KM Capital’s James Merryweather discusses the challenge of due diligence for early stage investment and explains the importance of domain expertise

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UK Business Angels Association

15 April 2020

James MerryweatherKM Capital was founded by Managing Partner Adam Kamani and his partners Stephen Morana and Mahesh Patel. Built by a team of successful entrepreneurs who have scaled some of the UK’s high-profile growth businesses of recent years such as prettylittlething.com, Betfair and Zoopla, the fund invests between £50k and £300k into pre-Series A businesses. We spoke to Investment Manager James Merryweather to find out more about KM Capital.

With a background in finance and a qualified member of the Institute of Chartered Accountants of England and Wales, James. A meeting with Mahesh, who also runs the Kamani family’s office, led to James landing his job at KM Capital. He explains:

“I met him at a time when the seed investment fund, which they’d launched a year previous, needed to bring somebody in to run it full-time. They thought I had the right skillset for them in terms of vetting new investment opportunities, digging into the financials and looking at their forecasts. They wanted me to bring a sceptical eye to things, and also to get out there and find companies that fit with us.”

Working alongside three successful entrepreneurs was a big pull for James too. Seeing the success they’d had with high-growth businesses, James didn’t hesitate to join the fund.

“It’s amazing for me to get the chance to work with such accomplished entrepreneurs who had decided to launch a fund. They have like a lot of wisdom and a lot of battle scars from running these businesses. When I came into the fund they’d invested in 12 different companies. It was getting to the point where it needed somebody to come and grab it and run it full-time.”

As James settled into the fund and got to grips with his role, he soon discovered that doing due diligence in the early stage start-up world was very different to what he was used to. Speaking about the challenges James shares:

“It’s difficult to find competition to benchmark people against and if there are competitors out there, they are privately owned so information is really limited. Finding comparative information on competitors or a new and emerging market is really quite tough. I think the novelty of some of these businesses and how new and innovative they are means the information is not really out there. That means you’re investing in people so you have to look at someone and say, ‘would I buy shares in you as an individual to go and execute this plan?’ There are so many uncertainties.”

KM Capital is sector agnostic but they acknowledge that they have a lot of experience in retail and e-commerce. While they are open to a plethora of opportunities, they know what they’re good at and that shows with the success that the founders have had prior to launching the fund. When it comes to opportunities that excite them, James comments:

“We would call ourselves consumer tech investors. We like technology that just simplifies the process for the consumer.”

“We would call ourselves consumer tech investors. We like technology that just simplifies the process for the consumer. We like technology that just makes the consumer’s life easier. I like things that are just doing something completely different or tackling an existing problem completely differently from how others are doing it. Our value is in our experience with retail, marketplaces, property and fashion.”

Thanks to the success that the founders have had in fashion, they have a wide network they can pull on if an opportunity comes up they want to invest in.

“Mahesh’s background in wholesale fashion means that he’s got an incredible talent for assessing retail supply chain. That’s where we can get comfortable with investment opportunities quite quickly because we’ve got a big network we can canvass an opinion on. We can also shorten the right company’s sales cycle significantly if selling to retail.”

When it comes to identifying a good opportunity, KM Capital prefers to adopt an informal and personal process, rather than the traditional formal structured pitch approach. James enthuses:

“We invest in people who share our culture and share our values; openness, being upfront and being humble. There are a few different indicators for companies that are credible and serious including having a pitch deck that’s coherent and easy to understand. If you’ve got that kind of clarity of thought in the discussions that you’re having with investors, I think to me that says that you’re going to be quite clear and able to story tell it to your staff, your suppliers and the customers you’re selling to.”

Another area that KM Capital looks at is domain expertise, which they see as crucial because if a founder knows their industry inside out, they are likely to fully understand the size of the market and opportunity for their business.

“I really value domain expertise and I think there are certain industries that in people’s heads have lower barriers to entry in terms of getting in and launching a start up in. Good opportunities for us come from people who we think are reliable sources and who are domain experts. People who we get along with, people who are doing things differently and people who fit in with our background are important too.”

What does the perfect deal look like to James?

“The perfect deal for me is when we are co-investing with someone who is a domain expert in an industry, like a domain expert angel investor, or a fund whose process we feel that we understand. We can assume the level of work and due diligence they’ve done, which makes thing easier for us. The UKBAA’s Dealshare platform is good for that. If we act on a deal through the platform, we already know to an extent the kind of work that your members have already done on something. That’s a big deal for us.”

Find out more about KM Capital at http://www.km-capital.co.uk.

Want to learn more about angel investing? Enrol in our course The Effective Angel Investor at http://bizangels.thinkific.com.

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