I have scratched my head repeatedly about why so many of my friends and colleagues bet their investments on apps with pre-money valuations of £2.5m. The fact is that doing as little due diligence as possible before betting £25-£50k on someone else’s idea and efforts is only a smidge more sophisticated than gambling on fruit machines.
It's great for us that they want to make some real money though as while the gamblers focus on trying to back the next Facebook, unsexy businesses are struggling to fundraise - until they find people like me.
So, what do I mean by the term “unsexy businesses”?
The world has forgotten about the businesses that people rely on each day; the backbone businesses of society.
These are the businesses we rely on every day such as dry cleaners, homeware stores, florists, food manufacturers and bed companies. Actually, a friend of mine famously sold his bed company for £222m and claimed that the concept was simple: everyone needs a bed and he could supply them with one. A great sector to be in versus an app to match people looking for a dog walker with a dog for example. Don’t get me wrong, I'm not saying that a dog walking app cannot be a great business but it’s hardly going to create the next member of the Sunday Times Rich List, is it?
The world seems to have forgotten about the businesses that people rely on each day; the backbone businesses of society. The businesses that are currently trading and now need money to scale, to grow and to multiply their profits repeatedly.
I say “the world” but I am wrong because private equity chaps continue to make millions from this activity. So why then is the average person with wealth continuing to bet on the apps that claim to be the next Facebook?
Entertainment. That’s right, most of these people are either ex-entrepreneurs or retired professionals that have had their main reason for existence either taken or given away. They have sold their business or retired and now face a life of normal living or what I like to call a "linear life".
Their escapism from this is to form a habit of gambling or investing. They know little about the gamble they are taking and in some cases, show little or no due diligence at all. The only winners in this trade are the businesses that are receiving investment.
I like unsexy business as well as some sexy businesses, too. They do however need to be sensible businesses, in sensible sectors run by sensible people.
Their founders use the gamblers money to give their idea a go while paying themselves a salary and taking up an office in a desperately overpriced start-up environment like Shoreditch. There is a fine line between gambling and investing but for me, if the investor does little or no due diligence then the term is gambling. They choose sexy businesses like a potential new Facebook because they must convince themselves that there is a chance of a hundred times return.
My approach, on the other hand, is focused. I like unsexy business as well as some sexy businesses, too. They do however need to be sensible businesses, in sensible sectors run by sensible people. There will always be some businesses that fail to perform but most them will succeed. I will have an active role in ensuring this via a directorship or an observer position on the board. I like to have an active involvement and take a long term, moderate view on what defines a successful outcome from my investments.
If the businesses, however, are run by people like a woman I had dinner with at a well-known entrepreneur’s club last month who told me; “I just want the investors cash and then for them to leave me alone”. Then I am in the famous strap-line of the BBC’s, Dragons Den: “OUT. There are plenty of gamblers to fill that role thank you”.