Origin Capital CEO Tim de Vere Green takes us inside his due diligence process and explains why being thorough is so important
Early stage investing is high risk but you can reduce the risk by applying a robust due diligence process. UKBAA research has found that at least 20 hours due diligence has a positive impact on the likelihood of a good investment return. We spoke to Tim de Vere Green, the CEO of Origin Capital, about the importance of due diligence and the need to be thorough in your approach.
Tim began his corporate career in management consulting before moving to investment banking. Following that he co-founded a multimedia publishing business, took on some freelance corporate finance work and ventured into property development. In 2007 he began his journey as an early-stage investor, mainly in technology, with Origin Capital. Describing how his journey has evolved from there, Tim says:
“Over the years I came across a number of people who were interested in investing alongside me in deals and that is how the Origin Co-investor Network was formed. That now comprises about 20 individuals and two of those have become partners with me at Origin. The three partners still invest significant sums in deals ourselves and we then share transactions that we like to the Co-investor network. Since 2007, the total number of companies we’ve backed is 32 and we’ve funded around 50 investment rounds.”
The due diligence process is something that Tim regards as very important, admitting that his focus on it is well-known among his colleagues in the investing world. Taking a very thorough approach, Tim outlines Origin’s due diligence process explaining:
“Our due diligence process is probably closer to a VC fund than the lighter touch one that some angels may take. We will interrogate the business plan and the management team, and do all the usual formal accounting and legal due diligence. I think where we perhaps have a particular focus, that not everyone else has, is we really do feel we’ve got to find experts in the technology sectors we’re looking at investing in. Although we can understand most of the technologies behind the companies that we’re looking at, we don’t purport to be experts in any one area. We’ve learnt from experience if you can find such individuals, they greatly increase your chances of success and decrease your chances of failure, which is what it’s all about.”
Having been an angel investor for the past 12 years, Tim has learned some valuable lessons.
“In process terms it is very helpful to take stock at different stages of a due diligence exercise. This is to make sure you understand which questions are going to help you decide to drop a company and not proceed, or get the correct answers in order to take it further. You can spend a lot of time just having meetings and discussions and undertaking general investigations, whereas the question you should really focus on is “What answers do I need to help me make a decision one way or another?”
Part of that due diligence process is assessing the founders of a business. Tim states that the founder is very important but not critical. Explaining his position, he expands:
“Great founders can make a success of average ideas and technologies, and poor founders can definitely flush excellent prospects down the pan. If we saw a really good technology with a team that we felt might need bolstering or strengthening at some point in the future, we would consider investing, but If that is the case we’d usually want to have a discussion with the team prior to investment to make sure that was something all parties acknowledged.”
“Our due diligence process is probably closer to a VC fund than the lighter touch one that some angels may take.”
What are the most surprising misconceptions that founders can have pre-investment?
“Valuation is certainly one. We try and address that very, very early on in the process. If we think a founder is just unrealistic about a valuation of their business, we don’t want to waste their time or ours looking at it. I also think some founders can feel that the investee / investor relationship is either adversarial or just one of reporting and information flow, whereas want to engage in a way that will help the business. Founders can sometimes be resistant, but we think board representation is usually needed to achieve that and it’s important for our own monitoring purposes too.”
Another area that can provide a challenge is the optimism of founders when it comes to how quickly they’ll be able to launch their technology and at what cost. Origin tries to address the potential sensitivities to forecasts and prospects prior to investing, so there is a contingency plan already in place should this happen.
Tim feels founders don’t always understand the importance of building a team.
“They sometimes don’t recognise strongly enough the need to have people to delegate to – they can’t do everything – and to have different skill in the mix. There just aren’t many companies in the world that are successfully run with one person at the top of the pyramid and everybody else on the layer below.”
Something that Tim acknowledges is that not every single investment is going to be a winner, even with a robust due diligence process.
“Clearly, we believe every investment we make is going to be successful but we also know we’re going to be wrong sometimes. We are going to need returns on winners to offset the losses on losers and of course, to go beyond that and deliver a positive overall portfolio return. We have to believe that the ventures we back will deliver as an absolute minimum a three-to-five times return and if we’re correct we hope that should allow us to make some mistakes but still come out on top overall.”
With plenty of experience under his belt, Tim is keen to highlight the parts of being an angel investor that he loves and finds fulfilling. He enthuses:
“I love meeting and talking to founders. I enjoy learning about their technologies and their journeys and their market opportunities, as well as doing an investment deal and closing a transaction with them. It doesn’t come without its stress, but I still enjoy it. And of course, I also enjoy the process of working with the teams post-investment to help make the business successful. The icing on the cake is an exit that works, albeit a few years down the line.”
What would he change about the industry if he could?
“VCs can be quite predatory in their terms in scale-up rounds for companies and that can make it hard for early-stage investors to support businesses that they know are going to need VC scale rounds later on.”
Find out more about Origin Capital and what they do at http://www.origingroup.co.uk.
Want to learn more about angel investing? Enrol in our course The Effective Angel Investor at http://bizangels.thinkific.com.