everything he had into it. He negotiated a redundancy package that served as a comfort blanket. This gave him a deadline by when he needed to have everything up and running.

“I know I was very fortunate to have that, but time was running out. It was a 12-18 month comfort blanket. You can’t afford to make a mistake, but you have to take the leap of faith.”

Raising capital 101

Haughton admits he knew nothing about raising finance when he first went out in search of investors. Subsequently, he learned very quickly the major dos and don’ts when trying to attract equity.

“I needed to raise a minimum of £750,000, and in the early 2000s the first port of call was the bank. It seems so strange in 2017 to talk about banks lending, but I was one of the very few who secured an unsecured loan from the bank of over £150,000. I was willing to put in £150,000 of my own money to get skin in the game, but it was money we couldn’t afford to lose.”

“It’s an onerous process and there’s a lot of bureaucracy. I found myself with £150,000 of my own money, £150,000 of the bank’s money, and was looking for £450,000 of equity investment. I knew nothing about business angel investors or the venture capital space so I had to become an expert pretty quickly.”

At this point, Haughton touches on something many entrepreneurs overlook. The importance of finding the right investors when you’re going to be giving up a part of your business to them.

“I needed to cross the equity bridge. When people invest, it’s no longer your baby. Venture capitalists (VCs) aren’t risking anything personally, but a private individual, they’re risking every pound they put up.”

“You have to put in enough money that shows there’s enough pain invested for you that you couldn’t just walk away and let it fail. You have to prove you’ll do everything you possibly can do to make it a success. You can’t afford to lose your life savings.”

“In the end I raised £750,000 based on a business plan, a piece of paper. I was left with 30%, but the VC was willing to put in a ratchet clause that enabled me to claw back equity according to milestone achievements,” Haughton says of the deal they had negotiated.

Let the hard work begin

It’s at this point that Haughton assumed things would get easier. He’d raised the capital, and that was the hard part, right?

Apparently not.

“I thought raising capital was the biggest thing to be achieved. I thought it was on a roll from there.”

“My business was all about finding affluent areas around London, so I needed to find 8,000 square feet of property with high ceilings and parking nearby. It was at this point I realized I wasn’t a covenant and was really going to struggle. As a landlord, would you rather rent to a startup or a massive pizza chain?”

“I thought to secure commercial premises you just scoured the estate agent market then put in an offer, but it doesn’t work like that. You need to appoint an agent to act on your behalf and market you to all the commercial agents.”

“Luckily when I needed property I had the money to show people. If you don’t have the money they’re not going to take your phone call, but I was still up against the lack of a track record and other leisure chains.”

With several parties involved Haughton says finding a property everyone agreed on was proving impossible. It was no longer about just his personal deadline, but one of his investors too.

“My VC was under pressure to get their money out the door. Their offer of funding had a six-month window and sadly I wasn’t able to secure it within that. I had to return the money.”

“I was frustrated. I’d thought raising the money would be hardest part, but with hindsight, finding the property was always going to be the hardest thing.”

Revolving doors

Just like that, the business Haughton had poured every piece of himself into for 18 months was falling away. This was all because three people couldn’t agree on a property. But what appears to be an ending in fact wasn’t that at all, as Haughton was about to learn.

“I’d been introduced to someone who’d sold his business and was doing loose consultancy advising individuals on raising finance. He’d introduced me to one of my VCs so we’d built a good relationship. When my offer was elapsing he suggested the pair of us probably knew more about raising finance than the majority of people out there I’d come across, so we decided to share our learnings with other aspiring entrepreneurs.”

Haughton had acquired knowledge that is absolute gold in the entrepreneurial space. Most entrepreneurs only need to raise capital three or four times in their lifetime. The majority are poorly equipped to hold their own at a table of people who invest in businesses like theirs for a living. It was a massive opportunity, one Haughton felt his learnings could be of real use in. Haughton Put two and two together and shortly after this, Envestors was established.

“We started Envestors in 2004, with the aim of helping early stage businesses help entrepreneurs navigate the path to securing elusive private investment from individuals and early stage VCs. At the time we were new kids on the block, which resonated quite well with the entrepreneurial ecosystem in London at the time.”

So how do Envestors bridge the intermediary gap between entrepreneurs and investors? As it stands, the business model is primarily one of consultancy.

“We’re looking to advise other early stage businesses how to become investor-ready. We charge an advisory fee and a success fee.”

“Envestors has massively changed over the years. We started with just a handful of investors, but we’ve now built up our own investor network to high net worth, ultra-high net worth, family offices, and early stage VCs. We also have a staff of about 26 and receive roughly 100 business inquiries each month.”

Playing cupid

Not just a consultancy, Envestors are also there to play matchmaker between the businesses and their investors.

“We look to engage with about three or four companies each month. We’re quite picky about who we invite. We have a good track record of finding quality companies and rejecting ones that won’t be successful.”

If a business’ application is successful, Envestors will prepare a fully regulated investment pack. It all sounds fairly straightforward in theory, but the Envestors team also jump through all of the hoops Haughton once grappled with on behalf of the entrepreneur and their business.

“The majority of our investors are looking for businesses that generate 10 times their investment over a five to seven year time period. They know they need a portfolio of five to ten companies to invest in, so they certainly aren’t putting all their eggs in one basket. They’re also aware that at least three or four will fail.”

“From an investor’s point of view, they can claw back their tax on here in the UK on the ones that fail. Their biggest challenges are the ones in the middle that are like zombies, they’re alive, but only just.”

And the business model isn’t just about entrepreneurs putting their all in. Wannabe investors are also thoroughly vetted before being allowed access to the Envestors private network.

“All our investors have to register with us formally. They then have to comply with the strict Financial Conduct Authority regulations which we do through the platform we built ourselves.”

“We have to be able to provide comfort to our client companies that all our investors are fully registered. Our clients can be assured we’ve vetted our investors, and that we try match them as best possible with our client companies.”

 

Must-knows

Now with a solid decade in the game Haughton has seen it all, and has a couple of key tips for entrepreneurs looking to raise capital.

Nail the exit plan

Think an exit plan is for the last page of your business plan? Think again, Haughton says. “Investors walk into the room backwards, so the first page of your business plan should be the exit opportunity. They wanna know how they’ll get their money out of this investment. They’re not looking to be greedy, which is why they don’t want over 50% of a business, but there absolutely needs to be an exit opportunity that’s spelled out and that everyone’s bought into at the very beginning, if there isn’t most investors will walk away. It’s not a stock market.”

Know how to sell

“They need to know how to sell their investment proposition. We now see a lot of technical companies who’re stars in their fields, but don’t know how to crisply pitch their business to investors. Private individuals who’re wealthy and have made their money don’t need to invest more money, they can quite comfortably sit in their arm chairs. You need to get them out of their arm chairs and off their remote control. They typically have short attention spans, so within 5-8 minutes you need to nail your proposition. It often comes down to whether or not this will be an exciting acquisition for a large corporate.”

Envestors are putting entrepreneurs on the table in a very unique and effective way. They’ve since helped their clients raise more than £100,000,000 in capital. It’s a fast-growing game to be at the forefront of. Not to mention their global presence in London, Dubai, the Channel Islands and Monaco. Moving into 2017, Envestors have got their sights set on China, Canada and Russia also. They look set to continue reaping the benefits of their in-demand skillsets.

Automatic for People: Fintech Gets Personal

Automatic For the People : Fintech Gets Personal

Fintech investment is booming, but what’s fuelling it – and is it sustainable?

Paolo Sironi explains why the future lies in robo-advisers and game playing.

After the financial crisis of 2008, you’d often hear Winston Churchill’s words invoked: never let a good crisis go to waste.

Fintech entrepreneurs clearly took note. In the past few years, fintech has emerged as one of the strongest examples of what the WEF’s Klaus Schwab calls the Fourth Industrial Revolution, where technologies fuse with the ‘real’ world to impact economies and industries, “even challenging what it means to be human.” Investors and multinationals have been pouring money into fintech start-ups – more than $50bn into 2,500 companies since 2010, according to figures from Accenture, the consultancy. In the first quarter of this year, global investment in fintech start-ups hit $5.3bn, a 67 per cent rise on last year. In Europe and Asia Pacific, investment nearly doubled.

While some talk about bubbles – citing the implosion of ‘unicorns’ such as the UK’s Powa – Accenture maintains the industry is levelling out and becoming more mainstream. In the past the set-up was one where new, digital Davids took on financial Goliaths, but fintech advocates now see scope for incumbents to align with disruptors and emerge with better ways of serving customers. “Disruption is already underway, though it might take the form of transforming existing firms more than putting them out of business,” is how Paolo Sironi puts it. An expert on quantitative financial analysis and digital technology for IBM, Sironi’s latest book, “FinTech Innovation”, offers a detailed, behind-the-scenes look at where fintech is going next. It charts the evolution of ‘robo-advisers’, and how goal-based investing and gamification will transform how we manage and invest our money in future.

“We’re seeing personalisation converging with planning and advice” among digital, or robo-, advisers, which attempt to standardise that personalisation via technology, as Sironi explains. He sees customer demand as a major force for transformation: “Banks have become too complex. Trust has eroded. There is a need for change in order to help people manage money differently. Financial advice needs to become more transparent and truly independent, rather than pushing products.”

Regulation is the main impetus for change. That has forced existing institutions to “think differently. Banks won’t continue to make money in the same way,” he says: “Greater transparency [of pricing] and a recognition of the need to put clients at the centre of their services is forcing banks to shift from distributors of products to the packaging and distribution of advice.”

Fintech is exploiting this position by offering simpler, cheaper ways for customers to invest, engaging them more and disintermediating the banks. In the last few years, that had led to a boom in ‘wealth-tech’ and robo-advisers (such as Nutmeg), but also peer-to-peer lending: “anywhere where disintermediation is possible.” Banks may be big tech spenders, but they are often outdated, he adds. “If you’re a newcomer, you can build technology around need, so you can be more agile.”

Robo advisers can offer a buffet of service levels, instead of using a standard questionnaire as their best guess of what a customer wants.

As a result, they are increasingly targeting affluent customers. Now provision is based on the needs and the tech literacy of clients. “It doesn’t necessarily mean they appeal only to digital natives.”

But it’s not just a question of throwing technology at the sector. “What you sell to customers, the way you engage, must be different.” This is at the centre of what Sironi calls ‘goal-based’ investing, a philosophy that puts the individual investor at the heart of decision-making. Goal-based investing draws on behavioural psychology – what individuals want from their investments, how they hope to use their money, and when. “The true risk that individuals face is not market volatility but the probability of falling short of personal goals,” according to Sironi. Addressing this is the true game-changer, because it more accurately matches the advice to personal goals and ambitions over time.

But human beings are notoriously bad at identifying what will make them happy in future, as we’ve learned from psychologists such as Daniel Kahneman and Daniel Gilbert. What suits us today won’t always be a priority tomorrow. Sironi sees gamification as the third big trend to address this. Gamification, he says, is a way for institutions and investors to understand their own attitudes to risk. “If you don’t understand markets, you’ll be seduced by latest headlines. Simulated games can help you feel pain and gain in a ‘safe’ environment. You can learn from how you behave in the game, and shape your portfolio based on this,” he says. Banks already use war games for that purpose with corporate clients. Digital engagement of human planners will also help them improve profiling, and there could be more start-ups emerging to offer educational opportunities for institutions. AI capabilities allow the technology to ‘learn’ and teach individuals about their own tolerance for risk. The potential effect of these refinements? There could be less exuberance, as people learn to stay the course and seek out longer-term opportunities, rather than just following the market. It will be start-ups that can combine the ‘fin’ and the ‘tech’ to create something new that will stand out. “Disruption cannot last unless there’s a way of sustaining innovation,” says Sironi, citing how Apple morphed from a hardware producer into services and branding. Financial incumbents that survive will do so by creating alliances with new ventures that transform them from the inside. But the most disruptive quality of fintech is, ultimately, not that it’s automated. It’s not the digital element that makes start-ups transformational. It’s how they can enhance the personal.

The Envestry Platform

Envestors launches the Envestry platform

In 2014, Envestors was looking for a digital solution to enable their sophisticated investors and high-growth businesses to meet, interact and finance growth in a secure environment. Finding nothing to fit the bill, they capitalised on their 10 years of experience designing and building their own solution.

The result is the Envestry platform. Now the Envestry platform can be licensed and white labelled, allowing companies to curate investment opportunities to offer to their own network of private investors while Envestors takes care of FCA compliance. The Envestry platform has 40 licensees and over 5,000 investors, giving it the potential to become the network of networks.

“We built the Envestry platform to make it possible for organisations to run their own networks,” says Oliver Woolley, CEO of Envestors. “When your platform has been built by people who’ve been in your shoes, you know it’s going to have all the features you need.”

The Envestry platform also puts powerful features in the hands of companies wanting to raise money from their own community. They don’t have to give a third-party their customer lists or worry about sending their potential investors to a site that will distract them with competing opportunities.

Perhaps licensee Modwenna Rees-Mogg of The Pluralists Club put it best when she said “Envestry is run by people who really understand the DNA of investing.

 

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Matchmaking Advice From a Secret Millionaire

Mike Greene, one of Channel 4’s secret millionaires, doesn’t mince his words when it comes to investing. Poorly-presented opportunities to invest in early stage companies mean investors like him end up “kissing a lot of frogs”.

“A lot of the time, I’m asked to go and see a company that wants investment, but they don’t have financials, shareholder agreements and other details to send me, so I end up in a meeting where all I’m seeing is raw enthusiasm. Afterwards, when I eventually get the details, the fundamentals aren’t there, and I’ve wasted my time and theirs.”

Mike is also often asked if he knows of any companies that are looking for investment, which has in the past made him something of an informal matchmaker. But no one wants to be the matchmaker known for pairing investors with frogs.

“When I heard about the Envestry platform, it was exactly what I needed to formalise what had started to become a financial dating agency. It’s not something I would have considered taking to the next level without the Envestry platform.”

It wasn’t for lack of looking around, Mike says. “There just weren’t platforms that could handle the needs of sophisticated investors at the £100,000-plus level, definitely nothing this user-friendly.”

Ease of setup and administering was important to Mike, who values his time the way every good investor does: with an eye to return on investment.

Mike Greene, Mike Greene Investments

Mike Greene, Mike Greene Investments

“It’s like driving. I know why I want to go from A to B, and I know how to get there. I want a car that will do the job without me having to understand how the engine works. The Envestry platform is like the car. It’ll take me where I want to go, and I’ve got Envestors making sure the engine is running correctly. And if I can use the technology, you know it’s pretty straightforward.”

The Envestry platform is new, but its developer, Envestors, isn’t. Mike has had a six-year relationship with Envestors after being introduced to them by Coutts, one of the company’s strategic partners.

“Having seen how diligent they put together deals for their network, I knew they were the ideal partner to take care of the financial, legal, and admin side while I go out to find great deals and investors for my network.”

When Envestors told Mike about the launch of the Envestry platform, Mike switched gears immediately. He went from passing on details of opportunities when asked to seeking out deal opportunities he could share through his Envestry site.

As an established and successful private investor network, Envestors has significant experience doing what Mike is now doing on a formal basis.

We built the Envestry platform to make it possible for highly active investors like Mike to run their own networks,” says Oliver Woolley, CEO of Envestors. “We designed it so Mike can do what he’s expert at—finding opportunities—and draw on our expertise in running a network. When your platform has been built by people who’ve been in your shoes, you know it’s going to have all the features you need.”

“They’ve made it simple,” says Mike. “If you’re an investor you can register and see what opportunities are available on mikegreeneinvestments.envestry.com. And I can change the look and feel as I want. If you’re a company looking for investment, there’s a simple template to fill out. I can review the submission, interview the company then register a deal and put it live if I think it’s appropriate for my network to see for themselves.”

All the information a potential investor needs is already loaded into Envestry before Mike presents the opportunities to his network. That means Mike is not only making a return on his matchmaking of investors with early stage companies, he’s confident no one is having to kiss any frogs.

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An investment platform that fits

David Hathiramani, CEO of A Suit That Fits is no stranger to raising money on an investment platform. That’s why he was excited to hear how the Envestry platform worked differently.

In 2015, A Suit That Fits raised £876,700 on a website that, in David’s words, “didn’t give you much control”. Being unable to tailor an experience is especially unappealing to someone who has spent 10 years building a booming business around customisation.

A Suit That Fits sells more bespoke suits every year than all of Savile Row. It has global operations and in 2016 was ready for more investment. The company wanted to improve its website, invest in its factory, update its brand and train more of its fit experts.

It also wanted to make sure that it’s fundraising efforts were as efficient as possible this time round.

The company is well-suited to using a funding platform to raise investment because it has a natural constituency for the offer. “Our customers are suit-wearing people,” says David. “Half of them wear suits for work and are based in London. They fit the crowdfunding demographic.”

The last time A Suit That Fits raised money, it meant sending their customers to a website the company couldn’t control. Not only that, it first had to persuade its customers to become clients of the website, which used every investor visit and email address to present competing opportunities.

Companies that use such sites have no way of knowing how many investors they introduce as customers of the site and who are ultimately distracted into investing in someone else.

Envestry, the controllable funding platform from Envestors, works differently.

“We’re not dissimilar to A Suit That Fits,” says Envestors CEO Oliver Woolley. “In Envestry, we developed a platform to fit the client. We don’t expect the client to adapt to fit the platform. Envestry users have much more control over the process than they have elsewhere.”

Another area where the Envestry platform’s difference shines is in access to the data. Open platforms generally mean signing away valuable data (customer lists) and getting none in return. Envestry platform clients don’t give away their customer data, and they get access to information that isn’t available on other platforms.

“We could see in real time which one of our investors had logged on,” says David, “so we could track if an event or piece of marketing led to an investment.”

“We found the whole process of setting up our Envestry platform very slick,” says David. “From start to finish, you could tell Envestors had done the due diligence and checks a million times before. The whole thing only took a couple of weeks.”

David Hathiramani, CEO, A Suit That Fits

David Hathiramani, CEO, A Suit That Fits

David says he found the Envestry platform itself easy to use, but even he didn’t turn on all its features because they weren’t necessary for this round.

“You can tell they’ve built it to be easy enough to use if you’re not such a technical person but comprehensive enough to allow you to do almost whatever you can think of to do with it. And as an Envestry platform user, you get a personal service from the guys at Envestors.”

“After a long time running a successful private investor network, we know what features companies need when they’re raising funds, and we know what investors want to see,” says Oliver. “We’ve put all of that know-how into the Envestry platform. Also, of course, Envestors is behind it, able to give advice and handle all the legal and regulatory compliance. Envestors gives you all the tools in the Envestry platform that you could imagine, but you’re not on your own trying to use them.”

And the tools don’t vanish when the funding round closes, either.

“Companies who use Envestry have the tool there for further funding rounds,” says Oliver. “They can use it as an investor relations portal to keep their shareholders and investors informed of progress and developments. Then if they want to do further funding in the future, they’ve got everything in place to switch it on and make it happen.”

Where are they now?

We’re pleased to bring you exciting updates from Envestors companies:

Faction_Black - logoFaction Skis’ recent apparel range launch has enabled it to reach the technical, lifestyle market. It has helped Faction Skis to grow 68 per cent in the season just closed, making it the fastest growing ski company in the industry. Its opening of 100 new retail channel doors for 2016-17, from Japan and Dubai to Colorado, along with a licensing deal with Quiksilver for Roxy means Faction Skis is set to grow another 70 per cent in the season ahead.
www.factionskis.com

Atlantic HealthcareAtlantic Healthcare is a transatlantic specialist pharma company focusing on gastrointestinal diseases. The first six months of 2016 have been extraordinarily busy for Atlantic. In February, it started a Phase 3 clinical trial (the last stage before regulatory approval) for its lead product, Alicaforsen, to treat pouchitis – a rare form of inflammatory bowel disease. The company also raised $24m through the founders of Salix Pharmaceuticals, Clinigen, and LDC (the private equity division of Lloyds Bank). These funds will take Alicaforsen through to “market-ready”. Most recently, Atlantic established its US office and appointed both sales and marketing, and business development teams.
www.atlantichc.com

Calon CardioCalon is developing the next generation of affordable, implantable micro-blood pumps to treat chronic heart failure. It has completed the pre-clinical testing to demonstrate the effectiveness of its new, passive magnetically levitated bearing in the MiniVAD system, and has achieved extraordinarily ‘clean’ animal data to support the lab data previously generated. Calon has also benefited from a series of positive interactions with major corporates active in cardiology/cardiac surgery. They have expressed interest in partnering with Calon and/or funding the development of one of its programmes, the MicroVAD, a smaller blood pump for use in earlier stage patients.
www.caloncardio.com

YocudaIt has been an exciting year for eReceipts, now known as Yocuda, the leading digital receipts provider. The business recently launched the world’s first, end-to-end, in-store customer identification and engagement solution. This was the driving force in the rebrand of eReceipts to Yocuda, an abbreviation of ‘Your Customer Data’, a name reflecting the company’s new, wider service offering. Its database has grown to over 20 million unique customers and the company is processing around one million receipts a day for clients including Argos, Debenhams, Halfords, Monsoon Accessorize and Booths.
www.yocuda.com

Free Family FinanceFfrees, the online current account provider has now opened over 65,000 accounts and has had current account throughput of over £150m. In July this year it will launch the UK’s first fully integrated, fully functioned digital current account.
www.ffrees.co.uk