A telecommunications success story, and a chance for Manchester

Podcast transcription - 18th JuLY 2018

Peter Cowley:                  Well, welcome again to another Invested Investor podcast. I'll have to excuse myself a little bit this time because I had a skiing accident here in the Alps, but I'm with a friend who's had a great journey as an entrepreneur and angel investor, Neil McArthur. So Neil, give us a bit about your background.

Neil McArthur:                 Yeah. Hi, Peter, and welcome everybody. I was born in a place called Irlam in Manchester, which is in Salford. My dad was a steel worker and my mum was a librarian. Went to a secondary school, and following secondary school took an apprenticeship at the British Nuclear Fuels as a Design Engineer. And following the completion of that, I went to university and studied computer science and telecommunications. Finished university in '79, went back to the nuclear industry briefly until 1981 and then together with a great friend, Graham Chisnall, we set up an engineering business called Thurnall Engineering. This was really producing control systems. I found some mechanical systems, mainly in nuclear but in petrochemicals as well and a bit of pharmaceutical.

Neil McArthur:                 We ran that business really until the mid 90's and then it about '96 the government really signaled the end of the big investments in nuclear fuel plants and reprocessing, so we looked to change the business quite substantially.

Peter Cowley:                  Before we go onto that, you went to the university in Essex but you moved back up to the northwest to build a business where you now live, didn't you?

Neil McArthur:                 Yes, certainly I moved straight back to the northwest so I've never really moved too far from where I was born to be honest.

Peter Cowley:                  So, did you have a bit of corporation life before you became and entrepreneur?

Neil McArthur:                 Only in the nuclear industry as a design engineer. Worked for them as an apprentice and then two years post-university. Then really we got stuck into the business in '81 so only 25 at the time.

Peter Cowley:                  And what triggered you to do that?

Neil McArthur:                 Well, I think it was always going to happen. As a kid, I'd got a potato round, you know, I was earning money left, right and center. I was always buying and selling things. I think there was a bit in there as there is with most entrepreneurs really.

Peter Cowley:                  Good, okay. Let's go back to the story of this first business.

Neil McArthur:                 The engineering business. I mean we did literally set it up in a shed. And in those days, perhaps wasn't just in the same way as it is today. You tending to just work with your own capital and just try and grow from your profits each year and we did that for 15 years. The great side of that is you don't half learn and your very careful with money and certainly every pound is a prisoner but downside it takes quite a bit of time to build up the capital. But, we did that up till '96 and then as I said the nuclear industry went through shocking phase and they were our core customer. We did a fairly major survey of the industry and found out that we were about as good as it got in systems geoengineering. And our life wasn't going to get much better.

Neil McArthur:                 So, we decided to reinvent the company and there's a great bit of business skill theory that you should go left or right, or up or down, but certainly not diagonally across the decision tree. And we went straight across. We changed industries completely. We went from nuclear engineering to telecommunications.

Peter Cowley:                  Did you sell the nuclear business off or ...

Neil McArthur:                 Not initially no, we set the telecoms business up in '96 and we run it, really with a free cash flow, we had 20 grand of free cash flow coming out of the engineering business per month and that was the limit of the investments in telecoms. So, we ran that for a year or so and then we did a joint venture with a company called Martin Dawes, who was a much more focused sales organization. Bear in mind we were all engineers and we'd built some quite good technically savvy products or services and once we partnered with a sales organization we managed to get some growth in the business and as we'll see, as we go on here, it really took off. But, once we knew that it was really going to take off we then disposed of the engineering business so we had a exit from the engineering and that's still going today.

Neil McArthur:                 It's split two ways. Part of it is Babcock International which is a nuclear still and is actually now doing quite well because the industry's come back and the other is Brooks which is a pharmaceutical automation business. So, that left us with a telecoms business.

Peter Cowley:                  Which you called Opal Telecom.

Neil McArthur:                 We called it Opal yes, and as the story unfolds you'll see that we tend to remember all the successes in life but we actually set up three telecoms businesses and one of them survived and thrived and two of them withered on the vine. But, we tend to forget about the ones that didn't go so well and focus on the ones that did really.

Peter Cowley:                  And, so what were you doing? What was Opal Telecom? What made it successful?

Neil McArthur:                 The great thing about Opal is that what made us go into telecoms was whenever you're trying to start a business you're looking for some disruption in the marketplace and disruption can come a number of ways.

Neil McArthur:                 In our case we got regulatory disruption. So the government decided to deregulate telecoms and those days there's only DT and Cable & Wireless that opened up to competition. So, we got deregulation. We got a big growth industry in telecoms, you could see growth and there's an awful lot of technology involved and there was big changes going on telecoms technology. You've got three fairly major disruptive events there. You've got to following wind when you've got that kind of opportunity.

Peter Cowley:                  And was this landline or mobile or both?

Neil McArthur:                 Now this was fixed line telecoms. We applied to our license to Ofcom to operate a switch telecom service. And of course, in those days, it was voice. It was before the days of data over telephony and so we were building business to business services and essentially what we were is building computer applications on the back of telephone exchanges to route voice calls, record voice calls, manage voice calls to call centers and small businesses and route international traffic. We came pretty savvy and as the new kids on the block really.

Peter Cowley:                  And you sold it in '02 so how big was it at that point?

Neil McArthur:                 Oh crikey, before you get to the surplus you got to go through the attempted flow because in 1999 we had this massive dotcom boom and in technology you couldn't do anything wrong. We had a business with Martin Dawes. I think our combined turn over at the time was, I'm guessing, 30 million, something like that. And we were encouraged to float the business.

Neil McArthur:                 So, we merged the two businesses together: Martin Dawes Telecom, our joint venture business which had the technology involved in it; and Opal, and we called it Opal as it happened, and we set about floating the business which was being managed by Deutsche Bank. We were raising 30 million of cash to develop the business. We had mid-point value on the business of 256 million pounds by some amazing guy in Deutsche Bank who did a discounted cash flow that you couldn't believe and certainly wouldn't believe today. It was a piece of fiction then, and it certainly would be today. But off we went on the road show.

Neil McArthur:                 We raised the money, the drop of a hat, no problem at all. We got into the last week of the road show. We were up in Edinburgh, the market turned.

Peter Cowley:                  So when was this, late 2000?

Neil McArthur:                 This was early 2000. This would be probably about April 2000. And in a space of a couple of months you went from not being able to do anything to wrong to not doing anything right. Deutsche Bank stopped the flow because they said people were pulling their offers while the market settled. Of course the market never settled. The float never happened so, instead of raising 30 million we spent a million quid we didn't have.

Peter Cowley:                  Yes.

Neil McArthur:                 Not a great start. But life got a bit better. We did the most amazing deal with Royal Bank of Scotland about three months later, who rescued us from the arms of some venture capitalists who were going to severely dilute us. And, you need to listen to this because this is a deal you would not hear today.

Neil McArthur:                 But, RBS actually lends us 25 million pounds with eight million pounds of security for fee of five million pounds for 12 months. So we were now 30 million in debt, 31 to be precise. We've got eight million of assets and we're EBITDA negative and sure enough we run the business for a year, we got it EBITDA positive. They renewed for much smaller fee, only a million and a half so now it's six and have half million in fees, mind you we didn't pay them. They were just racking the debts up. And then we bumped into Charles Dunstone's group Carphone Warehouse, who wanted to go into fixed line and we tried to get them to sell the service. Charles is ever for the deal doer, convinced me he got on the stock market, we haven't, it was probably better we did a deal.

Neil McArthur:                 We did a deal and we merged Opal into Carphone Warehouse in November, don't remember it well but it was November the 6th, 2002 and what a great deal it was.

Peter Cowley:                  Yeah, I think it's in the public mailer. Just over a 100 million or so.

Neil McArthur:                 Yeah it was and we took half cash and half shares so we rolled the dice, all of us and...

Peter Cowley:                  Paid back RBS no doubt at some point.

Neil McArthur:                 Oh yeah RBS got back at that point and of course they picked up a fantastic fee but in fairness we hadn't diluted. It was the right thing to do at the time. But, it was a bit racy and a bit dodgy and you don't have a chance of getting that out of a bank today of course.

Neil McArthur:                 But, you know, that's where then thing really took off.

Peter Cowley:                  And then did they rename Opal to TalkTalk is that what happened there?

Neil McArthur:                 Yeah, the idea was to take in to Carphone because they were a retailer principally of mobile phones. So we took it into Carphone. We wanted to go to residential. At the time we were mainly business to business. So, we renamed it TalkTalk, give it more of a residential sort of feel really. And then start growing the business. We kept the Opal name for the business division, which is still going today and we started setting about selling voice services into residential. And, we're using off peak capacity in the business equipment really, to drive the market and you know it went really, really well. But, the big eureka moment came for us, I think, in 2006. The business was certainly growing well and Carphone was doing well but we wanted to get into broadband. It was obviously the future. And the board were very keen for us to build a broadband network. And, we weren't so keen on it because we didn't like the technology at the time. We were on a telephony network and we needed an IP data network. Fortunately we were able to just ride the crest of a wave of conversion telecommunications, IP and voice, called Next Generation Networking.

Peter Cowley:                  Because I'd used ADSL I think from '99 so, it was obviously available to the householder then wasn't it?

Neil McArthur:                 Yeah, ADSL was but, BT had launched it of course as an 8-Meg product so it was in that mode but what we actually did is we launched ADSL but we actually fully bundled the network so we actually did a data roaming network essentially into the exchange and then converted, put the voiceover data at the exchange and did a converged, next generation network from the core right through. And that network's still running to this day and we've got about 4 million customers still on that network. Of course it's coming to the end of its life now as copper does, that was 2006. We launched it in November and of those of you that might remember that sign we launched a free broadband in the package so you effectively cross subsidizing voice line rental and broadband was free. And, we were signing 60000 customers up a month.

Peter Cowley:                  Right, yeah.

Neil McArthur:                 We were in serious trouble.

Peter Cowley:Yes.          

Neil McArthur:                 Serious trouble.

Peter Cowley:                  So are you still with the business aren't you? You're still an advisor to the group.

Neil McArthur:                 Yes, I am. I'm still employed by the group technically but I only work part-time in the group now but at the end of the day I'm and engineer and when the groups involved in big engineering projects, I get more enthused and when it's not I do less but we're back on the case again.

Peter Cowley:                  So, before we move on to angel investing, one or two things for entrepreneurs, obviously it was been a tough time at times. Can you think of anything that stands out that you could advise people?

Neil McArthur:                 I think the key things about entrepreneurs is when they get knocked over they pick themselves up and dust themselves off and get on with it again. Like I said, everybody's forgotten the two businesses that failed and we remember the one that succeeded so, you just got to keep going and there is some key things isn't there and one of the key things is, if you're not adding value, don't expect to make a profit. Arbitrage's only last so long. So, any business that's got an arbitrage in it somewhere, you'd be lucky to get much life out of it before somebody else jumps on the back or changes. You're looking for disruption. If you're going to start a business look for some disruption to give you the opportunity to get into an existing marketplace with ... whether it's a new product or a new way of doing things or something like that.

Neil McArthur:                 You've got to be different. If you join the "me too" club you very quickly get commoditized.

Peter Cowley:                  And I'm sure you found this as an angel that you only back businesses where they are going to be disruptive and add value.

Neil McArthur:                 Absolutely it's same thing, absolutely same principle. You're looking for value out. You're looking for some uniqueness, some disruption in there. You're looking at the management really because if you've got good management you stand a fighting chance and if you haven't you're gonna to fail no matter how good the idea is. The management's got to be sound and you're certainly looking for the quality of the idea and my own preference is technology. And my further preference would be services in technology.

Neil McArthur:                 I think developing products in technology in the UK is tough because of the competition from abroad, where are services I think we can be quite smart on there. And I guess when I stand up in business skills and talk to people who thinking of starting a business the one big thing I would say to people is that business is a lottery and to win a lottery you need six numbers and I've never met an entrepreneur yet that's had more than four. I think I have three. I think Charles Dunstone's had four. The facts are somebody else has got the other numbers and you've got to find them. And an entrepreneur who owns the six numbers, I don't think exists.

Neil McArthur:                 If you look at all the big entrepreneurs who've run really successful business, there'll be a few people in the shadows who contributed to the other numbers.

Peter Cowley:                  These are the numbers of people aren't they? The rest of the team.

Neil McArthur:                 Well, it's yes. The rest of the team, you know, because the facts are if you've got five numbers in the lottery, you get 10 quid. And if you get 6 you get 10 million and that's why you got to find the six numbers. So, I think it's really important you look in a mirror. Have a good look at yourself and think, "Have I got the six numbers?" Because it would be pretty unique if I probably haven't. Where are my deficiencies and how do I go about filling in those deficiencies?

Peter Cowley:                  Right. So, when was your first angel investment? Was it in the early 2000's or ...?

Neil McArthur:                 I've been dabbling in angel investing I suppose now for the best part of 20 years. It's certainly before the exit, but post exit of course you have a bit more cash rattling around in the pocket and you know entrepreneurs don't do 3% in the bank do they? I've been investing in all sorts of ... it's always been tech. I don't tend to invest in stuff that's not tech. My view of risk and other peoples is somewhat different so it's usually pretty high risk. Pretty high PO stuff.

Peter Cowley:                  That's the stuff I do, as you know well. The group that was skiing here today. So how many opportunities have you invested in you think?

Neil McArthur:                 If I was guessing, over the last 15 years, 40, 50 maybe. A lot. Obviously there's some big wins in there and some classic failures like you'd expect.

Peter Cowley:                  And what have you learned from those big wins and failures?

Neil McArthur:                 Look at the management for sure. Management, management, management. Business is about people so look at the people. So, look at the people and at first, the idea second. You know, make sure that there is some uniqueness and they can add some value 'cause you've got to get some oxygen. If a business survives two years it will usually survive much beyond and certainly when you go in pre IPO you can always wait for the call for the second round, can't you?

Neil McArthur:                 Hopefully the business has now added some value and the second round doesn't dilute everybody too much so be prepared for the second round. I think it's always good if there is some corporate finance people on the edge of it because they're usually providing advice mentoring. Because I've never had a lot of time to mentor my investments. And, they keep people fairly straight. They're also looking for the IPO opportunity.

Peter Cowley:                  Yes.

Neil McArthur:                 Because, you've always got a guide people from the those start up situations through. They've always got to have a few of where this is going to end. And for an investor it's often end with an IPO. So, the management team might not, might be a trade sale, might be an IPO.

Peter Cowley:                  Of your successes, how many have been IPO's, how many have been trades? It is half and half or ...

Neil McArthur:                 Maybe, probably more on the IPO side because in Manchester we've got a very, very rich, angel investing community. And we tend to invest in groups with the backing of small corporate finance houses and our view is generally anything, any money, people looking for two million tends to be angel investing. So, we choose a collection of 10 angels put up a couple of hundred grand for a couple of million. We've usually got some due diligence done by the corporate finance people. I've usually put the chairman on the board and I've put an exec on, give you a bit of comfort. And I now have a view thinking we're gonna run this for a couple of years and IPO it.

Peter Cowley:                  Yeah, that's so different from Cambridge as you know, the southeast where the angels hang it together has a group and one of the angels then goes on to the board and we don't have the corporate finances around the same way.

Neil McArthur:                 Yeah, I'm talking about small corporate finances house. I call them super angels or angel aggregators that sort of pull the relationships of the angels together. It is slightly different.

Peter Cowley:                  But they'll still take a fee for their work I guess.

Neil McArthur:                 They usually take equity themselves.

Peter Cowley:                  Okay, good. Which they pay for or ...

Neil McArthur:                 Rarely, I would suggest but the bid value out of course is they only do it if they can see an IPO out of it.

Peter Cowley:                  Right.

Neil McArthur:                 And they've usually been all over the management for that. And the few investments I've done when I've not had the kind of backing, they've tended be much rougher rides for sure and they've been more from the heart than the head because I've really liked, out of the people, or the technology involved and ...

Peter Cowley:                  Yeah, we talk about Manchester a bit more in a moment. But you've done a huge amount of your big charity property development et cetera so that's why you really haven't had time to sit on Boards and assist companies isn't it?

Neil McArthur:                 Yeah, well I never really left TalkTalk of course so that really precludes me from going, doing anything too much with boards in telecoms and I'm involved in the university as you know in Manchester which is very exciting place. You know we run our very large charity, which is very exciting place and entrepreneurs, once you've got some money in your pocket and it's burning a hole you tend to do something with it. We don't sit in beaches terribly well.

Peter Cowley:                  You've done a huge amount of work for your local town haven't you?

Neil McArthur:                 Yeah, I was born in a steel town and quite frankly it suffered very badly from mid-70's onwards and we've been slowly putting it back together. It's pretty respectable now.

Peter Cowley:                  And you also set up the Manchester Tech Trust. Can we talk about that as well?

Neil McArthur:                 Yes, the Manchester Tech Trust. Crikey, we did quite a big piece of work a couple of years ago where we were looking at the technology and enterprise market in Manchester and what the state was like and we were staggeringly surprised by how much was going and how little of it was visible. And the phrase that we use that, Manchester had managed to get the reality of its hype. That's not a great place to be. The good news is there's a lot to tell and a lot you can do. The bad news is it's a marking problem rather than an actual problem that of lack of entrepreneurs or lack of opportunity. And if you contrast that with Cambridge, where Cambridge has managed to absolutely get its halo shining, and everybody knows about it. Everybody's heard of Cambridge angels and in truth, you've probably got your hype slightly above your reality. But as well it should be.

Neil McArthur:                 That's how you grow a business isn't it? You get your hype off and you pull the reality up to the hype. Well Manchester's not doing that. And the trust is really about trying to get the academic sectors, we've got two major universities in Manchester and arguably four in total, in greater Manchester. Trying to get the universities working with the public sector to get the viability of what's going on in Manchester, higher. And the agenda is slowly building and the viability of finance in Manchester now, we run a website and we run drop-in centers for entrepreneurs. We do them every couple of months. We probably run 20, find 20 new entrepreneurs every couple of months, we signpost into finance. We're mentoring them, we're building up a network now and it's great working with you guys in Cambridge to see how you're doing it with your angel investing. We're trying to replicate some of that and we're trying to get Manchester to have what unique about Manchester.

Peter Cowley:                  Yeah, because you also a great pool of employees as well, haven't you? And subcontractors and other supply industry. Much more so than we have.

Neil McArthur:                 Oh, yeah. I mean, Manchester's obviously a bigger geographical area than Cambridge. And, we were talking the other night, weren't we? It's population is considerably bigger so if you're going to scale something Manchester's a good place. The great thing about Cambridge, of course it's nice and compact. It's really focused in the sense around the universities with people who've got some association. A lot of the investing in Manchester's not associated university at all. Tremendous number of entrepreneurs. A lot of tech entrepreneurs. But, the university doesn't have the same focus as it does in Cambridge and that's something that we're also trying to address to get the university more enthused about it, enterprise and technology transfer and it is doing. And, we're getting more visibility on that. That's what the trust's all about.

Peter Cowley:                  Yes. In fact in Cambridge, you look at my investments, the ones in Cambridge, of which they're probably about 25. Only about five or so came out of the university. The rest are just because Cambridge is full of entrepreneurs and I'm sure Manchester is as well. It's a matter of finding them, contacting them, to helping them and backing them if you can.

Neil McArthur:                 It's crawling with them actually. These days it's actually a career consideration to graduates isn't it? Be an entrepreneur. Have a go. There's certainly more money flying around than there was in my day. The one thing I would say though is when you spot them in the university it's really easy to sort of cox them, grab them and point them in the direction because they're in an environment that's got visibility of it. But, entrepreneurs that then come out the rest of industry or the woodwork from different direction, they're a bit harder to spot. A bit harder to get into the community and they want to join the community because they need to find these other numbers in the lottery game.

Neil McArthur:                 So, what we're trying to do is create a real network of people, of like minded people, who are trying to work with other people. It can be pretty lonely out there for an entrepreneur and you usually need some mates. We're trying to create that network.

Peter Cowley:                  Which is why the incubators and the accelerators you have will make a big difference.

Neil McArthur:                 Absolutely. And those are turning up all over the place now. We've got a very, very rich availability I think, of work spaces, if call them, or incubator centers, accelerator centers. They're really popping up and we've really got them visible now. And, the report that we produced, which has been published, its public domain. We've really tried to identify they are to everybody and it really does it support the point really that the reality is there and the narrative of Manchester needs to really come up to that reality.

Peter Cowley:                  And so that's what next is it? You obviously want to improve the ... and it deserves things to improve in Manchester, so what's missing apart from time? What else could be brought in to help?

Neil McArthur:                 I think it is communication and we are trying to be that super communicator. The venture capital companies are turning up. The ones that are doing well, because Manchester probably not so well known, there's a lot not there that would probably be there if it was so well known. Cambridge is also pretty close to London so you can plug into London a bit easier. Having said that we're only two hours from the train, it's no big deal.

Peter Cowley:                  Seem to be one and a half to Manchester.

Neil McArthur:                 I do think that we are getting a really good finance community there. The money is definitely there in Manchester. The communication of the all and really getting that halo that you managed to achieve in Cambridge, shining over perhaps the universities in Manchester. You know, we'll really start to make, not just the entrepreneurs but the big tech companies, start to think, "Why are we not in Manchester?" And we're having some big wins now with tech companies coming because obviously Cambridge is pretty hot. It's got loads of resources.

Peter Cowley: Overheated, maybe.

Neil McArthur: It might be.         Manchester is not as hot as Cambridge and London. We've got some fantastic academics in Manchester. We're turning out some high quality graduates, especially in things like, Material Science, Computer Science and some other good tech, Buyer Tech's and stuff like that. We've got some really good resources there and getting large companies as well to understand what's at Manchester and then of course some of them are getting involved in corporate venturing. And we want them to do that in Manchester.

Peter Cowley:                  Yes. Before I ask you the final question which you don't know what it is yet, can I just apologize again to listeners, this actually being done in a an apartment in Les Arcs, in one of the bedrooms here. So, the quality will not be as good as some of the other.

                                             But anyway, it's really great to spend some time with Neil as I do once or twice a year. So, the final question Neil is, I happen to know you're only 10 weeks difference in age. What are you going to be doing in another five or ten years time?

Neil McArthur:                 Well, I don't want my wife to hear this podcast really do we? Well I think she will do, so ...

Peter Cowley:                  Definitely be cautious with what you say.

Neil McArthur:                 The thing is, if it's not in your nature to do nothing isn't it? I'm always going to be doing something. I mean, I'm on the Board at Manchester University. I absolutely adore working at the university. It's great people. It gives you good insight to where the science is going which is fantastic. I'd be amazed if I'm not still in involved in something in Manchester. Maybe five years my TalkTalk days will have finished. The charity hopefully will carry on and I'm very fortunate. I've got great lifestyle, great friends. I live just a few miles from where I was born. Like I say I'm not somebody who spends enormous amounts of time on the beach. I'm sure I won't be bored Peter.

Peter Cowley:                  Excellent. Thank you very much Neil.

Neil McArthur:                 You're very welcome.

Peter Cowley:                  Thank you very much indeed.

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