The Exchanges

Q No, listen, I completely agree with you. Ok, so that's on, you mentioned kind of the, the kind of consistent compounding of great businesses, like your Go Cardless of the world, it's like your Lendables. On the zeros, what are the lessons from the bad investment decisions that you made as an angel?

A Yeah, it's, there's a lot. I think I got sucked into momentum and heat. I think I, one of the best things I ever did was surround myself by other angels, and there were only a handful in London at the time, and learn from them. I think one of the worst things I did is I would occasionally kind of outsource discipline and due diligence to them. That's just too easy to do. I think too many people in our industry, particularly angels who have other jobs, full-time jobs, We'll take the view that probably someone else has done the work. I actually think often it's surprising how people haven't done the work. So that is a massive trap. It's a trap I've fallen into.

AI assessment note: “one of the worst things I did is I would occasionally kind of outsource discipline”

Q Are there any questions you always like to ask to determine the muster of someone? So like one that I always ask is like, how did you first make money? I don't think great, great entrepreneurs first made money from getting a job at Bain after three years at Oxford. Like they did something before.

A Yeah, I love that. I, I think usually you see some trait of entrepreneurship. I think the questions I like to ask actually revolve around their unfair advantage. I'm trying to understand what their unique insight is and why they are uniquely placed to solve it. So I'll ask what the unfair advantage is. I'll also ask the question of why now? Like, it's really interesting that we will sort of, we, we have our recency biases that something may have worked or may not have worked, but we need this difficult thing to happen now. With a founder at the seed stage. So I asked the question of why now, and usually they should have a good point of view. The other one I really love to do is spend some time actually asking them how something might go wrong. What's keeping them up at night? And it's incredible how many founders will actually have nothing to share about their concerns. I mean, only the paranoid survive, as Andy Gray said. Some people have no paranoia.

AI assessment note: “I think the questions I like to ask actually revolve around their unfair advantage.”

Q So do you outcome scenario plan when you do deals? Cause you see a lot of people say, well, I just, I don't think it can be big enough. I don't think the market's got enough depth. Do you do outcome scenario plans? And how do you think about that given the challenge of seeing the next S curve?

A So we do, uh, and the way we frame it is we ask actually what is the kind of option value in this business? Like great founders understand the value of options. Like an example will be most of the best founders I've ever worked with have collected data without knowing really what it might be used for, but they've, they've instinctively known there's option value in it. They know that it might create some value. And so we try and serve a scenario plan by saying, okay, this is the plan. Do we have confidence in it? And then what's the upside? If this goes right, what opportunities might it unlock? And then obviously we reframe it and say, okay, what are the risks they're in? Premortem, how this might go wrong. And then you get a kind of balanced view of what all the outcomes might be. But then look, you and I have talked before. I don't understand in our industry how anyone can have complete conviction on anything. That makes no sense to me. Like I, I studied physics at university. We would go through a proof and I still didn't have complete conviction that I got it right. And then now we're in a venture capital industry and we see investments and we're supposed to have complete conviction that it's going to work. I can describe a bull and a bear case for every one of my portfolio.

AI assessment note: “So we do, uh, and the way we frame it is we ask”

Q Actually, still doesn't look like it's going to be that open for H.I.P.O. there. And M&A is more shut than ever before. My question is, you know, we're seeing PE come in a little bit more actually as the liquidity provider in the wake of those two being out. Are you as concerned as I am about the lack of liquidity in the ecosystem with this changing environment?

A Yeah. I mean, look, it's a problem. We need a multiplier effect. Uh, and I don't think it's just VCs because they need to raise more money. I think more importantly, the great thing about significant exits is founders will go on and do something else. And then for every Sort of large unicorn that succeeds. It spills out an amazing number of entrepreneurs that are able to swing for the fence because they've got some cash in their bank and they can, you know, go for it. You and I have talked before. I think one of the best groups of founders are those that have come out of the rocket ship companies because actually they kind of instinctively know they need to aim at big opportunities and they know how to run a Fast growth business.

AI assessment note: “Yeah. I mean, look, it's a problem. We need a multiplier effect.”

Q a really important one, but I do just want to stay on the, ah, kind of outcome scenario planning, because it's such a big part of venture, and it's always predicated around that, oh, we need a fund returner. That's why we do it. Do you agree about the importance of, you have to have fund returners, it's the only thing that matters, and how do you think about that?

A Yeah, no, I, I don't agree with it. I think, ah, a lot of VC strategy is a lagging indicator of what did work in the past, and the test, Or the experiment that worked very well in the past is funds with 25 portfolio companies, power law of returns, and one or two return the whole fund, and then everything else drives decent return and IRR for the LPs. That has absolutely worked, but just because that has worked doesn't mean other approaches can't. And I think we see from different PE models, we even see from debt models, there's other ways to actually be very successful at kind of growth stage. Uh, so I would not want to say that I would only structure a portfolio that can deliver or return or make investments that could, uh, return the whole fund. It doesn't make sense to me. The important thing is have a strategy and stick to it. You made this point in angel investing. It's super important. It's like actually have your strategy and stick to it. Don't fall in love with one company, throw your strategy out of the window and then dump the whole fund into it. Incredibly dangerous.

AI assessment note: “Yeah, no, I, I don't agree with it.”

Q Sometimes in my head, I think, how many friends do I want to lose in one single show? Um, my question to you, I mean, I, I, I don't agree that prices are better here, honestly. Like, for the best companies, for your word, whereas if they were to stay, they're just super high, they're so inflated.

A I think just a quick thought on, no, no, I, so if I look at where we sit today, some of the best deals are overpriced. I think it's often because they're the ones with the traction, uh, And they're therefore somewhat de-risked. And I think there's two things that make this a really difficult thing to answer. We talked about lagging indicators. The first is we're basically trading against, or we're working against sources of capital that were raised in the past. Like these are not brand new funds often, and often they were raised in ZERP. The cost of capital has gone through the roof, like given the current interest rate environment. I think that's going to get worse, if anything. The fact that a lot of these funds are giving out so many stock grants, you basically need to hit 20% IRR to break even. These numbers are really high. So that's the first thing. I actually think there's probably going to be less money in the market for venture in two years than there is today. It's kind of a question for us. And then the second thing is classic machine learning. I think we're overfitting to history. I don't think we know what the biggest companies look like going forward. And so it's very difficult for me to Just say that actually the sort of returns profile that funds got from investments 10 years ago, they're going to be the ones they looked like before. My belief is that AI is crea…

AI assessment note: “some of the best deals are overpriced. I think it's often because they're the ones”

Q Why do you think defense is different to health? I think in defense, you still have one primary buyer here really, which is obviously the MOD. And then you have very splintered and fractured buyers, which is the rest of Europe and each wants to have their own dominant, uh, domestic provider.

A So disclaimer, I'm a reservist, as you know, so this is something I'm really passionate about. And I'd say there's three things happening at the moment. Uh, that make it significantly more interesting than it has been in the past. The first is very smart people are interested in doing it because they think it's right. There are people like our peers that are interested in doing defense companies because for the first time they actually think there's existential threat. Second thing is actually while you do say, uh, you're right, there's maybe a single buyer. It's, it's more complicated that in the UK we have, Multiple services. We have multiple regiments within each. Each is a potential customer and they're being forced to innovate at the moment, uh, for the final reason, which is to some extent we are on the, you know, we are on geo politically, we are close to a war zone at the moment. And we have a point of view in that war. We occasionally have some of our armed, uh, servicemen at risk. I think those three things together mean that actually, when you look at Anderil in the US and they had a recent round, eight billion dollars oversubscribed, it shows you there's an appetite of people and capital to go in there. I think the UK has interesting talent. Uh, the UK is playing its part in Ukraine at the moment. It's an amazing place to test new technologies. And I think it's an o…

AI assessment note: “It's more complicated that in the UK we have, Multiple services. We have multiple regiments”

Q Tom Hume, my friend, what about you? Would you invest in OpenAI at a ninety billion dollar valuation?

A I would struggle to make that investment today. And it's not because I don't respect the team. My biggest concern at the moment, but if I observe the emergence of what Meta's doing, if I look at the arms race of what the cloud providers are investing in and the sort of Gemini, et cetera, any advantage is pretty ephemeral and the consumer facing product that doesn't, that drives I don't know, is it 50% of the revenue? Something like that is not sticky. So to invest in a foundation model, what would I want to be true? I would want to believe that they had some unique approach that made them more defensible. So an obvious one is memory. Like actually none of these have cracked memory yet, but if you have a personal assistant, a ChatGPT equivalent, and it, it remembers so that it can actually be applied Probabilities as to what you want going forward, then it's interesting. If it's unique in its ability to take agency, then it might be interesting. There's other orthogonal approaches that might be interesting. But if we're just talking about a foundation model where you're going to throw huge amounts of data, hundreds of millions of dollars of compute at H-one hundreds, like everyone else, it's very difficult to see a return on these investments.

AI assessment note: “I would struggle to make that investment today.”

Q Listen, I, I do totally agree with you. So, if we move then to the application layer, how do you determine between, like, sustainable value generation versus, like, I think we see with quite a lot, like, flash in the pan, fast revenue scaling, but not sustainable value generation opportunities?

A So, my colleague we do in London invested in Synthesia, which I think is an interesting business. So, you know, that is a business that creates synthetic video. They do it into learning and development environments, and there wasn't really an incumbent there. So they've concentrated on building a whole go to market business. And I think this to me is what's important in the application layer. You better have something proprietary in terms of data or distribution. In their case, they're just building an end to end enterprise ready solution with security and everything that enables you to spin up the videos. So those are the sorts of things that we're looking for. I like the framework that I think Sam Altman on your pod said, which is the easiest way to look at applications In gen AI or to cut them is to say to yourself, are they happy or devastated if the model's improved by 100 X? I've got to look for businesses that are happy they're going to improve by 100 X. Otherwise, it's just ephemeral in the same way as I think the foundation models are ephemeral.

AI assessment note: “You better have something proprietary in terms of data or distribution.”

Q Okay, so will you take market timing risk? Because Mark Andreessen or Ben, I can't remember which one, uh, said that, you know, there's no such thing as a new idea. It's always been done before, it's just maybe the wrong time.

A Yeah, I think that's, statistically, that's probably true, uh, sort of, I mean, this is, this is the challenge. If you, if I sit back and look at the sort of ideas I've been most excited about, probably someone has tried to do it before. Being too early is tantamount to being wrong. Unless you can survive long enough for the market to come to you. I've seen, we've seen some examples of this. I think VR is an interesting example. There are a lot of companies that were waiting for VR to come to them. That's market timing risk. In that case, you better have a kind of cockroach mode to be effective until the market comes and build the muscle.

AI assessment note: “Being too early is tantamount to being wrong. Unless you can survive long enough”

Q Actually, still doesn't look like it's going to be that open for H.I.P.O. there. And M&A is more shut than ever before. My question is, you know, we're seeing PE come in a little bit more actually as the liquidity provider in the wake of those two being out. Are you as concerned as I am about the lack of liquidity in the ecosystem with this changing environment?

A Yeah. I mean, look, it's a problem. We need a multiplier effect. Uh, and I don't think it's just VCs because they need to raise more money. I think more importantly, the great thing about significant exits is founders will go on and do something else. And then for every Sort of large unicorn that succeeds. It spills out an amazing number of entrepreneurs that are able to swing for the fence because they've got some cash in their bank and they can, you know, go for it. You and I have talked before. I think one of the best groups of founders are those that have come out of the rocket ship companies because actually they kind of instinctively know they need to aim at big opportunities and they know how to run a Fast growth business.

AI assessment note: “Yeah. I mean, look, it's a problem.”

Q Okay, so will you take market timing risk? Because Mark Andreessen or Ben, I can't remember which one, uh, said that, you know, there's no such thing as a new idea. It's always been done before, it's just maybe the wrong time.

A Yeah, I think that's, statistically, that's probably true, uh, sort of, I mean, this is, this is the challenge. If you, if I sit back and look at the sort of ideas I've been most excited about, probably someone has tried to do it before. Being too early is tantamount to being wrong. Unless you can survive long enough for the market to come to you. I've seen, we've seen some examples of this. I think VR is an interesting example. There are a lot of companies that were waiting for VR to come to them. That's market timing risk. In that case, you better have a kind of cockroach mode to be effective until the market comes and build the muscle.

AI assessment note: “you better have a kind of cockroach mode to be effective until the market comes”

Q Why do you think defense is different to health? I think in defense, you still have one primary buyer here really, which is obviously the MOD. And then you have very splintered and fractured buyers, which is the rest of Europe and each wants to have their own dominant, uh, domestic provider.

A So disclaimer, I'm a reservist, as you know, so this is something I'm really passionate about. And I'd say there's three things happening at the moment. Uh, that make it significantly more interesting than it has been in the past. The first is very smart people are interested in doing it because they think it's right. There are people like our peers that are interested in doing defense companies because for the first time they actually think there's existential threat. Second thing is actually while you do say, uh, you're right, there's maybe a single buyer. It's, it's more complicated that in the UK we have, Multiple services. We have multiple regiments within each. Each is a potential customer and they're being forced to innovate at the moment, uh, for the final reason, which is to some extent we are on the, you know, we are on geo politically, we are close to a war zone at the moment. And we have a point of view in that war. We occasionally have some of our armed, uh, servicemen at risk. I think those three things together mean that actually, when you look at Anderil in the US and they had a recent round, eight billion dollars oversubscribed, it shows you there's an appetite of people and capital to go in there. I think the UK has interesting talent. Uh, the UK is playing its part in Ukraine at the moment. It's an amazing place to test new technologies. And I think it's an o…

AI assessment note: “while you do say, uh, you're right, there's maybe a single buyer. It's, it's more complicated”