Wol Kolade, managing partner of venture capital firm ISIS Equity Partners, shares lessons learned from two decades of investing in growth companies.
During my 20 years working in private equity at ISIS, we have emerged from the recession of the early 1990s, witnessed the dotcom boom and bust – where countless millions were wasted on speculative technology – and are currently still trying to recover from the over- indulgence in debt that characterised the years that followed. So what lessons have I learned from two decades of economic turmoil?
One sector I have always avoided investing in is heavy manufacturing. While the UK is great at many things, there are simply too many other countries in the world that are more efficient than we are at making things.
Many years ago a friend of mine who worked for a private equity firm in Germany set me a task. We each had a pin and a map of our respective countries and the test was to find small, world-class manufacturing businesses within a 50-mile radius of the pin. Needless to say, I could not find more than one or two while typically he found ten. So when we set up ISIS our decision was to stick to the service sectors.
That principle was also extended to asset- heavy businesses such as property or hotels, where returns typically come from the increase in the value of the asset rather than from doing anything clever with the business.
Differentiation is another key factor. You might have a great business, but if lots of people can do what you do then that does not make for a compelling investment case.
On the other hand, I am also reluctant to invest in companies that are trying to create new markets as it is a very rare business that can do that. I have learned that for every Steve Jobs at Apple or Bill Gates at Microsoft, there are thousands of others who never made it. What I saw from the dotcom boom and bust was that anyone trying to create a market from scratch is going to get through a lot of money – a multiple of what they originally expected.
So what I prefer is to be able to see the market and the opportunity and support a business in improving its position.
Finding these companies often means looking at hundreds of businesses every year. Out of those we engage with, we may build a relationship with the management team for several months or even years before the investment is actually made. I am looking for people who are outwardly focused and who want to get on. They worry constantly about their market and why their customers want to buy from them.
Once we have made an investment, we make sure we stay in close touch with our companies.
But private equity is a support mechanism, not a control mechanism. Management run the business while the investors are there to challenge and provide guidance.
One fatal error is to underinvest. Skimping on building a business properly will cost you dear, as the potential buyers that you identified will be easily able to spot the signs of strain. So that means we do things well and look to the long term – even when the future is uncertain.
Personally, I believe things will get better, and growth companies will power that recovery. At the moment everyone is looking for risk-free returns, but you need to take risks in order to reap the returns. You understand that. Good luck.