1
00:00:06,420 --> 00:00:12,360
So it's quite important to explain the dynamics between what A, B,

2
00:00:12,360 --> 00:00:18,270
C really is and how you as interpreter might see us, but actually how we need to see ourselves.

3
00:00:18,810 --> 00:00:23,610
Because much like a company, our shareholders, we have shareholders are called limited partners.

4
00:00:23,610 --> 00:00:28,290
They are these are individuals, high net worth individuals, pension funds,

5
00:00:28,980 --> 00:00:33,750
sovereign funds of different countries that decide in their portfolio allocation that they want to do private equity.

6
00:00:33,750 --> 00:00:40,890
And within private equity to do venture capital with a venture capital to do early stage funds and they allocate some money to that.

7
00:00:41,580 --> 00:00:46,110
Their expectation is that you're going to give them a return superior to other asset classes.

8
00:00:46,110 --> 00:00:51,960
They might have been less risky over a specific time period, and most venture capital funds have a ten year horizon.

9
00:00:53,310 --> 00:01:00,420
On the other side, you have the entrepreneurs who see us as a source of funding and a source of hopefully value add in helping them scale.

10
00:01:01,620 --> 00:01:02,590
And the reason I highlight this,

11
00:01:02,610 --> 00:01:10,889
because you have to think about the dichotomy of those of shareholders and clients we are or clients is the entrepreneur.

12
00:01:10,890 --> 00:01:14,820
And if we serve them properly and we support them properly, they will have hopefully an exit,

13
00:01:14,820 --> 00:01:17,580
which means we can serve our shareholders by giving the return they want.

14
00:01:18,450 --> 00:01:24,600
But sometimes the misalignment between the two LPs have a I have a finite fund, I have a ten year fund.

15
00:01:25,050 --> 00:01:26,910
If I invest in a company in year four,

16
00:01:26,910 --> 00:01:31,330
that means I need to figure out a way for that company to give me money back to give to my shareholders by year.

17
00:01:31,920 --> 00:01:33,390
Well, six years later, by your ten.

18
00:01:34,930 --> 00:01:39,520
Except if you have Facebook where you can go back to your investors and say, hey, you know, they're doing well, they haven't gone public yet.

19
00:01:39,530 --> 00:01:42,970
Can I have a couple more years? And hopefully most investors would have said yes.

20
00:01:44,320 --> 00:01:48,790
And Excel, which was one of the early backer of Facebook, did quite well and so that their LPs.

21
00:01:49,540 --> 00:01:57,819
Secondly when I look at my my portfolio allocation and how actually create the the portfolio structure of what I invest in.

22
00:01:57,820 --> 00:02:04,270
I need to balance crazy risk like Nicholas, your 15 year old kid with two employees with a more mature company,

23
00:02:04,600 --> 00:02:07,809
probably a SAS business with 50 employees,

24
00:02:07,810 --> 00:02:14,500
5 million, 10 million run rate need to balance that out between timing between when I'm investing and then path to exit.

25
00:02:15,610 --> 00:02:20,620
And so the way we've tried to balance that out is by having also geographic disperse city which allows us to

26
00:02:20,620 --> 00:02:26,440
de-risk by finding companies in New York or London or Berlin or Stockholm and trying to select the best ones.

27
00:02:27,250 --> 00:02:31,479
But very few people, I think when they talk and think about VCs, think about the fact that my my job,

28
00:02:31,480 --> 00:02:39,220
the guy who can actually fire me is a Canadian sovereign fund manager who's giving me a lot of money to go find entrepreneurs like you.

29
00:02:39,790 --> 00:02:45,130
And the fact that I need to serve them by actually delivering on the results and the results for me,

30
00:02:45,460 --> 00:02:52,090
what I'll be measured on the way I make money is by having a next set of significant size so that I can return enough to the fund.

31
00:02:52,090 --> 00:02:58,030
Right? So just quick, simple economics. On the way VC funds work, most of them are on to two and 20 model.

32
00:02:58,030 --> 00:03:07,570
Every year I get 2% of the commitment to pay for my rent, my salary, the vast number of flights that I take every year and the staff that we have.

33
00:03:08,680 --> 00:03:17,530
And then if I have an exit and I return the fund, everything above the fund itself, the profit gets split 80% to the LP, 20% to me.

34
00:03:18,460 --> 00:03:26,410
So I'm not in the money until I return the fund. So I assume make it simple that you have $100 million fund, you two have had exits of 100 million.

35
00:03:26,410 --> 00:03:28,900
Your piece of the business has to return 100 million.

36
00:03:29,230 --> 00:03:33,730
And until you get to 101 million, units are making any money or any significant money from from the exits.

37
00:03:34,750 --> 00:03:38,770
So we are strongly incentivised to actually focus on on the exits,

38
00:03:38,770 --> 00:03:45,460
which sometimes putting my entrepreneur hat back on is a misalignment with what the entrepreneur wants to do, which that should build out scale.

39
00:03:45,820 --> 00:03:49,930
Maybe the ramp up path is a bit different from this kind of ten year forced curve,

40
00:03:50,380 --> 00:03:54,430
which is where a number of new kind of funding models started coming into play.

41
00:03:54,670 --> 00:04:00,100
It's such a good answer. In the last couple of years with the emergence of Kickstarter and Angel List and Lending Club is actually.

42
00:04:01,230 --> 00:04:08,400
Democratised the access to funding for entrepreneurs. I know some people.

43
00:04:08,400 --> 00:04:12,250
I've seen this graph. It's founders, founders, funders and founders.

44
00:04:12,270 --> 00:04:18,930
The name of the website. It's a great illustration of the kind of the value chain of a start-up and how different people come into play.

45
00:04:19,080 --> 00:04:23,850
So you and your co-founder are sitting here and come up with a brilliant idea.

46
00:04:24,120 --> 00:04:26,670
You effectively own half of the company each.

47
00:04:27,300 --> 00:04:33,690
You go to mom and Dad and convince Mom and Dad to give you a couple thousand dollars to at least pay for the server costs on Amazon Web Services.

48
00:04:34,200 --> 00:04:37,320
You launch an app on the App Store. Hooray, you're alive. You have a company.

49
00:04:38,460 --> 00:04:44,040
And at some point you turn to angel investors to actually give you some more funding via the Oxford SBS Fund,

50
00:04:44,350 --> 00:04:52,000
be it the number of various angel groups that exist in London and here they part ways with some of their money.

51
00:04:52,020 --> 00:04:54,900
And at that point, you start diluting yourself, you start giving out more equity.

52
00:04:55,560 --> 00:05:00,480
At some point you reach scale and you start talking to institutional investors, people like me.

53
00:05:00,600 --> 00:05:05,580
People have that relationship with LPs who have a focus on the exit.

54
00:05:06,030 --> 00:05:06,840
A couple of years down the road.

55
00:05:08,500 --> 00:05:15,610
Typical rule of thumb, when you are looking at a VC round, you're talking about somewhere between 20 and 30% dilution in that round.

56
00:05:15,820 --> 00:05:23,469
What does that mean? If you actually raised let's keep it simple, $3 million at a $7 million pre money valuation,

57
00:05:23,470 --> 00:05:28,840
that means your company is now worth $10 million and you gave away 30% of your company for $3 million.

58
00:05:30,010 --> 00:05:38,860
So what happens as you sequence various funding cycles is if you're given away, you're giving away 20 or 30% in each round after series D,

59
00:05:39,010 --> 00:05:42,760
the amount of ownership that the entrepreneur has is getting reduced significantly.

60
00:05:42,760 --> 00:05:45,940
So should you actually hit an IPO by that point,

61
00:05:45,940 --> 00:05:52,090
you might be worth hopefully $500 million and you only have 10% of the company, but it's 10% of $500 million.

62
00:05:53,890 --> 00:05:59,410
And I highlight this because a lot of people get very, very, very focussed on dilution and how much of the company you own.

63
00:06:00,640 --> 00:06:06,130
And I think dilution is critically important because that means that's the value to you of the business and how much you own,

64
00:06:06,880 --> 00:06:10,630
but it don't equated with control. There's different ways in which you can maintain control of your company.

65
00:06:10,630 --> 00:06:16,270
Different class voting shares such as Facebook and Google have agreements on veto rights.

66
00:06:16,990 --> 00:06:24,370
Focus more on the value of that money in terms of scaling up the business and focus more on whether that money is going to take your

67
00:06:24,370 --> 00:06:31,450
valuation from 10 million to 100 million because it gives you the cash effect to put fuel on the rocket ship and take it and take off.

68
00:06:32,560 --> 00:06:39,910
So if you end up exiting an IPO and you only have only have 10% of $500 million company, hopefully that's still a good exit as an individual.

69
00:06:40,870 --> 00:06:43,989
But this graph actually I always share it with my friends are doing angel investing

70
00:06:43,990 --> 00:06:47,620
because it also shows to them the angels that unless they have enough cash,

71
00:06:47,860 --> 00:06:50,080
they're going to get diluted down the down the path too.

72
00:06:50,140 --> 00:06:55,630
So before creating wise so the fund we were a white sub was actually an angel vehicle for my partner and I.

73
00:06:56,050 --> 00:07:01,690
And our biggest issue is that at some point you run out of money or you should, that you're putting in this risky asset class.

74
00:07:02,680 --> 00:07:06,700
Secondly, that you can't follow on on each investment round.

75
00:07:07,030 --> 00:07:13,209
So effectively, if I invest in Uber as an angel and I put in $50,000 at the next round to keep my percentage ownership,

76
00:07:13,210 --> 00:07:19,690
I would have had to put in $500,000. And then for this crazy $22 billion valuation, I would have to put in several million dollars.

77
00:07:20,170 --> 00:07:25,300
So either as an angel you get diluted or worst case scenario, the company crashes and you lose everything.

78
00:07:26,140 --> 00:07:29,440
So angel angel investor investing is definitely risky.

79
00:07:29,800 --> 00:07:38,020
The sense of I mean, I would not I would call it gambling, right? I think some US business school professor analysed angel investing and said

80
00:07:38,020 --> 00:07:42,550
that unless you can have the capacity to do over 40 deals in your portfolio,

81
00:07:43,060 --> 00:07:46,480
it's unlikely you will return to X on your on your angel investing.

82
00:07:47,560 --> 00:07:52,530
So that's a lot of risk for only two X bunch of other asset classes.

83
00:07:52,540 --> 00:07:54,190
It can probably give you that in the same timeframe.

84
00:07:55,210 --> 00:07:59,620
I mentioned that for people in the room who might also be considering angel investing as as an interesting path.

85
00:08:00,070 --> 00:08:04,030
It's fun because you get to work with entrepreneurs, but it's definitely is definitely Vegas money.