Entrepreneur first, investor second
Podcast transcription - 9th october
Alan Cowley: Thank you for listening to another Invested Investor podcast. Due to an equipment malfunction, this week's episode isn't to our usual high standard. Despite this, we decided that because Chris was such a fantastic guest, with an incredible array of stories, we wanted to go ahead with the recording. Remember to listen, enjoy and share.
Welcome to another fascinating Invested Investor podcast. On this week's show, we're excited to have Chris Mairs CBE. Chris is a founder and former Chief Technical Officer of Metaswitch Networks, a private UK based company that designs, develops, manufacturers and markets telecommunications software. He has since transitioned to become a hugely prominent early-stage investor here in the UK, advisor and mentor. We're currently sat in Entrepreneur First office in London because Chris is a venture partner here. Chris, you've got a hugely exciting background. How did you find yourself found in your first company?
Chris Mairs: Thanks, Alan, and thank you for inviting me. So I actually have a background in technology. I did a degree in computer science at Cambridge, when it was only a one-year course because there wasn't enough material for three years, which makes you realise kind of how ancient I am. And then I worked for IBM for a little while, and the founders of the business, which became Metaswitch Network, were all working for IBM. So it was through that group of people that ... And slightly unusually, it was seven co-founders. So that's an unusually large co-founding team. And that was what took me away from IBM
Alan Cowley: Oh wow. That is quite a large founding team. And did everyone have a C-level role when you started?
Chris Mairs: Like Chief Office Manager, Chief Code Developer, yeah. In the early days, it was quite a flat structure, obviously, with that many people. But over time, everyone sort of settled into their own hierarchy.
Alan Cowley: Okay. So what did you learn from those early years of growing the business? And what's kind of helped you into your investment life these days?
Chris Mairs: I think the thing that became most obvious, most quickly, is that hiring quality people is a) extremely difficult and b) extremely crucial to building a successful business. Ultimately, in the early days of a start-up, it's the people that make all the difference. You don't have any product, you don't have any customers, and it's the ability, creativity and integrity of the people in the organisation, not just the founders, that allows you to build a strong base.
Alan Cowley: Have you got any best or worst hires that you can talk about? And really why those were kind of good and why they were bad? Just to give future entrepreneurs an understanding of how to do it, really.
Chris Mairs: In the early, early days, we tried hiring raw graduates without any experience in industry, and we also tried hiring people from industry. And one of the conclusions, which I'll sort of still hold to be true, is that people from industry who are looking for a job, at the price that you can afford to pay when you are a start-up, may well not be the strongest people, in the sector. If you're Series A funded, and you can afford to poach people from DeepMind, that's great. But in the early days, you probably can't afford that. So what we did, having had some bad experiences of recruiting from industry, was to actually focus very much on taking people straight out of university. To the extent that, we even recruited people as developers who had never written a line of code. In the early days, we recruited pure mathematicians, we recruited philosophers, classicists, and we taught them how to actually do software engineering.
And while that was a big investment of our resource up front, I think it paid off in terms of a very able and very loyal team. One of the earliest guys who worked for me, a guy called Nigel Radcliffe, who then went on later to set up his own business, joined straight out of university at the age of 22. And it was immediately obvious that I explained something to him, he just got it, and went away and did it quicker than I could do it. When you realise that the person that you've recruited is better at doing the job than you are, then you think, "That was a good decision."
Alan Cowley: So obviously that might have been a one-off, but how quickly do you usually realise the person fits into the business?
Chris Mairs: Usually, I can tell within the first two months, I would say. And it's interesting that at interview everything seems to be really great, and then one week in, two weeks in, you start thinking, "Maybe this person isn't quite the right cultural fit, or maybe their ability to actually be creative isn't what I'd previously hoped."
Alan Cowley: Yeah, you must've learned a lot of lessons.
Chris Mairs: Too many.
Alan Cowley: Too many to talk about in such a short amount of time. You grew the business over a number of years. As you were growing it, what were the kind of pains that you and the other founders felt?
Chris Mairs: There always was, and there still is in that business now, which is, what, 37 years, 38 years old now? There is still a tension between not having enough revenue, and having too many customers placing too many demands on the business. So always, you're worrying about the revenue on one hand, but on the other hand you're worrying about all the different product features that your customers are crying out for. And I think that's pretty true of any start-up. You're on this fine line ... haven't got enough customers, and I've got too many customers. And you never seem quite able to get that balance right, so it's a bit of a roller coaster.
Alan Cowley: Do you find that a lot with early stage businesses then? That they commit to too many customers but don't have the resources to back-up that?
Chris Mairs: I think what I see, pretty often is that there is a desert until they find product market fit. Then hopefully, eventually, they find product market fit and suddenly they've got, not necessarily a huge number of customers, but they've got several customers. And they haven't put in place the processes for customer support, account management, bug fixing, new releases and all the other stuff that becomes pretty essential, pretty quickly, once you've got a real live customer base.
Alan Cowley: Yeah. Did you personally ever have an exit strategy when you set up the company? I presume you look for that now when you invest?
Chris Mairs: I don't really look for exit strategy, actually, because my view is that if you build the business, the exit will come. And I always say that to founders. You know, what does "good" look like for this business in seven years, time, nine years, time? And if they start talking about exits, then, for me, that's a bit of a red flag because I would far sooner that they're talking about the size of the organisation, the impact it will have, the global recognition. And if they're doing that, then someone is going to be very interested in acquiring the business, and if they're not, then you're going to get to an IPO eventually. So for Metaswitch, when we started it, the idea of technology businesses getting built quickly, and acquired quickly, wasn't really something that we contemplated. We already assumed that the natural exit would be an IPO at some time in the future. But, we did have various approaches from various businesses who wanted to acquire us. And, in fact, we turned them down because we just did not feel that we'd yet reach the potential for the business.
Alan Cowley: And what about your own exit strategy?
Chris Mairs: My exit from the business? Well, I spent almost all my career at Metaswitch, so I don't think I had one. I did retire in '96 actually because I'm actually blind, and at the time, my sight was deteriorating quite fast. And I wanted to spend some time travelling and doing other things, other than working, while I was still had a little bit of sight left. So, I retired at the end of '96.
I was fortunately in a position where we'd restructured the business to be owned by an employee benefit trust, which we did partly to get a bit of liquidity for the founders. Primarily, the real driver was that if all the employees had a stake in the profits from the business, but also ultimately in any liquidity event for the business, then we felt that would be a great way to keep people engaged for the long term. So, I had had some liquidity from that event, so I was able to retire at the end of '96. Then I came back to work in 2003, and then stepped back again at the end of 2011.
Alan Cowley: And you stepped back to become an investor? Was that the transition, or?
Chris Mairs: It's what has happened. I think, to say that was why I did it, would be giving me credit with a little bit too much foresight. I did decide that what I would like to do is do a little bit of angel investing. The history to this was that, at the time, I'd been living out in Palo Alto, and we had taken some substantial secondary investment a few years previously from Sequoia Capital and Francisco Partners. And, one of the reasons why I'd been living out in Palo Alto was that Sequoia encouraged us to put some engineers out into the Valley to mix with their portfolio. You know, drink the Kool aid, understand how things are done in the Valley. And I was lucky enough to be the responsible adult looking after a bunch of young engineers, playing at being a start-up in Palo Alto.
And, from that, I got the taste again for being in a small business because by then Metaswitch was reasonably mature, and reasonably large. So when I came back to London, I figured that doing a little bit of angel investing in the scene, particularly around Shoreditch, which was now getting very active, would be fun. And it's gone from being fun to being a sort of full-time occupation.
Alan Cowley: Do
Chris Mairs: I do.
Alan Cowley: ... Remember your first investment?
Chris Mairs: I do. It was a company now called Topia, which used to be called MOVE Guides, and I was in a very small syndicate run by an amazing lady, Maria Dramalioti-Taylor. And several of us put in pretty small checks into that business, into the seed round about business. And I think they did they're Series E round most recently.
Alan Cowley: Oh wow.
Chris Mairs: So, it's taken a substantial amount of capital, and it's hopefully eventually going to be reasonably good exit.
Alan Cowley: So, their stocks are still going?
Chris Mairs: Very much so.
Alan Cowley: Okay. Let's talk a bit about your portfolio then. Firstly, how many businesses have you invested in?
Chris Mairs: As of last weekend, I think 92.
Alan Cowley: 92. Wow. So let's start with what type of business do you invest in usually? Do you have a criteria or...
Chris Mairs: My criteria fundamentally is about people, and I said that earlier, with regard to recruitment, but even more so for founders. So obviously they need to be doing something which is potentially large in an interesting market, and there needs to be some defensibility, some argument why the business might be defensible. So the two key questions are always, why now? And why you? And if they can't answer the first question, then that's a red flag. But if they can answer that first question, then it's very much about why are these people the right people to do this?
And I'm always looking for some sort of edge, usually a combination of technical insight and domain knowledge. But ultimately, do they have that set of characteristics that it's hard to define, but quite easy to spot, which would make them into a resilient and impressive entrepreneur. The personal exceptionalism that's required to be a CEO. So that's what I'm always looking for. And I learned that from the partner at Sequoia who's on our board, who's Jim Goetz.
And I was talking to Jim after they'd invested in Metaswitch, asked him why it was that they'd chosen to invest in Metaswitch? And he said, "Well, there are three things we look for in a business. The first is the people. Second is the company needs to be relatively young with lots of opportunity for growth. And the third is we need to be able to cycle from Menlo Park to the head office of the business. So you keep those in reverse order. You clearly cannot cycle from Menlo park to Enfield North London. So you failed on that one. Your business is 25 years old, so you failed on the second criteria. So all I can say is your people must be pretty exceptional." Which was a very long way around to saying, "It's the people, stupid." And that's always stuck with me.
Alan Cowley: So, do you follow that in terms of the location here in London, not necessarily cycling, but do you have a geographic location?
Chris Mairs: The majority, of my investments are in London. I have some investments in Cambridge, some in Southwest of England, I live down in Bath, but vast majority in London and a small handful in the US.
Alan Cowley: Okay. So you touched on syndicates and your first investment within a small syndicate. Do you always invest in a syndicate or through entrepreneur first? How does it work?
Chris Mairs: So over time I suppose, as I've got to know a larger network of investors, my deal flow has become less of an issue. You know, I now have more deal flow than I can deal with. In the early days, I very consciously joined a syndicate in order to actually get access to early deals. Now, the vast majority of my investments actually are businesses that I've mentored during the entrepreneur first programme. Then they come to their seed round and if I like what they're doing, I will put in an angel check as well.
Alan Cowley: Do you have any advice for entrepreneurs that think they should go for funding or are about to go for their first funding round?
Chris Mairs: I think one of the things it's important to do is understand the dynamics of venture capital investing, and the importance of the power of law for portfolio construction, and the fact that certainly institutional VCs are always looking for a business that will return their entire fund. And that means that some businesses' wealth, they might be very, very good for you as an entrepreneur, aren't necessarily going to work for a venture capital investor. I think the same is true to some extent for angels. There are some angels who are less concerned about the real outliers, but certainly when I'm doing angel investing, I'm always looking for big businesses that will potentially return 10x, 20x, 30x, my investment. So if you are going to go for venture investing, then think big. Make sure you have a vision for the business that goes way beyond your initial go to market.
Alan Cowley: Do you mean that also thinking big about maximising the amount of money that you can get?
Chris Mairs: I didn't, but generally, speaking I think that is true. I always say to people, "If there is money on the table then you should take it, because you never know what macro factors might happen in the next couple of years that are going to be entirely outside your control." And also, almost invariably, things are going to take longer than you thought. So having a buffer, having a war chest if you can get it, is worth the extra dilution that it might entail.
Alan Cowley: So, with that, how do you feel about crowd funding and when companies manage to over-commit or over-subscribe on crowdfunding?
Chris Mairs: I'm not generally a great fan of crowdfunding. There are some businesses for which it is entirely appropriate and extremely valuable, particularly consumer facing businesses. You can get a very strong cohort of evangelists and supporters for your mission, but it's quite a hard way to raise a relatively small amount of money. Sure, if you go over subscribed, then take the money provided that you were careful enough to set your valuation before you actually set out on the mission to raise the money.
So, one of the things that I always advise entrepreneurs to do when engaging with investors at the early stages, don't talk about your valuation. Talk about the business and the amount of money you're going to raise, and because it might be that you detect appetite in the market, which means you can raise more than you initially thought about. It's a bizarre but true rule of thumb that the amount of dilution you take is pretty independent. The amount of money you raise, provided that you don't set your valuation too early.
Alan Cowley: Yeah, that's an absolutely, fantastic piece of advice. You touched quickly on some challenges that entrepreneurs face. What challenges do you think there are for investors?
Chris Mairs: I think patience is always challenging. If you're running an institutional fund, then you're driven very often by the 10 year lifecycle of the fund. So it's always difficult for institutional investors to be as patient as perhaps you might like them to be. But angel investors, I think you have to start out from the perspective that businesses are going to take longer to mature than they first said they would. So I always take any revenue projections with a huge pinch of salt.
If you're investing early, then any business plan can be written on the back of an envelope, whatever you like, and it's pretty meaningless. So don't describe too much value to the revenue projections. Don't get psyched out if the revenue projections don't materialise, if you still believe in the business. But you should be thinking about at an early stage, where is the next tranche of money going to come from? What are the KPIs for the next round? And that's always what I'm thinking about, is what's this business going to look like when it's trying to raise it Series A round? And that for me is more important than, will it have X amount of revenue? Sure, revenue might be one of the KPIs, but there are plenty other KPIs that might be sufficient to raise the next round of funding.
Alan Cowley: Let's move on to some successes and failures, and we'll start with some successes. If you can talk about specific companies that'd be great, but if not that's fine. And we just want to hear a little bit about why they became successful, and then we'll go onto some failures and why they failed, and what you've learned from that.
Chris Mairs: So, successes. I mean, I have to start with Magic Pony, because it was a pretty amazing journey. So Magic Pony Technology was one of the entrepreneur first teams from cohort three. I was their venture partner from day one, and then when they finished the EF programme, they asked me to join the board as chairman of Magic Pony. And that business went from zero to an exit Twitter in 18 months, time for a reported $150 million. So that is an IRR that I will never see in any company in my portfolio.
If you are completely brutal, you might say, "Well, they sold out early." You know, to that extent maybe it wasn't a great success. I'm hoping that there will be several businesses in my portfolio that will reach substantially high evaluations, but to get to that point in that period of time was pretty amazing. They never had a dollar of revenue when they were sold. They didn't actually have a product, they were still a technology business. They had some very smart technology, and they built a team of very impressive PhD and postdoc engineers and scientists.
So there was just a particular point in time where they had some video processing technology which was interesting to multiple people, multiple big tech companies, and they chose after much consideration to take the money at that point and join Twitter, which I think has been great for the founders. So definitely a success. I mean there are several other companies in my portfolio who have got to a much more mature stage. Tractable, which was the same cohort as Magic Pony using machine learning for image recognition in car insurance. Accident claims is the application of the technology that they chose. And that business has now raised a Series B, and will in due course I'm sure, raise a Series C, and will become a very substantial business. That was successful because
The founders and the CEO in particular, Alex Dalyac, absolutely ruthless in finding a sector, learning about sector, I mean, knowing nothing at all about insurance before we started this business, finding a very specific business application for a small piece of technology and then building the relationships and getting to the point where he can now do seven figure contracts with insurance companies.
Alan Cowley: Wow. What about some failures and why they failed and what you've learned from it?
Chris Mairs: I suppose the two reasons that you hear most frequently for why start-ups fail is failing to find product market for it or running out of cash. And running out of cash is ultimately pretty much why most start-ups fail. But often they run out of cash because they failed to find product market fit. So that is the, I would say, the single biggest challenges, and people say, wow, it's a long sales cycle, it's a difficult market. What they really mean is, we haven't found someone who has a sufficient enough problem to actually sign a check for the amount of money that we need. And that's because they haven't actually really truly demonstrated product market fit.
And often the reason is that they haven't spent enough time working with customers. They haven't managed to get the customers, engaged enough customers will work with them to actually find the real shape of this product that will be super valuable to the customers. The one reason, which I find quite often, which isn't cited there, is internal stuff either between co-founders or between the founding team and the employees. So a failure to build a really strong coherent culture where everybody is pursuing the same vision and that is a fairly uncomfortable way for a business to ultimately fail. But I've seen it happen several times.
Alan Cowley: How do you think that if people do have different ideas of where it's going, what's the best way to deal with that as an investor or as an advisor?
Chris Mairs: Well, what I always say to the founders is that ultimately, this has to come from you. It can't come from me. I can talk to you either as individuals or as a group about the sorts of things that from the outside seem to be causing friction and tension, but ultimately you have to be transparent. You have to have integrity as a team and you have to have a set of values that you will genuinely subscribe to. And that's not just people sitting in meetings and saying, yeah, that sounds reasonable, because they can't quite face the difficulty, the challenges of the first conversation. It's much more about being able to have the challenging conversations, but in a way that not too much gets spilled in emotion. So just bear in mind, we're all in this for the same ultimate reason. So let's talk about where the challenges are and see if we can find common ground.
Alan Cowley: Do you feel that entrepreneurs anticipate the personal sacrifice that running a business entail? Do you think they really understand the losses or the gains as well, and the ups and downs that come with it?
Chris Mairs: Some, but not all do. One of my roles as an early stage investor is to make sure that A, I'm comfortable that the founders realise the challenges that they're going to face over the next five, 10 years. And also from my perspective, they appear to have the resilience to cope with those. And if they're not set up for the journey, then my strong advice to them is, maybe being an entrepreneur isn't right for you. Maybe you should try a different career and come back to entrepreneurship later.
Alan Cowley: So, you've seen quite a few businesses exit now, like Magic Pony. What does that feel like for the entrepreneurs and you?
Chris Mairs: Well, for me it's a bit nerve wracking. For the entrepreneurs, it's brutal. If you think that running a business is difficult, you just want to try selling a business. It's typically a process that is going to take somewhere three months, if it runs smoothly, maybe longer than that, and at points during that process you will be completely exhausted. You'll be frustrated by the amount of due diligence. There will be things that come up that hit you from left field that can become existential to the deal that you have to work through. And if you don't have the energy and creativity to be working 16, 18 hours a day for a prolonged period, seven days a week, you're probably going to find that sale process doesn't go as well as you'd hoped it would. And bear in mind that half of all MNA transactions approximately end up not concluding, even when you thought you've got a term sheet, so you've got to be willing to really go the extra mile during the sale.
Alan Cowley: We have an entrepreneurial investor, Sharon Dagan, on the show quite a while ago, who talked about how she took a about a year planning for exit. Do you think that's a wise thing to do for a business?
Chris Mairs: If an entrepreneur is overly focused on their exit, then I worry that they are not going to be focused enough on building successful business that will have the good exit. So I think on the other hand, being able to plan for the exit is super important. If you get the right plan in place and you run a process where you get multiple people interested in buying the business, you will get a better price. There's nothing like market tension to drive the price of an acquisition.
Alan Cowley: So that leads on well to talk about a huge challenge that you had. You cycled across America. What were your motives for the trip and what was it like?
Chris Mairs: On what planet did that make any sense whatsoever? So my motive for doing the trip, originally it was, I had previously ridden from Land's End to John O Groats across the UK, 1000 miles in 10 days. And I'd done that to raise money for Fight for Sight. Obviously being blind, I tend to be quite focused on charities that will help mitigate or cure preventable sight loss conditions.
And then in 2017 it was my 60th birthday and I wanted to do something to prove to myself that I was still in some sense moderately physically in good shape. So I decided that if I rode 60 miles a day for 60 consecutive days, and I could call that my 60 by 60 at 60, and I like numerical symmetry. So I mean that sounds like a really bad idea as a reason for riding across America. But that's where I started from. And I looked for a route that was 3,600 miles, and I discovered the Pacific coast in Oregon to the Atlantic coast in New Hampshire was 3,653 miles. So that is close enough.
And I'd also been looking at the most common cause of sight loss, which is entirely preventable, is cataracts. And amazingly in the developing world, you can provide eye surgery to solve cataracts and restore sight for $40. Amazing. So I figured if I could raise $40 per mile, then I would be able to restore 3,600 people's sight. And that felt to me like A, achievable, but B, a least slightly meaningful thing to do.
Alan Cowley: And did you manage that? Raise the money?
Chris Mairs: Yes, we did. We raised a bit more than that actually. We raised enough to cure about four and a half thousand people with sight loss, I think.
Alan Cowley: Wow, that is absolutely, incredible. Have you got another one coming up? 65th, 70th?
Chris Mairs: Well, I figured that probably my wife was fantastically tolerant of this madcap expedition. So I think that probably I need to wait until I'm at least 70 before I raise the next opportunity.
Alan Cowley: Maybe we'll see you rowing across the Atlantic, back again.
So, let's just finish on, what does the future hold? Are you going to continue Angel Investing? Not going to set up another company, are you?
Chris Mairs: No, I think no plans set up a company. I think that Angel Investing, working with young founders is what gets me out of bed in the morning. I love working with smart, ambitious people, applying technology that I didn't realise existed to a problem that I'd never heard of. And so that I find absolutely fascinating and if I can still continue to provide some value, I certainly hope to be doing that for the next few years.
Alan Cowley: Oh, thank you, Chris. Thank you. It's been hugely enjoyable to hear your story and all the best for the future.
Chris Mairs: Thank you. It's been a pleasure.
Alan Cowley: Thank you very much.
Peter Cowley: Thanks for listening to another Invested Investor podcast. You can subscribe to all future podcasts via our website investedinvestor.com or via a number of podcast platforms online. Remember, you can order our book online, and be sure to follow us on Twitter, LinkedIn and Facebook to get the most up to date, interesting and insightful content from the Invested Investor.
