David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Private equity investments in the US, Europe, Asia and the Middle East spanning 30 years ranging between growth capital, small, medium and large buyouts and later stage growth investments.
Private Equity Investment Experience:
€9 billion cumulative Enterprise Value (€7.5 billion pre add-on acq.),
€1 billion cumulative Equity Investment (2.62x & 50%+ IRR (source: KPMG))
Deal Origination, including Cold Call platform in Environmental, Healthcare and Specialty Chemicals industry. Further direct investment experience in Crypto, Blockchain, FinTech, Gambling, Retail and Media companies
Geographic Experience: Europe, US, Middle East, SE Asia & China
Member of the Investment Committee since 1998,
Member (or past member) of the Board of Directors of 39 companies across Europe and the US
• €5.7 billion of debt capital raised, including 9 public debt issuances (among these were the first non-Sovereign debt issuance in Poland (1997) and the first corporate High Yield issuance in France (1999));
• 4 PIK-note / preference placements (€565 million);
• 4 IPOs;
• 1 ICO;
• 9 Equity syndications totaling €175 million;
• 2 fully-financed public tender offers in Germany and the UK (EV €1.45 billion)
• Managing Director of distressed operating business in Germany
• MD & Compliance Officer for Regulated Private Equity operations in the UK and Guernsey
• Designed and led the strategic restructuring of Polish and German businesses
7 EMEA M&A mandates (EV of €7.7 billion)
Specialties: Leveraged Finance, Private Equity, compliance, restructuring, negotiations, strategy, deal sourcing/origination
Industries: fintech, media, healthcare, retail, industrial (chemicals, power & water), infrastructure & gambling B2B & B2C, blockchain
When I was doing my undergraduate work, I took on a part-time position in private equity or a venture capital business owned by a bank. I used that to pay my way through school. I spent a little about a year and a half with them. And then I went to Boston, joined up with Advent International. It’s a big firm now, but back then it was a spinout of TA Associates. So, it goes all the way back to my university days and it shows that I’m not a multi-dimensional.
Historically I’m quite heavily involved in the media sector until now. But also, the fintech sector is on my focus. Typically, what we’re looking for are very large markets where fundamental change is undergoing and where we think that change is irreversible. A good example in the media sector is a digitization and gamification of advertising content and it’s not going to go back to the old days. You’re not going to see the traditional media dominate the advertising scene or the content scene. Same thing in fintech. The banks are sitting on some very old technology, they have a big customer basis, but now you have new companies sprouting up and challenging them. Whereas I’d say 15 years ago, the idea of that would have seen to be preposterous, and yet it is happening and is getting even bigger. Big, fundamental changes in big industries where you can make a difference. And that means that there’s a lot of room to grow.
That is really a good question. Because in the minute I say never, I usually end up finding some deal with some clever angle, when I think that’s still worth doing. Let me think about that for a moment.
There have been a number of industries where I have invested in and the results have been mixed. I’ve had very good results with retail, but I have very little interest in ever doing it again. And yet that’s a huge market, it’s convergent. When you digitalizing retail, it’s doing an Amazon-like effect but for me, it’s just not enough. It’s too competitive.
The next industry is mining space and things like crypto mining. I have some experience with it, but after learning more about the economics and the issues, I never want to touch that again. I like related fields, but just not mining deals. The other one that I will probably never invest in but I have a lot of affinities for, because it’s cool, is the semiconductor space and things like 5G, high-speed data transmission, and large memory. The problem with that it is very hard to sell into the customer base. It is crazy hard. And even when you do sell into that space, the competition comes in and it can be very expensive to stay ahead of the curve. I’ve never done one by myself but came very close a few times over the past couple of decades. And every time I think: «Thank God! I didn’t do that again!». That space takes a lot of money.
It’s hard to make money with cryptocurrencies, which are just another asset class. But to actually do the business of mining cryptocurrencies it is really an industrial play. It sounds really good: you are creating Bitcoin or whatever out of nothing. You need to buy servers and keep them fresh and the lowest possible energy price, but the point is – it’s a cost game. Whoever has the lowest cost and can keep their costs low can win. And when everybody thinks it’s going well; everybody piles in and guess what happens? All of a sudden you can’t mine as much because there are too many participants and you still have your fixed costs, which is that cheap energy you had and the cost of those servers.
But it’s fascinating. When creating a non-domiciled currency to hold value feels like you’re making something from nothing. The truth is it takes work and money. In the only deal we’ve got involved with they had almost every advantage, right up until the point that Bitcoin dropped below a certain level, more people came into the market and that meant our stuff couldn’t work hard enough. And neither could anybody else’s. It drove those profits down to nothing. And then you can’t reinvest if you’ve got no profits. And that was tough. Now that market goes from the stage of mining to the stage of trading.
Obviously, I’m a little bit biased in Europe. I think it is still exhibiting a similar characteristic as it did 20 or 30 years ago. For all intents and purposes, it’s one group, but it behaves as 30 something different groups, and digital is the first unifying technology or methodology for this market.
That means that unlikely China or the United States, which both have massive internal markets, Europe has it too, but it’s very inefficient in comparison. Digital technologies can push those boundaries and you can do a lot of cool stuff with that and across the board. We observe it within the media sector regularly.
We see it on the e-commerce side of the market and definitely see it on the fintech side. A company like Revolut offers bank accounts across Europe and in America. These things go extraterritorial because digital makes it easier. We are pretty excited on a European basis, but also on a global basis. There is a company We’ve Got Talent. It has a big creative community that sits all over the world: in China, the United States, England, Poland, and Romania. It operates globally. And it is only a little British business with offices in four different locations in Italy, New York, California, and London.
Probably the most unusual was the Polish Pay TV deal. There was an existing company with a large cable TV asset. What we needed to do was starting up a new company to focus on the digital TV part, so that we could get more content into the market. That would help the cable company, as well as other cable companies, to raise their rates because they have a better product.
That’s what the journey was. We ended up creating a company initially just on paper. Then we took it public on NASDAQ and raised $200 million. After that, we put the playout center here in the UK because it could get to the satellite, which could drop it into Poland, and then distributed to our cable business and also to a bunch of others.
In the journey, it went from zero to selling for 1.1 million, while being a public company in the space of three years. It was a big digital transformation project, expensive and focused on what most people would think of as up and coming, but still, a relatively small market, which was Poland. It was really cool.
As low as possible. But we are willing to keep following investments. Things like We’ve Got Talent ended up taking about $5-6 million, but the fintech company took $30 million. The initial check for a startup is usually quite a bit smaller, but that’s because then we work with that entity to help it grow and provide additional capital as it says it needs.
I think management is the first. It is a kind of leadership, and it helps people who are the founders, but that doesn’t always have to be. It just has to be people who are really motivated to try to deliver business opportunities. Engaged management is key.
We require that there would be a large market opportunity or somethings overly niche-oriented. We need something with a big canvas to play on.
There should be a couple of honest to goodness quality customer relationships, somebody who’s saying: «These guys have really got something and they are fixing or helping me to do something of quality». Because that becomes the support that tells you that you’re on the right track.
It’s very hard to do a startup where people are just thinking about the product and thinking out loud that they want to try to fix something. Then it’s too early for us. It needs to be something where there are some customer relations and engaged management. Those are probably my two biggest requirements.
It really depends. I don’t think there is a standard approach. We typically are ready to invest when we have the ability to add more money to increase our ownership stake. Quite often we start from a relatively small check.
We’ve had ownership that goes all the way up to 90%, but then we carve out equity again for the team so that they can have a future because investors don’t build companies, people do.
It’s all about constantly being able to restructure, so that the people, who are part of the equation, get its paramount.
We always say that we are a 40% IRR investor for a bare ass startup. That’s not enough compensation. We are looking at an asset which can grow a 100-200% a year for a while until it gets up to a decent level. I’d say that it’s a growth rate that we’re looking for and a fundamental return. I’ve met people who want 10X on their money or they will not invest in. That’s fair enough. But that feels like you are shooting your expectations because you are really smart and you are going to get a few big hits.
My view is that I’d rather have a slightly lower return but a greater certainty of it. That is our approach. We are trying to be sure that the investments that we make have a higher than normal likelihood of being able to survive over the near time.
I am probably more of a B2B player. We are a group that is deploying a quality technical solution. I think it is always helpful because you have more control of your destiny rather than trying to get it sourced somewhere else and then bringing it in house. Software and technology are quite important to us. The product has to be robust; it has to be something that is built to last.
We are seeing a lot of stuff and a few times it happens to us too, when you get something that isn’t really well built, in a way, you almost have to do it again later. That sucks. It helps when your team or the entrepreneurs have a view toward quality early quality yourself.
You need a to have lot of perseverance and to be open-mindedness.
I have inherited one startup from somebody else and it was a disaster. The problem with a one-person startup is that your margin for error of the management or the leadership is way high. Typically, investors like to back teams and there’s always one person who’s the real foundation for the idea, but their ability to bring a team along with them on the journey is a real test. Therefore, I just can’t imagine a scenario where I would back a one-person startup. I just can’t imagine it.
This is going to sound horrible, but as long as possible. The reason is the more you can observe how a team is behaving, how they get along, how they think, the better you are backing them as an investor. It’s one of the reasons why as a leadership and a startup you want to cultivate relationships as many as you can because that is what starts then to bubble up and grow up with confidence. We all make mistakes in that area. We all think, that we’ve got the right idea, we are in the right place at the right time. Why is it so hard to raise money? It’s because most of the people who are investing are looking for some evidence that you’re going to be able to survive and you’re going to be able to last. That is observational.
Sometimes it might take two months, which I think is way too short. But in general, it can take from about two months to a year, to be honest. I have examples of both: the shorter ones, on average had lower success, and the ones that took longer on average have had much higher success. That’s because we have more time to observe. That means the ones that are struggling to get their point across to be able to survive fall by the wayside anyway. And that’s tough. That’s a hard one. I know for management it’s really hard.
You ended up getting a lot of stuff, even though you’re not soliciting it. At the beginning of the pipeline, it’s hard to find a quality opportunity because you’re not yet in the flow or you don’t like a particular sector. If you like something you want to go and see as many companies as possible in that sector including their competitors, wherever you really want to just see what’s happening. Very quickly a critical mass of deals starts to coalesce around a particular area that you feel good with. It’s kind of a thing like if you buy the first house on the block, the risk that you may not like that part of town is a lot higher and there might be issues with that house. But if you’ve seen a lot of houses in that area, and then something quickly comes available, you’re much more educated. Therefore, you can make decisions a lot faster. I would say it’s harder at the beginning.
You see a lot of deals, just not a lot of good ones, but because you’ve got interested in certain sectors that rise rapidly, quality improves and then you deploy. After that you are focused on building the company. That means you are not doing as much stuff. You might have six companies in the portfolio, and yet you’re getting deals that could make you five times that amount. And you’ll get to invest when you think that is the time, right?
Speaking about numbers we are looking at a hundred plus deals every couple of months, then it starts to skinny down, but then we become much more focused on certain key sectors. I would say it’s the same rough number, but now it’s more focused. And then the number of deals coming at you goes up, but the longer you go through the investment the fewer action you make.
Most deals come from personal networking and by being known in a sector. Because I did a lot of media deals and I’ve been involved in the crypto market, I see a lot of opportunities in those sectors. I think that people are looking for deals and they make suggestions. If I wanted to start something in the fintech space, where I am now, it would be really hard. You need to ask around, to look on LinkedIn, and just try to find some people to talk to and get grounded. That’s one of the biggest sectors for startups in the market and it will take a while to sort through the noise.
It is hard. Anyway, most deals come through digging and referrals. I grew up in an Advent where we used to do cold calls to find deals and you learn about industries really fast. It is still a valued method that we use today.
Typical red flags are quite often management related. They are trying to be too focused on getting money out. That becomes a problem and that is tough. Stress on an entrepreneur is huge and there’s not a lot of money on an early stage. Quite often they’re coughing it up, but it tends to be a worrying sign because it means that the stress level for whatever reason is starting to overwhelm them.
Another bad sign is too much turnover and the team. That is almost always a bad sign and it can be very difficult to pin it down.
The next bad sign is a failure to get traction, meaning the story isn’t resonating, and this is tough. It just isn’t attracting people. There are a lot of companies that have great salespeople, including the entrepreneur and yet their product is crap. And you are scratching your head and think: «What the hell? Why is it like that?». The reason is that they are selling more of a dream than the quality product. That’s hard because you always feel like it’s not fair, but it’s a red flag when you’re not getting traction.
I would say there was one company in Poland with a very clever guy and smart technology. We couldn’t come together on the terms and the amount of money they needed. They needed more than what we were willing to put up. And I always regretted it. They were a quality team and it was led by a really high-quality person.
But for the most part, I am thankful for the deals I wanted to do that I didn’t do. You would be surprised at how often that happens.
Don’t pay too much, make sure all the right things are in place, try to structure it for the future. Sometimes that doesn’t suit the team that you’re talking to, because they’ve got other people courting them. They don’t feel like they can meet those terms. That’s why I’m thankful for the deals I’ve missed.
I’m mixed on conferences. They are quite a good place to go and learn who’s doing stuff. I wouldn’t say that I find many deals that way. 25-30 years ago I did, but that’s because you didn’t have the Internet quite the same power that it is now. Today you can actually go through a lot of articles, talk to a lot of people, see a lot of different business plans, without really ever having to step outside. Now you need to go and meet people, you have to talk about deals, and sometimes conferences are helpful because everyone is together. But it’s really hard to get enough time to talk to anybody there because they are all running around and they want to talk to you as the head of Revolut. And you are not really interested in Revolut. You’re going to learn about what are some of the other people doing.
I would say conferences are still important. They continue to attract enormous crowds. They also educate a lot of entrepreneurs, but they eat up a lot of time and there’s a lot of advisors there. I think that could be helpful because advisors obviously know a lot of people and they all see stuff which they could share with you. I think that helps, but getting deals from advisors is not nearly as good as digging them up yourself.
We are looking to merge some of our businesses with others so that they can become more robust because they all are affected by COVID-19 in one form or another. This means that you can actually bring together some teams that you wouldn’t be able to do otherwise. The growth of business during the downtimes is a bit like hacking.
Is COVID-19 a thread? No, I don’t think so. I think it’s more of an opportunity. It’s hard to live through it, people are scattered all over the place and do a lot of stuff from home. But I think the opportunity is that companies are learning how to work remotely. That is great in the digital era. People are being quite productive, and there’s also a lot of businesses, which are flourished during this time, but they may not flourish when it will normalize. Although, other quality businesses are struggling.
I think the opportunity here is huge and you should be all over those things because that kind of team and that kind of experience are hard to assemble, especially when you’ve got your own small businesses. I think it’s a big opportunity and other people are demonstrating they see it too because the investment activities go up.
It’s almost always management and a huge part of that is their financial management and cashflow skills. Just man doing some of the mundane stuff is always one of the biggest weaknesses. And it’s a big weakness even for big companies. It happens because startups usually have less experience in that area. They don’t have a lot of time and managing the cash flow, cash budgets and all this kind of thing could be hard.
The second weakness is human resource management. There’s one thing where you get them all hired and send out into the field to get stuff done. But as you’re growing there’s a lot of stuff that’s needed to keep everybody working together. The word ‘management’ is called by the verb ‘to manage’ for a reason. You need to try to manage all the important things. And most of what management does is human resource management. They are managing their people to try to get the results and that can be tough.
A lot of entrepreneurs are actually lonely wolves and they are just not great people, and that could be a challenge. Some are over people-oriented, but that’s just external. Internally they are viewed as a cold overly demanding pushy. What has it taken an interesting cocktail to get to success? I wouldn’t say one is preferable over another, but you need some balance and it is important.
I don’t know how much I want to work with Elon Musk, but I would love to be his friend. I think that guy just got so much on intellectually and he is so positive and action-oriented and I would say that would be cool to know him.
The second probably would be the head of Facebook. I don’t want to have any relationship with him but he is a quality human being to be around. And it’s not meant to be personal. There’s something a bit of an ethos, which is making money at all costs and I don’t really subscribe to it. I would just leave them off the list.
Bill Gates is phenomenal. He’s got a worldview unlike most others, he saw a lot and made a fantastic transition from building a business to a genuine humanitarian.
I don’t know how much I’d like to work with Steve Jobs. He was a tough human being, but what amazing drive and conviction! I would love to be in his orbit around what he was doing. I think he also had some very profound things to teach us. The idea of a product, as opposed to a feature and things like that, seems so simple. And yet some great questions to just keep asking about stuff.
Steve Wozniak probably is the one you’d like to work with. He is smart as hell and an individual who was very team-oriented who didn’t always get the limelight. I don’t think he has the same vision as the others or he was even close to that. But he can drive to a conclusion and he is the technologist at his heart. In that regard, you want to sit back and say: «I like that». He actually can see complicated technical things. It happening in his brain, whereas everybody else will say: «I think it should be able to happen». And they think they know who they can get to do it, but I think he’s probably somebody who could visualize it. That’s pretty powerful from an investor perspective.
I would say, you need them all together instead of working with anybody specific. I think you’d have an explosion, but having those personalities in your mix in some form or another, is a good thing.
Microsoft is definitely a breakthrough company. There’s no doubt about it. I think it is an extraordinary example. Amazon as a startup itself was not a breakthrough, but it became one with all its cloud. It is off the charts in terms of what impact they have globally. And the third is going to be Google with their transformation in the media sector, on the advertising and their methodology, and what they are doing really turns things upside down. There are a lot of other cool examples that are doing some similar stuff. But if you think about somebody who really broke the mold, definitely it’s them. Those would be my three that I would choose.
The advantage of investing is that you can switch industries if you want just by changing your investment focus. You can say ‘I’m going to do alternative energy or whatever’ and I have done things like that. I like investing, I like backing teams and I don’t see any real change in that. Sometimes with the younger companies, you end up doing a lot of workout stuff. These things are very fragile but it is a part of it.
Whereas I like the back things and strategic transformation I probably wouldn’t continue doing what I’m doing 10 years from now, just because I’ve been doing it a long time and it’s fascinating. I love all the cool stuff you could learn because I’m a curious person. I like to analyze these markets and figure out where everybody’s going and why they’re going there. It’s neat to become a subject matter expert in certain industries very fast.
To be honest I devour content both visually and from reading books. I’m very unpopular with my family because of the books around the house. At the same time I love art and photography and I am an active photographer myself. I believe in both of those things. For me, they are both equally tangible.
I can’t remember the names of some really good early books on some of the startup companies in Silicon Valley. For example, there is one where guys were developing a software algorithm for making investments without human intervention. It’s preposterous, but the story behind it is real and it is fantastic.
Another book is really fascinating and is called The Goal: A Process of Ongoing Improvement. It’s something that a lot of people get told about at business schools. It’s still a great book to this day. It’s well-written and is all about an organization that is striving and building to reach that goal. It sounds dry but trust me – it’s anything buck and it’s really fascinating.
The next would be the book Steve Jobs: The Exclusive Biography by Walter Isaacson. It is a thick one and I think that it is good at painting the picture and getting into some of the trials and tribulations of different decisions that were made. People who push the boundaries quite often are getting sidelined a few times before they get back on track and the persistence to never give up is very important. I think that is a great book.
It’s difficult to recommend just one book. Let me look around my bookshelf. There’s a really interesting book. It is a series of different styles, one of the same idea. And they are talking about ‘Is it real?’. These things require some esoteric thought and things that are not immediately obvious. For example, there’s a book called The Tipping Point. Some people are making observations about stuff and pushing your thinking, that it feels a bit like a message, but the reality is the message is the same. And that is ‘You have to see through the normal stuff that people are up to and try to see something almost like it is inverted’. It’s amazing how, when you get a different perspective on something, sometimes the clarity of the situation immediately becomes like an epiphany. I think things like quantum physics are super helpful.
That’s a good question. I typically wouldn’t give advice and I can’t think of a time when I would. What I have done is I tried to get help from some people who are more senior-oriented, and who can help in some of the mundane stuff like finance or human resources. Also, I tried to give them some pointers from other companies to talk about working together and hoping that can engender against some business ideas because most founders are lonely.
And it’s not just about founders. It goes all the way up to big companies and they are lonely for good reasons, as they are making a lot of tough decisions and selling their guts out to everybody and there’s only you, instead of an advisor. What they need is somebody along for the journey with them. That’s why we backed teams. Sometimes the best is just bringing in help alongside rather than advice.
I am happy to live in London. It’s quite a dynamic city with a lot of things going on and it’s an easy global city to communicate from, but also to reach other parts of the world. I would say in that regard, it is probably one of the biggest, most diverse, and approachable big cities around the world where I like to spend my time.
Also, I love the place where I grew up, Santa Fe, New Mexico. If I can have the Internet, the big screen, and all the good stuff there, I wonder if I should stay there 20 years ago, because there’s a lot of high-end thinking that goes on in that market. They’ve got a lot of government labs around them and there are also many eclectic personalities. It’s smaller and more approachable.
But at the end, I’m probably more of a nomad. I don’t have a place other than this. It is a great dropping off point. I think it’s a great place to be. Because there’s an enormous amount of talent here and that talent seems to be getting skinnier. It seems to be growing.