Full transcript: Jeff Lynn on London Real
2:31 Real, the video podcast dedicated to the people of the London technology startup scene. I am Brian Rose. I also host London Real, which is a similar trialogue format. We have guests like the 4-Hour guy, Tim Ferriss. We had a minister of Parliament George Galloway.
2:48 We even had Max Keiser from Russia Today on here, and he was yelling and yelling about Ben Bern and Bitcoin and all that stuff. He was actually yelling into your microphone, Jeff, so it’s nicer to have some calmer people here. I’ll try to be a bit quiet. Okay, I appreciate that. My co-host today is Michael Hobson, who is a designer, a coder and a project manager, and also one of the Three Beards, if that’s not obvious, and if you don’t know who the Three Beards are, then I pray for you, because they are a phenomenon here in London.
3:20 They host weekly events called the Silicon Drinkabout, quarterly events called Digital Sizzle. One’s coming up soon, and monthly events, Don’t Pitch Me Bro, which is a cool thing. We might be doing some pitching here today, but that’s different. Michael, thanks for being here. Yeah, is there anything coming up with the Beards that we need to know about, or is it just you said you have a crazy August coming up, right?
3:41 Yeah, we’re in a crazy August right now. So we’ve got two Digital Sizzles in the space of one month. We’ve just done one, about to do another. So we’ve got the summer party coming up on the 24th of August, which I don’t know if it will be before or after this video goes out, but yeah, it’s going to be a busy month. Awesome.
3:58 Well, if you haven’t been to a Drinkabout, please come down. It’s a really good vibe, and you get to meet people who actually like what they do for a living, which is strange. You know, I’d say a lot of people don’t. So please drop by. Our guest today is Mr Jeff Lynn, who is the co-founder and CEO of Seedrs, which is an equity crowdfunding platform for discovering and investing in seed-stage startups.
4:22 It allows you to invest as little as £10 to raise up to £150,000 from friends, family and other independent investors. You guys are an all-or-nothing platform, where companies do not receive any funding unless they reach their investment target. I think I got most of this right. You got it. Get on a few other things.
4:44 You were the first equity crowdfunding site to receive approval from the FCA, formerly known as the FSA. Anyone in the City will know those guys. They’re one of the main regulatory bodies. So that’s very impressive, and you were one of East London’s 20 hottest startups by the Guardian. Another big one, and Wired called you startup of the week, I think last year in August, and on top of that, GQ named Jeff, Britain’s 55th most handsome man.
5:09 I don’t think it was handsome. I think it was influential in 2013, February. Jeff, welcome to Silicon Real. Thank you so much for having. Maybe they should have been both you.
5:21 Oh, well, very, very kind. Flattery will get you everywhere. One comes with the other. You know, I saw in your past that you spent some time at Sullivan and Cromwell law firm in New York. I did.
5:29 Yes, you know have you seen the movie Wall Street? Mhm. All right, well, there’s a line in there when I think Gordon Gekko is working on a takeover of Teldar Paper, and he’s like, we’ve got to fight these guys, they’ve got Sullivan and Cromwell doing their legal, and I must have watched that movie like literally 400 times. So much respect to you. Well, cheers.
5:49 Yeah, that was my previous life. It was a fantastic way to start a career. I was defending or representing the equivalent of Teldar, and had a blast with it. It was a good way to start. I’m thrilled to be out of that and doing crowdfunding and working with some of the amazing startups we have here in London.
6:10 It’s quite a trek, you know, from changing careers, but that must have been an exciting time or exciting place to be, because that was quite on the front lines. It is. Yeah, the guys you go to for that. So, but we’re here to talk about Seedrs today, and I just wanted, just right off, because not everybody that’s listening to this is familiar with the intricacies of your business model, but for people that have heard or participated in something like a Kickstarter campaign, which is, you know, big in the states, and we’ve heard about crowdfunding, can you explain that subtle but very important difference of an equity-based crowdfunding platform and the pros and cons of such an arrangement?
6:47 Absolutely. So on a platform like Kickstarter, which is often called rewards-based crowdfunding or donation-based crowdfunding, the idea is that you donate money, you give money to a project, and you don’t get any investment in them. You’re not having any economic upside in their deal, but you’re getting something in return. Now, sometimes that’s a thing of no real value at all. So maybe somebody’s making an indie film, and what you’re just getting is a credit in the film, and it just kind of, you’re doing it for goodwill.
7:14 Other times there is a commercial transaction there, but what you’re doing is actually buying a product. So basically, and Pebble watch, which was one of the great Kickstarter campaigns, is a great example. They said we want to make this new kind of watch. If you give us $100, we’ll send you a watch, and basically what you’ve just done there is paid 100 bucks to buy a watch, and that’s fantastic. The difference with equity crowdfunding is you’re actually buying shares in the business, so you are getting the full economic exposure the same way an angel or a VC would, but you’re able to do so at a much smaller level, and what that means is if the business goes nowhere, your investment goes nowhere, but if the business becomes successful and they make money, you now own shares in a successful business, and you’ll make money off of that.
7:57 Both are awesome. Both are fantastic ways of utilizing the crowd, utilizing the web, and have unlocked new sources of capital for creative people. And I love Kickstarter, I love Indiegogo. The key difference is around what kind of business you’re trying to do, and what we often say is, look, if you’ve got something like that Pebble watch to give to people, if you got, and usually this is something that’s kind of cool, a little different, something maybe they couldn’t buy in a High Street shop, and is at the right price point, kind of 25-50 hundred pound, whatever.
8:30 A platform like Kickstarter, Indiegogo can work fantastically. The problem is most businesses don’t have that little sort of tangible consumer good to give away, and if you don’t have that, people aren’t going to fund you. You know, there’s sometimes a perception, crowdfunding that the world has turned on its head, and you can just post something interesting, people will throw money at you. It’s not how it works. People care about what they do with their hard-earned money, and if you’re asking them for £1,000 or whatever, and you’re not able to give them something concrete in return, then what you need to be able to do is give them the economics, and that is the idea of being able to give them a share in the business, or multiple shares in the business, and that’s what equity crowdfunding does.
9:07 In our very, very rough calculations, we would say that of the startup ecosystem out there, maybe 10% of businesses are kind of eligible for Kickstarter in the sense that, you know, it’s about 10% are making some sort of a product where you could use Kickstarter or Indiegogo or one of the rewards platforms to do, but about the other 90% really don’t have that kind of product, but they can be fantastic businesses. If you look at great businesses through the years, I mean, Skype could never have used a Kickstarter, what would they have given? Facebook couldn’t have used a Kickstarter or what would they have given?
9:38 And it’s that that 90% of businesses, many fantastic ones, for which equity crowdfunding works really, really well. Okay, a lot of people say a Kickstarter sometimes is a marketing event more than anything. It is, and, you know, equity crowdfunding is too. on Seedrs, people come to us. Entrepreneurs come to us, I think, for a host of reasons.
9:57 The capital is the core of it. I don’t know that we’ve had anybody yet. We funded 31 deals in the slightly over a year since we launched, and I don’t know that we’ve had anybody who really just didn’t need the capital at all and just came to us for marketing reasons. But with the capital at the core, you then get a whole bunch of other things that entrepreneurs want, one of which is the publicity, the marketing, the sort of high-level focus that it brings.
10:23 There’s the validation effect. Having lots and lots of people back your business is a great indicator to others, be it customers or further, later-stage investors, that you’re on to something. And then there’s also, and this is probably a difference with something like Kickstarter. There’s a support network. I mean, one of the things when you’re starting a business, having a 100 or 200 people with a vested interest in your success, all out there helping you, willing to make connections, introduce you to people, be your beta testers, do whatever you need as you go, or be your mavens.
10:54 That’s got a huge bit of value too, and a lot of our entrepreneurs actually see that, particularly in the long run is more useful even than the capital. I didn’t even think of that. You know, one thing we always ask people that sit in that chair is, why will you win in your space? So it’s a fantastic question. We’re going to win for two core reasons.
11:13 One is that we treat this business as a professional financial services business. We see it as real investing. There are a lot of people who have come at crowdfunding seeing it either, I think, the least sophisticated people have seen it kind of the way that I described before, which is just this new funky world where people just throw money at things and don’t understand incentive structures. There are some more sophisticated people out there, including some of our competitors, who get that, that’s not the case, but still fundamentally come at this with a tech and social mindset rather than a financial and investment mindset, and so they do a number of things that may work in the sense of getting a little bit of virality, and getting some popularity, but don’t actually result in what’s the most important long-run factor in success of a crowdfunding platform, which is investors making money.
12:02 This is only a sustainable business, and it only grows if, in the long run, even though many of the startups will fail, that’s certainly part of it, but if the successful ones can succeed well, and investors make money out of the deal. That is absolutely vital, and so that has been our primary focus, and we do a number of things to ensure that that happened. One, and I won’t go into sort of all the technical details now unless you want them, but just to put at its core, one thing that we do that none of our competitors in the UK do, is we provide something called a nominee structure.
12:35 So we hold the shares for the underlying investors as their nominee. We administer them. We issue votes or we issue consents. We cast votes. We take certain other actions.
12:44 It seems like one of those legalistic technical things, but actually it’s critical. It’s critical to let, for the companies, if they want to raise more capital. So a company that crowd funds or equity crowdfunds without a nominee structure will find it very difficult to raise venture capital down the road, whereas our companies can raise venture capital very easily. VCs love us. And then on the investor side, without a nominee structure, investors wind up very much unprotected, and it’s very easy to do things to them if you’re a slightly nefarious group of co-founders or later-stage investors, even do things to render their holdings worthless.
13:19 We step in and prevent that. So if the next Facebook, or the next Skype, or some other great business gets funded through us, and of the 31 that have gotten funded, I think we’ve got number in there that stand a great chance of making millions and millions for their investors. If they do that, our investors will be protected, and that’s the kind of thing that professionalism that really distinguishes us from our competitors, and I think is vital. The other thing that we do, and other thing about us that will make us win is we see this as a global space, and we intend to be a global platform.
13:51 I’m a huge believer, and I’ve said many times in the past that Britain is the best place in the world to build a high-growth global startup today, and there are a number of reasons for that, but it all comes down to a core bit, which is that we’ve got a great market here. Everything from the English language, a very, relatively well-to-do population, democracy, good infrastructure, etc, etc. We’ve got a good market, but it’s a meeting low taxes. Yeah, I me, relatively low, and fantastic tax incentives for investing in startups.
14:19 The Seed Enterprise Investment Scheme, the Enterprise Investment Scheme. It’s an amazing, amazing set of tax reliefs. But unlike the United States, it’s a medium-sized market, and it’s not quite big enough to just focus on building a domestic product, and so whereas US companies build for the US and often get very, very big before they even think outside their borders. Britain, first of all, has a long history of being a trading nation. I like to joke that, you know, it rains a lot here, and so for 500 years people have gotten on boats and gone elsewhere, where it’s sunnier and warmer, and you know that history, and some of it’s Imperial and some of it’s perhaps not as pleasant of a history, but a lot of it has been commercial and much more, much more exciting that history, that culture, and that general attitude, combined with just the constraints of an island nation of 60 million people, mean that this is a wonderful place to start a business, to get it up and running, to test the market, to get that product-market fit, and then roll out globally, and that’s what we plan to do ourselves.
15:17 So we’re looking to expand through Europe by the end of the year, so we’re open to investors and entrepreneurs throughout Europe, and expand further afield very shortly thereafter. But the US is tricky. The US is the one market here that’s very tricky, and the interesting thing about crowdfunding in the US. I’ve just gotten back. I was in Florida last week, speaking at the big crowdfunding US crowdfunding conference, and you know, as the rules are still evolving there right now, equity crowdfunding isn’t legal in the States.
15:45 It will be in a matter of months, probably, once the Securities and Exchange Commission promulgates rules. But the US system is an old-fashioned one. It was built in the 1930s, most like Britain’s financial regulatory system from the ’90s. It’s an old system. It’s a complicated system.
16:04 It’s because people got individual investors got burned after the Depression, so they set all these laws in 1934 to protect them. Exactly. Now they’re overprotected. Do you think? Well, you know what it’s like.
16:14 There’s a little bit of an overprotection. It’s just that they’re less fit for purpose. I mean, it’s the same. A lot of the principles underlying the laws in the US are the exact same as the ones that you have, say, in the UK, but the current regime, the Financial Services and Markets Act, which governs UK law, was passed in 2000, and even though it didn’t fully contemplate the internet, and there’s still a lot of kind of square pegs and round holes, but it’s a much more flexible piece of legislation.
16:41 And elsewhere in the world you see this too, regulatory regimes adopted kind of in the last 10 or 20 years that just better reflect the way that securities are offered and traded in modern times. There’s a lot about the US rules that isn’t necessarily wrong. It just, it’s a 1920s and 1930s view of securities markets, and although they’ve been amended and adapted somewhat, it gets very, very hard to put in place rules that work in the internet age when your baseline is thinking about things like subscription windows.
17:12 I mean, literally one of the things that would have existed at the time that the US laws came into place was if you wanted to buy shares of a stock, there would be a window you would go to and you’d fill out a form and you’d hand it over, and they’d issue you the shares, and that’s, I mean, that the implications of that versus distribution over the web are so profound. I mean, just as another example, there’s a whole set of rules that are changing now in the US on what’s called general solicitation and advertising, and the whole idea that you can only, you can only offer in certain circumstances, only offer securities, private company, to people with whom you have a pre-existing connection. Well, the last time the SEC even wrote guidance on that was the 1980s, and when it says, what is a pre-existing connection?
17:54 What does it mean for it? It’s like, well, your friends at the golf club might be acceptable, but like, you can’t send out a letter-writing campaign to everybody in your neighborhood. What the heck is a Facebook friend in that world? What the heck is a Twitter follower? And, you know, it’s that kind of antiquated nature of US law, that I think makes it a lot more difficult for what is a very 21st-century, method of capital raising to fit in.
18:19 So you won’t be going into the US next year, or it will happen eventually? I think it, it all depends. It depends on two things. It depends mostly on what the new US rules look like. So the US passed a law called the JOBS Act last year that in theory legalized a form of equity crowdfunding.
18:36 The SEC, Securities and Exchange Commission, needs to implement rules to bring that into force. They haven’t even published the rules yet. I have been spending a lot of time on the phone with the SEC as an advisor to them, trying to give them some guidance on how to do it. But I think they’re still struggling, and rightly so, because it’s this whole fitting rules into a 1930s regime. But I think new rules will come out, and once we see them, we’ll be able to make a better assessment.
19:05 There’s also an option for us to do sort of a partial play in the US. So you have a few platforms now like AngelList and CircleUp and a few others that are doing a form of equity crowdfunding, but without the crowd. So it’s an online investment platform but limited to high-net-worth accredited investors, and, we may wind up doing something like that in the US as well. Okay, fair enough. Well, this is Silicon Real, so now we’re going to get real.
19:28 Michael and I have a question about your business model, and so we’re just going to hit you with it. I had a question about your fees. You’re very upfront about your fees, but they’re not small. I think you charge 7.5% on the close of a deal, and I believe you charge 7.5% of the profits the investors make on an exit. Am I right?
19:46 And are those high or are those low in your opinion? So you’re absolutely right. Those are our two fees. I think they’re very reasonable, and I think that the important bit of context for, I’ll talk through both of them. The 7.5% that we charge for the companies once they’ve raised capital takes into account a tremendous amount of work.
20:08 For one thing, there are no legal fees involved, and depending on the size of deal you do, you know, the average deal on our platform is £50,000. So that’s £3,750 that a company’s paying. Often they would pay that just in legal fees to close an investment, much less to actually get the investors and do all the other work involved. I’m sure Sullivan and Cromwell charge more than that. Well, not only Sullivan and Cromwell charge more than that.
20:32 I mean, even a lot of sort of local lawyers charge, they’d charge several thousand pounds, often four or 5,000 just to sort of get out of bed in order to do a deal. So compared to the other options out there, even just for the, even just on a legal fee basis, we are often cheaper. But then add to that that we’re bringing you the capital in many cases. You have to do a lot of work to generate interest in your campaign as well. It’s not a passive experience, but you’re getting access to all of this capital, and we do a lot of other things that even lawyers tend not to do.
21:08 So we take care of your SEIS and EIS tax filings, and that makes a huge difference. It’s one of those things that for us to do, because we have a standardized process, isn’t a huge amount of work, but to do it on a one-off basis when you haven’t ever done something like that before would be hours and hours of the entrepreneur’s time, so we add a tremendous amount of value there. And I think the final bit to say there is that we are doing a lot of work on spec, essentially, up front, so deals that don’t fund we charge nothing.
21:36 We don’t believe in pay to pitch. We think that requiring people to pay money just for the chance to raise capital, and when they might not succeed is evil. So we do a lot to get people in the door and get them ready, even when they haven’t funded. And so, on balance, we think that 7.5% is fair. a very fair and reasonable price.
21:56 In terms of the 7.5% carry that we take, so that comes from investors, so that the company pays nothing more, but the investors, if they make a profit off of an investment through sale of shares or dividends, we take 7.5% of their upside. What I would say to that is, look, if you were invested in a fund, you’d be paying 2 and 20. You’d be paying a 2% annual management fee and 20% of the carry, so you’d be 2% out of pocket every year, even if the thing did terribly, and then if it does well, you’re out of pocket 20%.
22:23 So this is, people that don’t know, if you invest in a hedge fund, say you invest $100,000 in a hedge fund, they will charge a 2% management fee and 20% of the upside, as they say, the upside of any investment. Exactly. And mutual funds would be less, but you’re just saying it’s not uncommon. This, I mean, this is this this is, I mean, I think the comparison to hedge funds and venture capital funds, which are also generally 2 and 20, is reasonable, because this is a private asset.
22:45 I mean, mutual funds are different, because you’re dealing with a much lower cost of execution or much lower cost of management, but, you know, investing in private asset classes does have a certain cost to it, and for us, we think that, granted, unlike a hedge fund, we’re not making the investment decisions. We’re giving the investors the power and the responsibility to make their own investment decisions so to charge a full 2 and 20 to them, we think, probably wouldn’t be reasonable, but to charge what’s effectively a 0% management fee and 7.5% of the upside, we think, is a reasonable balance, and I think most importantly, on both fees, we have talked a lot with entrepreneurs and investors, and we did so before setting the fees and after the fact, and, you know, everybody would love to get a discount, but by and large, people’s views have been that they’ve been reasonable, and in particular, I think most important have been on the upfront fee on the 7.5% of funds raised.
23:39 While companies sometimes complain or ask about it before they fund, every single one that has gone through the process with us, and seen everything that we do, and seen how much value we had, have said, after the fact, oh, that’s a very reasonable fee structure. Okay, fair enough. I would say that that 7.5% that the company pays, in a way the investors are paying since they own the company. Yeah Well, absolutely. Look, money’s valuable.
24:01 And in a sense that’s right, although I think that the way we look at it is more than anything, it’s coming out of the founders’ equity. So if, for example, you’ve raised £100,000 for 10% of your company, really what you’ve done is raised £92,500 for 10% of your company, and instead of it being a million pound valuation for you, it’s a 925,000 valuation. And so we tell people, we say, look, figure out how much money you need, and then you just need to raise a little bit more than that to cover the fees.
24:32 Fair enough. Michael, you’re up. Cool. Yeah, I was just wondering, with a company like CrowdCube launching before you, albeit not being FSA approved at the time, do you think that with them coming before Seedrs did that sort of, did that hinder your progress, or do you think it in a way proves the concept? Well you know, it’s a great question, and, you know, I’ll speak very bluntly about CrowdCube.
24:57 I mean, I know their team very well. There’s a lot that they do that I like very much. But I do think they’ve taken a very, very different approach in terms of how investors are treated and how they view the law, and it’s one that we were never prepared to take. So, do they do equity funding? I don’t know.
25:13 They do. Yes, no, they do, do equity funding, but for the first two years they weren’t authorized by the FSA, FCA, they sort of attempted to come under a loophole that now everybody agrees doesn’t work, but they did it at the time, and, you know, there’s certainly at a person level a sense of frustration that they got an 18-month head start on us while we were patiently going through the approval process, and that was frustrating, that said. I think that, you know, first mover doesn’t always win, and I think that we have found that the takeup we’ve gotten in the year since we’ve launched has been much faster than the takeup that they got when they, launched, and I think it’s because of many of the things that I’ve pointed to before, is that we come at this, I think, with a much more professional and trustworthy perspective.
26:00 We see all the time investors who first hear of CrowdCube, try them out, aren’t happy, come to Seedrs and tell us what a better service we offer. And so, while, look, at one level it’s always nice to be the only player in the market. At the same time, I think that the, having them out there as a comparison and letting people see us side by side, has in some ways probably worked to our advantage. Interesting. It’s a good question, very good question.
26:25 You know, it’s funny, we had John Collison of Stripe in that seat a few weeks ago, and he emphasized to me that they are a technology company, not a finance company. Now he is trying to make payments easier on the web, but you are saying you are a financial services company? I absolutely right. I think it’s an interesting one. I mean, I think there are a number of businesses out there that are in what look to be financial industries, but really see themselves as technology or data company.
26:52 Wonga is another. You talk to Errol Damelin, he will always say he’s a big data company. He’s not. Yeah, absolutely. We see things differently, although we look to be scale, and although technology is an absolutely critical bit, a critical component to what we do, and we see ourselves as, I guess, culturally, an important part of the tech community.
27:12 It’s fintech. It is a financial technology, and first and foremost, we are a service business for our entrepreneurs and our investors. Okay, let’s talk taxes a little bit. I know Michael’s got a couple questions about this as well, that the Seed Enterprise Investment Scheme, which is something the UK has, gives a lot of favorable tax advantages to people investing in startups. Is that right?
27:36 You can explain this better to me. I think it’s like 50% off individual tax relief, 28% off capital gains. Can you explain that, and can you also address the fact that maybe these tax laws are inflating the equity-based crowdfunding, you know, valuation? Some people say some of these things are crazy. Well, it’s a very, it’s a very good question, and to those, in order, I think, yeah, the way the reliefs work.
28:00 The Seed Enterprise Investment Scheme, which was introduced just last year, is a specific regime for investing in very early-stage companies. So businesses can be raising only up to 150,000. They have to have less than, I think, 200,000 or 250,000 in net assets, less than 2 years old, and this is for very, very new businesses, and it was based on Treasury research and an understanding that there was a shortage of seed capital out there. The reliefs themselves, I think you got them pretty well.
28:35 I mean, the key parts are that whatever you invest, you get 50% back off of your income tax. So you invest £10,000, you get £5,000 off your income tax back, no matter what your marginal rate of tax is. You have to at least owe 5,000 in taxes, but even if you’re a lower-rate taxpayer, you get that 5,000 back. There’s also a way of set offsetting any capital gains you’ve received on other assets, which can go up to 28%, and then on top of that, if you sell your shares and you sell them at a profit, you pay no capital gains tax on your exit, and if you have a loss, you get loss relief, and that’s a little complicated.
29:11 It depends on what tax rate you’re at, but that can go up as high as 22.5%. So if you can stack everything up, 50% income tax relief, plus 28% on CGT, plus 22.5% loss relief, then on a losing investment you can get 100.5% of your money back through tax, which basically makes startups a protected asset, a downside-protected asset class, and for upside, you’re getting 78% back, plus no CGT on the upside. A lot of people won’t be able to. Sounds like a dream.
29:39 It is. Sounds like we’re in Dubai. Well, well, you know, the funny thing is, we have found, my investment director and I joke all the time that, you know, when we talk about this at events and we’re on stage, the reaction we get is kind of as if we’re snake oil salesmen. You know, and you get 50%, and you get 25%, and you get this, and you get that, and people kind of don’t believe it’s real. But it is real, and the logic is very simple.
30:00 The overall hit to treasury returns from this kind of a tax relief is pretty minor, but the potential impact on getting lots and lots and lots of new businesses off the ground. And the startup world is a pyramid. You know, the more you get off the ground, as long as there’s an ecosystem to support them, the more they’ll go up and up, and the greater chance you have of some major, major winners, and that’s what the government wants, and that’s why the government enacted this scheme.
30:22 In terms of what do they do for valuations? It’s a good question. I think that, I think, you know, there remains a very very profound shortage of seed capital out there. I think that we see the world very much, you know, this may be Silicon Real, and we may be talking about Silicon Roundabout, but, you know, startups and seed-stage businesses are a much wider group than just the kind of elite techy ones that sit around here. And to us, this is a country with hundreds of thousands of nascent entrepreneurs up and down the country, who have a great idea, who have the potential to build a great business, but they’re not even showing up on anybody’s radar.
31:02 They’re not leaving their jobs. They’re not able to even begin, because they can’t access that first 50 or 100,000s they need. And traditionally, to get a business off the ground, you really needed to have rich friends and family, or you needed to be sort of super connected within the kind of tech scene. And the vast majority of people were just never able to do that, and that shortage is a very profound one, and platforms like Seedrs are there to address that, and tax reliefs are there to address that too, to open up the flow of capital.
31:32 Do I think that some valuations are higher than they should be? Yes, absolutely. Is it because of the tax reliefs? That probably impacts it to some degree. I think that there is a bit of a dissociation, particularly in some entrepreneurs’ minds, between what they’re really worth and what they think they’re worth.
31:52 And people hear about these great valuations, people get, particularly out in California, and attempt to raise money at perhaps unrealistic levels. Interestingly, on Seedrs, you know, the crowds have been pretty strict on that, and they will not invest in deals where they see the valuations as unreasonable. Our average post-money valuation has been about £350,000, which is, you know, not by any means at the kind of inflated level that you would see for seed-stage businesses in the Valley.
32:19 But I do think it’s an issue, and I’ll tell one story, just my own learning experience, when we started Seedrs. We’ve had this kind of meta experience, where we built a startup that was for startups, and a lot of our thinking was developed as we went through the process of building our own startup, and I remember Carlos Silva, my co-founder, and I started working, and we found we had this idea. We were in business school. We found an angel who was interested in us, and we presented him this complex discounted cash flow model of everything that we were going to do, and discount rates, and what we were going to be worth, and we were worth exactly £682,000 or something like that, and that was the valuation we wanted.
32:58 And I don’t remember the exact number, but it was something like 600 to 700,000, and he sat very reflectively and said, let me give some thought, and he came back and he said, look guys, I like what you’re doing, and I think you’ve got a great future ahead. I think to this day you have created value worth £100,000, and so I’m willing to invest in you at £100,000. And both of us sort of, fell back in our chairs, oh my God, can’t think, but we walked away, and we thought about it, and we said, you know what, that’s actually perfectly fair.
33:24 Whatever we’d like to be worth today, what do we have? We’ve got a business plan, sort of, and we’ve got some initial ideas, and we’re not even finishing business school for six months. We want his money. That’s what he thinks we’re worth, and we wind up negotiating and getting it up a little bit from there. But viewing your valuation not in terms of what you’d like your company to be worth, or not in terms of how much of the company you’d like to keep, but in terms of what value have you actually created is very, very important, and I think there’s, regardless of tax reliefs, regardless of platforms like ours, there’s an important educational and conversational element to be had with entrepreneurs around how to really think about valuation.
34:03 Will you turn down evaluation? Will you say I won’t list this for that price, or will you strongly push back. If somebody, I mean, I think if there were a really crazy price, yes, we’ve had several people seek valuations in the sort of north of a million pounds, sometimes, you know, close to 2 million pounds, and we’ve pushed, we’ve tried to explain to them that it’s going to be tough, but if they want to do it, ultimately we’ll let them. And interestingly, two of them have funded.
34:34 In one case, it was a business where the entrepreneur was super well connected. I mean, everybody, any time I mention Seedrs to people in London, they’re like, oh, we know X, the entrepreneur behind this. And I, and he had already raised seminal money at that valuation, and he didn’t want to go down from it, and felt he could get it, and so he got it, and people supported it. And then there was another business that was newer, but was coming out of a top-tier accelerator program, and was clearly had a huge amount of potential, and they raised at a high valuation too.
35:05 And ultimately, our job is to get deals done and, you know, allow investors to invest in startups that they want to invest in, so we won’t stop them. But we do what we can, both offline with the entrepreneurs, as well as in our public statements, to try to get people thinking about where valuation should be. Fair enough. Michael, you’re in the industry. What, what am I missing here?
35:26 You’re surrounded by people in tech, people that are constantly looking to raise money. What would they think about, you know, Seedrs? Well, I’ve obviously met a lot of people that are on the platform, and from what I can gather, they’ve only told me good things. I mean, you know, it seems like a great way for them to get started. I mean, I’ve known people that were through accelerator programs that have gone on to Seedrs and raised further money, so it’s a good way to step up.
35:50 I’ve not come across anyone that’s had a bad word to say, so that’s a good sign, I guess. That’s very fair. You guys aren’t short on marketing. I was reading about this million-pound startup idea where I think you were trying to encourage a company to raise, what was it, a million pounds, and then move to London for a potential 100 million pound valuation. That’s interesting.
36:11 You talk about that briefly. Yeah, absolutely. So, the million pound startup isn’t really our brainchild. We are just partners in it, but the guys behind Digital Shoreditch, which is a wonderful festival every year here celebrating tech in the community, have put together this contest, and that’s exactly it. The idea is to raise, to get a million pounds, and, you know, get a company, a top-tier company, to move to London, invest the million pounds in them, not at a 100 million pound valuation but at somewhere like a 5 to 10 million pound valuation, with a view to building it into a 100 million pound company within 5 years’ time.
36:48 And we’ve had the opportunity to serve as the funding provider. So in previous sort of iterations, a contest like this would perhaps have gotten one wealthy person, or a firm, or a couple of big-time institutions to put up the money. The idea here was to crowdfund it, and let lots and lots of people participate in the success of this business. It’s ongoing now. Applications are coming in from startups from around the world.
37:13 We’ve raised about 38% of the money needed already, and we’ve got a few months to go, and hopefully, hopefully, we get a great batch of applications. We’ll know better by the end of the month, and assuming we do, I think we’ll wind up seeing the rest of the million funded, and it’s going to be a very exciting project, and they move to London, and they move to London. Government must love you. Oh yeah, that’s like a great advertisement. Come to London.
37:37 Well, that’s exact. I mean, that’s exactly it. I mean, I think I really do think that London is just the most amazing place to be building startups today, partially for kind of the reasons I described about the opportunity to use this market and then go global, but we just have an amazing ecosystem, an amazing trend line in the ecosystem. You know, Silicon Valley, for all its merit, is a very mature market, and you go out and you do a startup and all right, you’re another guy doing a startup.
38:02 The great thing in London is there’s just this critical massive energy that’s finally come together in the last few years. Then you have government, you have corporates, and you have just everybody around you know, wanting to see startups succeed here, and that’s pretty cool. That is a really cool thing. You know, I’ve got to move off Seedrs just briefly, and actually just a Silicon Real question, which is, you know, what if, what if you had to sign an NDA and you couldn’t work in fintech for the next two years, and I gave you a chunk of capital, say 20 million pounds, what business do you find exciting?
38:33 You could stay in London. What would you invest in? What would you do, or what do you find that’s exciting right now happening in tech in this city? That’s a really good question. Outside of fintech, and I do think fintech is one of the most, one of the most exciting, I think there is a tremendous amount going on in advertising and adtech.
38:52 I think that, one of the things that, about, I just, is a bit of context, and one of the things that I love about London as a tech city is, I don’t necessarily think we’re going to make the best semiconductors here, or do some of the types of technology that Silicon Valley has been strongest at, but where I think there’s so much value here is in the industries where Britain and London, in particular, have long really thrived. Advertising is one, fashion’s another, entertainment is a third, and a number of others along with it. I find advertising very interesting.
39:25 I’ve really gotten exposed to the ad world only in the last year or two. It wasn’t an environment I knew very much about, but as advertising agencies, and as people try to advertise products, try to adapt from what were essentially 50-year-old methods of identifying target consumers and reaching them, into these highly specified, technology-enabled plays and I mean everything, from, you know, super, super targeting through social media and other things, to one of the businesses that raised money through Seedrs was called Digital Spin. It’s now merged with another business called Future Ad Labs, and you know they’re looking to take captchas, you know, the annoying little squiggly letters on sites that everybody hates.
40:07 Jesus, I get them wrong. Like, you know, a lot. Time. Exactly. I mean, they’re Turing tests.
40:12 They’re just meant to distinguish humans from machines, but humans fail them all the time, and what these guys are doing is saying first of all, we can make this a lot better, and we’re going to do it as a puzzle, so that it’s much more intuitive for a human being, and a bot can’t do it, but while we’re at it, let’s incorporate advertising. Let’s take this little piece of real estate that has been a pain on websites and turn it into a bit of advertising, and they’re really, they’re leading the world in it. So I think that, you know, that’s one example of adtech.
40:40 There’s a lot more out there. I’ve been very privileged last year, and this year again I’ll be going to WPP’s annual Stream conference, which is a tremendous gathering of some of the leading minds in advertising and consumer-facing communications, and I think there is a huge amount going on there, whether I would actually be doing it myself. I don’t know. I’m a, I’m financial services. I get advertising.
41:06 I’m a novice, but I find it a really, really exciting space, and I’d love to learn more and be a bigger part of it. First time we heard that on this show is advertising, so no, I’m the same. I don’t think I understand that space, you know, as much as I I’m comfortable with finance. All right, getting personal a bit. If you can make a phone call to the 20-year-old Jeff Lynn and give him some advice, and it can’t be keep doing what you’re doing, Jeff.
41:28 It has to be something real, and it can’t be like buy Apple. What would that be? What would you tell him? That’s a really good question. I mean, I think I would, I think I’d probably say calm down a little bit.
41:45 I spent a lot of my 20s really worried about where my future was going, and everything was about the next stage, and you know, it’s a sort of typical type-A kind of thing. Went to university, went to law school, got a job at a law firm, and you know, and went on, and particularly once I got into practising law, I had this idea. I always knew I wanted to be an entrepreneur. I always knew I wanted to do something other than practice law for 40 years, but I didn’t know what, and I think it caused me a lot of angst over how that would happen and what would happen.
42:16 And, you know, I think if I knew what I know now, it’s taken a lot of hard work to leave law and build a business. You know, it’s by no means easy, and I wouldn’t pretend that it was. But I think that if I could have had a little bit more, not on Wii but just a little bit more confidence, and a little bit more perspective, on the fact that, you know, with thought and hard work and a little bit of patience, things can come together, and a little bit of luck, certainly, I think I certainly would have been happier, if not necessarily more successful, in my 20s.
42:50 So that’s probably the bit of advice I’d say: calm down, chill out, and have a bit of confidence. Okay, on that same note, what’s the best advice you’ve ever been given? I’ve been given a lot of great advice, and it’s hard, it’s hard to pick the best one. I think, though, that the one I, the one I’ll highlight here, is when I was first making a move from law, and I knew I wanted to do startups, but I didn’t know how, and I didn’t know what, and I didn’t know what context, somebody sat me down and said there is no talking about the startup world in particular, that there’s no market for general intelligence, and what he meant by that was I kind of had a view and many people do, lawyers and MBAs and others who want to get into the startup world, kind of think, you know, I’m a bright guy, a startup will just hire me and I’ll sort of advise them on strategy, and I’ll just think of cool stuff to do.
43:40 And what I came to, and because, particularly, you know, when you go to a law firm, that is what happens, you don’t know anything about law, but they just sort of figure you’re smart and hardworking and they’ll teach you, and realizing that in the real world, and this is true not just in tech startups but I think in everywhere, but very, very large corporates, you’ve got to create value from day one. You’ve got to figure out what you’re strong at, where you’re able to help, what, how do you earn your paycheck and make people want to keep you around, and understanding that you need to have, needing to have that perspective, was really, really very valuable. And I think part of what has worked so well for us with Seedrs, I always, I mean, I joke that the smartest thing my co-founder ever did was pick me, and I, I don’t mean that as obnoxiously as it sounds.
44:26 He had this idea, for what became Seedrs, and he’s a tech guy and understood financial services, but he, well, the thing that he got was that the legals were going to be the tough part, that that getting this, getting regulatory approval, and building something that worked from a legal and structural perspective, was the main pain point, and he’d never be able to afford to pay outside lawyers or others just to do the initial thinking, so he needed a co-founder who could do that and who could add that value, and so he went and looked for a lawyer who could do it, and we were in business school together, and we met and started talking, and the rest is, is kind of history. And I think the fact that I was able to come in and add value in that way from day one was absolutely critical.
45:04 And I think I probably would have thought, oh, I would, I would have been totally guilty of just applying to startups and saying, hey, take me, I’ll figure out something to do. But knowing that you have to add value from day one, and that just generally being smart doesn’t have value, was a really, really useful bit of guidance. Okay, last part of this question, and I’m going to ask you this same question next, To the 20-year-old who is listening to this right now, and they’re thinking, wow, I’m blown away by all these ideas, and I want to grow up one day and be like Jeff.
45:34 What do you tell them to do? What’s a bit of advice that you would tell them to do to get to where you are, or to get into the London tech startup scene? Well, first, I’d say, you know, have slightly higher goals than being like me. Come on, the 55 most handsome. No, you know, I will say something that is probably a little bit controversial, at least as, as you, as regards conventional wisdom in the space, which is that I’m actually not a huge fan, broadly, of doing a startup kind of straight out of university.
46:09 I think that a few years in a professional environment, be it as a lawyer, be it at an ad agency, be it in consulting, business, whatever, is, has a lot of value. Now, you can’t stay too long. I mean, if you stay too long, you get institutionalized, and you lose that creativity, but I think there is a sweet spot where you learn how professionals operate, you learn just some of the basics that you just don’t have when you’re 20 or 21 years old. And so what I would say is, if you have some burning idea that you just know is right, fine, go take a year and try to do it.
46:44 But if you just generally want to do a startup thing, fantastic, stay involved in the community, come to events, invest 10 quid here or there through Seedrs, you know, do all the various things you can do on the side, but spend a few years in a more traditional role, always keeping your eyes on the prize of ultimately getting out of that and going to do what you want to do. It’s interesting advice. You know, I mean, I left banking after like 10 years, and for the first year I was like, I hate it.
47:10 I don’t want anything to do with it. But now I get a lot of young guys that ask me, they said, should I go into finance? And a lot of times I say, yeah, you’re going to learn a lot, you’re going, it’s going to toughen you up, you’re going to learn how to be, you know, how to, you know, be responsible, how to come to work every day, how to do this, this, this. So now I actually say that it’s not such a bad deal, just don’t think it’s going to be the solution to all of your problems.
47:30 That’s right. And I also, you know, I, I think that, and as I, you know, getting back to my earlier point about, sort of, I wish I could tell my 20-year-old self to calm down a bit. I, I really liked the four years that I practiced law. I think I would have liked it more had I just been much more confident that I’d get out of it. What really stressed me was the times when I doubted myself and thought, oh God, maybe this will be my whole career, maybe I won’t have the chance to be an entrepreneur, and when I got overwhelmed by the idea and the existential questions of, is this what I want my life to be?
47:58 I think if you can go in with a really, really clear mindset that this is a few years, I’m going to save a little bit of money, I’m going to get the experience, and then I’m going to go, yeah, it’s going to be hard work, it will toughen you up, and that’s vital, obviously, but I think it can also be a much more rewarding experience if you look at it that way. Good advice. Now, Michael, you’re in a tremendous place, because you’re a designer, a coder, a project manager, you live and breathe this whole roundabout, and you’re probably hiring people on a regular basis.
48:25 How do you answer that question for the 20-year-old listening? What they should do, is it different than your voice? I think Jeff’s advice was great, and me personally, my path kind of followed that route as well. I was a web designer for my first few years out of university, and before that I had done a few bits and pieces, but you know, it was that first, like, gap of being in a proper company, and not jumping straight out, of, you try to do something yourself, but actually getting a bit of a work ethic before I did that, and obviously, with, without line of work, with Three Beards, we do all the events and everything, so I’m obviously going to say, you know, the best thing you can do is network and meet people, go along to events, put yourself out there.
49:07 I mean, my path followed, the process was going through a startup weekend. I went to a hackathon, and it was that hackathon that then spurred me to join a startup, which we created at that weekend. So that was, you know, a bit of serendipity, a bit of luck, but you know, without going to these kind of events I would probably, like you say, become institutionalized and not have the courage to give up the day job. And, you know, we get people all the time come along to Silicon Drinkabout, but on a Friday, people from the banks that are coming along, like, hate their job, you know, sucking the soul out of them.
49:39 They’re like, how do I get into a startup? And they’re coming along, and like, that’s the first step. Come along and talk to these people, see what it’s all about, get a feel for it, see if that’s actually what you want to do, because a lot of the time people hear about startup life and it’s all you know, fun and games and laughter, but it’s not really. It’s long hours, it’s stressful, it’s tough, so it’s got a rock star quality to it. It does.
50:00 Yeah, but it’s not an easy life by any means. So, you know, really give it some thought, and meet the people that are in that life before you decide to make that jump, as well, because it’s not for everyone. Definitely not. It’s good advice. You know, I see a lot of guys come to the Drinkabout, but I think I’ve been to six or seven now, and they, it’s their first time, you know, and some guys are like, I’m thinking about doing a startup, or some guys have come from Manchester last week.
50:20 There was a lawyer from the City, and he had been watching London Real, and he just kind of cruised up and was like, hey, Brian, and I’m like, why you here? And he’s like, I don’t really like my law job, and I just wanted to kind of get some ideas, listen to what’s happening. And that’s why the Drinkabout is a real, like, it’s not a lowkey, it’s just a friendly environment where you can just bounce ideas off. We try, and we try and just welcome everyone. You know, it’s hopefully a good kind of welcome mat for people that are trying to get into the scene.
50:45 Like, like you said, without there being any physical embodiment of that. I mean, you get places like Google Campus now, where you can rock in and meet people that are involved, but hopefully we provide a bit of a welcoming mat, as I say, and a way for people to get into the scene. You know, it’s funny, you use, Michael, you use the word serendipity, and it’s a great word, and one of the things I’ve long felt is that you in the startup world there’s no question, serendipity is absolutely key.
51:10 You need those moments, but the one thing you can do is put yourselves in a position where serendipity is most likely to, occur, and it’s things like the Drinkabout events, that you just, if you go enough, the odds that you’ll meet the right person. I mean, some nights you’ll have a few beers and nothing’s going to, you know, more comes of it, but at some point, and you do it enough, those serendipitous moments occur, and that’s just vital. I don’t know any startup that can’t trace their origins back to some serendipitous moment, to some night drinking somewhere.
51:40 Exactly. Probably your startup as well. Three Beards as a company, we started out over a few shots of Sambuca, at a bar somewhere. There you go, where all great ideas come from, a few shots of Sambuca. And I mean, Jeff, you’re a big fan of London for many ways and many reasons, and you probably agree with me.
51:56 In New York and San Francisco you would have a different vibe than you have in London, and people seem to go to the pub to kind of relax, and there’s not a lot of business cards being passed, and there sure as hell aren’t a lot of pitches going on, and it’s a kind of a cool, chilled vibe, where I don’t think that exists necessarily in America. I think that’s absolutely true. Certainly not in New York. I mean, I love New York, but there’s nothing chill about it.
52:19 And even in San Francisco, the other thing about London, of course, and I think this matters, particularly in talking about what industries are there, interesting things happening, and, you know, this is an unusual city, because you’ve got the centre of business, it’s the centre of politics, and it’s the centre of, of creativity and culture. You know, and other than maybe Paris, you don’t really have another city in the world that’s quite like that, and what that means is at that pub, you know, you’re going to meet a lot of different types of people. I mean, in New York you’re going to meet a b, you, I can, you go to an event, you’re going to meet a bunch of other bankers who want to get out, and it’s a bunch of bankers whinging at each other.
52:53 Here you can meet that person who’s working in fashion, who’s kind of interested in a startup. You can meet that person who’s working at Westminster, who’s heard all about the Tech City person’s working in the City, and I think that’s really, really cool. Yeah, no, I definitely feel that vibe. Jeff, how do people get a hold of you so you can make them rich? Well, they can, first off, visit the site seedrs.com, and what we like to say to everybody, investors and entrepreneurs, is signing up is free.
53:20 Take a look around. We’ve got a lot of information on the site. If anybody wants more information, they can email us, they can call us, our details are all on the site. Tweet me, I’m @Jeff Seedrs. You can also tweet our main account @ Seedrs, and I’m around and about and approachable and accessible, and love to talk to anybody, entrepreneur or investor, who’s interested in what we’re doing.
53:42 Awesome. You seem like a very accessible kind of guy. Sure. Now that’s very cool. Awesome.
53:45 Michael, what’s going on with the Beards? I know you’ve got the sizzle coming up. If people want to go do that, how do they get tickets? How do they find you guys? Tickets through the website, threebeards.com, but, like I say, man, every Friday, Silicon Drinkabout.
53:58 Also now in Manchester and Copenhagen, and a few more cities coming soon. So excellent. Awesome, thanks for being here today. That’s the toughest seat to be in, that seat. It is hard, it’s really hard, because, like, being there, you know, you’re going to be asked questions and answer questions, and, yeah, I talk a lot.
54:15 So thanks for being here. I appreciate it. If you want to, if you want to listen to this, if you happen to be watching it, we’re on iTunes, and vice versa, if you’re listening to this, and you want to see the 55th most handsome man, you can come to our channel. We’re currently on the London Real channel on YouTube. We’re going to be spinning that off to a Silicon Real channel.
54:32 Until then, we’re on Twitter at Silicon Real. Literally, this podcast is to reflect the community, so if you guys have ideas about who we should have on, if even you guys have pictures of Shoreditch or videos that you want us to use in the intro, I’m all for that. This is fun as hell. This is our episode number eight, I think, and I’m having a great time doing this. So thanks so much for being here, guys.
54:52 This is great. Thanks, thanks for having us. Okay, cool. Then until then, it’s about the people. Thanks so much.
54:58 No, shocking. PayPal, I think they’ve forgotten who their customer is. They’ve forgotten what got them going. You know, PayPal got going by helping people transfer small amounts of money from one to another, and now
