Andy Phillipps: Active Hotels, via, to angel investing PART TWO

Podcast transcription -22nd February 2018

Peter Cowley:                  Hi, and welcome to part two of Andy Phillipps' Invested Investor Podcast. In part one, Andy talked us through how he founded Active Hotels, grew it to a hugely successful online hotel marketplace, and then sold it. Grew it to become what it is today, Booking dot com.

                                             Part two is all about what he did after that sale. He'll be discussing his involvement in another of his ventures, Toptable, and then his transition into Angel Investing. Excitingly, he will include his top tips to entrepreneurs and Angel Investors including the advice that new Angels should never assume you're above average when you start. You will not be.

Andy Phillipps:                 So that happened, and then I was working with a lady called Karen Hanton, who was the founder of Top Table. She had a very similar culture. She had grown it largely from cashflow to be, and its an online restaurant booking business which has very similar dynamics actually to the hotel industry. I used to frustrate her a lot by always referring to restaurants as hotels on stage. And so, myself and Matthew Witt who was the obstructer at Active joined that board and we helped, I hope, to transstructure that business and help accelerate its growth, and that grew to be the largest online restaurant booking company in Europe before we sold it to OpenTable, which now actually is owned by Priceline, so ...

Peter Cowley:                  So how long were you still at Priceline? A couple of years after ...

Andy Phillipps:                 I set up the board I think in 2006.

Peter Cowley:                  Okay, and you were already on Toptable at that point.

Andy Phillipps:                 Yes.

Peter Cowley:                  And how long did you stay with Toptable then?

Andy Phillipps:                 I stayed with Toptable, we sold in 2010, so for five years or ...

Peter Cowley:                  But you were a non-exec.

Andy Phillipps:                 Yeah, so I was non-exec. I wasn't exec of the team, and I found that quite the difficult dynamic at times because I had been used to being chief exec. I didn't like to think of myself as a dictatorial chief exec but I was used to making decisions, and suddenly that dynamic of being chairman rather than chief exec is very, very different. You're trying to make sure the chief exec has heard what you're saying, but then it's ultimately up to them to make decisions. Now, Karen is quite a strong character and didn't have a problem resisting when she disagreed with me, and we'd normally made the right decisions anyway, so she was a very easy person to be introduced to, but I did struggle with that transition for a while. Slightly in parallel with that, I'd also co-founded a company called ReeVoo with a friend, Richard Anson and two people from Active Hotels.

Peter Cowley:                  Review, that's R-E-V-O-O, is it?

Andy Phillipps:                 R-double E-V-double O, which we thought was sort of trendy and googley at the time.

Peter Cowley:                  ReeVoo, it's a play on the word review, is it?

Andy Phillipps:                 Yeah. That's user-generated content from big brands now. It didn't do that when it started actually, but that's what it's permitted to do.

Peter Cowley:                  Okay, so you're sort of starting to go plural at this point.

Andy Phillipps:                 Yes.

Peter Cowley:                  Where does Angel Investing come into this?

Andy Phillipps:                 Angel Investing, I drifted into it. I'd love to give you an argument that all my career decisions have been thought through, but actually the criteria for an entrepreneur when they're looking for an Angel Investor is they want someone with operational experience with knowledge of the marketplace, but most crisply they want somebody who's got money, and it was obvious that I had money. So you start getting approached. I don't want to suggest it's entirely altruistic. You're obviously looking for a return, but there is quite a big element of altruism from quite a lot of Angel Investors that if you're going to make an investment that's yield return, you're probably better off putting it in property historically and just sitting back and ignoring it.

                                             The motivation for angel investing is partly to stay involved and current with the scene, but also partly it's to give something back. My Angel Investors and my board have given me massive amounts of advice and support when you could argue it was irrational to do so, and I did feel, and still do feel actually that once you've in “made it”, there is a responsibility to give something back to the ecosystem as well.

Peter Cowley:                  Well done. What a statement to make. Thank you. You haven't said that before. Excellent.

                                             When did the Angel investing start then, in '09, '08?

Andy Phillipps:                 No. Probably from 2005, 2006. I put some money into ReeVoo very early on, which I could argue at least was an Angel investment. It's the best piece of advice I got given out there. I'd got lots of advice actually, and one of my tips for other Angels is to go and talk to lots of Angels before you start because you can get some really vital advice. John Bates gave me some brilliant advice.

Peter Cowley:                  Yeah, I know John. Yeah.

Andy Phillipps:                 John works at London Business School and he would say, if you are going to do an Angel Investing, then start slowly because I can promise you you're not as good as you think you are. He was absolutely right. My first couple of Angel Investments were disasters, largely. He helped me not to lose too much money. I think his statement is that successfully Angel Investing is not losing all your money in the first couple of years. That advice certainly weighed quite heavily on me, and then Simon Murdoch was actually pretty instrumental. He's actually won, I'm sure you know.

Peter Cowley:                  Yes. I do.

Andy Phillipps:                 He won't remember, but I remember talking to him at the beginning and he was saying, "If you are going to do Angel Investing, then make sure you make at least 10 investments because they fail for all kinds of reasons that you can't predict and you need the numbers to start working with you." So again, he set me off on a route that makes a lot of sense in retrospect. At the time, I took it slightly on faith from him.

Peter Cowley:                  How were you sorting your deals then in the early days?

Andy Phillipps:                 Most of them were from marketplaces. Because I had sold a marketplace in Booking dot com, I became quite a high profile over that time period. People were beginning to approach me because they knew I was involved. I'm trying to remember when I joined Cambridge Angels. Probably about 2007, eight.

Peter Cowley:                  I don't know. Before me, I think. Yeah.

Andy Phillipps:                 I also had got some deal flow going to Cambridge.

Peter Cowley:                  And London Business School.

Andy Phillipps:                 And the 100, and then I was teaching INSEAD as well, so I got quite a lot of deals from the business school community, which has been a blessing and a curse because I was teaching at INSEAD and LBS. At the time, I was explaining what I was looking for or what I thought made a good business opportunity and then, because I know exactly what I'm looking for, the pitch always looks brilliant, as far as I'm concerned.

Peter Cowley:                  Yes. You direct it straight at you.

Andy Phillipps:                 To select which ones were actually genuinely brilliant was quite hard. I'll tell you some of my best investments and some of my worst investments have both been from business schools.

Peter Cowley:                  How many investments do you think you've made over the last 12, 13 years?

Andy Phillipps:                 It's over 40 now. I probably average three or four a year, somewhere around that.

Peter Cowley:                  And how many have failed completely so far?

Andy Phillipps:                 About seven, and then I've got quite a few living dead as well. I won't name names.

Peter Cowley:                  And how many exits?

Andy Phillipps:                 I've had six or seven exits, but out of that, I'm maybe this goes back to Simon Murdoch's point, without three exits, my portfolio would be in quite a lot of trouble. I've had three reasonably good exits though, including Toptable, Perkbox, which is only a partial exit actually, and Zoopla. A couple of those are over 30 times there, and that covers up a lot of, for want of a better word, screwups along the way.

                                             I don't think I'm particularly bad actually, he said slightly defensively, but most of the announcement seems to show that the best returns for Angel Investing rely on that 10 to five percent that really make stellar returns, and the rest of the portfolio is pretty average. I'm certainly in that circumstance.

Peter Cowley:                  Have you had cash on cash positive yet?

Andy Phillipps:                 Yes.

Peter Cowley:                  Well done. Okay. And you've still got about whatever the number is, probably 10 or 15 that you think will succeed to some extent?

Andy Phillipps:                 I've probably got 15 that I've realized some value from. I think I've got just over 20 percent RIR, but I either have the business written at cost or if I've been offered something, I've not necessarily taken it, but if I've been offered good I'll write it up to that, but the rest of the time I either keep it at cost or if it's gone bust, obviously I write it off. I'm not sure that's a recognized valuation I told you. That's what I use.

Peter Cowley:                  Well, I use the one which is very similar, and I'll write down if necessary. I'll write down subjectively and objectively.

                                             You add huge value. You've been entrepreneurial. You're unbelievably well-connected. You're, as we joked earlier on, you're very self-deprecating.

Andy Phillipps:                 You're such a nice man, Peter.

Peter Cowley:                  So how have you helped, and have you hindered, on these journeys?

Andy Phillipps:                 I think I've hindered certainly early on because of that transition from being chief exec to being an advisor. We did many things wrong, but one of the things we did right is we normally made decisions quite fast, and if those decisions were wrong, we then went back and changed them or tried to bluff that they were actually the right decision in the first place. In that circumstance, I had probably the maximum amount of data there. Obviously I didn't know everything but I was pretty intimately involved in the business.

                                             The challenge when you're non-exec is your access to information is very filtered. It's coming by the chief exec. You can spend some time in the business but you're viewed with some suspicion, so your access to data isn't as good, and yet you may still have the mindset you need to make decisions very, very fast, so qualifying your input to being advisory and another data point to allow the chief exec to make a good decision is absolutely right. If you don't believe the chief exec can make a good decision, then he shouldn't be onboard.

                                             It's a big shift. I went back in as an exec role for one of my businesses in ReeVoo, for example. Then you have to switch back again to making the decisions, and then, I'm now not exec, and you have to switch back again to coaching. It is an interesting dynamic to get that right.

Peter Cowley:                  We talked about what you might have hindered. I doubt you did. What about the added value? What are the specific areas you think you've been able to add? Not specific examples, but areas.

Andy Phillipps:                 A lot of successful breaking businesses relates to people normally, so getting the people structures right, making sure you're selecting the right people as you grow. I certainly have opinions on and hopefully they're valuable there. I've got a general business experience now and certainly in marketplaces, I can… there’s pattern recognition goes on now, so I can say actually the challenge here is to build the platform so we can truly scale the next level because there was ... VC for example wouldn't be interested at all in the economics.

                                             I've spent quite a lot of time focusing on uni, as in every single business plan that probably you or I have ever seen always goes up rapidly towards the right, and it's either revenue, gross margin or profit. Some of them do but most of them don't, so most of the time I spend focusing on the gross margin per transaction making sure we're not locking needless cost into that, or if we are, making sure that we have a clear route to getting out of it so that focusing on the uni-economics there, and also focusing on the ability that once we've got these uni-economics right, that we can really rescale fast.

Peter Cowley:                  Yeah, because in the marketplace, you've got two sides. You've got the customer requisition on both sides, and possibly the lifetime value only on one side. You need to look at both sides. I don't do many marketplaces. I don't understand marketplace. I don't understand consumers ...

Andy Phillipps:                 No. The dynamics are very different. So for example, YPlan Wireless which was you know not a huge success, the dynamics were very, very different to Hotel. Hotel is largely static and is always selling rooms in the future, whereas ... Of course, it's always entirely dependent on who's performing at that particular point in time. The dynamics are very, very different in those two examples.

Peter Cowley:                  Okay. As you might be aware, I put all my rules for engagement with entrepreneurs on my website. I make it very open and transparent. What have you learned in the last 10 years? Huge amounts, you're going to say.

Andy Phillipps:                 Yes. I've learned quite a bit along the way. The most important first message that I learned was actually John Bates' advice. You haven't got the Midas Touch. I think one of the challenges for any first time Angel is, you've got one base point probably where it's worked. You've just made quite a lot of money and you slightly assume that whatever I touch next will also make quite a lot of money. Just a bit like the general population, if you ask them, "Are you an above-average driver?" Every single person is an above-average driver. Successful entrepreneurs probably have even higher levels of confidence and they are absolutely above the average on business Angel Investing. Assuming that you not above the average, it's probably a good idea when you first ...

Peter Cowley:                  That's a great, great tip.

Andy Phillipps:                 Assuming you're going to need a portfolio et cetera, I think it's very valuable. The next one sounds really very obvious, but it's not you running it, and I think that's the challenge, and I see it in many Angel pitches actually, that we spend a lot of time ... Not you, but one, spends a lot of time digging into the opportunity, digging into the marketplace, the dynamics et cetera, and probably not enough time digging into the individuals because it's not a matter of whether this is a good idea, it's whether this is a good idea that these people can execute against. You can justify it that however the answer the question is indicative of whether they're a good person to run it, but you're fixing a lot more time on the cliché, but as with all clichés, there's a kind of trick behind it that working out of the balance of skill sets and the drive and the individuals in the team are really going to throw out this ...

Peter Cowley:                  That takes time, doesn't it?

Andy Phillipps:                 It does, and also judging that from a single pitch is quite hard, I think.

Peter Cowley:                  I think it's impossible, isn't it?

Andy Phillipps:                 They're in a sales mode and most people can sell themselves for a period of time, but actually trying to work out more dispassionately about whether this person has ... I've got a slightly unusual criteria. I quite want someone who has, its not necessarily academic ability, but it's a fast clock speed and an ability to analyze situations rapidly. They won't always be right but at least they're moving fast, and that's quite difficult to pick up. The people who've got a track record of success up to this point, it's normally a good indicator.

Peter Cowley:                  Not necessarily entrepreneurial. Just in corporate life.

Andy Phillipps:                 And if they're not entrepreneurial, I was an entrepreneur before I set up Active, and without Adrian, I think I would have really struggled because I was, in the first three or four months of this, I was coming up with excuses about why this wasn't working. Actually, Adrian, I remember very distinctly saying, "It doesn't matter whether you have an excuse or not, Andy. It's not working. You need to fix it. You're no longer reporting to a boss that if he agrees with you, it's all going to be okay and you'll still get promoted. It doesn't matter whether anybody agrees with you or disagrees. If you're not making money, you'll go bust." Adrian knew that instinctively and I didn't.

                                             Having someone who can coach an entrepreneur or mentor an entrepreneur who hasn't previously got star-tup experience I think is really important. That can be on the board or it can be in the founding team. I was very lucky that I showed in the founding team.

Peter Cowley:                  Right. Okay. Any other tips?

Andy Phillipps:                 As we talked about potential gross margin, I want to be convinced that you've got the potential to sell a lot, and I know this is frustrating as an entrepreneur. I used to get very annoyed that people used to come along and say, "Unless I can see I'm going to make 20X here, than I'm not going to invest in this business because I need 20X to cover up all my failures." I'd be like, the reason you have so many failures is you're always looking for 20X. They're bound to be risky, aren't they? That's how capitalism works. I'm afraid I've come straight back to that. Even when I thought this is a solid three X opportunity, they still, the founding team can get ill.

Peter Cowley:                  Competition can appear. Fraud, Bad debt…

Andy Phillipps:                 Unless you have that real sense of ability to scale here and protect yourself when you're scaling, which is why I know you invest in a lot of IP-rich businesses and have the same penchant but alongside marketplaces, you want a barrier entry that means you can get a very, very significant business here. You know, being crude about it, it's so it can bail out all the failures that I've made as investments along the way.

                                             I'm very nervous if deal momentum ... I'm still a sucker to it. I've made investments in the past which I won't name, but where there's been huge traction to get in on the deal, and you sort of stop thinking and you're more concerned to actually lever yourself into the deal.

Peter Cowley:                  Fear of missing out.

Andy Phillipps:                 Yeah, and it's a brilliant tip as an entrepreneur. If you can get that feeding frenzy, basically with Angels and VC's, your funding round is done pretty much. As soon as they switch from, you know, is this a good opportunity to kind of get in on it, that's the point at which you won. However, as an Angel, I recognize that I'm susceptible to it and I try and steer away a bit, or at least carry on doing the due diligence properly.

Peter Cowley:                  Come back out.

Andy Phillipps:                 Back out.

Peter Cowley:                  Even if the crowd is in.

Andy Phillipps:                 Yeah.

Peter Cowley:                  Okay.

Andy Phillipps:                 That takes a bit of self-belief at times. Maybe a less obvious one is fellow investors. I've had a couple of opportunities where, just as you want the exec team to be aligned, having all the stakeholders aligned to where you were trying to get to is important, and particularly one of the big clashes, occasionally at least between Angel Investors is, some are very, very reluctant to work with VC's for example, along the way. Actually, I find VC's relatively easy to work with. I'm pretty sure that's slightly the unfashionable thing to say, but you know they are behaving logically in most cases. They are trying to optimize the return. You might disagree with their decision, but the mentality or the objective is very, very consistent. For Angels, it's a more disparate group. Some people are running it because it's something that they are passionately interested in or it's almost a hobby. Some people are doing it as pure investment.

Peter Cowley:                  Some are doing it to try and find a job, actually.

Andy Phillipps:                 Yes, and some have a naïve belief in the chances of success. One of the joys about working with Cambridge Angels is, broadly speaking, everybody who makes investments through Cambridge Angels knows that they have a very significant chance of losing all the money and it's not a surprise. I've had Angels who've invested who didn't have that expertise and it's cost the founder lots of problems when there's been a down round or something has gone wrong. Your fellow investors is quite important.

                                             Then, a very wise person from Cambridge Angels actually, Rajat, gave me some advice once, which is a brilliant piece of advice and I wish I had thought of it, which is if your investment thesis requires a change in behaviour from the founders or the executive team, do not make the investment. It just doesn't ...

Peter Cowley:                  Change of behaviour. What's an example of that, do you think?

Andy Phillipps:                 It's probably a plasma follow on to the first round, that if the business has been run in a particular style or with a particular focus here and you're requiring the chief exec or the top team to change the way they operate in order for you to justify making the follow on investment, don't do it. As with all rules that have had to be broken, but whenever I've thought actually this is a real opportunity if we could change this, it's no good me thinking that, and that's actually the chief exec is coming along and you genuinely believe that they're going to ...

Peter Cowley:                  So that's interesting. That's investor-driven pivot effectively, as opposed to exec team-driven pivot.

Andy Phillipps:                 Yeah.

Peter Cowley:                  That's very interesting. So you're saying basically change is in that situation principally wrong. Not wrong because they've chosen the wrong direction, but wrong because they're trying to impose it on an exec team that hasn't necessarily bought into it.

Andy Phillipps:                 Yes. For example, if you're expecting the communications to dramatically improve in the business in order for it to be more effective, or the style of management to change in any material way, however much the founder says that they want to do that, changing behaviours is actually quite hard a thing to implement here and I agree with Rajat. I think it's quite hard to rely on that if you want to make a follow on investment.

Peter Cowley:                  Right. Okay. So Andy, have you got any more tips for Angels?

Andy Phillipps:                 I guess the only, and this was a surprise to me, you know maybe it wouldn't be to other people, it's obviously in retrospect, but your good businesses when you first start out, so you've made your 10 investments or whatever, your good businesses are likely to take, I think the average is now 14 years, but certainly 10 years or so before they make you a return. There's a rather depressing period over the next two, three, four years where the bad ones either can't raise further funds or you just give up.

                                             Your losses are much more evident much earlier than your successes, so you kind of have to keep your nerve over that time period, and keep your cash in reserve, because otherwise you're just going to run out of cash over that time period, so planning for that I think is ...

Peter Cowley:                  The sort of trough of disillusionment.

Andy Phillipps:                 Yes, exactly. Used in a number of ...

                                             And then, there are an inordinately large number of people looking for money. Again, being quite focused on what you are looking for and what your edge is, for want of a better term. I run marketplaces and I've invested in marketplaces and that's kind of where I sit. I've got a bit of a technical background as well so I invest in technology as well. There are opportunities in every walk of life, you know, from running new hotels or new leisure centres or new tech businesses. Actually working out where you're going to focus and building up the deal flow and the network and the contacts in order to be successful. That's often your most, Angel Investors I think are entrepreneurs statistically, so that's often where you've come from so you often invest around that, where your deal flow is probably.

Peter Cowley:                  That's probably not quite true. The most active Angel Investors are entrepreneurs, but there's a lot of passive money there as well.

Andy Phillipps:                 Yes, you're probably right. By number, they're probably, or probably by quantum, I guess they're probably ...

Peter Cowley:                  The active ones. Yeah. Okay. They're entrepreneurial. Okay. And tips for entrepreneurs. You must have, I don't know if you know who he is. I don't know how many pitches you've seen, how many entrepreneurs you've been to. Must be hundreds, might be a thousand even. Give us some tips for the entrepreneur.

Andy Phillipps:                 I guess it's guidance a bit from what I'm looking for here and this is going to be contradictory, so apologies for that, but I'm looking for absolutely exceptional people who I want to believe can take it through to exit. If I think they're good with running it for two or three years with the possible exception of the technical founder, you bring in a general manager, chief exec or something with time, but certainly if there's a chief exec who has got a general management background, I want to believe that person can take it through to the full distance because my track record of switching chief execs actually is not good, and I think quite a lot of VC's say the same thing as well.

                                             I'm looking for people who are delusional almost ambitious, and they've got a very strong sense of self-belief, but coupled with some self-awareness and self-questioning. There's always that sort of cliché of strong opinions loosely held, and I'm looking for that kind of schizophrenia that absolutely they can stand up in front of the team of two or three hundred people and lead them over the parapet if it were, but also step back and go, I don't know what to do in this circumstance. Can I get some advice?

                                             That's quite a difficult thing to find in an individual, but most good entrepreneurs I think have got it. I have reasonably strong opinions on how approached I get, and I'm sure you do as well. I get approached by lots of people with strange business plans on LinkedIn, and it's an incredibly unproductive way for the entrepreneur to get a hold of me. I don't have time to go through them all, and also to be frank, if that's the best way the entrepreneur can get to me, you know, one of the big challenges for any entrepreneur is you're always selling something to someone. You're selling to your staff to try and get new people. You're selling to customers, et cetera. A key asset to that is how you get the contact and LinkedIn I don't think is the best way.

Peter Cowley:                  I'm sure we have the same answers, but what is the best way of getting at you?

Andy Phillipps:                 Through a contact. Using your network to get to you. I know that discriminates to people who have good networks, but on the other hand, I also think good networks are very important for running the business. So it's discriminatory but I'm afraid it's discrimination I stick with a bit on that.

                                             I think Angels are different to VC's to some extent, but I think also the personal chemistry between the founder and the business Angel is very important as well. I want to believe, maybe delusional as well, that I can add some kind of value or I can work with this individual and if the personal chemistry is not there, then I don't make the investment normally. I want to believe that this person can be someone that I can pick up the phone to here and similarly vice versa will pick up the phone to me and say, "I've got a problem here. Can you help?"

                                             It's not saying, there are investments I've made where there are other people representing the company on the board and I don't want to interfere in that, but I do want to believe that that person is open to advice and it's someone that I would enjoy working with. That's self-indulgent, but if you'll just be making investments for return, you shouldn't do Angel Investing. There's an element of personal preference. I just want to work with people that I like.

Peter Cowley:                  Enjoy, yeah. The pint of beer test I call it, even though I don't drink beer.

Andy Phillipps:                 I guess the other advice for entrepreneurs is, we all see many, many deals, and I say no to an awful lot of very, very good deals, so it's just kind of please don't be offended if I say no. It's as much my fault as yours in that circumstance. I have had people who I've said no to that have been very, very upset or feel betrayed by it, and I've also had a situation, I'm sure you have as well, where people have thought I was investing not because I said I was, but because they thought I looked enthusiastic in the pitch. They told other people that I'm interested in investing and then when I back out, it potentially impacts all their other investors as well. The expectation that I will say no rather than yes is helpful in managing that dynamic.

Peter Cowley:                  Yes. Any other tips?

Andy Phillipps:                 Grovelling sycophancy and some free gifts as well.

Peter Cowley:                  I like that. Good, Andy. I'm going to ask you a question which you haven't prepared for here. I am about a decade older than you. What are you going to be doing when you get to my age?

Andy Phillipps:                 I'm really depressed. I think actually about the time that I retire, I'll stop doing this. I'll probably have got quite good at it. I think I'll probably carry on at Angel Investing. Part of me really, really wants to go back and start up a startup again, but a bit of going back to our previous point, every driver thinks they're better than average. The stats are absolutely against all the founders and I'm aware of that. Certainly for consumer businesses I think it's very rare to get to those consumer-facing businesses.

Peter Cowley:                  But the stats are pro serial entrepreneurs, so where's this age experience thing, where's the tip over? Is there one?

Andy Phillipps:                 I think where that goes is you get slightly more involved in a couple of start-ups, but you're working with a chief exec who's under 35 I suspect, for a consumer business. It's my selfishness on that. When I have gone back in an exec role, I'm not good enough to do it without worrying about it and working long hours, so end up working evenings and weekends again, and I definitely have a conflict with family life on that.

Peter Cowley:                  Exactly. You have three children under 10, are they?

Andy Phillipps:                 Yeah, they're three under 10.

Peter Cowley:                  You do protect your family life well, don't you?

Andy Phillipps:                 I'm not sure my wife would agree, but I try quite hard to protect it well, yes.

Peter Cowley:                  Andy, it has been a real pleasure. The audience and me have got so much from this. Thank you very much indeed.

Andy Phillipps:                 Thank you very much. Pleasure to be invited.