Sources of capital

Published: Wed 11 January 2023
Updated: Tue 17 January 2023
By steve

In Markets.


My brush with private equity

A very long time ago, I wanted to get funding for a software startup. This was in the 1980s. I was young and naive, and so was my business partner. The PC was a new thing, and very little software was available for it, and we had an idea for something that might have created a decent market. But we didn’t have any money, nor did we have any rich friends who might be persuaded to chip in. Instead, we telephoned 3I, or “Investors in Industry” as it was then known.

Creating a company, to write software for a device that might have been a fad, and getting funding for it was a daring thing. When we spoke to 3I, the first thing they wanted to see was our order book, three years of accounts, our cashflow and, well, the stuff that private equity people want to see today. They were not interested in ideas, or demos of flaky, unfinished software.

What we really wanted was venture capital, but this didn’t really exist. Well, it did exist, but only really on the west coast of the USA. People like Arthur Rock were already well established there, but nothing remotely similar existed here then. In fact, I’m not sure venture capital, or the sort invented by Rock, exists now in the UK, in spite of the fact that one of the titans of the industry (sector?), Michael Moritz was born in the UK.

Venture capital doesn’t get written about much, even in the financial press, because mere mortals like most of us, cannot put money into it. It’s certainly not for the fainthearted: it’s making concentrated bets on startups based largely on intuition and gut feel. We laugh at Masayoshi Son for ploughing a fortune into such obvious Ponzi-schemes as We Work, but using the same process for choosing who to invest in he hit some balls out of the park.

If the UK is going to have real, home-grown, high-tech entities it needs to have some reckless investors like Son. Trying to support high-tech startups with government money is, basically, bound to fail. No minister could bare to admit that 98% of the companies he’d put money into had failed. In fact, if civil servants were making the decision, the percentage would be a lot higher.

The UK has some excellent universities, and some very talented software and hardware experts working in the country. We also attract a wealth of talent into our top universities from all around the world, but especially developing economies. We should have a much bigger tech industry, but we don’t because no finance is available. This is ironic, as finance is such a huge part of the UK economy. Unfortunately, it’s the wrong kind of finance. It’s the 3I sort of finance, not the Sequoia Capital type of finance. Although both sorts provide financing away from public markets, one leads to highly fragile, highly geared, low-wage, cash-cow type companies. The other leads to companies like Google and Apple.

It’s often assumed that Rishi Sunak would understand what’s needed to get investment of this sort. I don’t think this is the case. He worked in California, but for TCI Investment Fund Management. Apart from the fact that it’s believed that he was not involved in actual investment decisions, this kind of hedge fund invests in public markets, and will not be involved with venture capital.

Finance is a complicated ecosystem. Lumping all of it together as ‘The City’ is extremely unhelpful, but typical of our lazy press.

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