Simon King: Academic turned VC on angels and venture capitalists

Podcast transcription - 10th January 2018

Peter Cowley:                  Okay, welcome again. Today we're meeting, talking to Simon King from Octopus, who I first met because we were both mentoring on an accelerator in Cambridge, and I gave him my card, and he mentioned the logo on there, which I'm on the board Plumis, he was using in his own home, which is great.

                                             So we got to know each other, and we haven't yet co-invested, but we're close I'm sure. So Simon, could you just give us a bit of your background? Education, what you've done abroad, etc. and why you've moved to Octopus?

Simon King:                      Yeah, of course. Well thank you very much for the introduction Peter. So my name's Simon King, I have been a Principal at Octopus ventures for the last six years, but I grew up just north of Oxford and was at school in the centre of Oxford during my secondary school years. I spent three years on the east coast of the US growing up as well, which gave me a different perspective on life. And then subsequent to my secondary school education, I went to Cambridge to study natural sciences, and then towards physics, and after four years at Cambridge decided to take on another level of education and went down to Imperial to do my PHD.

Peter Cowley:                  In what? What was that?

Simon King:                      In specifically plastic silver cells, but more broadly in organic electronics. I did three and a half or four years of the PHD at Imperial, and then I was juggling with the decision as to whether to go down the academic track, or to jump ship and go into the commercial world. I spent another 18 months as a post document at Imperial trying to work out that decision.

                                             At the end of that, I came to the conclusion that I love technology, but I love the application of technology in society. So I wanted to be in something that was closer to the market, a little bit faster moving than the pace of academic life and so I left Imperial. I spent six months doing something totally different working for a charity in Ghana, building primary schools, and after coming back from Ghana to the UK, I was applying for lots of different jobs. Primarily actually in start-ups trying to working in start-ups, and I speculated they sent my CV across to Octopus, and was lucky enough to get hired off the back of that CV.

Peter Cowley:                  And when was that?

Simon King:                      That was in 2012.

Peter Cowley:                  So you've had five years, five and a half years?

Simon King:                      Yeah, so the beginning of 2012. So it will come up for six years the beginning of next year.

Peter Cowley:                  Okay, we'll talk. Obviously one of the reasons I have you in this is to talk about the difference between getting capital from VCs and angels and different behaviours, and different advantages and disadvantages. So when you joined the organization, what training course or something, how did you get to the point where you were allowed loose onto the community of start-ups?

Simon King:                      Yeah of course. So I was very green I have to say when I joined Octopus. I come straight out of an academic career, so I knew about technology and about the technology world, but not necessarily about the commercial world, so it was a pretty aggressive learning curve, but that's something that I really enjoy. So then a number of different training courses kind of specifically to bring you up to curve on some of that, but a lot of it is also on the job and working with some of the fantastic people who are already in the team at Octopus Ventures. So I think team is about ten or so when I joined.

                                             The vast majority of those are still here and still working with the business today. I think the key learning for me coming from an academic background and going into commercial organization was the way that data is presented externally, so that was a big learning for me. Where as in an academic institution or university, you typically lead with the data and follow up with a conclusion, and hoping that everyone else is coming to the same conclusion and following your kind of journey to that conclusion by looking at the data.

                                             In the commercial world, you leap with a conclusion, and then people will create the data if they got time to. And it took me a little while to get that flip actually. There's a book called the Pyramid Principal, which is written by a bunch of consultants, and I do recommend that to academics who are coming out into the real world.

Peter Cowley:                  Yeah, we’ll put that into the show notes. I mean, we talk about data here, but you're not talking about business as necessarily generating data, you're talking about the conclusion being there is a market opportunity, we're going to go big in this market. The data behind that is tech and root to market, is it?

Simon King:                      Correct. Yeah, so often times people will view on whether this is a good business, you know? Should we be progressing this to the next stage of our investment, rather than I think initially when I came into the organization, I would be going through here's the market sizing data that I've done. Here's the kind of of analysis and business model. Here are the various bits and pieces, and when you put them together, I draw this conclusion. Where as in a commercial setting, people are more interested in the conclusion you've got, and if they got specific questions about how you got there, then they'll query each in reflection.

Peter Cowley:                  And of course that's what you deduce as doing, isn't it? It's questioning those conclusions where there's not enough data. Can we talk an example here? Perhaps an early example that you can talk about where the conclusion was the pitch deck is conclusion, isn't it?

Simon King:                      Correct.

Peter Cowley:                  Or the results from the pitch day, and how the data did or didn't work while you were unwinding.

Simon King:                      Sure. So a good example would be magic pony. Say fantastic business, which we've now exited, but we invested first in early 2015. That was one of the entrepreneur first businesses from one of their early cohorts came out. We met the guys, just two of them at the point where we were looking to ... initially it was a really early seed stage investment, and not a lot of info around companies at that point, but they had a big vision to disrupt the data compression space, particularly in video where they saw a massive challenge. As you'll know, the amount of data that we're using on databases, or even manual bases is even continuing to increase exponentially.

Peter Cowley:                  Mostly driven by video.

Simon King:                      Correct. Yeah. Over 80% of it. And I think there's some statistics coming out showing that more than 50% of the traffic in the US at times last year was purely Netflix related. So that's just one of the kind of hints at the problems, and clearly all the various backwards and forwards, and net neutrality in the US as well pointing to that also. So we took a look at the business and limited information that was available. We had a fantastic team, and primarily at Octopus we're looking for team first and that's true of most early stage investors, obviously.

                                             But also then the market opportunity, so what were the guys trying to do? What big problem in the world are they trying to tackle? Because we're looking for really disruptive technologies, and the third piece that we looked into in depth was what's the technology like? So who else is doing it? Have these guys caught on to something which is really truly differentiated from anything else that's out there? And that was key in standout with Magic Pony actually.

Peter Cowley:                  Did you do that by going outside, or could you actually determine that internally within your own resources here?

Simon King:                      So we do both. We have a network of experts in different fields, we're a generalist investor, so to some extent, we do rely on a wider network to give us pointers when we're analysing deeply technical businesses. I, within the fund, have been more focused on kind of machine learning and AI over the last few years, and Magic pony was squarely in that space, so I was relatively familiar with what was going on more broadly in the kind of start-up ecosystem, at least the published information that was coming out of big corporates, the Googles, the Microsofts, etc., and I'd certainly never seen anything like what these guys were trying to do.

                                             Part of that was because they were taking something that was being done in medical imaging, super resolution, and applying to video, which hadn't really been done before. So it was super novel. We had to look through all of their patents. We called on a couple of experts that we work with who are deep in kind of the compression space or video space, and everybody was telling us we haven't seen this before, this looks really exciting, and that's what drove us into making an investment.

Peter Cowley:                  We were having a later podcast where somebody who did exactly the same turned it down. We'll find out why. We've just been talking to him a few minutes ago. So tell us, so from that, does the investment committee have to be unanimous in making a decision to invest? Is that your internal process?

Simon King:                      No, so we are collegiality driven in that we do look to a wide group of people to input into the decision making process. But we're primarily advocacy based. So we're looking for champions internally within the team to say yes, I think this is a really good business, and we should be making an investment in it. They clearly can't do that by themselves, so they need to bring people up to their kind of level of enthusiasm in order to drive deals through, but no, we don't have to have the entire team saying yes, we think this is a good idea.

Peter Cowley:                  And so going back to the data. So the data that you had analysed and forecast and looked at your crystal ball lead you to making that decision to invest, which we all know was a great result, wasn't it? Can we just talk about the journey between your investment and the result?

Simon King:                      Yeah, absolutely. So I was partly involved in the investment process that's writing the internal papers and doing some of the due diligence work, but then I wasn't closely involved after we had made the investment, and there were a couple other people from Octopus who helped look after the company. So I can't give you too much detail because I don't know it, about what happened in the interim, but yeah, it was a fantastic success for us. So we sold to Twitter last year for a reported 250 million dollars.

Peter Cowley:                  Yes. Great result.

                                             While we're talking about results, can we talk about one that's a failure. You don't need to name necessarily, one way you'd invested and you'd done the analysis and the data, but basically the data, because it is forecast data was wrong?

Simon King:                      Yeah.

Peter Cowley:                  Give us an idea of one or two or whatever, or any generic feelings you have about failure.

Simon King:                      Yeah, absolutely. I mean the first generic feeling about failure is if we don't have failures, we're not doing our job properly, because simply we're in the business of taking risk, and if we have no failures, it means that we're not taking sufficient risk. If we don't have the failures, we're never going to have the successes. And so, while it is, it can be frustrating, and it can be a painful process on all sides, it is a part of the day job, and we do have to recognize that that's the case.

                                             Yeah, in terms of specific examples, there was a business that I looked after that I was involved with and helped lead the initial investment in the transportation space. It was an aggregate of mini camps, it still is, and we invested in 2013 I believe, and the business was growing phenomenally up until the point where we had invested, so we invested in series A, and a number of angels that had invested in the C ground, they'd been growing a few hundred percent year on year over the past couple of years. It looked like a superb business, great management team, and unfortunately, not even six months post making that investment, Uber chose London as their first international launch city, and as a result, the competitive landscape changed basically overnight for that business.

Peter Cowley:                  Could you have foreseen that?

Simon King:                      I don't think so. When I look back at our investment decision, we had listed out a number of competitors. Uber was actually one of those competitors that we'd listed out. At that point, they were largely focused on black cabs in the US, which was a kind of more luxury end of the market. I think they had just launched Uber X in San Francisco in the summer, and the data was not widely available about how successful that was. And subsequent to San Francisco being a success, the guys raised a big chunk of money.

                                             So I think they raised 250 million dollars from Google to start, and then three or four months later, raised another billion to launch internationally, drop straight into London, and the rest is kind of history.

                                             So there are always going to be this exogenous risks. You try and do the best that you can, we list them all out, but we recognize we're in the business where these risks exist.

Peter Cowley:                  There's a saying that says that if 90% of all aircraft were going to crash, you wouldn't get on an aircraft, and 90%, so not 90%, that's a bit unfair, but certainly 70% plus of businesses in generally won't be positive exits.

Simon King:                      Correct. And I think series A says, at least the last numbers that I saw were 50% by number of failure.

Peter Cowley:                  Yeah, that's series A, I'm talking about earlier stages.

Simon King:                      Yeah, absolutely.

Peter Cowley:                  Okay. Just before we move on. Did that mini cab company fold, or was it?

Simon King:                      No, it's still going. I think there's, the community landscape is clearly changing again. It was in a bit of a mire I suppose. And having operated in a kind of gray environment around the world because legislation simply hasn't caught up with technology in most places, and so clearly Uber has had some issues, both internally and externally, and do I think it's a winner takes all market in that space? No, so I think there will be room for others and I hope this company does very well.

Peter Cowley:                  Good, okay. Can we talk about whether you see any difference in the way that you find deals, process them, close them, and follow them? The way that angels do? I mean, I probably once talked about how Octopus or early stage VCs, or later stage VCs, or whatever you cluster yourself with, do it, and I will interject with the odd comment about how I see it being done for angels.

Simon King:                      So we sat at the top of the kind of pipeline I suppose, which is where our deal flow comes from, and we see, only order 3,000 business plans per year. A lot of those come cold to us, and they're just inbound emails. But, a big number of them come from our wider network. Either personal networks or other funds that we know service providers, or those accountants, and our portfolio is also a fantastic source of deal flow.

Peter Cowley:                  And your LPs of course?

Simon King:                      Correct. It's probably a slightly longer conversation I was talking about. Our LPs are sort of a mix of different types of funds actually. So primary funds are VCTs. And we have thousands of underlying investors because we're raising money from the general public into those venture capital trust funds. But we do have some more typical institutional LPs as well. And yes, absolutely.

Peter Cowley:                  And some individual LPs as well?

Simon King:                      Correct.

Peter Cowley:                  LP will describe in the show notes. Okay, so this is the final coming in, 3,000?

Simon King:                      About 3,000. We meet with a few hundred per year. Three to five hundred type of range. There's a team of ten of us internally whose responsibility is mixed, but primarily focused on bringing new businesses in and moving them through our pipeline, discovering more through the diligence process, and recommending businesses for investment.

                                             So, as you'd expect, there's a number of stages to that process as we kind of gather information and meet with more of the team and bring our own team at Octopus Ventures up to speed on the business, therefore making an investment. So from that 3,000 down to three to five hundred meetings per year, and then investing into 15 to 20 businesses per year.

Peter Cowley:                  Right, okay. And I suspect there's common themes here, but what excites you about a business and, not just what excites you, what gets you to a point where you'll invest in a business?

Simon King:                      Yeah, of course. So, there are a few key characteristics that we look out for first. As I mentioned earlier, fantastic management teams has to be at the top, and I think it's the top for us certainly. I'm sure it will be the top for most VC funds, and probably for angels as well. Because fundamentally in these early stage businesses, they might not have that much else. It's really about the team and what the team can create.

Peter Cowley:                  And how do you work that out though? Is this all gut feeling or is there more to it than that?

Simon King:                      No, definitely not. There's an element of gut feeling, but gut feeling being from an insight gained from experience of working with entrepreneurs certainly, and I try and look for at least three objective key criteria, and that is the founder or CEOs ability to sell. He or she has got three things to sell. The equity in their company. So have they sold equity to a fantastic list of investors? Have they sold to people that we respect, that we know make good decisions, who we know do their due diligence, and we know are difficult to impress. So that's one of the key.

                                             Two is customers clearly. Have they been able to see what they've got to an impressive range of customers, or an impressive number, or an impressive list, pedigree of customers? And three is their employees. Have they been able to attract A grade employees, senior execs out of probably very well paid roles into this tiny start-up doing something really new and innovative. And if you can solve for those kind of three objective criteria, then I think you can point to great founders and great entrepreneurs.

Peter Cowley:                  Which implies obviously later stage. Because to have done not the equity sell, but to build a team and a soul, meaning you've really got a business that's already got some product market fit.

Simon King:                      Correct. So it doesn't necessarily have to have all three of those. And I think at absolutely different stages you'll see different amounts of each of employees, investors and customers clearly. So those are the kind of three objective criteria. I think there are also characteristics that you look for in an individual as well. Can we work with these people going forwards? Are they are a fine balance between humble enough to know where their weaknesses are and take advice, and yet confident enough to be able to really espouse and sell what they know. Resilience I think is one of the most key characteristics, because we all know that these start-ups go through a roller coaster ride of the motions.

                                             We ride them at one step removed as investors, as clearly they're experiencing much higher peaks and troughs than we do, and to be able to get through those, you need to be a strong character.

Peter Cowley:                  Yes, okay. Let's people, they are their own astute business plan.

Simon King:                      Yeah, of course. Another key for us is does it fit with a venture capital business model. I think this is really where VCs and angels will differ most actually. We have LPs and shareholder in our funds who we're responsible to, and we have a business model that's designed to try and make a good return for their shareholders, and that means we're investing in early stage businesses of whom a number are going to fail. We have to be able to make investments which will return sufficient funds to cover those losses and make additional returns for those shareholders. And in order to do that, the prototypical business model for doing so is you invest in ten.

                                             One is able to return the whole fund, three or four of them will do sufficiently well to make you a good return, and five of them will fail. And if you're not investing in businesses that are capable of returning the fund or big proportions of the fund, then we're not doing our job properly.

                                             We've got about 700 million under management, we have to be looking for businesses that are capable of returning to our funds in the hundreds of millions. If you earn 20% of a business at the point of exit, which we're looking to do, then you're looking for a business that's minimum going to be worth 500 million at the point of exit.

Peter Cowley:                  And how many 500 plus millions have you had in the last say three years?

Simon King:                      That's one that's exited, we're still relatively early stage funds. We were setup in 2008. So successes are still coming through.

Peter Cowley:                  That's only nine years. It sounds like a long time, but it doesn't really from a really big exit-

Simon King:                      Absolutely. And that was the very first fund raised. So, relatively small fund at that point as well. So we've subsequently also been growing our funds under management at the same time.

Peter Cowley:                  Okay. So that's quite important, the difference there. You mentioned that the business model requires return. Actually, most angels would also like a return on their investment. And we obviously have some tax relief which softens the downside. What about technology service, lots of deep tech, brand building, etc. Have you any particular focus?

Simon King:                      In terms of the businesses that we're looking to invest in?

Peter Cowley:                  Correct.

Simon King:                      So as a funds, not really. We are sector generalist. We are geographically constrained in that we're looking for businesses with a UK presence. Ideally the senior management team is based in the UK, and we're investing in companies in the UK. But as a fund, no, we tend to stay away from life sciences. There's a different type of risk investing in businesses that need to go through clinical trials for example. But otherwise, anything that fits that VC business model, it's attacking a market that's sufficiently large so that you can grow big, maybe half a billion pound business.

                                             And two, that's able to scale over a reasonable time frame. Five to ten year type time frame from being single digit, worth single digit millions, up to being worth hundreds of millions at the point of exit. And that naturally excludes some types of businesses consultants, agencies, these types of things. But as long as it fits those models, we're very happy to look across a range of markets and sectors and verticals, and business models actually. So everything from B to C type businesses, like a Zoopla or a Graze, or Secret Escapes, all the way through semi conducted businesses, advance materials businesses that are really still in the kind of product development cycle, and it will be a long time before they get to market.

Peter Cowley:                  Have you got to imagine how many you'd like to deploy in the journey of a business, or does that vary so much you can't answer that?

Simon King:                      It varies a lot. As I mentioned, we like to get a kind of significant minority holding in these businesses, meaning in the double digit percent holdings of companies, but we're still a minority investor. So we're looking to back management teams.

                                             We don't want to take majority stakes in these businesses. As I said, 100 million under management, we've got quite a lot of money to deploy, so we're typically looking at least over the lifetime of an investment to try and invest in the 10 to 15 million sterling type range, but part of the process we go through is making a smaller initial investment, and then learning as much as we can along with the entrepreneurs through the course of that first period of investment journey, and we can make a much better informed decision at the second investment-

Peter Cowley:                  So you're going as low as quarter of a million?

Simon King:                      We have done yes. So the full range of check sizes is from 250,000 all the way up to 25 million.

Peter Cowley:                  For the first check?

Simon King:                      No.

Peter Cowley:                  In total?

Simon King:                      In terms of the check size that we can write. For our first check, we are typically looking at series A, and seed investing. So that's between 250,000 at the low end, and five million at the top end.

Peter Cowley:                  Alright, excellent. So this has now got to the point of investing? Can we now talk form that point onwards on your journey? How you get involved in terms of monitoring the company, adding value, etc.

Simon King:                      Yeah. So you almost always take a board seed or an observer seed when we're investing in a company. And that's really important for us because we are an active investor, we're trying to be as helpful as we can to the entrepreneur, also, as I mentioned before, when we're looking to make that second investment, the follow on investment decision, we want to be as well-informed about the business as possible, and that means being close to the business. And typically when were seeing on the board, we're seeing the information come through. You're riding the journey with the entrepreneur, and your board members are getting to understand where the challenges are and where the exciting opportunities are. So we will almost always have somebody from the team who's helping the entrepreneur by sitting on the board.

                                             In terms of the other services that we can provide to help companies, we've got a portfolio of about 60 businesses today. That's very helpful for a couple of reasons. One, it gives us some kind of volume purchasing power leverage so that we can help with service providers and recruiters, this type of thing. Two, we can step out of the way and put companies in contact with each other so they have a common investor or a common thread, which is us, and that means that we can facilitate that interaction, and a slightly legislative business for example can help an earlier stage business when they're trying to tackle the same challenges that each effects-

Peter Cowley:                  I've been doing this. I've had about 60 investments. I've made 60, there aren't 60 left. And I'm trying to do a lot more than I do at the moment, I do about 15 out of that lot, but there's only me. So have you got some sort of platform to do that, to interconnect the start-ups?

Simon King:                      We do it by email threads actually. We've had a look at a different range of different types of technology, and email tends to be just the most simple and work the best. Most people are already using their email as the primary kind of communication channel.

Peter Cowley:                  But that meets the essential point, that meets the essential heart.

Simon King:                      It does.

Peter Cowley:                  So they can't, unless they've already met each other, they can't.

Simon King:                      And that's the key. So we try to hold drinks and meetups so that our CEOs and founders, and also different functional heads can meet each other, and also kind of various themed events as well. So that we try and get some interaction, and that just absolutely lubricates the email channel, and means that people are much more comfortable getting in contact with each other.

Peter Cowley:                  How well, I feel I underperform on that, and I'm quite concerned about that, and I will do something about it. How well do you think you perform on that?

Simon King:                      We're getting better all the time. I don't know how we can.

Peter Cowley:                  How you can measure it?

Simon King:                      How we can benchmark it, exactly. So I think it's a challenging one to answer in absolute terms. We're definitely seeing an improvement over time, so we're getting better at it, and at the face to face meetups, definitely help that.

Peter Cowley:                  And there are other things that will add value to it I suspect. You know other investors. You're well connected. So there's other elements. You're not going to be the only investor in the later B round or C round, are you?

Simon King:                      No, absolutely not. So the network is key, and it falls into a few categories. One of which is our venture partner network. So we used to have, we do have a very wide range of different venture partners. We also have a set of ten individuals who are on our payroll who we call our operating venture partners. These are people from all walks of life, different backgrounds. They are typically people who have specific functional skill sets that we see the portfolio lacking.

                                             So for example, there is a guy call Ian Perry, who has been working with us the last couple of year. He is an EDM chair, and on a number of different boards, but in his kind of pre plural life if you'd like, he built and grew sales teams for B to B software companies. He did it a number of times very, very successfully. One of the most common problems we see at series A, or at least post series A, is founders and CEOs handing the sales job over to a sales team, and it's a really tough transition, because the CEO or founder knows everything about the product, they can sell to anybody because they know exactly where the problems lie, they've seen it before, they've built the products and solved these problems, but they haven't necessarily productized what they've got, and they haven't productized the sale.

                                             They don't have a step by step repeatable process, and so when they try to hand the sales across to somebody else who's come new into the business, everything goes to the right. Sales flat line because the CEO or founder has stepped away from the sales role and suddenly it's handed to somebody who's having to relearn all of this, and that's not necessarily what they're good at. They're good at being given that product and selling the hell out of the product.

                                             So, Ian works with our portfolio companies in post series A in their go to market strategy. How do you productize what we've got. How do we make sure that the messaging is exactly right for the type of customer you're going after? Who is the perfect customer for this product at this point? Should you really be growing the pipeline, or should you be cutting it back and shrinking it to the core set of customers who are really going to find value in this?

                                             Whereas you may be able to sell it if you're a good sales guy if you haven't sold the right product to the right person who actually needs it, they are going to churn at some point, and that's going to cause you problems.

                                             So we've got ten operating venture partners who work with the portfolio companies to help them solve this specific issues, so that's not a key area in where we're trying to add value. And I think the last one that I would highlight at this point is the work that we've been doing in helping our companies internationalize outside the UK.

                                             So for many companies, the UK is a big market. For some, and certainly for many at a certain stage, the UK becomes smaller than their ambition, and they would like to go elsewhere, and we've seen time and time again, companies struggle to expand outside the UK. In particular for example, going to the US. A number of companies try it, and I think try it too early, underestimating the challenges that they'll face there, and they really struggle and have to retreat, and it'll cost a lot of money to do so.

                                             So we've been spending a lot of time working out why companies fail and what questions they should be asking, and what's the right time and the right amount of money and the right resource to go and tackle new and international markets. So we actually just published a few weeks ago a long e-book if you will, on how companies should tackle expanding to the US. We have a small team in the US whose job it is to help out our portfolio expand across there and answer the same questions that every company struggles with when they move across.

                                             Should I setup a new company bench? Should it be an office? Should I get east coast, west coast, what do I do about healthcare, what do I do about holidays, all the similar learning that all these companies go through, they've been helping these companies by centralizing that research in one place. And also helping the boards of those companies before they make the decision to go to assess how much money is it going to cost us? Is it the right time? What problems is it going to cause? So Priscilla Bala, who is one of our US leads has put that piece of work together, I'll happily provide you the link so that you can share it with your followers. It's a fantastic piece of work, and I would strongly recommend it to anybody who's considering going across to the US.

                                             Read through it and if you're interested, get in touch with Priscilla.

Peter Cowley:                  Well let's move on to exits. Which obviously we like exits. Now I just want to talk about a level of misalignment between funds, angels and founders, and I've experienced this myself last year, where the largest investor wasn't going to move the needle that much on the exit, so they want to carry on more. The founders, and the early stage angels were thinking, the risk might increase again if we have more money. Have you met that in your five years here?

Simon King:                      I think it's a persistent challenge in the ecosystem. I think there are a number of different solutions to that challenge, but primarily, I think every entrepreneur, every small business should really evaluate what type of funding they need and at what point.

                                             So one of the critical things that I tell entrepreneurs when I go and give presentations is, we really need to asses whether venture capital money is the right type of money for your business. And I've used this analogy in the past. Venture capital money is a bit like adding rocket fuel to a business. And there are really good things to adding rocket fuel. Clearly, you're never going to escape the atmosphere if you've got a prop plane, but equally, you're not able to slow down, right? And if you suddenly decide that actually I don't want to escape the atmosphere, I want to stay stratosphere, then you don't really get the option to jump off that ship.

Peter Cowley:                  And if the next chunk of fuel is not available, then you crash.

Simon King:                      Correct. So you can take the metaphor a little bit further, but I don't think it's necessarily a huge problem in all circumstances. The way that I think about exits is it's not necessarily a full exit for every shareholder at every stage. You can think about exits as a refreshing of the share hold base of the company. Who are the right shareholders for the company at this stage of the company?

                                             So at the early stages, absolutely, you're looking for individuals who are willing to take the high risk option. At the next stage, you need institutional investors who've got the deeper pockets to be able to fund the deeper cash low points and get the business through and spinning nicely. At some point in the future, it may be that private equity investors are the best share holder for the business because they're looking to roll up a number of different businesses in the same sector. Or potentially a large corporate, who've got really deep pockets for R and D. And they're bringing the company in to try and spear head a new leg of product development for example.

                                             So you can think about exits in lots of different ways, and at each of those points, there's the potential for earlier shareholders to get a return on their money.

Peter Cowley:                  But is there? This secondary market? Have you experienced that?

Simon King:                      Yes, we absolutely have.

Peter Cowley:                  Can you give us an example?

Simon King:                      An example would be Graze. So this is a business who sell snack boxes. You'll see them now in Sansbury's and Smith's, but originally they started as a subscription business. So you'd go online, you'd have a look at the snack that you want to come through your letter box. You'd make an order, you'd say I'd like a box a week or a couple of boxes a month, and something like this, and they'd be delivered to your office or to your home.

                                             We partially exited that business when Carlisle, a private equity investor became shareholder a couple of years back. And that was a really good exit for a couple of early angels in the business.

Peter Cowley:                  Including Octopus?

Simon King:                      Including us. It was partial exit for us as well, where we chose to retain a stake in that business, and it's still going from strength to strength, but at the point that Carlisle came in, it was an option for the various shareholders to decide whether they wanted to stay on that journey, or whether they wanted to take the very good return that they'd seen from early days until that point.

Peter Cowley:                  You have 17 investments you said. How many every year do you think this secondary happens then? I mean, you may not know the number.

Simon King:                      Yeah, I don't think I do know the number. Not that many at this point. As I said, there's definitely a grading of different levels of maturity in the portfolio because we have continued to make new investments and the oldest investments are now coming up to seven or eight years old. So those would be the most mature. They're the ones who are being approached more frequently, but it's down to the board of the company, and often times that's still heavily the founders and the management team to decide whether they want to continue on this journey or whether they want out.

Peter Cowley:                  Yeah, okay. Let's talk a bit more about the difference in VC and angel funding. I've got a few ideas of course. Can you give me what you'd like to say?

Simon King:                      Sure. Clearly there's a number of differences, some similarities as well. I think the one that sticks out for me is probably motivation and responsibilities I suppose. They're the two that really stand out. On the motivation side, most financial venture capital investors are purely focused on the financial terms in the business. At least at a fund level. At an individual level, there may be different motivations, but the reward structures and incentives inherent in these businesses is setup and designed to promote financial gain as a result of making these investments. And I think that could be very different to angel investors. Clearly there's a spectrum within angel investors. Some are purely going to be looking at the financial side of making an investment with these companies. But others are looking for both the financial and kind of operational. They like getting involved, they like being hands on and helping these startup companies. There's a range of different kinds of angel investor, some who are doing it alongside, where their day job is clearly something else, and some who are investing in small companies full time, and it becomes what they do on a daily basis.

                                             So I think with angels, you sometimes have to be careful about really the motivation of an investor. Why are you interested in making an investment? Whereas with a financial VC, for right or for wrong, you can pretty much guarantee they're in this to make a return, and while that's a one track mind, that can be very helpful when you're trying to assess the motivations of your underlying shareholders.

Peter Cowley:                  And yes, I've certainly noticed that angels generally are more founder friendly. And I don't mean that in too negative of a way. But angels will always invest probably for tax relief reasons and ordinary shares, which I found this out. Whereas with VC, you will usually get in with some level of preference, is that fair to say?

Simon King:                      Not at the seed stage actually. When we're making seed investments, we're going into ordinary shares alongside the angels. We pride ourselves actually as being as entrepreneur friendly as is possible for a venture capital fund, which actually I think is pretty friendly towards entrepreneurs. So we do go into all odds, we try and mimic as much as we possibly can the rights that you'd see angels investing at seed stage. And clearly as you go up through the different funding rounds, the market almost becomes slightly different, so you're right. At series A, a one times long participating liquidation preference is the market standard.

Peter Cowley:                  Can you just explain that for those in the audience?

Simon King:                      So that means that those shareholders or those investors, sorry, who are participating in that round will get that money coming back first on a sale liquidation of the business, and then the other shareholders, which are typically ordinary shareholders will catch up, so as to where they haven't seen the first money come out, they then catch up so that everybody is shared equally effectively on a per share basis.

Peter Cowley:                  Providing the exit is final?

Simon King:                      Providing the exit is final.

Peter Cowley:                  Yeah. Otherwise-

Simon King:                      And then everybody shares equally together there after.

Peter Cowley:                  Yes, okay. The other thing that I think might be different, one of the reasons for this podcast series, and the book later is the concept of up-scaling angels to be better investors, so contributing. Now not everybody's an entrepreneur, not everybody can help on the board. What level of skills do you have in the team in terms of entrepreneurial experience? Because early stage ... maybe it comes to institutionalized, I can understand corporate management is much more important. But early stage, particularly if their young founders, it's help from somebody who's done it before?

Simon King:                      Yeah. And I think there are a few different sources. So within a team, the founders of our team actually were entrepreneurs themselves. So the history of Octopus Ventures, it was setup as an angel network by a small group of individuals, and they set it up as a business, and that business was acquired by Octopus and became venture's team. So the genesis of the ventures team is an entrepreneurial one. And similarly you'll find with other funds, right? People who have set them up as a business. And so there'll be entrepreneurs and investors in that sense.

                                             Also, we have three entrepreneurs in our team, and they've come from setting up their own businesses, and decided to jump ship to the other side of the table. So there's a bit of experience on that side in our team as well. But actually I don't think you necessarily need to have an entrepreneurial background to have some of the empathy with the entrepreneurs. I sit on six portfolio company boards. I ride the highs and lows alongside the boards, and the entrepreneurs who are going through that journey, we can see how difficult it is in the hard times, and we've experienced the highs when they're going through the exciting sales and the exits.

Peter Cowley:                  What about saving information mistakes? You've obviously learned to ... You couldn't have sat on six boards when you joined Octopus, could you?

Simon King:                      No.

Peter Cowley:                  So you've learned lots in that process. How much of that is the involvement-

Simon King:                      So that's part of it. And you look for each board member to contribute differently. So absolutely we'd like to have on the boards, especially with first time founders, people with grey hair around the table who are able to tell these people the problems that they face, the challenges that they faced in scaling a business from nothing up to a successful exit. But, equally there are other challenges where you don't necessarily need to have that direct experience to be able to feed in.

                                             Fundraising challenges. Nobody better placed to advise an entrepreneur on who you should go and speak to about fundraising, what's the right time to go fundraising, how much you should be looking for, what your evaluation expectations should be, then a VC investor or angel investor, because there in the market doing this all the time. Whereas an entrepreneur might go out and fundraise once every couple of years, I'm looking at businesses on a day to day basis. The portfolio companies that I look after raising on average every 18 months, and so I see lot of different investment rounds and speak other lots of different investors.

                                             So I should be able to input more on that side than an entrepreneur.

Peter Cowley:                  You know that leaves conflict which we've mentioned before.

Simon King:                      It does.

Peter Cowley:                  The conflict between what the entrepreneur wants, what you want as an investor, and what the company wants, because all of these are subtly different aren't they?

Simon King:                      But there are other things that we can input as well. We see the good and the bad when things go well and things go wrong. So when we're talking through legal documents and looking at the various different causes, often times entrepreneurs will be thinking about these, what happens, and it's unlikely this is going to happen. So should I really care about it? We've seen those things happen. We've got 60 portfolio companies. We've likely seen all those clauses, at least examined in detail at points throughout our investing history, and so we can advise, you know, this is actually going to be a really important thing about a situation in which this happens or that happens. How do you want to negotiate that point going forwards?

                                             Or options, that's another classic area where we can feed in really heavily because we've seen people go through this journey of deciding actually I think our option plan should look like this. Well no, are you sure, because we've had situations where we've seen this cause real problems with this type of person, that type of person, because you cause misalignment. Bonus plans and these types of things as well.

                                             So, we have sufficient experience on boards as investors that we see a lot of the challenges that entrepreneurs will see at least at a board level fundraising level.

Peter Cowley:                  Which is exactly this project actually, and we will have a whole section on options, because that's so conplex ... There's certain things that continue to get misunderstood, or just not know.

Simon King:                      Yeah. So yes, I think you definitely want to have some experience and gray hair around what it takes to grow a business from the operational side. Whether that's an advisory board, whether it's a chair, whether it's an NED or a board member, yes, absolutely. I don't think it has to come from the investor.

Peter Cowley:                  And you certainly don't have any grey hair.

Simon King:                      Yeah.

Peter Cowley:                  Any other difference between angel and VCs that you can think of?

Simon King:                      I think there's a responsibility difference. It's linked to motivation. But clearly our sources of funds are from our shareholders who are individuals who have their own motivations primarily financial, and that feeds through to what we need to do on behalf of them. So we have a fiduciary duty to our shareholders, and that's clearly something that angels don't have to invest in more often than not, out of their own pockets, either looking for their financial return or not depending on the individual, but their responsibilities is typically only to themselves, or partner. Yeah, exactly. So, and that can create some challenges when investing with those two parties together.

                                             Because we have to think about the financial return and our shareholders in all the decisions that we make.

Peter Cowley:                  Yes. Which might lead to stronger decisions than an angel will make.

Simon King:                      Potentially.

Peter Cowley:                  I'm sure it does as well. Before we finish, can we talk about a great story that we've actually interview Simon Thorpe about this, and he's mentioned it, Swiftkey.

                                             So when did you get involved with Swiftkey, or was this before your time?

Simon King:                      So the first thing is this was before my time. So I joined in 2012. I think the first investment we made was a C stage investment pre product into John and Ben in 2010. So it was a couple of years before I joined.

Peter Cowley:                  But you were the biggest investor, weren't you, is that true?

Simon King:                      We were. We were the first institutional investor in the business, and we were joined by Index, and then Axel throughout the journey, but we continued to follow on into that business throughout.

Peter Cowley:                  Okay. And that was a great exit?

Simon King:                      It was a great exit. A fantastic team. Sold to Microsoft a couple of years ago, 2016 I think. Bought it for 250 million dollars. Fantastic set of guys and we've seen them already, the management team there has gone on to do great things. Some of them still with Microsoft and working with Swiftkey. Some of them have left to do other things and start new companies, and we very much hope that they enjoyed the ride alongside us, and we've already started to see them come back to us and look for funding for their next ventures.

Peter Cowley:                  Yeah. I backed to Rod, who was the COO for Swiftkey, with Spectral Edge. Well excellent, thank you very much indeed Simon. It's been really interesting. A different viewpoint from the angels we've interviewed before, and I wish you well.

Simon King:                      Thanks very much Peter.

Peter Cowley:                  Thank you.