Funding from the founders
Can Brent Hoberman's Profounders Capital help close the equity gap?
Brent Hoberman and Rogan Angelini-Hurll explain why Profounders Capital, the latest fund “for entrepreneurs, by entrepreneurs”, can help close the equity gap.
When Peter Thiel, a former Wall Street derivatives trader, hedge fund manager and Paypal co-founder, established the $220m Founders Fund in the US in 2005, he set out a vision of venture capital in which founders get more of a stake and a say in their companies, while the investors who back them take a more collaborative approach – because they’re all experienced entrepreneurs.
One of its partners, Napster founder Sean Parker, said the fund was evidence of “the pendulum swinging back” in favour of entrepreneurs, thus implying flaws in the traditional VC way of doing business. Owner-managers often complain that their relationship with institutional backers can feel more like relinquishing control than receiving value, so talk of funds “by entrepreneurs, for entrepreneurs” causes considerable excitement among those seeking investment.
A flurry of European funds with similar objectives have since emerged, including Lukasz Gadowski’s Team Europe, Atomico Ventures, led by Skype founders Niklas Zennström and Janus Friis, and the £100m Notion Capital fund, established by MessageLabs’ Jos and Ben White.
While the strapline on the website of Brent Hoberman’s new fund is also more or less “by entrepreneurs for entrepreneurs”, the Lastminute.com founder says his desire to start Profounders Capital was born less of a frustration with traditional venture finance, and more from a desire to close an equity gap that exists for promising tech companies seeking seed funding.
“There’s nothing wrong with institutional money, but for venture capitalists to get a management fee, to a certain extent, the larger the client, the easier it is to make money,” he says. “It’s also lower risk to take preference shares in a business that already has a significant growth track. The early stage requires more running around, more pain and the risks are higher.”
Hoberman and a veritable dream team of investors – including Bebo founder Michael Birch, telecoms magnate Peter Dubens and the man behind M&A advisory firm LongAcre Partners, Johnny Goodwin – have so far raised £20m for their all star seed-fund, which looks to make investments of between £500,000 and £2.5m.
Hoberman says this kind of fund is far more vital in the UK than the US, where a host of ‘super angels’ such as LinkedIn founder Reid Hoffman are available to step in where VCs fear to tread. “The ecosystem in the US is more robust,” he says. “There are more people like Reid who will do massive amounts of angel investing.”
Rogan Angelini-Hurll, a close friend of Hoberman’s, was drafted in as one of two general partners in the fund, tasked with managing day-to-day interactions with portfolio companies and the fund’s various entrepreneurial investment partners. He agrees with Hoberman’s assessment: “The angels in America can fund the same area we’re funding but they don’t in Europe,” he says. “That’s the reason an equity gap exists.”
Angelini-Hurll, who helped Hoberman write the original business plan for Lastminute.com, toes the party line, saying “there’s nothing with traditional VC money” but he adds that a fund such as Profounders is in a position to offer more to investees than simply a scaled back incarnation of conventional venture investment. “If one was being idealistic about it, we are trying to ‘give back’ and that’s a more individual, emotional reaction than an institutional one.”
Hoberman says the fund “differentiates in terms of having investors who can really add value. The odds are stacked against start-ups. We balance those odds. Our arbitrage is that we’re saying we’re doing this at a lower risk. We’re entrepreneurs who have done it before and it will work because we can add some value.”
Angelini-Hurll also highlights the “clear areas of expertise” the investors boast. “Apart from the consistent experiences they’ve had of the progression of a business plan from start-up, to a great business to exit, they also bring interesting skill sets which we’ll use for portfolio companies when it’s appropriate.”
Michael Birch, for example, is a “viral marketing king”, according to Angelini-Hurll, so when a portfolio company wants “incredibly educated insights into viral marketing and some suggestions”, it’s the general partner’s job to bring mentor and mentee together. Hoberman, meanwhile, notes that Dubens’ experience of large deals working with private equity houses adds specialist knowledge of financial engineering, fund structure, exits and follow-on rounds.
In the spirit of collaboration, the fund has also cut back on term sheet language traditionally used by VCs which is “complicated and possibly disadvantageous for entrepreneurs” as well as some of the more punitive protections VCs employ such as “triple preference on exit”.
Unsurprisingly given the calibre and reputation of the investors, the fund was inundated with business plans when it was first unveiled last summer, receiving applications from over 600 entrepreneurs. The team met 200 and eventually drew up a shortlist of five businesses, one of which, browser and mobile application TweetDeck, became the fund’s first portfolio company.
Angelini-Hurll says they’ve now “dug themselves out” of the business plan backlog and the fund is currently doing due diligence on a group of “four or five” companies. He adds that they are talking to other entrepreneurial investors who will make Profounders a £40-50m fund with a broader skill base, raising its “financial and intellectual capital”.
Despite the emphasis on collaboration and added value, the fund isn’t about turnarounds or wild punts. It’s looking for lean, well-run start-ups and the phrase its partners are keen to repeat is ‘capital efficiency’. “In other words,” says Hoberman, “businesses where you can get tremendous leverage.”
That mantra is echoed by investors much larger than Profounders as VCs become more cautious in sympathy with wider economic confidence, but it’s even more crucial for a fund with relatively limited financial muscle. “What we mean by capital efficient is broader than just having low capex. It also means we like to see the ongoing fixed cost base at a manageable level,” explains Angelini-Hurll.
The fund does allocate cash for subsequent rounds of investment, however. “No matter how realistic people are in their forecasts, there’s always potential for a further cash requirement. Success can bring the need for further finance rounds,” he says. The fund also looks for businesses that are difficult to start, “because that difficulty becomes a barrier to entry”, Hoberman says.
“We like to see developed IP that we can hang our hats on so we know we’re backing the management team to develop that IP,” says Angelini-Hurll. But IP is easier to identify in a pure technology company than a website, so where did TweetDeck fit in? “If you’re a website, it’s harder to get something patentable so it comes down to the development the site is making,” he acknowledges. “We liked their management team and they’re doing 500,000 downloads of their application a month so it’s the momentum we’re backing.”
Angelini-Hurll and his fellow general partner, experienced VC Sean Seton-Rogers, expect “realism rather than dressed up conservatism” from entrepreneurs pitching for funding. “From a cash needs requirement, businesses need to be realistic,” he says. In contrast to what some VCs have advised, this doesn’t mean ‘cutting your cloth’.
“Because the market has seized up there’s an element of cutting financial needs. All entrepreneurs should do what’s best for them and the company and not just cut their cloth to fit whoever they’re going to see. Raise what you need to raise, not less because there’s less money around.”
The majority of Angelini-Hurll’s experience was gathered as a senior media consultant in the City, and this has enabled him to look at venture investing from a fresh perspective. “Industries have, or seem to develop, accepted practices. I had the ability to come in and say that we can do things differently.”
With a number of similarly entrepreneurial funds emerging around Europe, how significant is the trend? “There are definitely more of us around,” he says. “That reflects two things in Europe – it’s probably only now that you’ve got a significant number of European entrepreneurs who are capable of doing it and it also shows that entrepreneurs like to help the next generation.” Hoberman adds that if the model is proven to work, we’ll see “more and more examples”, which in turn can only be a positive influence on the way institutional investors engage with entrepreneurs.