Ashesh Shah (The London Fund): Be Brave!
20 Jan, 2022
Lucius Cary is Founder and Managing Director at Oxford Technology Management. After forming and raising finance for his first business in 1972, he founded “Venture Capital Report” in 1978 and was its managing director for 17 years. In 1996 became Chairman of VCR in order to concentrate on Oxford Technology Management’s investment activities. Oxford Technology Management raised its first fund to invest in start-up and early-stage technology companies in 1983. In 2003, he was awarded an OBE for services to business.
After school, I did an engineering apprenticeship with the Atomic Energy Research Establishment, Harwell. And I then went to Oxford and I read Engineering for 3 years. Then I went to Harvard Business School to try to learn something about business. When I came back from there, I decided that I wanted to start my own business, but I didn’t have any money, because I had borrowed money to pay for my education. I thought: to start an engineering business you would need a lot of money, because you have to have a product, to have a factory, you have to buy machines, you have to make your product, you have to deliver it, then sell it – and then you have to wait to get paid. You need a lot of capital to start an engineering business. I didn’t think, I’d be able to raise enough money to do that. So I thought I would start an American hamburger restaurant. The big advantage of a restaurant is that as soon as you open your doors, you get paid in cash, and you don’t have to pay the butcher for 6-weeks or whatever you can get away with. And you can rent premises. Restaurants generate cash from the minute you start. Nevertheless, you do need some money. I wrote a business plan and I reckoned I needed £27,000 to start (because of the inflation, the equivalent is about quarter of a million today). At that point I was archetypal young entrepreneur: I had a business plan needing £27,000 to start and I had an overdraft of £3,000 at the time to pay for my education. My problem was how to raise the money. I went to see my bank first of all – this was 1971, and they offered to increase my overdraft from £3,000 to £4000, so I had something to contribute, but not a huge amount. There were 2 venture capital companies at the time, so I went to see both of them, and they both turn me down after 20-minute meetings on the grounds that I was too young and I never run a business before. Then I put an advertisement in the Financial Times, it said “ Entrepreneur seeks £26000 to start a business. Estimated value to investor after 66 months is £237,500. Please write (box number).” That was then £27,000 I needed, less the £1000 the bank was lending me. I had 10 people answered that ad, people who today would be called business angels. I sent a copy of my plan to them all. Then one rang me up and said that “let’s meet in the pub”. I went to have lunch with him in the pub, and it was a very unsatisfactory meeting: there was somebody else there who wasn’t interested in the proposition. It was in the summer, so we talked a bit about the cricket, and then we got some drinks, and then we talked the bit about the business, then we got our food and – the whole thing just felt very bad. So, I , later that afternoon I rang him up and said, “That went very badly and I’m sure, you don’t want to invest in me.” He answered, “You’re quite right. I’m writing you a letter.” And I said, “But can I come and see you again and do it properly?” And he said, “Alright, come to breakfast.” So a couple days later I went to his house, we had breakfast and talked about the business for 3 hours. There was nobody else there. And at the end of that time he offered to invest £5,000 on the terms I was suggesting. The terms I was suggesting were that I would put in my £1,000 for shares, the investors will put in £999 for shares, so I would have a majority of the shares, and then the investors would make a loan £25,000 to the business secured against the assets of the business, but not guaranteed by me. The effect of that structure was that if the business failed, I would lose £1,000 and investors – £26000. If the business went well, the first profits would get used to repay the investors their £26,000 plus some interest paid in the form of directors fees, and after that, we share the profits 50/50. That seems like a fair deal to me, and it obviously did to him, since he offered to invest on these terms. Later I discovered that this is called having a lead investor, and as soon as you have somebody who offers to invest in your proposition on agreed terms – not because they’re your father, or your friend, or something, but because they think it’s a good commercial proposition, everything gets much easier and everybody else starts to take it seriously. That’s exactly what happened in this case: I called the other investors and said, “I’ve got £5,000 now, we’re making progress. If you’d like to join us, don’t wait, otherwise, it will be closed.” Quite quickly I was oversubscribed; I had more investors than I had room for. I took the 4 largest: 2 for £8,000 and 2 for £5,000, and it gave me my £26,000. Then I had to find a site for the restaurant, I found it in Bristol. I knew nothing about restaurants, but I learned fast. It was an American hamburger restaurant in the days before McDonald’s had come. The restaurant was up market, so it was quite smart. It was hard work. I did everything myself: it was open 14 hours a day 7-days a week, I cooked, paid wages, and did everything. After a bit, it went quite well, and I had enough money to open a second one, then a bit later – a third, so after 5 years, I had three restaurants in the chain. Each restaurant had its own manager, and I had an income – and time. I think, the investors had been repaid their loan by then. Looking back at the difficulties I had had raising capital – the whole method of raising capital in the UK was very hopeless. So I started a second business with the office above one of the restaurants, which continued to run, called Venture Capital Report. VCR was a monthly magazine that carried articles about entrepreneurs and the businesses for which they were seeking capital. But unlike my tiny little ad in the Financial Times, this was a 5-page article, with a description of the product or service, an analysis of the competition, CVs of the founders with photographs, a cash flow projection and suggested equity structure, what the deal was for investors, and the name and address of the founder. I sold that magazine on subscription. It was very difficult to start because it was a real chicken and egg problem. How would I find people to write about when I didn’t have any investors? And how would I find investors if I didn’t have any businesses to write about? In the end, I managed to persuade 5 people to let me write them up and we published the first issue. 30 people bought the first issue. Then one of the businesses got funded so it showed I that the idea could work. I had a bit of luck then, because the first issue was in December 1978 and Mrs. Thatcher was elected in April 1979, and she was on the same tack, trying to make England a more enterprising place in which entrepreneurs could raise capital to start businesses. The cabinet office subscribed to Venture Capital Report, and she used to invite me to Downing Street to talk to her Chancellors, where I told them about the practical difficulties people were having trying get businesses going. I gave input to the various government schemes to make things better. Venture Capital Report eventually ran for 25 years, and the Financial Times called me “the grandfather of the industry,” meaning the business Angels industry. But after 5 years, by 1983, it became clear that the people who never could raise money were scientists. When we used to write about ordinary businesses – restaurants, hotel developments, squash courts, or fashion designers, or something – they would raise money, but when we wrote about science businesses, they didn’t get any inquiries. Investors don’t understand science, and sensibly, people don’t like to invest in what they don’t understand. So in order to try to do something about that problem, I started my third business – a seed capital fund, Seedcorn Capital. By that time I’d sold the restaurants and was focusing on Venture Capital Report. It was a small fund, £125000, which I’d got from a larger venture capital company in London. The idea was to invest in five things of £25,000 each – in science things. Luckily for me, my first investment was very successful. The founder became a multi-millionaire, and the investors got back £500,000 quite quickly. The founder of that business became my biggest investor. That enabled me to demonstrate that it is possible to make good returns by investing small sums into science start-ups, and I’ve done that ever since. I’ve invested in more than 150 science start-ups since 1983. Everything I’ve done has been a result of finding a problem and then trying to find a way of solving it. I’ve been on all sides of the table. I experienced at first-hand the difficulty of raising money as an entrepreneur with no money and no track record. I helped to raise money with VCR, but not investing myself; about 400 companies raised money through VCR in the 25 years of its life. Then I became an investor myself.
Almost everything we do is unusual. I’ve been always interested in science, so we back lots of scientific inventions. I’ll give you one recent example, which is not yet a commercial success. This was a professor in Oxford, who had invented a way of making endohedral fullerenes. Fullerenes are carbon cages, hollow spheres of carbon atoms. When it was discovered, the researcher, Harold Kroto, did an empirical analysis and he could see that there were 60 atoms. He wondered what structure it could be. He’s called his wife who was in New York (he was in England at the time) and said, “Get the football down from the attic, and put a ring round every intersection on it, and number those intersections.” She rung back in a few minutes later and said, “60!” So he knew that was the structure: it is a sphere, made up of a series of pentagons and hexagons of carbon atoms. Back to our investment. This professor had found a way of making these fullerenes with an atom of another species inside. At the time it was 3 – gadolinium, yttrium and nitrogen. He didn’t know what they were for, but they had interesting electrical properties. That’s exactly my kind of thing, so we invested in him to keep him going. Now we’ve sold some of this material, [email protected] – nitrogen fullerenes, and the price is more than £100M per gram– it is the most expensive material on the planet. We only sold a few micrograms, and the other day we got asked to supply 1 milligram, but it would take us 4 years to make this amount. It’s very difficult stuff to make. The application, which may not work, but is being developed (they’re quite a few universities and scientists working on this around the world), is an atomic clock. The nitrogen atom inside of the cage is effectively isolated from the rest of the Universe: the nearest thing is a carbon atom which has a huge distance away in atomic terms, so the nitrogen atom does its quantum spin resonance at a very precise frequency, undisturbed by the rest of the Universe. If you get enough of these atoms molecules together, the resonance can be detected, and that could be a very accurate time signature. Today, atomic clocks are quite large and expensive, and there are half a dozen of them on every satellite. These new clocks may be equally good (maybe not quite as good), but they would be very good anyway and could be on a chip inside a mobile phone to improve GPS accuracy – to a few millimeters as opposed to the current few meters, which could enable controllable autonomous vehicles and a lot of other things as well. This business is not yet a commercial success – it is still a one-man business in a lab. But it could be the start of something big.
We probably get 1,000, it’s several every day, but most of them are not science and not near Oxford. We get 50 to 100 possible proposals each year and review about 20 of these. And then we make 5 to 6 investments per year.
We’ve been doing this for long time – more than 30 years. We only invest near Oxford – all our Investments within an hour’s drive, so that we can be actively involved, because the scientist may be brilliant, but he’s, probably, never run a business, never seen a VAT return, or made a deal with an American distributor. We get actively involved to help. We’re quite well known in our field: if you were a scientist in Oxford wanting money, people around would recommend that you see Oxford Technology.
Well, we only have one rule which is not to have any rules. We take each case on its merits, and different things are important – sometimes the people are important, sometimes the science is important, sometimes patents, sometimes markets. But the idea is that if the business goes well, it should make a big difference and therefore become very valuable.
We don’t really have any preferences, we take what comes. Because we’re in Oxford and Oxford is one of the world’s leading centres of Bioscience and Medicine, many of our investments are in BioTech. Anyone who is interested can see exactly what we do by downloading our latest quarterly report from our website – there is a page of information on every investment, including the failures.
Right at the start. Almost always we are the only investor at the beginning when it’s still too risky and too small for others. We usually make the first investment. Our fund structure is such that it goes well, we have enough money in the bank to be able to invest the same amount again a year later and the same amount again in year 3. For example, we’d invested £75000 in Lightpoint Medical, and this was the first external investment the company received. A year later we put in another £75000, and more than £1M came in from other investors. The third year we put in more money, and more money came in. Our investments are encouraging others: they think (possibly wrongly) that we know what we’re doing, because we’ve done a lot of it, and they like to follow behind us.
We only invest in companies that are within an hour’s drive.
We move very fast. That’s one of the big advantages we have. We often meet people at 10 in the morning, and we agree to invest in them by 12 o’clock, and we get them their money within a week, sometimes it’s just the next day. We don’t use lawyers, we just have an agreement, which we’ve done many times before and which everybody signs up to. And then we give them the money. And they love that! It’s a huge help for the people raising money. Sometimes it can take you 9 months to raise money and it’s very depressing and a tremendous waste of time. And the businesses get badly damaged because of the time they spend looking for money: during that time the founders are not concentrating on what they should be doing, they are just talking to investors. Many investors won’t make up their minds, saying neither yes nor no.
Typically it’s £75000. Sometimes a bit more, but that’s what would be typical for us. If you look at a report, you’ll find there every investment we’ve made in every company. We put in small amounts ourselves, but we bring in lots more often from others. Typically, we put in our money to enable the founders to demonstrate something – to do a big experiment, or make a prototype, or write some software. If it works, then the value will be increased. Then we invest later at a higher share price and other people come in at that time.
We only had 1 exit in our current fund, it was 14x. We would hope for between 10 and 100.
We’ve got 5% to 30% – and everything in between.
We don’t really need anything. As long as it’s good science and a founder who is going to listen to advice, then we’re happy to invest. Some founders want to run the business and become a managing director, and that’s fine. Some of them don’t; they want to remain in their labs doing their science, and that’s fine too. In this case, we recruit people to run the business. We invest at such an early stage that we don’t expect there to be a team. If necessary, we will build a team. If there is a team, that’s fine; we are very happy, as long as it’s a good team.
Yes. Lots of our companies have 1 or 2 people at the start.
I should think. Steve Wozniak, probably. Steve Jobs would have been fine too, I think. Oh, or Bill Gates. Actually, Wozniak and Jobs were a good team – one was technical, one was marketing. That was a good team.
I guess, scientists who have an inflated idea of the value of their invention. Some scientists discover something and they think it’s worth 100 million, although they haven’t made any sales. Usually, we don’t invest in them. Scientists who won’t listen to advice – they think they sort of know it all. Quite often, when we meet people, we make suggestions, like “have you thought about trying this or that?” and the reaction to that questions is quite interesting. We like to invest in people who will listen to advice. I’ve done more than 150 startups, we’ve got a lot of experience about things that happened in practice. What we like is to have regular short meetings – every fortnight or something. Just informal meetings, a conversation. We like people who ring up and say, “This has just happened, what do you think we should do about this?” Then we go round, and 10 minutes later we are in their office and can talk and solve the problem before it becomes an issue.
I’ve must have done it, I just can’t think of any. And there are also some I wasn’t asked to invest in, but I would have loved to be invited.
None! I’ve been asked to invest in perpetual motion machines several times, but I’m an engineer myself, so I’m not mad. Once I had a man who came all the way from Portugal to see me. He thought that the Universe was doubling in size every second, and that’s what accounted for gravity, this constant expansion of the Earth was forcing us into constant acceleration. He came with two suitcases full of “information.” He wanted to turn Brownian motion into a force to propel a rocket to the Moon. I said, “I’ve only got a small amount of money, and this project needs millions. I’m afraid, I can’t support you.” It was very hard to make him leave.
We very rarely do Green energy projects, because they require too much money. I have a small amount of money, so if you’re going to make a nuclear fusion or a better wind turbine, it takes millions just to make a prototype. We have to be able to invest in things where our investment will make a difference, achieving a value-enhancing step. About a year ago we invested in a scientist who has develoed a way of counting the number of bacteria in a sample in an hour. Normally, bacteria have to be cultured which takes several days. He can get an answer in an hour. I would hope that the water industry will be able to certify the quality of the water all over the world within an hour, not in several days. It should be very valuable to them. Our investment was used to make the first prototype, and I hope that this investment will now become much more valuable. This is a good example of what we try to do.
No. The way we work has changed because we are now working from home. We have a conference call every day at 9 with the three of us in the UK and our office in China. We have another call at 2. Then we talk to our investee companies for the rest of the day. It’s changed the way we work, but it doesn’t really change what we do.
Both. We’ve got some companies that are very badly affected. One of them which was worth more than £100M six months ago is now possibly going to go bankrupt. Another is trying to develop a test for COVID, a machine to do 5,000 tests a day at a low cost. This could become useful and valuable if it works. So, Covid has certainly created opportunities, as well as lots of problems. All the companies we invest in are very small, and small companies have a huge advantage that they can move really fast, where big companies take a long time to make decisions. Little companies have a definite advantage, when you get something like COVID, because small companies can switch their business models overnight.
The discovery of lasers was one major event. I guess, the internet has been the biggest game-changer in the way the world works. And the discovery of DNA brought us a completely new understanding of biology. I’m reading a book about the immune system right now, it’s an unbelievably complicated thing, but all of it is beginning to be understood. The discovery of DNA has completely transformed medicine.
I wouldn’t do any, really. I think, there are a lot of people who spend far too much time thinking about how they should do stuff. I don’t suppose that Steve Jobs or Wozniak read blogs about how to start a business – they just made a computer in a garage. They went actually to a group of tech hackers, where they would borrow, beg, or steal chips and stuff. They were great doers. I would encourage people to do, rather than think and talk about how to do. Have an idea, make something, try to sell your service, and try to get your first customer – that’s much more productive than reading blogs from other people on how they did it.
Don’t involve lawyers. Stay away from lawyers if you possibly can. Get an investor and get an agreement with him, heads of terms that are written up in every detail you can think of: who will pay for what, what are the shares that are going to be split, etc. At that point just sign it, both parties; we don’t use lawyers at all. It is very expensive and time-consuming to have lawyers. Later as the business grows and if larger sums of capital is needed, then legal agreements can be done.
No. My life is extremely interesting. I’m involved with lots of interesting people, I have interesting conversations all the time. And I wouldn’t want to change it. Also it’s my own company, so I’m in charge. I’ve always had my own business, and I doubt I’d be good at working for other people.
A good VC is one who is able to take a decision quickly and who is genuinely seeking to help the founders to build as great business. Many VCs are much too risk averse and move far too slowly. This is damaging to the businesses seeking capital as the founders get distracted from developing the business and have to spend a long time, sometimes 9 moths talking to investors.
Well, I play Chess – too much Chess, I guess. And I used to play Go, but stopped playing it. I find it too stressful.
Edinburgh is my second favorite city in the United Kingdom if assuming London is the first.