Investing in the future
Podcast transcription - 10th July
Alan Cowley: We hope you enjoyed part one of Hermann Hauser's Invested Investor podcast. In part two, we're going to hear some hot tips to entrepreneurs, as well as Hermann speaking about some of the failures he's encountered and how we can learn from them. Enjoy.
Alan Cowley: So how involved were you in ARM, because obviously it was a spin-out of Acorn, wasn't it?
Hermann Hauser: Yes. It was the 12 people that was the team that I originally put together for the ARM, which was a crazy decision. We did a microprocessor in a little Cambridge start-up. But we felt that we needed a new processor. The 65 for two, which was the microprocessor in the BBC micro was an 8 bit processor, and there was just not enough performance. So, we needed either a 16 or a 32 bit processor. We looked at every single 32 bit microprocessor in the world, including the 8286. We went to Intel and said like, "It's not a bad processor, but you screwed up the pin out. You have put both the address pass and the data pass on the same pins. Nobody can make a sensible computer out of that. But if you sell us the dye, we'll do our own pin out, so maybe we can make something of your chip." They said, "Get lost." So, we said, "Well, you get lost. We'll do our own." You know, at the time we were arrogant.
Alan Cowley: Well, the rest is history, isn't it? Just a quick question, do you have all your old products, such as the Acorns and the Active Book Company? Do you have those at home still?
Hermann Hauser: Yes, I do.
Alan Cowley: Okay. Brilliant. Before we move on to your invested life, can you just tell us a story of E-Trade?
Hermann Hauser: Oh, yes. That was one of the real fun stories in my life. It all started with ESI, called Electronic Share Interchange, I think it was called, that I did with Jack Lang in Cambridge. The idea was to have a Cambridge stock exchange. So, we went to the London lawyers, Slaughter and May, who wrote the rule book in the 18 somethings for the London Stock Exchange. It was a 40-page rule book, and said, "Could we start another stock exchange in the U.K.?" They said, "Absolutely. No problem." We've done one here before. Here is the rule book. The present rule book of the London Stock Exchange is 400 pages, but you don't need that. As a start-up, we can make it very simple for you again. But then, the internet made it possible to do share trading, over the internet, so we did that first with a view of them going and producing a stock exchange. So, we were the first company to allow people to trade their shares over the internet. It was a bit primitive really, because we would receive the order over the internet at our premises in Cambridge, and then send a fax to ShareLink, which was the telephone trading company in Birmingham that had an interface that could do it, and they did it for us and then they faxed it back and we put in back into-
Alan Cowley: Uploaded it online.
Hermann Hauser: Uploaded it online. So, that's how we started. But it caused quite a splash at the time, because we had a price feed from the stock exchange that allowed people to look at the price and then decide whether they want to buy the share or not, and it as a 15 minutes delay, so that it's not real-time. But that was all right. It was the only launch of a company, together with the ShareLink founder, in the pump room of Tower Bridge. There's a nice room up there and we had 50 partners, financial journalists in there, and we told them what we were doing, and we're selling shares over the internet, and they got up and clapped. Journalists never clap, especially these financials. So, they thought we were just the bee's knees, and this was the greatest thing since sliced bread because it would revolutionise share industry et cetera, which it did.
We said, "Now, hang on. Hang on. We've got one more announcement to make. The stock exchange just told us that they're going to break the deal that we had with them because they want to do it themselves." We had a deal with them, and we're very sorry, but in a month, we might have to close down our operation." You should have seen the headlines in the next day. "London Stock Exchange Tries to Squash Little Cambridge Start-up." This is, seriously, we were the absolute headline. Frontpage of the financial times. The government got involved and there was the Office of Fair Trading, I think it might have been, or some government office that the London Stock Exchange reported to, and we went to see them. We realised that the government can be your friend. So, they said, "No, we want to have competition in this country. We will tell the London Stock Exchange that this is isn't along, to give you a better deal." I said, "Well, how can you? You know, the London Stock Exchange is this fantastic, important organisation. How can?" "Oh, no, no," they said, "We'll tell them. They'll give you a deal."
Then, I had the most extraordinary meeting of my life with the head of the London Stock Exchange, who absolutely hated to have to meet with me, this start-up in Cambridge. He just loathed it. Then, he did something, which showed me he was out of his tree. He greeted me with the words, "My word is my bond," in front of the main stock exchange conference room. This is the motto of the London Stock Exchange, "My word is my bond," when he'd just broken a contract with me. I thought the guy is an idiot. I lost all respect for big institutions or people who head them and realised that they are people like anybody else and sometimes people in high positions are just stupid. The guy was just stupid. So, he then started negotiating with me. Now, there was he and his lawyers on one side of the table, and me and my lawyers. He started laying into me how I can't behave like this and who do I think I am, and they're not going to do that. His own lawyers said, "You can't say this. You've just broken the trust you've got it to give him." Anyway, they gave us everything that we wanted, cheaper for longer. So, we were riding high and we then became E-Trade.
Then, the next peculiar story, but I went to the U.S. and said to Christos Cotsakos, who ran E-Trade U.S., which was the darling of the American financial industry at the time, that I'm going to build up E-Trade U.K. for him, and I was going to sell it to him then for four or five times revenue. He exploded and said, "Absolutely not. I'm not going to give you a guaranteed exit. Let the market decide." I said, "Okay, Christos. That's fair enough. Let the market decide. But if you were my only customer, you know, I don't have a market. So, you've got to allow me to sell to anybody else." He said, "Yeah, fair enough. But I'll give you a list of 10 people that you can't sell to," like Charles Schwab and JP Morgan and all these guys. So, he gave me the list. I signed the deal.
It comes to the year 2000. Goldman Sachs advises E-Trade U.S. on their international strategy. The first thing they said is the next, most important market is the U.K. What are you doing in the U.K.? "Well, I have this joint venture with this guy called Hauser." They said, "Okay. Who owns the trademark?" "Well, the company." "So, how much of the company do you own?" "40% or something." "You've got to buy that company." So, we have revenues of one million at the time. So, he could have had the company for five million.
Alan Cowley: Yeah.
Hermann Hauser: His first offer was 80 million. I then went to see how these companies are valued, and it was this crazy internet time. I thought it was eyeballs because we had lots of eyeballs. No, not so. It was several accounts. So, there was a German company called Consort, that had a valuation of 500 million, because it had that many accounts. These accounts, that typically had 100 or 200 pounds in it, because people wanted to learn how to trade on the internet. They were worth 30,000 pounds. So, on that metric, we were worth 450 million pounds. So, I went back and said, "No, 80 million isn't enough. How about 450 million?" We settled for 280.
Alan Cowley: 280, up from the four or five million that you could have taken?
Hermann Hauser: It was one of my better deals.
Alan Cowley: It's absolutely, brilliant. Well, on that, on your better deals obviously as a start-up, let's move on to your angel investing.
Hermann Hauser: Yes.
Alan Cowley: When was your first angel investment, but also what attracted you to angel investing?
Hermann Hauser: Like all other business angels, I think when you've built a company yourself and you've made a little bit of money, you sort of feel that you want to help other people to do the same. Our first investment really was IQ (Bio) with Chris, when we felt we could help. It was Chris Keatley, who was interested in using this Pap test, which became a successful test.
Alan Cowley: Okay. So obviously, you wanted to help start-ups. In what way was this? So, you're still running your own company, aren't you?
Hermann Hauser: Yeah, we were both running Acorn Computers. Of course, we gave them some money. I think it was only a few hundred thousand pounds. We then met to define the product, to understand the technology, so this was an early exposure to life sciences, which was fascinating. You know, I realise that this PCR, and I learned about PCR at that time, because it was a PCR test, polymerase chain reaction, that creates these incredibly sensitive diagnostic tests. So, that was a great revelation to us that you can have these life science mechanisms that can be very, very sensitive and very unexpectedly accurate.
Alan Cowley: It sounds like you've got your own business, and you're still interested in other industries. Is that why you were kind of-
Hermann Hauser: Yes, and then they're entrepreneurs. Chris Keatley was a very energetic young expert in that field. He wanted to start a company. He was quite friendly with Chris and we decided to help him.
Alan Cowley: Okay. So, that was your early angel investing. That's back in the '80s. What year did you set up Amadeus?
Hermann Hauser: 1997.
Alan Cowley: 1997. Did you set that up alone, or did you co-found it?
Hermann Hauser: No, with Anne Glover.
Alan Cowley: Anne Glover.
Hermann Hauser: It's always been, I've had two very successful business partnerships in my life. One with Chris Curry, Acorn Computers, and Amadeus.
Alan Cowley: So, why did you decide to set up a firm, then?
Hermann Hauser: Because I had such, I think at that time, I must have been something like 50% of the business angel money in Cambridge. So, I had such a deal flow, because they knew I was a sucker for technologies. If they came with an exciting deal to me, I'll fund them. So, I did. But I already had 20 or 30 companies at that time, and I realised I need to do this more professionally, and I needed to have a process, a due diligence process, and after making the investments. It must have been more than 30 because when the people did due diligence on Amadeus, I think I was on 50 boards.
Alan Cowley: 50 boards?
Hermann Hauser: Yes. They said, "This is a little bit too much. You've got to resign from many of them." The reason why I went on the board is that people wanted me on the board and clearly, I couldn't turn up to every board meeting in every company. I would have spent all my life in board meetings. But I always prided myself of being interruptible, so if any of the 50 companies wanted anything from me, they had my mobile phone number. They phoned me and I tried to help the best I can. But then, you know, this was a very good excuse to come off most of the boards, so I did.
Alan Cowley: How many boards are you on nowadays?
Hermann Hauser: We have a maximum of six at Amadeus. We feel six is the maximum number that a partner can handle.
Alan Cowley: Okay. So, how many investments do you think you've made? If you include those 50-
Hermann Hauser: Well, well over a hundred. I haven't counted. It must have been well over a hundred.
Alan Cowley: Wow. So, do you have a criteria at the moment?
Hermann Hauser: Well, there are three criteria in order of importance in my men. The first one is the size and growth rate of the market because unless it's a big market or will be a big market, why bother?
Alan Cowley: Yeah.
Hermann Hauser: Two is the quality of the team, and I'm always looking for a star in the teams because if you have an outstanding person, you can normally gather an outstanding team around him or her. The third, sadly for a propeller-head like me, is the defensible technology. The reason why it's in that order is that I've seen so many examples of where an A team with C technology would beat the C team with A technology.
Alan Cowley: Yeah. Okay. What does your ideal entrepreneur or entrepreneurs look like? What sort of characteristics do they have?
Hermann Hauser: Well, they have to have passion, and that probably goes without saying, and every venture capitalist will tell you that people really have to be passionate about the project that they're engaged in, because that will give them the energy to punch through the difficult periods that invariably they will encounter in a start-up.
Alan Cowley: How do you gauge that? You meet them for the first time, or do you have to?
Hermann Hauser: Yeah. I think the two things that I suppose comes with having a bit of experience in this field is one, you realise whether they're just, have a sort of superficial excitement about the project, or whether they really are engaged and it really has become part of their lives. The other is assessing whether if they're a five-star wizard because if they tell you that they're a five-star wizard, they normally aren't. That also takes a little bit of experience.
Alan Cowley: What's the most exciting investment you've got, at the moment?
Hermann Hauser: Well, there are four technologies that I think are really, are going to change our lives in the next five to ten years. One is AI and machine learning. Two is blockchain and smart contracts. Three is synthetic biology and the fourth is quantum computing. I've got some favourite companies in each of them, but long term, if you're thinking just of a single one, in terms of the sheer excitement about the long-term consequences, it's potentially one in quantum computing. It's a new quantum computing architecture. That could be the sort of arm of quantum computing. But if you don't want to go completely blue sky, I suppose it's a graph core, the chip that has a chance of becoming the microprocessor of choice for machine learning and AI.
Alan Cowley: Okay. That's pretty-
Hermann Hauser: It's the first unicorn in Bristol, which has managed to raise 200 million for that company or 1.7 billion posts, so it's a very unusual situation that you can do that in Britain. Normally, you can only do that in Silicon Valley or in China.
Alan Cowley: Is that one that you've sat on the board with?
Hermann Hauser: Yeah.
Alan Cowley: Yeah. Really interesting.
Hermann Hauser: Yeah, we've just had a board meeting, so it's a very exciting company.
Alan Cowley: Oh, that brilliant. Okay. So, we've talked about a lot of success. Can we talk about some failures?
Hermann Hauser: Well, you know, there have been lots of failures. Many of these companies failed in lots of different ways. One remarkable thing to report is that I only have one single example where the technology failed completely. Technology often doesn't work quite as well as people think it will or not on time. But a technology that doesn't work at all is actually very rare, in ICT. Life sciences is a different story. In ICT. That was a company called PoLight. I will never forget that because we were very excited about that company. It was called PoLight for polarised light, and it was based on chalcogenides. Chalcogenides are materials where one wavelength of light can change the refractive index of the chalcogenides for another wavelength of light. Therefore, we thought we could produce WORM discs, these write-once only discs, with a higher density than anybody else in the world. So, we thought we might be able to revolutionise these laserdiscs for data storage. The back of the envelope calculations really looked very good, that we could be much better than any storage medium every devised before. So, we started this company. It was very exciting.
For some reason, the Czechs are world experts on chalcogenides, so we had a Czech PhD student at Cambridge, and was a spin-out from the chemistry lab. One day, he comes into the board meeting and says, "I'd like to prove to you now on the whiteboard, that what we're trying to do can't be done." So, he wrote up the formula to prove to us this isn't possible, and had a great smile on his face, because this was quite a difficult argument that he won. We all accepted it. Then, we knew we're going to shut down the company. So, it was both a great technical achievement to understand that this can't be done, and a disaster for the company, because we knew we didn't have a company, so we had to close it down, and he didn't have a job. But he was completely intellectually honest, and he knew what he was doing. He knew that this meant that we had to close the company down. So, it was quite sad.
Alan Cowley: Have you heard from him since? Has he set up another company in a different?
Hermann Hauser: I don't know. I have not kept in touch with him.
Alan Cowley: Okay.
Hermann Hauser: But I'm sure, he was a great researcher. He probably stayed at university, but I have lost contact with him.
Alan Cowley: Before we kind of finish, let's just have a quick chat about the European Research Council, because you work very closely with that.
Hermann Hauser: Yes.
Alan Cowley: What does the ERC do?
Hermann Hauser: The EIC, the European Innovation Council, which I chair. The ERC is probably one of the greatest success stories of Europe. The European Research Council is about, I think 20% of Horizon 2020. So, it's probably 12 or 14 billion euros over seven years. The reason why it is so successful is that it's a grant-giving body for universities that only has one criterion, which is excellence. Cambridge, of course, does extremely well. In fact, the U.K. does extremely well on the ERC. It's one of the sad things that's going to go away with Brexit. The reason why it's such a success is that it's become a European-wide yardstick for excellence. So, even humble universities like Cambridge will quote the number of ERC grants that they have as proof of how good the university is. This is quite a contrast to the way the grants were given in 2020 before, where you had to have people from Greece and Portugal, because you had to have two or three countries involved, and you normally had to have a country from the south and one of the smaller countries. Although, it was incredibly beneficial to build up a community of European researchers, so it was certainly worthwhile doing, not all the projects have been successful, whereas the ERC projects are spectacularly successful.
Because the ERC has worked so well, the commission then decided to set up the EIC, the European Innovation Council, which takes these ideas, these successful ideas from the ERC and elsewhere, and makes companies out of those. So, this is the next stage after the research, which is of course, of the commercialisation stage. There, we will have what we call blended finance. We have a combination of grants, loan guarantees and equity for the first time. This will probably be around 12 billion euros over seven years, so this will be a couple of billion a year, or thereabouts. So, it will be a substantial initiative, and it will use the equity money to crowd in market money. So, it will never go alone. It will always let the market do the due diligence, but it will help create a better equity base, a better venture environment in Europe, because Europe is still only one fifth of the venture capital compared with the U.S. So, we're way behind and we need to grow our ecosystem, which is growing very well, European venture capital. U.S. venture capital didn't do particularly well during the first 20 years, and people often forget that. European venture capital has just had but 20 years. If you now look at the returns between the U.S. and Europe, there isn't any difference anymore. In fact, the European venture capital gave slightly better returns over the last few years than American venture capital.
Alan Cowley: Wow. Do you think that's because of the number of venture capitalists out there?
Hermann Hauser: Well, the reason why Europe is doing better is that the deals are a lot cheaper here. The good software engineers, for example, are three times more expensive in Silicon Valley than here. So, we've got a much lower cost base, and arguably, the people are as bright in Europe as they are in the States.
Alan Cowley: Absolutely true. So, we've heard the four real new prospects that you're looking forward to out of the next few years. How about yourself? What's in store for the next 10 years? Where will you be in 10 years?
Hermann Hauser: Well, I have this great excitement about the present. I've never seen so many exciting, interesting deep technology deals than right now, and deep technology is what I do. So, I'm enjoying what I'm doing and I'm enjoying doing some of this back in my home country of Austria. So, I've set up a little family fund there in Innsbruck with my cousins. I am on various committees in Austria advising the government to help the Austrian ecosystem, which has always been the last in Europe. So, the big advantage of being so far behind is that you can grow very rapidly. The growth rates are high, so people are very excited about it, and it's very easy to know what to do, because you just need to copy what the successful countries like Britain have done, and I'm helping with that.
Alan Cowley: No, that's absolutely, brilliant. Hermann, your business journey so far and your investment journey have just been absolutely, extraordinary, and the stories you give are absolutely, brilliant and the listeners will absolutely love them. All the best for the next 10 years, and we'll watch out for Austria, as well as Amadeus. Thank you very much.
Hermann Hauser: Well, 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 several podcast platforms online. Remember, you can order our book online. 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.