Tucked away in a hard-to-find mews off Berkeley Square in London’s Mayfair is IW Capital, one of Britain’s most ambitious companies.
IW Capital has raised £65m to date in EIS venture capital and private equity through its network of 10,000 wealthy investors. It also boasts an SME finance brokerage, IW Inventa, and a PR arm, 42 Bruton, which arranges publicity for startups and SMEs.
Recently, it announced that it plans to offer £200m worth of debt funding to small businesses a year.
It’s all part of founder Luke Davis’s aim to create a one-stop-shop for entrepreneurs and investors.
Davis got his first job in the City aged 26 as a trainee stockbroker before becoming a derivatives trader (“I absolutely hated that job and I was terrible at it.”)
His first foray as an Enterprise Investment Scheme (EIS) investor was going into film production, financing projects by producer Julia Taylor-Stanley, whose credits include Coriolanus and The Tempest. In that, he seems to have been the only person to have made money from the film business. “We have had a success from that investment, which took had a long time,” he admits. “There’s easier ways to make money than from films.”
Davis’s next move was founding peer-to-peer small business lender Money & Co with Nicola Horlick, dubbed “Superwoman” by City journalists for juggling her career as an investment manager while bringing up six children.
He launched IW Capital in 2011 to coincide with the government lifting Enterprise Investment Scheme (EIS) tax relief from 20pc to 30pc.
The idea was to create a boutique investment house for high-net-worth individuals. The company hired analysts, private equity analysts and increased its investor pool by acquiring angel investment network Beer & Partners.
At the time, the fallout from the financial crisis was biting but Davis says that the turmoil helped trigger the launch of fintech as a way to solve problems. Happily, his fledgling company was there to invest in fintech startups.
Growth Business sat down with Davis, an avuncular 41-year-old, to talk about why regtech could be the next disruptive wave, what he looks for in from SMEs approaching him for funding, and his plans to make IW Capital a one-stop-shop for SMEs covering everything from funding to marketing.
How does IW Capital differ from other financiers?
Our secret sauce for IW Capital is that acts as the investor rather than a broker for individual investors, which, gives us more control and enables better deals and exit strategies on behalf of our investors.
Broadly speaking, we take a 30pc stake in a company including an equity stake ourselves. Because of this, our interests are aligned with investors. At least we can say honestly say to our clients, we genuinely care about this company because our investment is at risk too.
There have been months where I’ve struggled to pay the rent because we couldn’t find good-enough deals. In the early days, deal flow was tricky, but it was the right thing to do.
What’s your deal flow like today?
Last year, we had around 700 companies come to us.
The EIS market is shrinking as the government puts more onus on knowledge-intensive startups. How has that affected IW Capital?
It’s helped my business actually because I’ve picked up good staff. There were a lot of companies out there just doing pub investments, which you could argue wasn’t risky because of the underlying property assets.
I’ve always just done straightforward private equity while a lot of my competitors do this complicated stuff, where you invest here and then you put a pound in this, and it comes back through a complicated structure. I’ve never been into that. I want to invest in a company and watch it grow.
What are you looking for from entrepreneurs?
When I go to these meetings, it’s always the individuals. Every single company I’ve had where the relationship has broken down or the investment looks ropey, it’s because the human interaction has broken down. Of course, the business plan is important, and you can see there’s a unique opportunity there and they’re generating revenue. But it’s the management team that’s behind it that’s key. I’ve worked with management teams where they could have literally invented the wheel and they’d have got it wrong!
How many exits have you had to date?
We’ve had one exit, which was only 2.5x money, but we’ve got four or five which could go at any time – pub chain Brewhouse & Kitchen gets offers all the time; holiday money exchange service WeSwap has been our largest investment to date and it’s had three trade-sale approaches and we’re looking to list that this year.
There’s a misconception about EIS that you are tied in for three to five years; actually, it’s five to seven years. We’re at that point where we’re looking to get some exits. Obviously, we’ve had some failures along the way but overall the portfolio is weighted in our favour.
How many companies have you invested in?
Forty including those we’ve lent to through our debt fund.
Tell me about the debt side
It’s the opposite end of the risk profile; equity is high risk venture capital early stage private equity – super risky — debt is for mature, 10-year-old companies, EBITDA positive, and that growth will be year on year. You can’t guarantee the risks, but we’ve never had a default on those companies.
How much have you lent through the debt side?
Not a huge amount, around £7 million.
As an investor, I would be more interested in lending to established companies.
Bizarrely, most of my clients are interested in the equity. A lot of them don’t care about income, they just want growth. They get capital gains relief and a 30pc tax break. That £7 million for our debt fund has come from those clients.
The debt works on volume. You need to be working on £100 million. I’ve been to other finance houses who were willing to arrange a facility of that size, but then they say, ‘How soon can you deploy it?’ and that’s the problem, because you don’t have £100 million of deals ready to go.
We’ve set up a broker called IW Inventa, based in Brighton, eight months ago, which some of your readers might have had a call from. We have a team of people on the phone phoning up SMEs asking them if they want finance or a new invoice-discounting facility. We’ve got eight ex-BNP Paribas, Bibby Financial employees recommending cheaper invoice discounting, unsecured or secured debt. It’s great for small businesses to speak to Inventa because they’ll have three or four debt proposals within a week. And we can include our own debt solution alongside institutions if it’s suitable. The reason I did that was to create my own deal flow. Instead of sending it on to institutions, I’m creating deal flow for myself.
You’ve got 10,000 plus clients on your investor database. How do you think you’ve been able to build up trust?
I learnt very early on when I was stockbroking myself that you’d see people who only ever told you good news. They would be too scared to say something bad was happening in your portfolio companies. That way, you’re just storing up problems for later. If you tell everyone every single company is brilliant all the time, eventually, they’ll stop believing you. I tell the guys, honestly, even if it’s bad news, you keep the longevity with the clients. The underlying message is just being honest … be completely honest about the opportunity and risks, as soon as you know something is afoot. It pays dividends when people realise you’re being honest.
What’s the next financial product you’re planning to offer?
You shouldn’t have more than 20pc of your portfolio in venture capital. I’m looking at setting up IW Capital wealth management. A lot of our HNW clients want to simplify their lives rather than complicate it with a lot of financial advisers. From a business point of view, we have thousands of clients who are millionaires, so being able to offer good advice on everything from mortgage broking, insurance, fund allocation, tracker funds, I think would be building IW Capital up, adding a lot of value. It would round out IW Capital’s offer from just EIS venture capital and, increasingly, debt. It wouldn’t be our core business, but we could provide a genuinely good service.
What’s the next disruptive technology in your opinion?
Regulation and regulation technology. With Brexit there are going to be more problems to solve, and entrepreneurs are going to come along and innovate.
Everything will get more complicated with import and export, say, and some smart man or woman will come along and solve it. You just have to reverse engineer all the problems that are going to be thrown up by Brexit and then you’ve got investment opportunities. Here’s a problem, let’s find an opportunity.
Wherever’s there’s huge problems and disasters, there’s always going to be an entrepreneur who comes along and will find a solution. From my perspective, that’s exciting because these new crunch points provides opportunity and employment.
Lots of journalists have been naysayers about Brexit. People just want me to say it’s going to be a disaster. Don’t get me wrong, staying in seems the sensible thing to do – at least from a big business perspective – but my view is that I set up the business in a recession after a stock market crash, and WeSwap was set up because the market was falling to pieces. What actually happened was the birth of the fintech sector. Opportunity comes out of crisis.