October 29, 2015
Venture capital is about capturing value from backing ambitious people and believing that with help and guidance, they will quickly amass knowledge and experience to match that raw ambition.
So, it is a people business – finding incredibly smart, connected people who have an exceptionally strong idea in their head about how they want to succeed in the property world.
For me the property world has never been about making money by simply pushing paper around. So it is with venture capital it is much more creative than that. You are making your money by investing into people who are going to create things –buildings, jobs and yes, money.
There are many in the property world who can understand how to source, buy and manage transactions and there are many with entrepreneurial flair. But the secret of a successful venture capital investor is to be able to find and recognise those with a combination of both these two talents. This is one of the property world’s dark arts. Many companies out there will back a promising looking property deal – even a brand new company’s deal – but the number of finance houses prepared to back a new start-up property company is few and far between.
To return to the all-important question of ‘How do we judge as to whether or not the right combination of property and entrepreneurial ability exists’ is difficult to put into words. We used to have a joke that whenever we were contemplating investing in a property company we would request that the prospective entrepreneurs should have psychiatric tests, if they passed we wouldn’t invest. Successful entrepreneurs are driven individuals but often are wired very differently from the average person.
The ideal prospect for corporate investment comprises two or more executives wanting to start up on their own account. Ideally the prospective entrepreneurs would have a few years post qualification experience such that they have good market knowledge and can demonstrate a believable track record. However such people will be at the stage in their personal lives where they are beginning to settle down and most likely will have a partner or wife, a large mortgage and children either existing or contemplated in the near future. Finding entrepreneurs at this stage of their lives when they are brave enough to set out on their own is a challenge. This time in their lives is the best time for them to be contemplating running their own business but in terms of a wife, a mortgage etc, the absolute worst time for cash flow. We are approached regularly, by prospective entrepreneurs, saying that they want to start up on their own but when we examine their business plan we find buried within it six figure salaries for themselves. This single discussion tends to weed out 90% of the potential entrepreneurs that are looking for backing. Of the remaining there are those who are prepared to mortgage their grandmother or do whatever it takes to give them the financial flexibility to become a true entrepreneur. This is the stage at which it becomes really interesting and the thinking referred to earlier in this article comes into play.
The next stage to achieving venture capital backing is based on acquiring trust from your prospective backer. It is of huge importance that the investor and investee like and trust each other. Once invested, very active nurturing is required substantially more than a typical non-executive investor, talking hourly rather than daily.
After 25 years of backing people, I know what does and doesn’t work. I don’t like crocodile people – people with big mouths and small ears. I like people who listen to other people’s points of view and people who can deal with an unusually high degree of independence and say in their business. We also like people who are driven to succeed but understand they also need to be part of a team. So, start re-wiring your brain and thinking outside the box.
Founder and Executive Chairman
Author: Ray Palmer, Founder and Executive Chairman