Simon Cook - Venture Cap 101

Full transcript: Simon Cook on London Real

2:19 Okay, here we go. This is Silicon Real, the video podcast dedicated to the people of the London technology startup scene. We have crazy guests like Tim Ferriss from The 4-Hour Workweek, MP George Galloway and Max Keiser from Russia Today, who yelled a lot about Bitcoin. Definitely check that out. My co-host today is entrepreneur Colin Pyle, who comes to us, comes to London via Toronto, China and India, sometimes riding motorcycles across those entire countries, sometimes getting Guinness Book of World Records.

3:21 So thanks for being here. All right, yeah, it’s good to be back and back in the chair after a beard last week and another beard next week. So beard, we share whole venture with the Three Beards who run the Silicon Drinkabout. I’m sure you know them. And so we kind of have a beard every couple weeks here.

3:36 And if you don’t know the Drinkabout, it’s a weekly get-together right here in the Shoreditch area. It’s a really cool vibe. We try to go after we shoot Silicon Real and hang out with the people, and I always tell people it’s a strange breed of individuals there because it’s people who like their jobs, so it’s always shocking that people are that excited about that. So more fun to drink with people who enjoy their jobs. Yeah, yeah, it’s a crazy scene, so definitely check that out.

4:00 Our guest today is Mr. Simon Cook, who is the CEO of DFJ Esprit. They are the European arm of Draper Fisher Jurvetson of Silicon Valley, which I believe is the largest venture capital network in the world with 140 investment professionals and over 600 portfolio companies. You guys have invested in SpaceX, Tesla and Skype, among others. Sure. You have been involved with a number of Europe’s most successful technology startups, including LoveFilm, which was sold to Amazon, and Cambridge Silicon Radio, the Bluetooth company, which IPO’d for a big chunk of change, I believe.

4:36 And Simon also led the acquisition of 3i’s European VC business. Welcome to Silicon Real. Thank you so much for being here. Thanks for having me. Cool.

4:43 You know, I saw a quote that someone said about you and I want to ask you about it. It was from, yeah, I’m going to start right there. It was from William Reev, who’s the head of operations of Paddy Power. Paddy Power, sorry, that’s a company here in the UK. And he said that Simon is what many VCs want you to think they are but aren’t, and I always wonder if you could tell us what the hell he was talking about.

5:08 You got me there. Say that again. That’s he said Simon is what many VCs want you to think they are but aren’t. Okay, so I guess I can. Yeah, William and I had a lot of time together working together to build LoveFilm, worked very closely.

5:27 I guess what he might be referring to is when you have a venture capitalist investor, you expect them to come along and add some value to the business and roll up their sleeves and really participate as a member of building a great business. And I think, you know, I did a lot of work with William going through detailed cash flow models, understanding cash conversion, going through the balance sheet, looking at how we can optimize the business, where we could raise money from. So I think he’s referring to the fact that some venture capitalists invest and then they’re to find their next investment.

6:01 Some of us actually spend a lot of time with the companies we’ve invested in and actually become part of the founding team, and that’s where that’s our philosophy to venture. Okay, interesting. Just so people get a scale, I mean, as far as in the UK, just roughly how much money do you have under management, how many companies, employees, what countries are you in? So we, I founded DFJ Esprit in 2006, that’s seven years ago now. We’ve raised about $1.1 billion in those seven years, a combination of primary investments, so we’ve raised funds to make new investments in new companies, and we’ve also quietly consolidated the venture capital market in Europe, and we’ve bought about 15 venture capital firms, not just 3i but Prelude, Kov, Seamans, and the list goes on, and we continue to combine those activities today.

6:51 So we’re investing in 10 to 20 new companies a year, some new companies, some follow-on rounds, and we’re probably doing, acquiring somewhere between 20 and 30, 40, 50 companies a year on the secondary side. And to give you a kind of context, across the whole of Europe there are 200 companies a year that raise more than 3 million pounds. So the European venture industry is incredibly small. It’s there’s lots of small startup deals that get done, but deals where people raise more than 3 million pounds, $5 million, there’s only about 200 a year across the whole of Europe in all sectors, and we’re kind of hitting around the 20, 30, 40 company mark.

7:26 So that gives you a sense of our market share. Has there ever been that kind of a VC acquisition, I guess, phase that anyone has had? I mean, that’s a lot of that’s a lot of companies to acquire from the VC to. Yeah, no, it’s, Europe is a very young venture capital market. It really only started to get going as a sort of Silicon Valley style market in ’99.

7:49 One of the first ever big internet deals was in sort of April ’99 when QXL raised $10 million from Apax. So we’re really not that old. A lot of small companies got funded, a lot of corporates came in and tried it, people haven’t really understood how to make it work. We take a lot of learnings from our relationship with Draper Fisher and their experience in the Valley. They’ve been going in the Valley since ’85.

8:10 Tim Draper’s dad, Bill Draper, has a great book out. He invented the limited partnership structure that the entire industry runs on. So, and Tim’s grandfather was a venture capitalist, so we really take a lot of input from them about how to look in value venture capital can operate in Europe, and then we apply that here, and we’ve been doing it ourselves in our different careers. But there are, you know, what’s interesting in the market of 200 companies, there are actually about 250 investors, so there’s actually more VCs than our companies being funded because of the kind of messed up structure.

8:42 And it used to be a little bit like that a decade or two ago in the Valley, and it got tidied up. There’s now some big players in the Valley, and there’s always a new exciting fund that comes along, and we love working with the next, you know, business angel that becomes entrepreneur that becomes a VC and raises money. So there’s always new guys, which are exciting, with the small funds. And what we’re starting to see in Europe now is the emergence of a handful of bigger funds like you see in the Valley, and that’s what we’re trying to do through an unusual consolidation route, as opposed to just going out raising a billion dollars.

9:09 When you acquire these VC funds, do you acquire them primarily because of the people or because of their portfolio, or a combination? A combination. We generally take the team on board, so we give the people in that organization a career path back into primary investing, so they get to do new deals which they would otherwise wouldn’t do. But we’re not interested in buying unexciting portfolio companies, because we’re active in the market. We meet most of the 200 companies a year, the CEOs come and tell us about their plans and their excitement.

9:42 We kind of know the cool companies, and so, because we’re primary investors, we know which companies we’d love to be in. We don’t always get the chance to invest because those companies might not be raising capital, so when we hear that an existing investor has a stake for sale, we’re very keen to try and get into that company. So we only really buy high quality portfolios if we can. We’re not really looking to pay cheap prices for unexciting companies, and you know, the discipline of understanding where the company could go is the same whether you’re buying somebody’s shares or putting money in and actually then helping the company to grow and build and get a good exit, you know, is the same thing.

10:13 So the day job is exactly the same, it’s just how you get to know the company slightly different and how you raise the money is different. You know, the standard question we ask anyone who sits here, whether they be, you know, entrepreneur or anyone, is, if you had to explain, basically the three questions, which is what have you done, what are you going to do, and why will you win. They’re very general, but I think it also applies to even someone like a VC and not just a startup.

10:38 So what have we done, what have you done, what are you going to do, right, and why will you win. So we, what have we done at DFJ Esprit? We’ve been investing in technology in Europe since the late 90s when we were there at the start of this market. We’ve invested in, collectively the group has probably done 200 to 300 investments. We’ve learned a lot of lessons, we made some mistakes, and we’ve had some great successes like LoveFilm, you know, Cambridge Silicon Radio.

11:04 I still remember the day when James Collier came in and he sketched a circuit diagram on the wall and he said, “That is a Bluetooth radio, I can make it for five bucks,” and it didn’t exist, and we funded the company along with Amadeus. And we tried to raise money in ’99, 2000, but the entire Valley wasn’t interested because they said Wi-Fi would do everything, and people now look around and see Bluetooth everywhere, but for a couple of years nobody believed it would ever happen. So it’s exciting to be at the POS, you know, when you meet an entrepreneur who has an idea for a market that big, and it’s just in his head, and then to be involved in helping build that company and take it through, you know, that’s what we’ve done, and we love doing that.

11:41 Draper Fisher Jurvetson is all about changing the world, big ideas. It’s why we back Elon Musk with Tesla. I mean, who would have thought of doing a car startup? It was the first car startup in 50 years, and then he wanted to take on NASA. You know, what kind of crazy people invest in people who want to build rockets?

11:56 But that’s the kind of thing we do. You know, what we need is more of that ambition in Europe. It’s still a young market, people are building companies, selling them, but then, you know, probably not getting as far as they could as they do in America and build 10 billion dollar companies. But the second generation of entrepreneurs, serial entrepreneurs, are coming along, so where we want to take this is we want to keep doing what we’ve been doing but go bigger and bigger and bigger and really start to build world-changing companies and try not to sell out too early to the Americans, which is what’s been happening probably for the last decade.

12:24 And you know, that comes with confidence as the market matures, people get confident, capital flows, and we can start to take the Valley on at its own game in some of the areas that we’re really good at. And besides size, what makes you guys different, as far as, you know, why will you win? Is it a different mentality you bring to investing? I think the, yeah, you mentioned earlier we’re very hands-on. Although we have a large portfolio, we have one of the biggest teams, so I have at least 10 partners at any one time in my firm, which is a very big team for Europe.

12:54 Most of the other firms are quite small. None of us has more than five or six boards that we work with. Some of the other competitors are on 15 boards each, and if you’re going to 15 board meetings in a month and looking for new deals, there’s only so much time you can give. So we try and run a bigger team. You know, it means there’s, I have to share the economics with a lot more people, but that means that we’ve got to build bigger companies.

13:16 So more people, bigger team means we can do more work, but then we have to build bigger companies to be as successful, so it kind of self-perpetuates. We believe in globalization, you know, if you don’t know what’s going on in the world today, you know, it’s not about building a great UK company or a French company, it’s about building a world-class global leader, and then positioning that company for an IPO or for a trade sale. So I think we have one of the most extensive networks in the world.

13:41 Draper Fisher were one of the first companies to really go out and think about international investing, long before anybody else. We’re not that well structured, we’re a little bit crazy, we’re a little bit entrepreneurial. People kind of don’t really understand this that well, so you get the second generation who come and execute on global domination and big funds and do things a bit better but a little bit less boring. So I think what I really like about what we’re doing is constantly innovating and living and acting like entrepreneurs, which attracts the best entrepreneurs to us.

14:09 So you know, some firms study the market and try and think what the trends are. We don’t even attempt to do that. What we want to be is the number one partner for the best entrepreneurs in the world who will come and tell us what the crazy new ideas are. We’re not smart enough to think of them, but we want to be the best partner for the entrepreneurs that can think of the great ideas. And I’ll give you an example.

14:27 The CTO of LoveFilm, or one of the companies that was merged into LoveFilm, was Graham Bosher, and four or five years ago he said he’s had this really crazy idea, he wants to put healthy food in an envelope and post it the way we were posting DVDs to everybody, and we all kind of went, “That’s crazy, why would anybody subscribe to snacks and get them through the post? It just doesn’t make no sense.” But we invested in the seed round and we helped get them going, and we’ve been, you know, investors along the way, and that’s probably the most successful company I’ve ever been involved with.

14:59 Graze’s $100 million turnover, hugely profitable in the UK alone. We’re just about to launch in America, it’s going to be a massive, massive success. The initial trials have been incredibly positive, and we’re building out a huge infrastructure in the US as we speak. So to take, you know, a funny little idea about posting healthy snacks in the post, which seemed mad, you know, world-class entrepreneur proved to us it’s a great market. We’ve made it a market leader in the UK and it’s now going to take America by storm, and that will be a billion dollar company, I’m sure, in due course.

15:27 And we would I would never sit here and think what we need to be investing in is healthy food snacks, you know. It’s just not how we work. And you guys invest in any good idea, right? It doesn’t have to be web or tech, I mean, like you said, you know, Tesla was the, you know, first IPO since Ford, and you guys are going after these businesses that look like mature businesses, but you just look for the idea more than anything. We look for huge markets, we look for some disruptive innovation, and we look for ambition, you know, and some kind of unfair advantage, but you want to know that there’s going to be ultimately high margin business at the end of it.

16:01 I think the venture industry got a little bit carried away with things like Groupon and Zynga, which grew very quickly but didn’t really have a sustainable business model. So it’s, you know, it’s one thing to go to zero to a billion dollars revenue, you know, Google did it in five, six years, Facebook six, seven years, Cambridge Silicon Radio got to a billion dollars revenue with Bluetooth chips in seven years in the UK. So it can be done, but if you get to a billion dollars revenue and the margin is zero, the company’s not worth anything, and you know, you have to understand the business model.

16:28 And I think the venture industry is shifting back now to understanding where the margins come from and what is the sustainable advantage. So we’re not just looking for big ideas that can grow quickly, we actually want smart big ideas where you can actually build really valuable companies, and that’s borne out with Tesla. You know, we’ve been in Tesla for nearly a decade through the venture rounds, then IPO. We’ve held our stock to the IPO. Tesla’s share price just bounced market cap from about 1.5 billion to 12 billion in the last six months.

16:53 You know, we’re still involved, so you know, you’ve got to play the long-term game and have a, you know, focus on ultimately what we’re trying to build, and that’s what we think about. You putting those profits in Hyperloop? There’s, well, yeah, we, there’s a next generation of things coming through. What’s Hyperloop? That’s Elon Musk’s sort of next sort of interesting idea of transportation, sort of shaking up the sort of the way people get from city to city or from place to place.

17:19 You know, it’s a theme that we hit on often here on Silicon Real, and Bindy talked about it as well, is that the UK and London haven’t had those big exits, you know, and so it’s always like playing second fiddle to the US. It’s a much lower number of IPOs and stuff. Will that change, and how will that change? I think, you know, if you statistically analyze the market, we don’t do that badly in Europe. There’s about, it’s a more mature industry in Europe than the US, and if you look at companies that are worth more than $100 million, where this real money’s been made, the average is about 100 exits a year in the US.

17:57 It’s up to about 150 at the moment. It is a very buoyant, healthy economy for tech startups because of lots of reasons, but there’s lots of good things happening in the States right now. Europe got up to about 30 a year, so we were doing quite well up until 2008, 2009 or 2008, then the financial crisis slowed it down, as it did in America. But what’s happened in the last couple years, the Euro crisis has really dampened appetite for exits in Europe. So at the moment we still have a much lower exit opportunity because of the Euro crisis, but that will end.

18:27 You know, it’s not going to go on forever and there will be a rebound, and you know, we’re long-term investors, so we’re happy getting good prices, working with entrepreneurs, building great companies. The exit markets will rebound, things are cyclical. You can still take great global companies onto NASDAQ, as you know, as people are doing with some European companies. The best performing IPO on NASDAQ a couple years ago was QlikTech, which was an Accel-backed Swedish software company doing business intelligence software.

18:49 So, you know, there are still exit opportunities. It would be great to have a buoyant IPO market in Europe. It will come in time, you know. The guys who are running fund management businesses today, they love mining stocks, they don’t carry iPhones, but they’re all going to die in a few years’ time and they’re going to retire and go away, and the 30-year-olds in those organizations today who get tech are going to be running those firms in five years’ time and they’re going to buy tech stocks.

19:11 So you know, it’s going to take time, but it will come. There’s still good exit opportunities available for the best companies. Europe is subdued at the moment, but there were opportunities. Skype was built in London, that’s a 10 billion company. Yandex is a $10 billion company built in Russia.

19:27 Autonomy was built in Cambridge, a 10 billion company. So what we’re not very good at is celebrating success. Yeah, you know, it happens a lot more, and statistically the average exit in Europe is about $300 million. It’s about the same in the US over the last decade, so we build about the same kind of thing, we just don’t do it as much, and it’s certainly down for the last couple of years, but we don’t talk about it, you know. The British media, you know, love to be, you know, cynical and downbeat, and the other thing is tech wasn’t mainstream, you know, for the last decade.

19:55 Whenever I’ve gone over to the States, the US mainstream media covers tech. You can read about the latest gadgets, you know, the American market is tech-savvy. Five years ago the Sun was not covering iPhones and smartphones and gadgets, there wasn’t a page on what’s the latest app. Every newspaper in Europe now has gadget sections and technology sections, this stuff has gone mainstream in Europe in the last five years, so the financial markets will follow, I think, and it’s changing dramatically.

20:21 You know, there’s usually a section in it which is about, right now we kind of play devil’s advocate, and I was just thinking about what question to ask you, and if you looked at, you know, the CV and you guys as a company, you’re big and you’ve got so many companies, and I was just wondering if I was a startup, would I, I wonder if I go and talk to you, would I ever get any of Simon’s attention, or you know, would you be busy driving Tesla cars and flying on SpaceX? And you know, obviously you kind of answered that in the beginning with William Reeves’ comment, but is that a concern? You think you need to address, being that the size you are, that you’ll be there for those early stage startups?

20:57 Yeah, I think, you know, there’s a limit to how much you can scale a venture firm. You know, the firms have got to a billion dollars in the Valley and you’re seeing the full service model from Andreessen Horowitz, and, you know, the people are building service businesses to billion dollar funds, but I don’t think they can get bigger, it’s going to be hard for them to get much bigger. So there is a natural limit. You know, we all sit around the table, the 10 partners, and we discuss our portfolio every Monday, and you know, five or six companies each means 50, 60 companies.

21:26 I can’t scale it to 20, 30 partners and 10 companies each and make it 300 companies. So there’s a natural kind of right size. Our funds will be about the same size. If you look at people like Index, they raise the same size fund every three or four years, so there becomes a point when you’re a sizable organization and you can’t go any further. The great thing about the Draper network is that I only have to worry about Europe.

21:48 We can launch a fund in Israel or Moscow, as we have, or you know, maybe we’ll do one in the Middle East, we’ve got them all over Asia. Those guys are going to have to worry about startups there. I have a very simple job, which is to just get my arms around the 200, you know, companies that get funded over 3 million, and then there’s probably about 700 Series A smaller companies that we get to know, but I can actually, although it seems quite impossible, I can actually kind of get my arms around a market that big.

22:14 In Silicon Valley, where there’s 1,500 deals, you know, it’s much harder to get your arms around the market and know everything, and you really need to be, you know, quite a different kind of entity over there. So I’m very excited about Europe. I don’t want to get much bigger than we are, I think we’re right-sized, and, you know, as William knows, we, our model means you get a lot more of our time than some other people. Just as a corollary to that, how do they handle it in Silicon Valley since they are a bigger entity?

22:42 You know, brand is probably more important. Brand is important in Europe because entrepreneurs particularly want to work with firms with US connections, and they want to work with people that have got a good reputation they can trust. When you take equity investment in your company, it’s kind of like getting married with no divorce clause, and there’s just no way out. You know, once somebody’s got shares in your company, you’re in business together whether you like it or not, so you’ve got to trust who you’re in business with.

23:04 If they’ve got a 20, 30 percent mark of your company, in the Valley it’s so much more competitive that brands become more important, reputation becomes more important. So that’s why, you know, the Sequoias and Draper Fishers and others, you know, maintain so much presence and get the best deal flow, because it becomes a self-fulfilling cycle. So it’s really hard to break into the American market today. Europe is still small enough that we might get, you know, one or two new engines.

23:29 We actually need to grow the market, we need another probably five or six venture capital funds of our size in Europe at least, because we don’t do all the deals on our own, we syndicate, you know. We put 5 to 10 million in, we like to do that alongside another VC. You know, we don’t want 50 percent of the company, we want 20 percent of the company, so we need more bigger funds in Europe. There’s room for new people to come in. We can grow the overall market quite significantly, I think.

23:51 The Valley is right-sizing, it’s very hard to break into that now. Andreessen Horowitz, with their incredible track record of who they are, managed to do it, but I can’t see too many new entrants coming in to be that successful in the US in the near future. Over to you, Colin. Yeah, I guess you talked about sort of a lot of your failures, and I think that’s always important to touch on. So I guess you first off, you’ve had, you have such a track record, you’ve been around for a long, long time.

24:17 Is there anything you just won’t invest in anymore? And maybe you could tell us about you know, an investment that just went really, really badly. Well, there, you know, there’s one of the interesting things about venture capital is that people think it’s high risk. Actually, the biggest risk is that you pay a dollar a share and they’re still worth a dollar a share in five years, but the company can be fantastic. I’m actually a huge fan of small companies that don’t have shareholders, and most of the SMEs in Europe are little companies with happy customers, happy employees, paying their taxes.

24:52 There just isn’t enough profit to distribute to shareholders, and they’re not going to grow at spectacular rates, but half the working population in Europe work for SMEs which are like that, and I love beautiful small companies that don’t have to serve shareholders. And the biggest risk when people think venture capital is a failure, it’s not that we invest in companies that go bust. What happens is we invest in something we think is going to be huge and it turns out it’s a niche, and the company’s perfectly viable, it might have 20, 30 employees, 20, 30 customers, it’s paying its taxes, it’s a huge part of the economy, but our shares are worth what we paid for them, and so it’s not a good investment, and because it’s not worth, and then getting somebody to buy them, because the company’s probably not going to scale, is quite hard, so we end up selling them back to management for, you know, a loss.

25:35 So you know, the perception that we build companies that go bust, right, is not true. One in 10 we just get the market wrong, you know, and we end up with, you know, not great investments but beautiful, economically viable companies. It takes a pretty spectacularly bad management team to go bust. You either raise too much money and you spend it, you get the strategy wrong and you don’t pivot quick enough, and there’s a few of those, but I’d say it’s one in 10 which are so badly run, right, that they blow up, and everybody hates to see people lose their jobs.

26:04 And you know, I think one of the key things that we bring to a management team is that we’ve seen it so many times now. Some of the first-time entrepreneurs, they don’t really see it coming, and I can see, you know, problems coming six months ahead of anybody else around the board, probably, and we can say, “Guys, we need to adjust our spend or you know, really work extra on marketing and sales.” So you know, we can help steer the company to a soft landing.

26:25 But it’s a risk is a very different thing in venture capital. It’s, I love small companies, I think they’re incredible, they’re just crap investments. How small do you invest? So we do, we’ve done sort of a few hundred thousand dollars in a seed round, generally for people we know or, you know, or we take a small piece of something interesting because we want to follow it for the A round, right. Our typical investment, our average investment is about $10 million over the last decade.

26:52 So sometimes that’s a million, or maybe it’s a little bit in the seed and a million, million or two in the A round. Most of our money goes into B round. So the main risk in Europe, because there are so few follow-on investors, if you do an A round you’ve got to really think where the B round’s going to come from. In the Valley there are about 3 or 400 A rounds and there are about 3 or 400 B rounds a year, or C rounds, later rounds. So statistically you start a company in the Valley, you’re going to get funded.

27:19 In the UK there’s about 50 B rounds and there’s about 2 to 300 A rounds, so you’ve got a one in five chance in the UK of getting any more money. So we start tons of companies, but the number one risk is nobody else is going to invest, and that we focus on that. We save a lot of money, so when we invest we don’t put 10 million on day one generally. Sometimes we do in some late stage deals, but Graze is a good example. We put a lot more money into the latest round in Graze than we had in originally, to really back the winners.

27:46 Is there a certain rate of return that when you’re sitting around that partner meeting and you’re about to make an investment and you’re like, I think we’re going to make 30, 40 percent annualized, or is there a certain figure that you look for, or is it really just an arbitrary call, is, and I like this idea and I want to be involved? No, there, you know, it’s a hit-driven business, it’s like the movie industry, it’s like music industry, it’s like horse racing. You know, I’m sure there’s a generalized theory of backing winners inside all this, maybe I’ll go and do that in my retirement.

28:15 The winners pay for the losers, you know, the blockbusters pay for the arty film. So you can’t invest, if you don’t invest in the blockbusters you’re not going to get the money to pay for the other one. So everything has to be a blockbuster is what I’m trying to say. So everything we invest in has the potential to be huge. There’s no, because that’s how the returns come and the winners pay for the losers, and it’s about one in three which we make between 5 and 10x on a third of our investments, one in three we get our money back and one in three we lose money, and if you add all that up that’s about two to three times the overall fund.

28:47 So at the fund level we’re looking to do two or three times the money, and we’ve been doing that for a decade or two. At the individual company level they have to be able to do five or 10x on an individual basis, ’cause if they don’t, if you have a third of your companies doing 3x, all you’re doing is returning the fund and you ain’t going to be in business a very long. You get pitched all the time and you have people come in with ideas, and what’s the biggest mistake people make?

29:12 I mean, you mentioned earlier not raising enough money, but I mean even from a perspective of the own entrepreneurs, you know, ego is, there is there anything that you, it’s just a commonality, I think in Europe the lack the single, I was discussing this with a, we’ve got a partner over from the States at the moment from the, and, you know, he, his immediate reaction having been here a month is, where’s the ambition? It’s just it’s the constant missing thing is people come in and they’re, everybody’s going to build a 10, 20 million business in five years, but you know, that’s not what you should be aiming for. You know, that’s kind of adjusting it to say the what you think people want to hear to make the numbers work for the money you’re trying to raise, but you know, we need people who want to be much more ambitious in Europe.

29:54 So that’s something that, you know, it’s frustrating when you see this guy with this great idea and he wants to do this with it and you want to scream at him, how big could this be, you know, think bigger and go, go much more visionary in how you’re going to execute on this. So that it’s a very European phenomenon, about, and maybe it’s because of the stage of the market, people haven’t done it before, they’re nervous, they’re worried about how much money they can access, et cetera, and they don’t want to come in and, you know, make wild statements that don’t seem realistic, but you know, nobody in the Valley comes in and underplays what they’re trying to do. So we see that quite a bit.

30:26 You know, we don’t, we can add execution, we really like entrepreneurs that understand their market and have a product vision and they really know what problem they’re trying to solve. We can hire a great CFO, we can hire a sales team, we can hire a professional CEO that can build processes at the right time. What we can’t go out and hire is somebody with a real product customer vision of what they’re trying to do for that customer and who’s passionate about it.

30:48 So that’s what we really look for in our founding teams. So don’t worry about not having the CV of, you know, being a CEO of a company for 20 years, but do come in and tell us what it is that you’re trying to do and why you’re passionate about it and why your customers are going to care, and that’s what we look for. Those guys that pitch kind of too low or a too finite version, do you ever send them back and say, “Add two zeros to that plan and come back with a different idea”?

31:11 All the time, all the time. Yeah, and yeah, and you know, the other thing is when we have backed a serial entrepreneur and they’ve made us a lot of money and they come back with their next idea, it’s really, really frustrating when their next idea just doesn’t, you know, doesn’t feel good, and it is interesting, it’s just because you’ve had one good idea and built one great company doesn’t make you automatically know what the next one is, and quite often when we have a serial entrepreneur we’ll say no to his idea two or three times until we both jointly come across something that really seems to make sense. So, you know, not every idea is obvious, but a lot of them just don’t make sense.

31:49 There’s a quote of you where you said the most important thing is the customers and then the second most important thing was the employees. I was just wondering what you meant by that. Yes, I think at the end of the day you need to be solving a real problem, and your customers need to pay you, and so the, or want to interact with you, want to use your product, want to download your app, want to be on your site. So without customers you have no business, and then when you have customers you want to give them the best thing, the best service, the best product, the best experience you can, and that’s where passionate employees who really care and are good at their job come in, and with those two things, profits, exits, everything else follows.

32:30 You know, a business that has great customers and, you know, great bunch of employees will be noticed. We’ll help get it noticed, we’ll make sure that the right Valley companies or the right investment banker gets to meet the team, and we’ll then, you know, start to talk about how to realize the next stage of the business, but without those things you’re not going to create exit. You can’t build these things without customers and employees. That’s the heart of any great venture business.

32:56 It’s interesting, ’cause a lot of entrepreneurs would think it’s the product or something like that, but Simon’s seen so many come and go. I guess like the passion is the one thing he says a lot about, but we’ve heard that a lot too in the chair. I think John Collison from Stripe said you know, he learned just solve a need, right, that’s number one. It’s kind of if you’re not solving a need then you know, rethink what you’re doing. Yeah, one of the funds that invested in Stripe, it was like, make something people want.

33:21 That was with a fund. Yeah, that was it. That’s the hardest thing is that people don’t actually know what they want, and the magic is in that sort of, you, Steve Jobs is good at this, it’s that bit in between, make what people want, but have the vision to know what they want before they know it, and that’s the hardest, and those are the most exciting things. You know, it’s again going back to Graze, do people really want to subscribe to a bunch of, you know, nuts and seeds in a box?

33:49 Well, they clearly do. But you know, who the hell, if you asked them, if you went and did a market survey four years ago, would you buy this product, people would just look at you and say, we don’t know what it is, we don’t, you know, and again Graze is a successful company purely because of the quality of the product and the innovation and what the brand has come to represent, and how much they put into the business is totally different from when they started, and that’s because they listen constantly to the customer, reiterated. They started with a minimum viable product, they listened and they added a lot of feedback loops to get the product right, and that was vital to their success.

34:25 Once they got the product right, the viral loop kicked in and member-get-member took off, and we didn’t really do very much marketing ’cause the customers all told each other how great it was, and the secretary who got a box of food on her desk, the secretary next to her said, “Hey, what’s that? That’s cool, how do I get one?” And there were free voucher codes in every box and it just went completely viral. But all came from getting the product right, and the first product for the first year or so wasn’t right and we had to do a lot of iteration.

34:50 Do you like subscription businesses? They’ve kind of blown up over the last few years. Is it overcrowded space or I think it’s, I obviously, LoveFilm and Graze and others, lots of software as a service businesses, I think subscription businesses can be great. I think you have to constantly innovate, you can’t expect customers to keep paying unless you keep giving them something new. So it’s a great cash flow model.

35:17 You know, when people pay you in advance it’s incredibly, you know, good to have that money coming in, it means your equity requirements are reduced, but you then have a duty to invest that capital into new invention and product development, and if you don’t, and you just maximize it for profits or you maximize it in growth, you’ll, it’ll blow up eventually because people will suddenly stop subscribing and your churn will just kill you. And so I love subscription businesses, but you have to put enough money back into continued innovation, and it’s about, it’s a relationship, it’s not really subscription, it’s a relationship business. What are you providing for me, am I happy with it, are you innovating, and people expect so much constant innovation today.

35:54 You can’t stand still with anything like you used to. Yeah, I see that direct deposit from Spotify every month and Netflix and I’m just like, what are you doing for me? You know, I mean, it’s something people are aware of and then they will walk away, I guess, if you’re not. Yeah, if you don’t keep providing, and there’s always going to be some new competitor breathing down your neck, but you know, it’s hell of, as a founder you’ll end up with a lot less dilution if you get your customers to give you money monthly in advance to fund your business than if you come to me and ask me for it.

36:22 It’s very honest of you. It’s very honest. True. All right, crowdfunding, you’re the expert now. You got a question?

36:26 Yeah, I just wanted to hear your thoughts on crowdfunding, where do you think, sort, have you seen it impact, I guess you guys are much bigger, but have you seen it impact sort of the ecosystem of raising funds, and where do you think crowdfunding is in five years from now, for example? So I think crowdfunding is fascinating. We’re investors in Seedrs, we’re investors in Unbound, which is a crowdfunding, crowdfunding platform for novelists. We ourselves are actually crowdsourcing our capital funds.

36:58 So because of the changes to the Enterprise Investment Scheme in the UK, instead of getting our money, you putting your money into a pension fund and us getting money from the pension funds, last year we launched a direct channel to angels to invest in our funds directly through EIS. So we’re actually crowdsourcing investors, and we’ve, I don’t know how, we’ve got 50 to 100 investors who’ve personally invested directly with us in the last year. So we’re huge believers in cutting out the middlemen and reducing friction in the network if you can.

37:26 The flip side of that is I think it’s a very young industry, there’s lots of pitfalls. You know, if you send a check to a Kickstarter funded company and they take $2 million and they actually needed $5 million and they never provide you with what you’ve got, there’s no way to get your money back, and you know, I think there’s going to be a lot of people get burnt along the way, there’s a lot of regulation, there’s a lot of problems. I think the heart of people who raise the money is in the right place and the heart of people who donate the money or give the money is in the right place, and it actually is accelerating the innovation loop, because instead of an R&D department at Philips trying to figure out what people want, spending years developing it and putting out the market and finding it fail, you can actually get some level of interest, you know, through crowdsourcing and get some people showing that they’re interested in it.

38:18 But I think them actually providing cash, I think we’re going to have some, you know, some blowups where people, you know, have lost money and never got a product, and there’ll be some lawsuits, but it’ll mature and it’ll take time. So I think it’s fascinating, it’s all about using the internet to remove middlemen. We’re doing it ourselves, the product design companies are using it to innovate faster, so it’s a trend that will continue, you know. Individuals investing in startups rather than funds, there’s a reason why the City exists.

38:47 I would say this, I’m a fund manager, I believe that the fees we charge are justifiable for the work we do. We review thousands of businesses, we invest in a handful, we manage them. For you to do that as an individual, it’s fun and it’s exciting, but you know, most of what we invest in fails, most of what you invest in through a crowdsourcing platform will fail. I don’t think people are fully prepared for that yet, and there is a value, there is a reason why the City, you know, is the City, it exists to channel money and manage funds on behalf of companies and investors.

39:15 So there’s a way it can go, but I think there’s also some challenges ahead. And the fund management industry is not dead yet. No, the City exists because there is some intelligence there, as they do kind of know what they’re doing. And yeah, more so than the average individual is what you’re saying. Yeah, I think there’s, you know, the time it takes to assess a company, you know, if you’re going to invest in startups taking equity, crowdsourcing platforms, you need to take a portfolio approach.

39:42 I would never just invest in three or four companies, we invest in dozens because we don’t even know which one’s going to be successful, but we know you have to invest in dozens to take the time and evaluate the thousands. Which you, on a crowdsourcing platform, to pick the dozen or two dozen you want to do takes a lot of discipline, a lot of time, you might find rather go off and do something else and pay a fund manager, you know, 1 or 2 percent to do that. Generally, you know, people can pick public stocks all day long, you know, you could crowdsource public stocks all day and pick, but lots of people prefer to give it to a professional fund manager, pay the fees.

40:11 So there’s room for everybody, but I don’t, you know, I think there is value a professional stock picker provides, and particularly in high-tech startups there’s a lot of management, you know, these companies need follow-on rounds, they need to be right-sized, they need to, you know, raise capital or downsize, they need to be exited. It’s very difficult to do that with a, you know, few shares as an armchair investor, but there’s a role for it, definitely. Maybe more funds will be crowdsourced like we are, maybe you’ll see people actually coming and putting funds, which is actually illegal at the moment, because of the JOBS Act in America all of a sudden you’re going to be able to market funds which have never been able to be done before.

40:47 So maybe you’ll see people putting money into venture funds through crowdsourcing more than just individual companies, once they realize managing 20 or 30 invest individually is quite hard work. Do you think crowdfunding has in a way sort of the entrepreneur now, I think some of the valuations on crowdfunding platforms don’t quite add up, but yet they’re getting funded. Yeah. Is it creating the wrong expectation for some entrepreneurs, and then they come to see you, you’re like, your business isn’t worth a million dollars?

41:17 Yeah, no, I’ve had this. It’s angels, it’s, you know, there’s a big risk in getting the pricing wrong and getting, of course, when you’re an entrepreneur you want to retain as much as possible, and you want the highest price because it makes you feel good, but if you, if you take money from an angel or crowdsourcing platform or for us at the wrong price and you don’t get to the next milestone and haven’t created value and you need to raise more money, going back to my Gutenberg story, then there’s going to be pain and the investors are going to be sorry, you’re going to be sorry. So I would say this, wouldn’t I, but you know, pricing your company right, getting the right level of dilution is right, making sure you raise enough to get to where you want to go is right, and there is going to be a lot of pain felt out there.

41:55 We have seen some great companies that we would like to invest in but because the previous round is valued so high nobody wants to take the pain, the company can’t actually raise money, right. You know, in the Valley it’s much more mature now, you have convertibles, basically most people are doing convertibles, which takes that risk out, so they’ll put the money in at a discount to the next round, and we, you know, we think that’s great. It makes a lot of, if you like the company, don’t want to get into a pricing argument, put a convertible in, make a, you know, a 50 percent discount on it or whatever, and when the VCs or whoever funds it in a year’s time you’ve made a decent return.

42:25 Is that like a convertible bond where you put in the money and then you have an option to buy it at a certain valuation? You put the money in and instead of agreeing what the price is, you set the price at a discount to the next round, so the next time it raises money you get an automatic uplift, 50 percent or whatever. Yeah, yeah, 10, 20, 30, 40, 50 percent depending on how long it is, and you know, that’s most people in the Valley are now doing, you know, convertibles to take that whole price, you because nobody, what’s an idea worth, you know, what is an idea worth.

42:53 It’s, you know, it’s actually for me the reason why venture capital works is we take minority stakes, you know, our average investment is $10 million and our average equity is 20 to 25 percent. We don’t want 75 percent of the company, you know, we want the people who own the 75 percent to be so motivated that they’re going to make our 25 percent worth a lot of money, so that’s why venture capital works. But if we had 5 percent, you know, we’re kind of misaligned, because the founder is going to get 95 percent of the upside, and it doesn’t matter if it’s 100 million or 200 million, you know, it doesn’t make that much difference to us.

43:26 So we need enough of the company to get some value out of the upside so we’re aligned and to do the work. So you know, a decent 10, 20 percent stake, 30 percent stake makes sense. Anything more than that, you know, it becomes the other way around, where why should the entrepreneur work for us when we’re getting too much of the upside. So there’s a natural kind of equilibrium in the relationship if you’re both aligned to try and build the best company you can, and you know, try to maximize short-term pricing for a company that has to raise multiple rounds of money is, you know, is pretty dangerous.

43:56 Can you tell people the Gutenberg story really quick? I really liked it. Okay. Yeah, no. So yeah, we were talking earlier that there’s nothing new, so the first ever internet deal in Europe was done in the 1400s when Gutenberg invented the printing press, and he raised money from the Mainz business angel community, and a couple of angels funded him, effectively which is a 1x pref legal instrument, so they got their money back, then they would share the profits of the instrument.

44:22 He raised an amount of money but he didn’t finish the prototype, so he had to go back to them to get more money to finish the product. It was nearly finished but they had the upper hand at that point, so they did a cram down, wiped him out, they took the project over and they finished it off without him, so he lost all of his equity basically. You know, that’s a, you see that, you see that 500 years ago, you see that today. I’m sure there’s probably histories in Roman archives about it, it’s just human nature.

44:48 Investors want their money back and then they share the profits. Make sure you’ve got enough money to get to where you need to go to, and yeah, Gutenberg learned the hard way about a business angel, venture capital preference, cram down. What is a cram down for people that might not know? Cram down is where the company’s revalued at a low price and effectively the preference, if you raised money at a preference. So if you raise $2 million and it’s in a preference share and then you value it at four, so the company, the $2 million gets its $2 million back and then gets 50 percent of the profits.

45:22 If a year later you value the company at a million dollars, the preference is worth more than the value of the company, so the equity is worth zero and the people putting the money in take over the company, and that happens all the time if you don’t get the pricing and the partnership and who you’re working with and the amount of money you’re raising right. Been happening for 700 years. Huh. Yeah, that’s awesome. What are your fees and are those typical VC fees?

45:45 I think a lot of people just don’t know. So we don’t charge companies anything, there are no fees for working with the company, we’re aligned completely as equity holders in the company to make them as successful as I say, we have 20, 30 percent. We want the founder to make as much as possible and we want to make a return on that equity. Our investors pay us a management fee for managing the fund, and that in private equity runs between one and a half and two and a half percent, you know, our various funds running around that level as everybody else does, and then we get a carry of the profits.

46:18 And again, as we were talking earlier, the concept of carry comes from, again, from London in the Middle Ages when people would fund speculative voyages out to the Far East to explore the world and come back with a hold full of spices or, what, gold or whatever, and the captain’s share of the hold would be 20 percent of what he brought back, and the idea of carried interest is the profits that we get. So if we build a bunch of valuable businesses we’ll keep 20 percent of the profits and our investors will get 80 percent of the profits. And again there’s nothing new under the sun, that’s been around forever.

46:52 The concept of the limited partnership, which is a 10-year fixed vehicle, is a legal construct, and again that was invented by Tim Draper’s dad in the 60s, with the first ever proper venture capital fund under that model, and most venture capital funds work like that today. Things are changing though, you know, EIS funds, I think we’ve been working on and maybe coming, and I think there’s a whole bunch of different ways of investing in startup companies. There are public vehicles, there’s Imperial Innovations, which are publicly listed, you can invest in startups that way.

47:23 So I think there needs to be more innovation in venture capital, the idea that the limited partnership structure from 30, 40 years ago is relevant today is correct for some parts of the world, but I think there’s room for a ton of innovation, and we do a lot more innovation than most people in terms of fund structures. And just to be clear about your fund structure, so you raised some money and then that fund is closed and then it’s a 10-year horizon and you won’t pay investors back until you’ve had that horizon because your companies are very illiquid. Yeah, we typically, our holding periods are, you know, normally between three and seven years, and so we raise a 10-year fund, we invest for 5 years, so if we’re investing in the fifth year of that fund it might be 5, 6, 7 years before we exit.

48:03 So funds tend to be 10 years and maybe a year or two extension. Those are the institutional funds that we raise. We’ve innovated on the angel side, so we now have EIS angel co-investment funds, and angels don’t have 10-year horizons, they have an amount of money they want to invest this year, so we run an annual program. Excuse me. Yeah, yeah, cheers, thanks.

48:27 You guys are both effectively Canadian, so you can the, so with our angel funds we raise a certain amount each year and then we put that in every single deal, so every deal we do, if we raise X amount of angel money that might give us 20, 30 percent of each deal, so every deal we do during that year we’ll put our angels in a fixed percentage of every deal and they get the, you know, the same exposure that our institutions get with the additional benefit of V relief in this country, and the tax benefits in the UK for doing angel investing and hopefully, you know, venture fund investing with us are phenomenal. You go to the Valley and you say, well, if you invest the government gives you 30 percent of your money back, and then if it works out it’s tax-free, and if it fails you get another 30 percent back because you get loss relief, and people can’t believe it.

49:15 It’s the most incredible business angel and hopefully venture capital regime in the world for stimulating investment in startups. Yeah, Jeff Lynn from Seedrs was talking about it last week and I was just like, wow. Said it sounded like Dubai or something. Will that tax treatment stay, is that here to stay, you think? I believe so.

49:31 Yeah, I think the, you know, the Conservative government have done a lot to grow it. What’s really interesting though is that the French government have adopted the same policy and so they have a very buoyant venture capital scene. So if you’re, they introduced the wealth tax and nobody likes paying the wealth tax, so they then said if you put money in venture capital funds, and they do have funds, unlike the UK where it’s not really funds yet, they have funds in France, and every high net worth individual in France is allowed to put €90,000 in the venture capital fund and then gets 45,000 relief, they have 50 percent relief, and this is the first year in a decade the French venture capital industry is bigger than the UK venture industry.

50:11 Wow. So it really does work, and what’s really interesting though of course what people don’t, what people forget is where does that money go? We put money into a company, the first thing they do is go and hire a bunch of people, those people get their salary and they pay a third back to the government, so the government giving you 30 percent relief is just coming straight back to them within a year, so it’s actually a, you know, it makes all the sense in the world.

50:31 And you can, the other thing those companies do is they’re reinvesting profits into further job growth. The later stage companies are hiring 50 to 100 people, so it’s not the little companies who hire five or 10 people but the bigger companies that are hiring 50 to 100 people, plowing all of their profits back into the economy, means that even at 50 percent relief the government is making a profit on these activities, so it makes all the sense in the world for governments to do this. And actually in America, people forget outside the Valley, Boston and New York, most of the venture funds there are things called SBIC where the government puts up a lot of the debt at low interest rates, so almost every part of the world apart from the Valley, Boston and New York has government supplying capital for venture capital, and it makes sense because it is for job creation and tax generation and it comes straight back and it’s the best way to grow the economy out there, which is why you see so many different, in, you know, the Irish government have done a lot, we do a lot with them, we have an office in Dublin, we’re actively investing in Irish startups, we have the V government working with us, the European Commission, most of the governments get this, and it’s here to stay because the numbers make sense.

51:35 On a more personal note, if you had to sign a non-compete and you couldn’t do any more investing, but you still wanted to work in the industry somehow, what would you go do? You know, would you ever operate one of these businesses? Yeah, I’m an entrepreneur at heart. I started my first company at college, I used to write computer games, I’m a techie coder, I had a computer games company in the late 80s, showing my age, as did William Reeve, by the way, he was also a bedroom coder, and that’s when you could write code in your bedroom and sell games through the post.

52:05 So I’ve always been an entrepreneur, you know, it’s been incredibly exciting to found DFJ Esprit. We found it as Esprit, I went to the Valley, I pitched DFJ, they bought a stake in my company, so I’ve been to the Valley, I’ve raised money, I got their brand as well as part of the deal, which is cool, and get to hang out with Steve and Tim and John and all the rest of them, so that’s cool. But you know, I’ve done all that stuff, I’ve raised money and I’m building my business now, so I love being an entrepreneur.

52:31 I won’t stop being an entrepreneur, you know, I won’t, I don’t have to keep doing entrepreneurship inside the venture capital industry, but I think there’s so much opportunity in Europe, I’m not going to give up now. You know, when I joined 3i in the late ’90s I was a 30 grand a year analyst, I turned up 10 years later with a check for 300 million to buy them and negotiated with my boss across the table, so that’s kind of. I saw that on your seat, it was sneaky, like a B 3i and it was like, he worked for 3i.

53:00 So was that always in the back of your mind? Absolutely, you know, I think opportunity, you make your own opportunities, and you know what’s amazing is entrepreneurship is growing so much now and, you know, when I was running my computer games company at college I had no idea how equity worked, I just ran it for cash. You know, I wrote a game, sent out an invoice, got a check and I just ran it for cash. I had no idea I could have sold my company for 10 times revenues, you know, that whole equity game was I didn’t learn till I was, you know, 28.

53:25 Now people are, you know, watching Dragons’ Den and they’re learning about it, you know, entrepreneurial activities grassroots level is everywhere, people don’t want to work for banks. I went to become a management consultant, I shut my company down and became a management consultant, how stupid was that? But that’s what you did in the late late 80s, early 90s, you became a banker or a consultant or an accountant because that’s what you’re supposed to do as a graduate.

53:45 Today the number one, if you go to Stanford 50 percent of everybody there wants to start a company, they’re at Stanford to start a company. It’s starting to happen now in Europe, people are going to university to learn to come out to start a company, and that’s pretty cool, so that means venture capital and entrepreneurship and all of that stuff is going to be a massive growth industry in Europe for a long, long time yet. That’s exciting. As an entrepreneur, you know, I think one of the biggest things is learning how to say no.

54:10 Have you ever come across a company that you invested in, you were just like, I just really want to spend 100 percent of my time on this, there’s such a great opportunity here? Yeah, I used to be, certainly when I was new in the industry, you, you got to that, you just got so excited, and I certainly won’t name a company, but I know I was working on a deal with a partner in another venture firm and he actually wrote a letter to the founder saying, “Can I come and join you? I want to give my job up,” and you do get that passionate about when you see these things and they just look so amazing.

54:40 I’m a little bit older and wiser now and I’ve seen so many things that, you know, I maintain that passionate excitement but I know, I guess I know the odds a bit more, so, you know, I have the luxury of I’ve got my own kind of startup to grow, but I also then get the advantage of investing in a bunch of other people’s successes and working with them, and that’s I’ve got the best of both worlds. But yeah, you need that passion if you, you’ve got, it’s marriage without divorce, so you’ve got to go to the board meetings, you know, excited and interested, and you know, and you’ve got to be able to deal with the fact that two out of three of them aren’t going to do what they’re supposed to do. So you know, we spend more of our time dealing with problems and disappointment and negativity, so if you’re not an eternal optimist, you can’t do this job, because there just is an awful lot of bad news and things don’t work out, but you have to keep looking for the good stuff to keep going.

55:31 That’s good. One of our standard questions is, I ask, Simon, if you could make a phone call to the 20-year-old you and you could give him a bit of advice, besides, you know, you’re going to buy 3i one day, what would it be? I think you know, again, I go back, understand the equity game. I mean, it’s the single, you know, don’t buy lottery tickets, don’t, you know, maybe do a little bit of professional career stuff just to get some basic skills, but understand the entrepreneurial game.

55:58 You know, the wealth that you can create and the fun you can have doing it is incredible, and I didn’t learn that when I was 20, it took me till I was 28 and it didn’t, I didn’t really understand it. But just think about for a minute, as an owner of a company, you know, you work, you build something really cool, you go out there and you sell it to a customer and they’re really excited about it, you can actually sell that sale for 10 times revenues. Just think about that for wealth creation, right?

56:26 You’ve built a product, you’ve sold it for a couple of dollars to somebody, you think, okay, I’ve got a profit margin on that, that business isn’t worth the profit, that business is worth 10 times the effort you’ve gone into the sale, so you’re worth, you sold something to somebody for $2 million, your company’s worth $20 million. That’s how it works, it’s insane, but it is the single most incredible way to create wealth and it’s not that complicated, you know. Not everybody is successful, there’s a huge amount of risk, but the one in three odds I’m talking about are hell of a lot better than the one in 14 million that the lottery offers you.

56:56 So learn the equity game, hang out with entrepreneurs, start young, fail. It gets incredibly hard when you take a job to then get married, have a mortgage, and they give you your 5, 10 grand a year pay rise every year or whatever it is, or two, three grand in this market, and you’re on the rat race and you’re stuck and you can’t get out, and then you got kids and, you know, and there’s two times when you can start companies: is when you haven’t got any responsibilities and you know you can go for it and take risk, or when you’re, you know, 45 and you’ve made enough money and, you know, business has been bought and you’ve been made redundant and you got nothing else to do. And it’s crazy, think about how much human capital potential is locked up between the ages of 25 and 45 that could be out starting companies, and we can all do it, you know.

57:38 It’s, if you remember Woolworths was the High Street retail chain that went bankrupt, I don’t know if you remember, they were everywhere, and when it all fell apart individual managers started buying their stores, and there was a lady who was in her 30s and she bought four or five stores down in the south of England and has made a huge success out of it, and she only did that because she got made redundant and the thing went bankrupt. She could have done that 10 years earlier, and people just wait until they have to, and I think this, you know, single most, entrepreneurship is amazing, learn how it works. Yeah, and put some skills together and get it.

58:09 I guess the other thing I’d say is it’s very hard to do on your own. You know, I have, so I have incredible founders, co-founders with me, I have an incredible team, the team’s developed over time, but this isn’t the Simon show, this is, you know, DFJ Esprit is a big team. I couldn’t have done it on my own. I think the most important thing for me was to find, you know, some people that I could share the journey with, because there’s so much to do and there’s so many ups and downs that it’s really hard to be a one-person entrepreneur.

58:36 So go and find some like-minded people pretty quickly and do some things with them, and you might, you might not work out, you might change your mind, but it’s a pretty tough thing to try and do single-handedly. Now on that same note, what’s the best advice you’ve ever received? That’s a good question. The best advice I’ve ever received was probably buy a house when I was young, sadly. And did you?

59:06 Yeah, yeah, yeah, no, yeah, property is always a good bet. I shouldn’t say that as a tech, te, equity game again a little bit. It is, yeah, yeah, yeah, yeah, it is. You know, the different, it is the equity game except it’s completely underpinned by the, you know, banking system and a government system, which means you’re lost, you’re not going to lose money. So I you know, again, you know, properties, you know, having a house was a good, good investment 20 years ago, 30 years ago.

59:32 You know, the final bit of the advice question we usually ask is, is the advice you would give to the 20-year-old listening who wants to grow up and be like you someday, but you know, Colin and I were talking about it and we were thinking, what’s the advice you would give to the 30-year-old who is about to start a small VC fund and potentially wants to be as big as you are one day? You know, what advice would you give them? I would say innovate and think broadly about capital sources.

59:57 The old LP model, going to talking to the same shrinking group of people, makes no sense. There’s a ton of money in the world, but think, if you want to raise a fund just think more broadly about where that capital is going to come from, and there’s so much room for innovation. Crowdsourcing is just one example of that, but there are EIS funds, there’s lots of corporate funds, partnerships, there’s gazillions of ways of finding capital. It’s the same if you’re an entrepreneur, you know, don’t just think, oh, I can’t, I can’t stop my company because I can’t get a VC.

1:00:29 Go and ask a customer for an advanced payment, customers are the best way to fund companies, you know, friends and family, maybe angels, but you know, there are many, many ways to fund companies, you know, do a licensing deal or, you know, there’s just lots and lots of ways to get cash into a business, and it’s the same with venture capital funds. If you’re 30 years old don’t beat your head up trying to do the old model that’s been around for 20, 30 years in the Valley, you know, it’s, that’s a tough model in Europe, it’s a tough model in the Valley, there’s very few new funds happened in the Valley this year, I think the number of new funds is all-time low, but there’s a ton of capital in the world, you know, there’s a lot of money in the world and it’s all going to go somewhere.

1:01:02 So go and figure out how to get it, and that’s half your job is raising money, right? Or well, 99 percent of my job probably, truthfully. You’re not a very good venture capitalist if you haven’t got a fund to invest. Do you like raising money or would you rather run companies? I did about 400 pitches in our last fund.

1:01:18 You know, it’s incredibly humbling, it reminds you of what the entrepreneur has to go through. So it’s a necessary evil, I actually do enjoy it, because those are my customers ultimately, my investors are my customers and the entrepreneur, both of them are different types of customers, but I have to service their needs, and listening to them and innovating is all part of it, and yeah, it’s humbling, it’s tough. You know, it’s kind of like being a teenager and when you go out into the dating scene you’re going to get an awful lot of rejection, but you keep at it and occasionally you’ll find somebody.

1:01:51 What did I miss, Colin? One more question, I know you guys invested a little bit in Baidu and I rode a motorcycle around China, so I got some sort of ideas about China. What are your, what’s your take on China, 5 years, 10 years, is it going to keep going up or flat or crash? Yeah, it goes, what to say about China is, it’s a difference between, as I said, investment, building great companies or great countries, great economies, and pricing investments are two different things.

1:02:22 So I think you know, China is an amazing place, we were one of the first people in, we bought 38 percent of Baidu, I think for $10 million. So Baidu, for if people don’t know, is like the Google. Google, yeah. And incredibly successful for us, and you know, we did a number of other things as well, the whole market got incredibly overheated and pricing, you know, got a little bit crazy, and there was a huge land grab, you know. I think China’s not going away as a long-term economy, it’s a big market player, they’ve got to develop their own internal market, and there’s innovation going on there, there’s a, we’re talking to a lot of Chinese investors who are looking to come to the UK to learn about innovation.

1:03:01 One thing I haven’t really touched on is kind of where innovation comes from, which I talk about, and why London is so important in that. You know, people say something like between 50, 60 percent of the world’s population living in cities, and within a decade or two it’ll be 70 percent. Countries are only a recent invention, countries didn’t exist thousand years ago really, they were kingdoms and fiefdoms, and you know, we invented countries a few hundred years ago, countries might not exist in the future.

1:03:30 Cities are where all of the power lies and where everybody’s moving to, and it’s kind of weird with the internet and distributed information why people are coming to cities more and more, but it’s happening, and it’s because human interaction and cross-pollination and all kinds of exciting things, and it’s actually where innovation happens. Innovation happens when two people from different backgrounds come across each other, start talking, and people go, “Wow, this can go with that.” In a physical sense?

1:03:54 You think in a physical sense? You can, and there are some great startups that have, I know some great, great startups whose founding teams have never met, you know, some of the bigger names on the internet are actually four or five guys who actually met on the internet, so some internet startups can work, but actual innovation comes across from people sitting around a beer, cross-pollinating ideas, and that happens in cities more and more, and if you do a list of the world’s cities by GDP, population, London comes out about fifth in the world. So it’s one of the most important places.

1:04:27 You kind of got Tokyo, New York, London, there is, I think Beijing’s up in there, and San Francisco is number 27 by the way. Right, so is that because as an urban area it’s quite small? Yeah, but in terms of GDP, population, but you have to just, where do ideas come from, where does cross-pollination come from, and it comes, that’s, there’s going to be more and more innovation and things happening in London. Zuckerberg was a psychology graduate who, you know, then came across some computer science guys and created Facebook, he wasn’t a computer scientist guy, and you know, London is amazing for that.

1:04:59 One of the biggest untold stories in London is the healthcare and medical side of innovation which goes on and isn’t really told, and we have this Tech City side everybody’s talking about, but you know, we’ve got the Francis Crick Center being built at the back of King’s Cross, which is a billion dollar, 1,500 scientists being put together to solve the world’s top health problems, so you’ve got Google there, you got Amazon, you’ve got Shoreditch, and you’ve got one of the biggest medical research centers on the planet being built, funded with a billion dollars, and all kinds of interactions and things are going to come out of that, and cross-pollination. Let me give you a small example. Cancer Research UK raise money in buckets in train stations to do cancer research, and then they fund clinical trials, and when you get a clinical trial you get all the data, and you pay PhD students to go through the data looking for patterns and things.

1:05:48 Cancer Research UK held a hackathon earlier this year in Shoreditch and they said, “Why don’t you guys come up with some ideas what we can do with this data?” And they came up with a mobile phone game which was then made available, people downloaded the game with real life clinical data from cancer trials, played the game looking for patterns, and they did the full research in one month at higher accuracy than paying PhD students for 18 months. Wow. So that’s, they crowdsource their research.

1:06:13 They crowdsource their research where some people from, yeah, and that’s why London is such an amazing place. You’ve got all of this innovation, we’ve got all these, you’ve got this population, we’ve got incredible hospitals, universities, we’ve got Shoreditch, we’ve got so much going on, we’ve got this multicultural, cultural, disciplinary, you know, swarm of ideas, not all of them work, but that is where true innovation comes from, and that’s what, going back to China, we have Chinese investors coming over here trying to learn where does true innovation come from, where do these great British inventions, you know, the internet and TV and everything we’ve invented, how does that happen? But a lot of it just comes from risk-taking, free-thinking and multi-disciplinary crossover.

1:06:48 And you know, the other thing you have to remember, in the Valley half the companies in the Valley are started by immigrants. They go there ’cause there’s some money there, but actually if the money was in London, you know, are the Europeans or the Chinese or the Indians, would they like to come and live in a city like London versus Palo Alto? Yeah, Palo Alto is great, but you know, you just think about that for a minute, if you know, if the money was here, the opportunities here, the cross-pollination of ideas is here, I think.

1:07:14 And you start, you drew a map of the world based on cities not countries. Get rid of countries, they don’t exist. You know, London is fifth in the world, and it’s pretty exciting about what could happen here in the next decade. And innovation effectively comes from population density at the right GDP, it comes from cross-pollination of ideas. Let me give you another example.

1:07:31 There’s, I can go on forever, but so the last Industrial Revolution was in the UK, in Birmingham, and there was Joshua Wedgwood used to hold something called the Lunar Society, and that was a dinner held on the full moon of each month, hence the Lunar Society, and at that dinner was Joshua Wedgwood, who was doing pottery, there was James Watt, who went on to invent the steam engine, there were the scientists who did all the laws around, my brain’s gone, around water and thermodynamics, and around that table the guy discussing thermodynamics made James Watt think, I could make an engine for that, and because Joshua Wedgwood there with lots of manual power he said, “I’ll buy one from you.” And around a dinner table in Birmingham 300 years ago, cross-pollination of ideas invented the Industrial Revolution, and that kind of, you know, we probably need a Lunar Society in London or something, but it’s going to happen here because it’s going to be the random different types of people, people with different ideas crossing over each other and saying, “I’ve got this problem,” and somebody going, “Wow, I’ve got a solution for that.”

1:08:33 And that comes from huge populations but also from lots and lots of different activities, and you know, we’ve got this, we’ve got the City, we’ve got the advertising industry, we’ve got a huge medical research facility, we’ve got Shoreditch, you know, the list goes on, why there’s so many opportunities in London for us to invent and create new companies and new ideas. Love it, great. Yeah, I’m a big fan of population density and just how many crazy things that can happen just from these people bumping into each other.

1:08:58 Absolutely. And immigration is so big here too, right, which is just amazing, you have people from China but from all over the world, things happen differently other places, and I love traveling, going around, and I come up with my best ideas and sort of just the way I think about things when I come back from traveling is completely different than before I left, and I think that’s such a good refreshing, and when people come here with different ideas it’s phenomenal. It is, you know, it is the greatest advantage of London, and one of the US’s biggest weaknesses is they’re in, you know, they’re changing a bit but it is still quite an insular thinking country, and you know, that’s probably their biggest weakness, but you know, they’re doing pretty well at the moment.

1:09:36 So how do people get in touch with you? Do you want people to get in touch with you, do you accept pitches, do they contact, you know, DFJ, what’s Yeah, [email protected]. We can’t have too much deal flow, you know, always looking for the best new ideas, you know, we love to meet early stage companies, we invest more serious series B, we do a bit of seed, but we’d love to hear companies and get to know them and watch what they’re doing. There’s, you know, there’s only, as I said, there’s only 2 to 300 companies actually get funded, A rounds in the UK, and only about 50, 60 get B rounds, so it’s not like the market’s so big, I can’t have too much deal flow, we love to meet everybody, we love to share ideas, give back criticisms, tell people what we think, and you know, I’ve got at least 10 partners, I should add up how many I’ve got, that we’re all willing to take time to meet people.

1:10:26 I think people always see the VC guys as kind of up on the top of the mountain, you know, there’s the analogy inside the bathroom with the bathroom door locked and everyone’s trying to get in. And but do you, I mean, do you have to market yourself into a certain extent and make sure everyone knows who you are to get those little, the, you know, the people? Entrepreneurs build companies and occasionally they raise money and they probably do it on whole, some people do it lots, but most people do it once or twice in a life, so if you do something once or twice in a life, you, it’s not something you know a lot about, so you then ask people about it, and there’s a reason why a lot of venture capital firms used to be called Apax, Atlas, and there’s a reason why 3i is 3i, because it was a phone book job, you know, when you need money what do you do, you open the phone book to the fundraising page and there was, you know, all the guys were beginning with, you know, at the top of the alphabet.

1:11:09 That’s because people don’t really understand it. The other, you know, there is also a statistical problem is that we, I think we get something like 2 or 3,000 pitches a year, we meet at least 500 face to face and we invest in 10 or 20, so you will meet probably at least 2,990 people that will tell you that I don’t know what I’m doing and I’m unapproachable and I haven’t got any money, because I only invest in 10 or 20, so you know, the odds are stacked against me. You know, it’s just, we do say no an awful lot, and again it’s because the very few companies actually have enough ambition and scale to take venture capital.

1:11:45 I love small companies, small companies, you know, are incredible, and one great way to screw up a good company is to bring a venture capitalist on board. So we, you know, if we meet a great company and we say, “Think what they’re doing is great,” we’ll tell them, and just, it’s just not going to scale to be a $500 million business. And it is a bit frustrating when people are really passionate but they don’t quite understand that their company isn’t going to be worth $500 million.

1:12:09 We try and explain why, but some people, you know, that disconnect between you, an engineer who thinks he’s got this incredible company worth a lot of money, and the realities of how hard it’s going to be to try and build that company up and make it worth something, is that’s the frustration. But we try and be open with people and tell them what we think, and maybe, and quite often people come back with, you know, they’ve changed it a bit or thought about things, but again, you know, most companies, small companies are a beautiful thing. Shoreditch is full of wonderful, exciting, creative, cool companies with happy customers, happy employees and economically viable, and and contributing to the London economy significantly.

1:12:46 They don’t need venture capital, it would, you know, it’ll make a mess with them because they’ll end up having to, you know, try and be something they might not be able to be. But there’s plenty that will, and we want to meet those guys, and the biggest, most ambitious guys are the ones we want to meet, and any stage, you know, whatever stage, we love to get to know people and have a relationship and see what happens. Thank you so much for coming. This is our longest ever Silicon Real, and I think it’s a must watch for anybody who’s in this business or anybody who wants to understand the simple fact of equity financing, which has been going on for probably thousands of years.

1:13:24 Yeah, I’m sure, I’m sure. And I think your next career will be a historian, I think. Yeah, that’s your calling, I think. Some, yeah, an academic, I think possibly. Yeah, Professor May.

1:13:33 Yeah. Do, did I miss anything? No, amazing, you know, yeah, from kind of in the industry, I’ve invested, I’ve started up companies and I still learned some stuff today. So if you are just new to the industry, man, this is a good one. Fantastic.

1:13:46 Well, you know, we’re going to keep going here. This is week 8, week nine’s week nine of Silicon Real. You know, it’s people in the community, kind of for you guys out in the community, if you want us to interview someone, give us their names. We want to get not only the winners, we want to get the losers, we want to get, you know, the guys that have failed once and the guys that are doing really well, so we want to get everyone’s story out there. We’re on Twitter at Silicon Real, you can listen to this on iTunes as well, or come watch us on YouTube channel, currently London Real, actually Silicon Real TV is our YouTube as well, and yeah, contact Simon if you’d like to pitch him.

1:14:20 And thank you. 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. Last part of this question and I’m going to ask you this same question next, to the 20-year-old that’s listening to this right now and they’re thinking