How do you know if you’LL make a good startup investor?
For many people, investing in startups can seem like a dark art, fraught with risks and uncertainty. Startups are notoriously risky investment propositions, and with approximately 100 million new businesses starting every year, the likelihood that you will happen across the next Uber or Deliveroo can seem outlandishly far out.
Thankfully, startup investing doesn’t have to be scary, if you know where to look and how to focus your efforts.
At Dot Matrix Group, we bring together startups and investors and empower businesses to grow through strategic investments. The members of the DMG Syndicate come from a wide variety of backgrounds, ranging from corporate finance and traditional investing to marketing, entrepreneurship and even education.
For the first in this series of ‘Meet the Syndicate Member’ we recently had the chance to sit down with Stuart Billingham, one of our Syndicate Members and investors, to discuss how he came to start investing in startups, and why he thinks the opportunity is huge for investors looking to break into the space.
Stuart Billingham is the Managing Director and the Head OF EMEA Regulatory & Compliance Solution Sales at IHS Markit, a global business insights and information provider with revenue exceeding £3 billion. Stuart started his career in the late 1990s, early 2000s.
“All my education was done in an unorthodox way. For instance, I did the London Stock Exchange apprenticeship scheme at 16. I realised I should have gone to college but I did it in the evenings. Then I did my Masters in Hong Kong.”
Stuart has worked for the last two decades in credit derivative trading and automation. He has now grown his expertise and developed more data and technology to monetize in other ways. Today, he’s expanded his knowledge base and looks for investment opportunities that fit his background and expertise.
“I’m very involved in regulation technology (RegTech) at the moment. Cyber-security is also becoming really important. We have really important software that identifies how open your firewalls are to disruption.”
Why become an investor?
Stuart is currently a member of a few different investment funds. He believes it’s important to gather insights (and identify opportunities), from multiple different sources, and he believes in working closely with the people that run the business.
“The traditional VC model is a 2 and 20 model, meaning a 2% annual management fee with a 20% incentive for profits above a certain predefined threshold. DMG doesn’t operate like that. When you invest in a FinTech company, you don’t just buy into the business, you buy into the people running it. Part of the reason I invest through DMG is because of its connection to the startup community 9others. It’s the connectivity and the trust that Matthew has developed through that network which sets DMG apart. He’s incentivized to bring good companies to the table, so I think they’re really onto something by bringing DMG together with the 9others side.”
DMG Portfolio: Why invest in Coconut?
In one of DMG’s most recent offerings, Stuart made an investment in the FinTech startup Coconut.
“I met Sam O’Connor and I feel that he has a very interesting background and his background was very interesting to me. I’m involved in RegTech in the B2B space, but with his background in B2C from PwC that made it a really interesting proposition to me. They were also going for a real niche. I see a lot of startups that are looking to boil the ocean, and I get why they do that, but the problem with that is that you become really broad. I knew that he knew the tax area. He created the trust and credibility by having built a business in the past and having sold it. The danger area for Coconut is the competition.”
For Stuart, the decision to invest in Coconut was nuanced. “It had a lot to do with meeting the founder Sam, assessing the idea and analysing the business model. I struggled a bit with the valuation, but that is the problem with a lot of FinTech businesses right now. The problem with tech firms is how they get to their valuations. If you’re looking at cash flow or EBITDA, it’s hard to keep things on the same par with the expectations around how quickly they will grow and scale.”
What are the challenges to investing in startups?
For Stuart, the key to successful startup investing comes down to developing a sense of realistic valuations, understanding competition, and assessing the ability of a team to bring a product to market quickly and efficiently.
“Speed to market is a huge challenge. Trust and credibility on the enterprise side is also huge. Big banks are consolidating their preferred vendor lists, so startups are having trouble getting on preferred vendor lists. Hiring and getting the right talent is hard. You only have limited resources and getting the right people can be really tough. You’re asking people to take a huge risk.”
What do you look for / what’s a turn off etc?
The two main things that Stuart looks at when assessing a startup opportunity are the founders and management structure. Ultimately, he looks to understand what space they are in and what the scope of the opportunity is. If he sees people going for big trends like Cloud, that’s a good thing. Ultimately, he’s looking at the opportunity landscape to make sure the management have done the due diligence on the company.
“The other real challenge is that founders can be emotionally tied to their companies. That’s good and bad because they’re ‘all in’ and they’re sweating blood to making things happen, but they can be somewhat blind to opportunities.”
Unseen opportunities and the future of startup investing
Stuart feels that some of the biggest opportunities for emerging technology companies will revolve around blockchain, peer to peer technology, insuretech, and healthtech. That being said, he doesn’t think new startups have to completely reinvent the wheel to be massively successful.
“One of my mentors was the founder of IHS Markit, Kevin Gould, and we used to brainstorm ideas. We used to say, you don’t have to have the idea that no one has thought of, you can just look at processes that are being done but just do them better.”
Considering becoming an angel investor?
If Stuart has one piece of advice for new investors interested in dipping their toes in the water of startup investment, it is this: don’t put all your eggs in one basket.
“Don’t invest your life savings. The rate at which many of these firms collapse is shocking, so you have to keep that in mind when you make any investment. Also, invest in something that you’re passionate about. You can build up and start with something small. Try to go for non-dilution rights if you can. People sometimes invest in a certain number of shares, and then when people invest at Series A and B. Look for non-diluting rights if possible. Also tax incentives like EIS in the United Kingdom is really helpful and has been very successful in supporting startups in the UK.”