Investor Talk: Highland Capital Partners’ Laurence Garrett
One of Europe's foremost tech VCs gives us his view of the start-up scene
Laurence Garrett is a partner with Geneva-based firm Highland Capital Partners, a firm whose portfolio includes some of Europe’s hottest tech and internet start-ups.
Drawing on his experience with Highland, and his background with the likes of 3i Ventures, Laurence gives us his view from the summit of the European tech scene…
Can you tell us about Highland and the sectors it operates in?
Highland’s about 23 years old, it’s really a US-based partnership in terms of its location. It’s been in Europe six years now. Fergal Mullan opened up the offices in Geneva about six years ago, and really started to focus on growth capital for later-stage technology capital, for companies with typically around …10m in revenue, and growing pretty rapidly.
In the US, our bias is more towards early stage investing, in terms of the DNA of the companies. In fact we’ve actually hosted and seeded many of the companies in our portfolio.
How important is the international aspect of Highland?
Today Highland has an office network covering Shanghai, Geneva, London, Boston and Silicon Valley. We see that reach as being very important, in terms of getting the pulse of different companies and seeing how they compare across different geographies.
Also, if you want to help companies internationalise, which we do want to do, our different bases can help. For example we recently took on an Israeli firm who wanted help in internationalising their business into the US, and we were perfectly placed to help them.
Can you tell us about some of the UK companies you’ve invested in?
Our main UK company is Glasses Direct, which we’ve been investing in for some time, and we also did the Moonpig acquisition. Moonpig is a fantastic brand. Nick Jenkins has done a great job, and we’re delighted to have made that acquisition.
What sort of things do you look for in an investee?
We always look for terrific entrepreneurial talent – which means drive, focus, and the passion for making a success. We also look for terrific growth – we’re investing at a later stage than some other investors, so our investees are already selling their services and products. We’d expect at least 50% growth in the business.
As important as the growth rate is capital efficiency. We look for businesses that can demonstrate being really capital efficient, and you can measure this against the unit economics of the business. How much does it cost for each customer acquisition? What is the lifetime value of the user? What is the gross margin in the business?
Once you’ve made that assessment is there anything else you analyse?
Then you come back to the key numbers. It depends on the nature of the business, but you can usually look at how much the losses are to date, and how much capital has been required to date, and then forecast when that business is going to turn profitable. Most of the businesses we invest in aren’t profitable, but you can stress-test the business model to see if it is going to become profitable in the near term, and work out how much capital it’s going to take.
We don’t want to invest in businesses that are really going to take hundreds of millions in capital to reach profitability. That’s not our game.
Which industries and sectors are particularly hot in the UK at the moment, and which are not?
The ones that are really good are internet and digital. That’s the hottest space in the UK at the moment. We’re also seeing that the offspring of the internet and digital media, things like big data and cloud computing, are really important. And for the first time in a while, I am seeing enterprise software coming back. The tools and technologies that can assist corporates are pretty interesting, and getting some real investment appetite.
The markets that are more challenged are in healthcare, which is requiring FDA approval, and also some of the hardware areas.
What are the most common mistakes you see investees making at the moment?
The most common mistakes between investee and investor involve expectation setting. We’re all looking for people who can predict future growth and development, and do that accurately. We’re not all fortune tellers, but the people who can set expectations well are the ones you want to do business with.
The investee-investor relationship can go wrong when the expectation either from the investor is incorrect, or the company underperforms in terms of its forecast. It is so much better to over-perform than under-perform, as an investor it is such a different feeling.
So you think a lot of start-ups are guilty of over-promising and under-delivering?
This problem can actually work both ways. The VC community can over-promise and under-deliver as well – on what they can provide through their investor network, for example. I’d like to think we don’t do that, but some investors can certainly be guilty of it.
Ultimately you have to set expectations in life, and if you get that expectation right you’re on for a good relationship. That’s what it’s about at the end of the day, because when you make these investments it should be a seven-to-eight year investment.
What about business plans? Are they over-exaggerated as a source of problems?
Not always. I don’t think all the plans we see are unrealistic by any stretch. But business plans can be a source of problems.
We want entrepreneurs who are after real, honest dialogue with us about what they want to do and how difficult that’s going to be. We know it is difficult to build great businesses and to build great value, and we don’t want someone who thinks it’s going to be easy – that sends warning bells to us.