Nestled in the uber-conservative setting of London’s Saville Row, Index Ventures’ new London base is the backdrop for my meeting with Ben Holmes, partner at the firm.
The venture capital firm’s new operating suite on the fifth floor overlooks the 16th century men’s fashion retailer Gieves & Hawkes, a business sold to Chinese retailer Trinity Group on the day we meet.
Holmes’ journey to technology investor began by studying engineering at Oxford University, before taking up a management consultancy position in the late 1990s. At OC&C Strategy Consultants, Holmes was tasked with advising buy-out firms on tech acquisitions and become increasingly interested in the space.
Consumer internet is the sector Holmes has a particular passion for, and he believes it has the potential to keep producing rapid growth stories such as Skype, Spotify and Instagram.
However, the breakneck pace of innovation in the space often leads to a chicken-and-egg situation, Holmes adds, with only the seasoned investor knowing just when to dip their toes in.
‘It is a question of do you do you try and invest before you see something gain market traction, or do you chase it after?
‘My approach is to find businesses which have enough of those key validation points for you to feel there is some social momentum behind it, but that haven’t crossed the chasm in that valuations are too high for you to get in.’
When weighing up a potential investment Holmes is adamant that he prefers to see a particular area of strength, be it the management team, the product or the market appetite, shine though.
With social payments company iZettle, cited by Holmes as one of his most exciting recent deals, it was all about the product. Holmes and his team at Index led a €8.2 million (£6.7 million) investment in the Sweden-based business back in October alongside Creandum to allow it to expand into chip-card markets outside the Scandinavian nation.
The company’s technology allows users to take credit and debit card payments anytime, anywhere. However, Holmes says the team has not only created the underlying software, but also taken it to market and ‘packaged it up beautifully’ into a smartphone app.
Index, which has offices in London, Geneva and San Francisco has three active funds. Its Index Ventures V fund makes both seed and venture investments and has €350 million to play with. In addition to that there’s the Ventures Growth II fund worth €500 million, which concentrates on more established businesses with typical deal sizes of €10 million and above, and a €150 million Ventures Life Sciences package.
Since its foundation in 1996 the firm has made 150 investments, including over 40 in the London area. It has also closed 35 seed deals in the last 24 months, since it entered the space, making it the most active tech investor in Europe.
Its most recent exits came about through the realisations of companies including RPX, Assistly and Gluster. However, the firm is best known for getting in on the ground floor of such household names as Skype, Last.fm, Playfish and Lovefilm and delivered impressive returns.
Rocking the banks
Another recent deal for Index, which has a global team of 50 people, is a fundraising for social lending platform Funding Circle through a £10 million growth capital outlay. The support provided to the 18-month-old company has come about through Index’s commitment to backing disruptive businesses.
‘We have done a number of investments which tap into this theme of disrupting financial services. Funding Circle is effectively disseminating the function of the high street bank,’ says Holmes.
Despite the noise that Holmes hears coming out of Number 10, he believes there is still a distinct issue with small business lending. It’s a sector he sees as ripe for disruption.
The investment in Funding Circle is akin to the one which Index made in bookmaker Betfair in its fledgling days, when the gambling business was rewriting the way that consumers make bets by allowing them to gamble against not only the bookmaker but also fellow punters.
But could the growth of crowdfunding present a threat to venture capital itself? Holmes thinks not, as the key parameter to venture funding is the risk involved.
‘We expect to lose money on many of the investments we make, consumers do not. They can access the VC class through personal investments like EIS, but that is generally a high net worth kind of thing.
‘For small businesses the premise on which they can raise money is that their models are very easy to understand.’
For a company like a bakery or restaurant, Holmes says, it is relatively straightforward for an armchair investor to look at the accounts and make a robust judgement. Of course, they cannot expect a spectacular upside in the long run.
Help not hindrance
According to Holmes, in order to encourage further investment in the tech sector, government involvement should be limited to facilitating rather than direct intervention.
He points out that VCs tend to find themselves ‘crowded out’ of markets where the powers that be have an equity interest. State investment drives up valuations, he adds, ultimately driving down the amount of early-stage investments that are made.
‘I think a few years ago it was on the political agenda and to be honest I am glad that it has dropped off. They are now rightly more focused on making incentives right for entrepreneurs and cutting red tape,’ he explains.
But government should also be a ‘great cheerleader’, in Holmes’s view, to attract investment and champion the success stories of different sectors.
Having been at Index for ten years, Holmes has been at the vanguard of the social technology revolution, and has experienced the rapid growth of companies like Skype, which Index invested in, and Spotify.
Each year sees hundreds of proposals landing on his desk, but he points out that the quality is improving as entrepreneurs become increasingly resourceful.
‘The start-up capital available to help launches is falling quite rapidly, and is being driven down by the availability of open source and platforms like Facebook,’ he explains.
‘This means that entrepreneurs can achieve a lot without much capital. That is a great thing for us, as often the best proof of how they will perform is how well they have done without funding.’
Holmes is excited about the various technology hubs that are being built up in cities such as London, Stockholm, Berlin and Tel Aviv, and believes that many more people are seeing entrepreneurship as a way to build a career and lifestyle for themselves.
The Tech City movement in London’s East End is one which Index was involved with at a very early stage. The firm backed business card printing business Moo back in 2006 when the company bought up a big office building near to the Old Street roundabout and started to let out spare space to other start-up companies.
Holmes believes that the congregation of start-up technology firms in areas like Tech City has been a great help in putting technologists and marketers in touch with each other.
‘If I could contrast it with a few years ago when we had companies spread out all over Europe, now we have a big concentration of companies in London and it means that we can have events like chief technology officer meet-ups over breakfast,’ he adds.
The explosion in valuations of social media businesses has recently come to public attention though the $1 billion acquisition of photo sharing service Instagram by Facebook, and Holmes has his own views on the transaction.
‘From my perspective, on some metrics, to pay that much for a company with no revenues seems very expensive. On the other hand, it is not illogical. Soon Facebook is going to be public with a market cap of somewhere between $80 billion and $120 billion, so to spend 1 per cent of its market cap on an acquisition of a very fast-growing company on a mobile platform is not that crazy.’
The danger comes when start-up technology firms start to value themselves on the basis of the prices paid for industry front-runners.
‘A category leader may be valued very highly, but if you are not a leader then you cannot expect to be valued in the same way,’ he states.
Away from his commitments to Index, which also involves seven board roles at the likes of Just Eat, Mind Candy and Notonthehighstreet.com, Holmes is looking to master Swedish, which he says he is making slow progress on.
Holmes also has a personal blog which as well as keeping the world appraised of interesting developments inside the Index camp also allows people to keep up to date with his running efforts via the RunKeeper app. The latest post reveals that he ran 4.3 kilometres in just over 20 minutes 28 seconds, adding the comment, ‘Much quicker today, shows how lazy I was yesterday’.
It’s a fitting parallel to Holmes’ ambition and rapid ascent through Index Ventures, where he has become one of the most influential European technology investors at the tender age of 39.
Ben Holmes’ vital statistics
Year of birth: 1973
Place of birth: Wellington, New Zealand
Family: Married with two sons aged four and two
Hobbies: Tennis, skiing
Best business decision: Backing online take-away business Just-Eat when other investors were scared off by the sector
Inspirations: Clive Sinclair and Daley Thompson