Capital is as important as the idea

Podcast transcription - 12th December 2018

Alan Cowley:                Welcome to part two of Victor Christou’s invested investor podcast. In part one, we heard all about his entrepreneurial

ventures. This podcast will focus on his investment career, including Victor's tip to any entrepreneurs looking for funding from CIC, “We look

for transparency, journeys last many years, so there's no point in hiding things.”

Peter Cowley:                  So, I think that at Stanford you met David Gill who we've interviewed previously, and that led onto your next role. Can you describe that?

Victor Christou:              That's absolutely, right. I went to Stanford as a result of wanting to learn more about business and having a view that venture capitalists had a better life than entrepreneurs.

                                           I went to Stanford because it was the home of entrepreneurship and venture capital. While I was there in 2005, I met David Gill from Cambridge.

Peter Cowley:                  Banking, I think?

Victor Christou:              Banking, yes. He and I struck up a friendship and he helped me get my first job in venture. So, it's all down to David that I'm in venture. So, David knew of the founders of Oxford Capital Partners, which was where I got my first job in 2005. I left the Bay Area and came back to the UK for family reasons really, because my wife, who wasn't my wife then but became my wife, didn't want to move out to the US at that time. We came back to the UK and I got a job back in Oxford where I'd been living before and worked at Oxford Capital until 2009. I really cut my teeth there in venture. It was a really, good training ground because it was an EIS investor, so entrepreneurial investment scheme investor, we did a lot of deals from 2005 to 2009 and I learned a huge amount from Ted and David, the founders there.

I learned a lot about venture investing, and I coupled that with what I'd already learned in Stanford and my previous experience. That period for me from 99' through to 2009, was totally transformational in my life. I had got on this entrepreneurial journey, spotted that I had a weakness and didn't understand something, so did something about it. I had a view of where I wanted to go next so moved into venture. I think that's been another lesson for me, when I started just my life journey; I didn't know what I didn't know. I knew I liked chemistry and that was what got me excited.

All I was looking to do, was what I liked the most and I was good at it.  I was enjoying it, so I took the next step, which was to do a PhD and the next step to becoming an academic, was postdoctoral research. I had an opportunity to go to Berkeley, so I took it. I then had an opportunity to start a business and I took that, and the I had an opportunity to go to business school and I took that too.  I think it's really, important in one's life journey that you take the opportunities you get, they don't come by very often, so you need to take a risk.

Peter Cowley:                  That's an entrepreneurial mindset of course, not an academic mindset.

Victor Christou:              Yes. For me it's always been about opportunity and not about backfilling. I think if you can tolerate the risk and the instability, taking opportunities means there's no better life.  That’s how I got from Oxford Capital Partners to Wellington Partners, which is one of the largest Pan-European venture capital investors out there. I worked with a brilliant team there.

Peter Cowley:                  A fund which was in the millions each year?

Victor Christou:              I joined Wellington 4 which is a €260 million fund and very early investors in Spotify. It been very, successful in Germany and expanded internationally. I joined the partnership when they had just opened the UK office, I was looking to move into something bigger from Oxford Capital. So, I moved there and had a fantastic time, learned a huge amount from some very, very seasoned investors. I also learned how difficult it is to fundraise. People always think about venture capitalists as the people in charge of the purse, but all venture capitalists, need to raise capital from people who ultimately control their purse. And so, venture capitalists go out to talk to pension funds, insurance groups, sovereign wealth and so on, to convince those organisations that the venture capital fund is a good investment. In the same way that entrepreneurs need to convince venture capitalists.

Peter Cowley:                  Or angels?

Victor Christou:              Yes, or angels. So, you're always pitching. You're pitching all your life.

Peter Cowley:                  Angels don't have to do that because they've already built their wealth.

Victor Christou:              But at some point, the angel will have been pitching to raise capital.  I think you are responsible for your own brand and your own destiny, I'm a big believer in ownership as well. Owning the outcome and making sure that you influence what's within your sphere of influence and you drive it the way you want it to go.

Peter Cowley:                  Let's talk about some of the journeys that you've been under with OCP, some of the lessons learned there. Then we'll move onto Wellington and CIC.

Victor Christou:              I think the experience I had at Oxford Capital was informative in the sense that, I went from managing my own business and being in control of my own destiny, to managing a portfolio of assets where effectively you get to live your life vicariously through other people. Now, a question most people ask me is why I wasn't a repeat entrepreneur. It's an interesting question because I thought the idea for Opsys was a really, good one, and I think over 20 years it's proven to be such. I didn't have another idea that was as good. So, I thought I'd build up a skill set that complimented my experience at Opsys, by going to business school.

Peter Cowley:                  The journey wasn't as successful as it could have been, you had made some mistakes. It didn't make you fabulously for wealthy did it?

Victor Christou:              Yes, that's right, I had to work hard, but I'd learned a huge amount, I thought there's an opportunity for me to put those skills to work in venture.

Peter Cowley:                  Who were OCP investing in? Tech companies in the Oxford area?

Victor Christou:              Yes, tech companies across the UK, with a natural focus on Oxford and generally, tech businesses rather than software. So very much B2B, deep tech businesses, which are now in favour, but went through a phase of being deeply out of favour.

Peter Cowley:                  Did it? In the 00's.

Victor Christou:              Yes, especially when we went through the dot-com boom. There was a lot of B2C consumer internet activity, but it was difficult to get deep tech businesses funded. I felt, I could compliment the other skills that were at Oxford Capital. I learned a lot about managing a portfolio, about the importance of representing the firm, Oxford Capital or any firm, rather than going native, I guess that’s the venture phrase for it, buying into the vision.

Peter Cowley:                  Internally never mind externally.

Victor Christou:              It's a risk that you need to be aware of when you invest, you can spend too much time with your entrepreneurs, one needs to maintain a distance, be supportive and be helpful in every way you possibly can be. But the job's a financial one, to make a financial return, and so maintaining some element of distance and some element of scepticism and sense of value of the money, one needs to respect the money. We talk a lot about respecting the entrepreneur and making sure that the entrepreneur is duly rewarded if a business is successful, but the capital deserves that same kind of respect too. I think it's very easy for everybody to lose track of the fact that people are committing, angels as well, committing substantial amounts of capital and trust to an entrepreneur and that capital is as important to the business as the idea in my view. So, I think respecting the capital is an important aspect of the business that I've come to appreciate, particularly now that I'm running the firm here at Cambridge Innovation.

Peter Cowley:                  You moved from Wellington to Cambridge?

Victor Christou:              Yes. I was thinking about what I should be doing with my life and then had a phone call from a search firm, Paul Bailey, a search firm in Cambridge. He said, "We've got this fantastic opportunity for you to work in a university spin out fund." I was like, "I'm never working in a university spin out or anything to do with the university again." And so, the one condition I had when I joined was that I wouldn't have to deal with university politics.

Peter Cowley:                  Well, initially Peter Keen was running that.

Victor Christou:              Yes, exactly. So, Peter Keen was one of the founders, I joined Peter I guess I was effectively, employee number two. Peter already had a vision for where he wanted his life to go and so I took over from him in September 2015 and have been running Cambridge Innovation ever since.

Peter Cowley:                  You raised an initial fund?

Victor Christou:              So, Cambridge Innovation is a vehicle created by the University of Cambridge to be the private provider of capital to its spin out funds. The university has been far sighted in thinking about how best to structure its relationship with its academics to create a culture of entrepreneurship within the university.  So, the university encourages entrepreneurship, I think it is one of the best tech transfer groups in the whole world. The university's group, Cambridge Enterprise, I really believe is one of the world's leading commercialisation groups. They are active and very supportive in creating businesses out of university intellectual property, that’s their mandate, to translate intellectual property into the public domain.

Peter Cowley:                  It's not just the university, is it?

Victor Christou:              We operate more broadly within the Cambridge cluster, which is a loose aggregation, a self-identifying set of individuals, organisations and operations in and around Cambridge. It has been a very successful ecosystem since the 1960s when the very first science park in the UK was set up in Cambridge. Cambridge has, for a long time been the thought leader in that space, and the Cambridge cluster is now Europe's largest tech cluster, probably third largest health care cluster in the world. Certainly, the university is one of the most entrepreneurial universities in the world.    Cambridge Innovation is right at the heart of all that activity, providing private capital to the best and fastest growing businesses in that ecosystem. We like to believe that we're an important part of the ecosystem. We manage £125 million, on our balance sheet, it’s an important aspect of what we do, we have a balance sheet structure to our investment.

Peter Cowley:                  So, you're basically patient.

Victor Christou:              Yes, we want to have flexibility, we’re set up as a balance sheet investor to allow us to build businesses as fast as we can but not to exit those businesses early or be constrained by short- term terms.

Peter Cowley:                  Yes. The VC generally has a term doesn't it?

Victor Christou:              Yes, that term is typically five years of investment and then the next five years you spend trying to sell those businesses. That is typically not long enough, one of the lessons I've learnt is that it takes a long time to build big businesses.

Peter Cowley:                  That's in 10, 15 years?

Victor Christou:              20 years, we started Opsys right at the start of the movement in OLEDs, the very first patents. We filed our key patterns in 96', 97’.

Peter Cowley:                  So, they're all gone now.

Victor Christou:              We have extensions and continuations. But people only now know about OLEDs screens.

Peter Cowley:                  Probably about three years ago?

Victor Christou:              An OLED TV is still viewed as being quite an exotic thing and yet people are familiar with OLED displays. But it takes 20 years to build a tech idea into a business. Digital media businesses move more rapidly. I think there's anecdotal data that shows that it takes eight years to build a billion, dollar business, in Europe. I think healthcare businesses take 15, 16, 17 years to grow to maturity, a short, term vehicle just doesn't offer you the flexibility to do that, things are changing.

Peter Cowley:                  So, what are your most exciting investments in terms of growth? Was it Spotify or something else?

Victor Christou:              By the time I joined Wellington, Spotify was already a big business, it’s a fantastic business to be associated with. I don't feel that I can collect any of the credit for that business, but it was interesting watching those guys build a really, big business.  From the position of being an investor, it was interesting to see that happen, I learned a lot about the way they operated and created a globally important business. We have got elements of that formula in some of the portfolios we have today. CMR Surgical for example, a medical robot for surgery, I think that's going to be a huge.

Peter Cowley:                  We're intending to interview Martin Frost who is the CEO.

Victor Christou:              I've known Martin for years. I first met him at Oxford Capital. That’s another thing I learnt, that the relationships you build early on in your career, can come back and have an impact on you later.

Peter Cowley:                  Could be a negative impact of course.

Victor Christou:              So, you need to think about the way you behave in your business career. Interesting anecdotes I picked up in business school, which helped me. I've always thought about relationships, but it was brought home in business school. So again, we're with David Gill we took a negotiation class in business school, which was an eyeopener because the Sloan Programme is full of really, seasoned and experienced executives and in that cohort was the chief negotiator for GM.

Peter Cowley:                  General Motors.

Victor Christou:              General Motors, yes.  Who had been involved in a huge number of negotiations with the workforce.

Peter Cowley:                  Oh, really? Not just the tier one suppliers but the workforce?

Victor Christou:              No, the workforce.

Peter Cowley:                  Yes.

Victor Christou:              And so, she brought to the negotiation class a level of experience and understanding of how negotiations happen in the real world that a lot of the MBA students had no idea about. So, it really brought home to me the longevity of a negotiation and the longevity of relationship. The thing that became clear was that those people who maximise, for their own position, tend to have relatively short careers. Whereas if you maximise and compromise going forward you build relationships that survive. If you are good to people, people are good to you. There's this reciprocity that is much more than a theory. It happens in the real world. You don't have to maximise your position, in order to be successful, I think that is something that we bring in Cambridge Innovation. 

Peter Cowley:                  So, it's be patient really?

Victor Christou:              Yes, but also not trying to maximise your position and not always trying to get absolutely the best price and have this zero-sum game where you have, to win and someone else has, to lose. There are multiple positions where, if you compromise a bit both parties or all parties can win.

Peter Cowley:                  Well, the rule number one of negotiation is win, win, isn't it?

Victor Christou:              Yeah.

Peter Cowley:                  And whatever that win, win means is you both walk away happy and smiling even though one might have lost.

Victor Christou:              Yeah. Exactly. It's making sure that you understand what's important to other people and everybody tries to get there. I mean, you can't always get there and there are some people for whom it's just impossible.

Peter Cowley:                  So, Victor, let's just talk through some of the failures. I mean, we all have our successes occasionally but it's the failures we learn from. Give us some examples.

Victor Christou:              Well, I think my own business arguably didn't turn out the way we wanted it, could have made more money. And that was a question about capital intensity and misjudging the business models. So, I shy away from businesses that are very capital intensive because it's difficult to see how a venture investment is right for that. I also shy away from businesses that are dependent on legislation. So, at Oxford Capital I had an investment, it was a supply chain investment essentially and provided verification of tropical hardwood through supply chain. It made sure that the tropical hardwood that was coming into the supply chain was legitimate.

Peter Cowley:                  The provenance of it?

Victor Christou:              Yes, provenance. In order to be successful that business required the EU and the US to mandate that tropical hardwood was sourced sustainably and provenanced correctly. That legislation was mired in politics and took years and years to come through and years beyond the horizon that we had for the capital investment in the business. So that business I think floundered and failed as a result of being dependent upon legislation.

Peter Cowley:                  But there's also another side to that, isn't there? Domino Printing here in Cambridge grew on the basis you had to put sell by dates on eggs and milk bottles. So, the legislation drove that positively.

Victor Christou:              So, it can be positive, but if you're waiting or dependent upon it, it could equally go away. You see that in the solar tariffs that were changed dramatically and resulted in a number, of businesses going bust as well. Never had any solar investments for that reason. But a really, good example of how legislation drives value is in the healthcare sector, right? Which is completely driven by legislation. People who don't understand the legislative process flounder because it's very, very complex software. But that software supply chain business is a good example of a failed business that depended on legislation, I had another example that I worked on Wellington, which was a wood gasification business. It took wood chip and wood pellets and gasified them to generate energy, electricity and energy.

Peter Cowley:                  Gasify not burnt.

Victor Christou:              No. So, you gasify it. So, you do it in the absence of oxygen and you vaporise the wood and that gasifiers the wood. Then you can bust it in the gasified phase and it generates energy.

Peter Cowley:                  Then burn the gas that's come out of the wood.

Victor Christou:              Yeah. Exactly. That's another example of capital intensity. Complexity as well as confounding the business prospects. Another example, not necessarily of a business that failed but a business that took much longer to get to maturity that is the other thing you learn, it takes twice as long and cost twice as much as you anticipate, if you take that on board it still costs more and takes longer.

Peter Cowley:                  Yeah. Exactly, and still doesn't sound a good enough number.

Victor Christou:              Yeah. So, we had a business making biobutanol. It's, again, another Oxford Capital investment. It was a good business, a business called Green Biologics. They are using a technology to use lignocellulose, waste fibers from sugar processing. So, if you take corn, for example, you crush corn and get corn syrup and the fibers that are left have a lot of energy and a lot of value in them or you can digest them using enzymes and you can create butanol. And butanol is used in nail varnish and a huge number of industrial products.

Peter Cowley:                  That's a liquid butane?

Victor Christou:              No, it's an alcohol. It's for carbon alcohol, which is kind of like ethanol, which is alcohol.

Peter Cowley:                  So slightly?

Victor Christou:              It's heavier, thicker, burns more energy because you've got more carbon in there. But it's also used as a solvent in industrial processes. We backed that business on an idea from the founder, the business is still going today, and they've built a pilot plant in the US. But the founders left. I was involved in having the founder step down from being chief executive being the chief scientific officer.

Peter Cowley:                  It was the right thing to do for the business.

Victor Christou:              Yes. There's a process you go through which is never easy. And then having a conversation with a founder about their future in the business because my interest in the business as an investor is to make the business as good as it can possibly be, and whilst being sympathetic to the founder we've got to find the right role for the founder. If the founder is constraining the business, we need to remove that constraint or repurpose it. I think in early stage businesses it's often terminal if you just fire a founder. It's never a good thing.

Peter Cowley:                  At angel level it often is.

Victor Christou:              It's never a good thing to do. And the founder is good because the founder is the person that has the vision. So, what you try to do is to match their skill set with the skill set of business building, that's a difficult conversation, but it's one that we have, all too often.

Peter Cowley:                  I warn my CEOs at the beginning they need to grow with the business or faster than the business grows in terms of their ability. Otherwise, they may not be CEO on exit.

Victor Christou:              Yeah, that's a good thing to be doing.

Peter Cowley:                  Yes. So, if you start early then at least they'll work on that journey to try and always be slightly ahead, but they can't guarantee to do that. It's been really, interesting, Victor. I'm going to ask you this final question which I think you know as you listen to some of the podcasts. Thanks very much. So, I guess you're in your early to mid- 50’s.

Victor Christou:              Early.

Peter Cowley:                  Early?

Victor Christou:              Still.

Peter Cowley:                  It's okay. I'm approximately 10 years older than you. What you're going to be doing when you get to my age?

Victor Christou:              Oh, I hope I'm still in charge of Cambridge Innovation. In 2013 when we started, we had this big vision about what it could become. I feel that I'm not even a quarter of the way to delivering that vision, I feel it's still within my control and power. I still feel that that opportunity is one that I'm shaping.

Peter Cowley:                  Okay. Well, let's extend the question. In 20 years?

Victor Christou:              I've been active all my life. I've always tried to push to do new things. I'll still be active. If I'm not in Cambridge Innovation, if they force me to step down, I'll be some non-executive or an angel investor or an entrepreneur, maybe helping other entrepreneurs. I just love the vibrancy and the excitement of doing something new and I just want to do that until I drop.

Peter Cowley:                  Excellent. Well, thank you very much, Victor. We've learned a huge amount from you. Thank you.

Victor Christou:              It's been a great pleasure. Thank you.

Peter Cowley:                  Thanks for listening to another Invested investor podcast. You can subscribe to all future podcasts via our website or via a number, of podcast platforms online. Remember, you can order our book online, and be sure to follow us on Twitter, LinkedIn, and Facebook to get the most up to date, instant and insightful content from the Invested Investor.