Richard Hargreaves has watched the UK’s private equity industry develop into the global player it is today.
Richard Hargreaves has watched the UK’s private equity industry develop from a virtual monopoly to the global player it is today. He tells GrowthBusiness why he has remained committed to backing young companies
When Richard Hargreaves talks about venture capital, it’s worth listening. Beginning his career at 3i, he went on to found Baronsmead, which established some of the first VCTs in the market. He chaired the British Venture Capital Association (BVCA) in 1989, when the rise of US mega-funds was reshaping the industry. But rather than jump on the buy-out bandwagon, he went the opposite way, devoting his attention to early-stage companies. His latest project is Endeavour Ventures, which he describes, rather self-effacingly, as a network of savvy investors whom he and his team present with interesting investment opportunities.
‘It’s a sort of angels’ club, except that our members are time-starved. They’re not the kind of angels who you meet in the pub, invest £25,000 for a 20 per cent stake and then come in on Sundays to help with the marketing.’
Instead, members choose what they like the look of from a number of pre-selected ventures, all of which Endeavour’s partners are themselves committed to as investors. Since launch just over two years ago, the firm has raised £12 million for 17 investments, with deal sizes of between £250,000 and £1.5 million.
A promising start
Naturally, it’s too early to measure the company’s success – but Hargreaves is open about the early indications.
‘Of the first three investments we made, one company we exited for double our money nine months later. With another, we have got our money back and are looking for a double. A third looks like being a write-off. We tried to do all sorts to help it, but we were a small shareholder and kept being rebuffed until it was too late.’
It’s no secret that the stellar returns trumpeted by VCs on selected deals are accompanied by failures that pass unrecorded. It’s just rare to hear someone being so frank about it.
‘The truth is that most VCs massively oversell how much value they add,’ says Hargreaves, warming to his theme. ‘Everyone in the industry knows that when you get a real humdinger, there’s usually a fair chunk of luck in it.’
Clearly, the trick is to select the right investments in the first place, and recently, Hargreaves has made some good calls. Talisker Pharma, the company that doubled investors’ money in nine months, was a start-up when Endeavour invested in late 2005. The developer of drugs for central nervous system ailments was purchased by US-based EUSA Pharma for £10 million.
Endeavour’s current portfolio includes companies as diverse as fashion designer Sarah Arnett, US-based credit card reward scheme operator Rainbow Rewards, and SPDG Technologies, a company aiming to solve the world’s water problems.
‘There are emails every day,’ says Hargreaves, describing his level of involvement with some of the businesses he backs. ‘That’s not something that can continue indefinitely: we are a limited resource.’
All this hands-on involvement is a far cry from Hargreaves’ early days at 3i, which he joined following a civil service job evaluating research grant applications. It was then called Investors in Industry and was ‘a semi-monopolistic equity supplier for everything from start-ups to management buy-outs’, as Hargreaves puts it.
‘I stayed there for ten years, and when I left in 1983 we said we had an 80 per cent share of the market,’ says Hargreaves. ‘The guy who came up with that statistic had figured, “Well, someone else must have 20 per cent”.’
The venture capital scene was still young when Hargreaves founded Baronsmead, with scant choices for start-ups looking for investment. In a way, this reflected the lower status of entrepreneurship itself.
‘It was still not quite seen as the proper thing to be starting a business,’ he recalls. ‘The image of a business start-up was someone like Alan Sugar selling aerials out of the back of a van. It was seen as a little tacky compared to being something like a doctor or an advertising exec.’
Birth of an industry
The 1980s saw a mushrooming of ‘active venture capital’, with home-grown operations like Baronsmead joining the investment banks and US firms that were homing in on the UK. But it wasn’t all good news for entrepreneurs, as investors gravitated towards bigger and bigger deals.
Hargreaves’ chairmanship of the BVCA in 1989 was dominated by three issues: spreading the benefits of venture capital across the regions, ensuring that early-stage companies kept their fair share of it, and persuading burgeoning private equity houses of the benefits of joining the association.
The three campaigns led in time to the launch of the nine regional venture capital funds, the introduction of VCTs and the Enterprise Investment Scheme (EIS), and a BVCA that embraces buy-out houses like Hg Capital and Apax Partners as well as early-stage investors.
The third achievement hasn’t been universally appreciated in recent years, as leading venture capitalists have sought to dissociate themselves from the buy-out houses in the wake of increasing hostility from the press.
‘Some people do feel resentment,’ Hargreaves concedes. ‘Now the big houses are doing really, really big things. They don’t invest so much as own. That’s not very comparable with backing a start-up at all.’
So should the two industries should have separate trade associations, as they do in the US? ‘Provided the one doesn’t completely overwhelm the other, there is a strong case for keeping them together,’ he answers carefully.
Hargreaves reckons the private equity industry and the media share the blame for the furore last year, which many believe led to the Chancellor’s widely criticised changes to capital gains tax.
‘Both sides handled it badly. The media, as ever, went for the scandal – some pretty nasty insults were slung around. Private equity kept its door locked and told the media to go away. That was arrogant, but it was also naïve. If you tell the media to go away you can guarantee they will be back.’
Hargreaves has been here before. On the BVCA council in the late 1980s and early 1990s, he witnessed mammoth buy-outs such as KKR’s takeover of RJR Nabisco, the subject of Barbarians at the Gate, as well as homegrown efforts such as the failed leveraged buy-out of supermarket chain Gateway (which lives on as Somerfield).
‘The big buy-outs of 1989 were almost all failures,’ he recalls. ‘If 2008 is as bad as some predict, it could go the same way – which would be another thing for the BVCA to have to handle.’
There is a mischievous twinkle in his eye as he adds: ‘There could be a good PR opportunity in it though, if you said, “see, these people do take a risk”.’
After selling Baronsmead, Hargreaves launched Classic Fund Management, in which he ran other VCTs, including the trust now known as Chrysalis. But his time here came to an unhappy end.
‘There was a falling-out between the founders. There were issues of weak performance – which since looks rather good, but guess who made the investments. There was also a fundamental difference of style between the founders.’
So what is Hargreaves’ style? He pauses before answering. ‘I don’t live in an autocratic world. I like to achieve consensus, so that if there’s a problem we’ll discuss it like responsible human beings, no matter whose fault it is. Not everybody is like that.’
After parting company with his former partners, Hargreaves found himself a free agent once again. He gave some thought to what he really enjoyed doing, and founded Endeavour to reflect his vision of what venture capital should be about. He says he doesn’t back anyone he doesn’t personally like and derives most satisfaction from the process of building valuable businesses out of bright ideas.
‘Yes, we and our clients are making money,’ he states. ‘But part of what excites us is helping people, educating them in growing their business.’