One of the major frustrations for private investors is that it’s hard to invest in early-stage fintech firms. Sometimes by the time a company has listed on the stock exchange, a large part of the exponential growth has already taken place. There is of course equity crowdfunding, but most of those companies are either pre-revenue or pre-profit. So how can you invest in unlisted fintech companies before they come to market? You can do so by buying shares in a company that already does. In this interview, I talk to Tim Levene, the CEO of Augmentum Fintech Plc [AUGM] an LSE listed VC that invests in fintech like Interactive Investor, Seedrs, Farewill, iwoca, Tide, Habito, Zopa and Onfido to name but a few…
Did you always want to be a VC?
Certainly not. I’m not sure anyone really wants to be a VC at a young age, that would be quite a precocious idea. I would classify myself as an accidental VC.
I always wanted to be an entrepreneur and went on that journey. I then became an active angel investor and had the opportunity to work with the likes of Jacob Rothschild in 2009, who has had an extraordinary career that also pretty varied. Those really were the first steps for me.
RIT Capital, their listed investment trust, allocated me some money to cut my teeth and demonstrate whether I could deliver ultimately a return, and over 11 years it has been a huge learning curve.
Investing in private, high-risk, high-growth companies is a far more challenging proposition than I’d ever anticipated, but certainly the best way to learn is by doing, including losing money along the way. Just make sure you make more than you lose and you’ll have the chance to fight another day.
How does Augmentum help private clients invest early-stage high-growth companies?
Historically, venture has been pretty inaccessible to retail investors. It has been the preserve of very large institutional funds, mega endowments. The vast majority of venture historically was not in Europe, was in the US, but in the last few years, European venture has come of age. It has grown more than 10x in terms of capital available, so it’s never been a better time to be a European tech entrepreneur.
There has also never been a better time for retail investors to get exposure to some of these emerging companies. The challenge has been the traditional route of going through the public market. There is so much more capital available to high-growth tech businesses now, which means when they come to the market, if at all, they’re coming much later. So retail investors are missing a lot of that run on the way up. You have the likes of Seedrs and Crowdcube, who are really market leaders in providing retail investors opportunities to invest in private assets, but it is not the whole market.
One of the motivations that I had in going public, despite the fact that it’s pretty unusual for a venture fund to be listed on the London Stock Exchange was to open up the access, democratising access to venture capital and fast-growth fintech businesses while they are still private.
I felt there was a real demand from retail investors, smart consumers, in our case of consumer fintech businesses, that were very passionate, having a very different relationship with these products, and fundamentally, believed in them and thought this was a far better proposition in financial services and perhaps experience that they’ve had in the past. I think the opportunity for them to become owners, albeit indirectly, through a vehicle such as Augmentum, was pretty compelling.
If you look at our register of shareholders, the fastest-growing area is retail investment platforms, so the likes of Interactive Investor, Hargreaves Lansdown, Share Plc and AJ Bell. All these platforms that on IPO were pretty small, in terms of relative of our shareholding, but are now significant.
We’ve recognised the importance of retail investors, and retail investors have embraced this emerging asset class, seeing us as one very effective way of indirectly getting exposure to a diversified set of assets.
Diversification is extraordinarily important. We look at several hundred opportunities a year, we say no 99.5% of the time, and even when we say yes, we don’t always get it right. We currently have a portfolio of 20 companies. That will grow over time, but ultimately, not all of them will succeed. We do expect some of them to be highly successful and not only deliver a compelling return but also pay for those ones that don’t quite go to plan as well.
I talk to a lot of aspirational, emerging angel and otherwise private investors and the first thing I say is please make diversification a priority. Inevitably, when you back companies at an early stage, the chances of success are low, but when you get it right, it’s a fantastic return. But getting it right is unbelievably difficult.
How do you pick the companies you invest in?
Fintech is a very broad church and I’m often asked what ‘fintech’ really means. I often say it’s whatever you want it to be, but for us at Augmentum, we’ve very clear on what we are looking for. We have built a team with deep fintech operating and investing expertise, and this depth of understanding is incredibly important because financial services is very fragmented. It’s diverse, heavily regulated in parts and can be incredibly complicated. Ensuring you really understand where the market is going and a deep understanding of the different dynamics within your particular focus area within financial services is important.
It goes without saying that the size of opportunity needs to be material. One of the benefits of financial services is that we’re fishing in an extraordinarily deep pool. If you look at global revenues, we’re talking about trillions of dollars a year in revenue, in an industry that’s been pretty inefficient to this point. An industry that in parts has been high-cost, not particularly consumer-friendly, and we think it continues to be ripe for disruption.
If you look at financial services relative to other industries, the disruption by ‘challengers’ to date is still a single digit’s percentage. So relative to other industries, we’re very early, and so for those that wonder whether they have missed the boat in fintech, there’s certainly still a long way to go.
A lot of very significant businesses will be built over the coming decade, and we are looking to back not just an exceptional idea, targeting a very big opportunity, but ultimately, it comes down to execution.
I experienced this when I started my first business, Crussh, and have seen this again and again over the years, from the world of juice bars to venture capital. Being part of the creation of Flutter, which became Betfair (and the umbrella brand has since been reestablished as Flutter), I came across probably 100 people over the years that said they had the same idea, at a similar time, and we saw many ‘me too’s. It just came back to one, timing, and two, execution. Execution comes down to a truly exceptional team that has the requisite skillset and the capital behind them to be able to execute on that strategy.
If we can find all those ingredients, then all of a sudden, these good ideas suddenly become something that we want to dig into. We then see that we have an executable proposition with a team that have all the right characteristics of success. Even if you have all of that, there’s still a very big challenge and journey to come.
Many of our portfolio companies are quite established but often they weren’t when we backed them, several years before. We back them at a time when the risk is high, but ultimately, our job is to filter through an enormous pile and find that needle in a haystack.
It is a challenge but we live and breathe this 24/7 and our team are arguably specialists in this field with, between us, probably 100 years of experience in the European digital ecosystem since the late ‘90s.
What have been your best and favourite investments so far?
I think your best investment is the one that ultimately delivers you the greatest return, so I think that will change, and hopefully, I’ll have several ‘bests’ that keep getting better over time.
I think the best so far was Betfair. There have been a lot of acquisitions along the way, but if you were an early investor in Betfair, when it went to IPO you probably would have made four or five hundred times your money from your original stake, even more so in today’s terms. That was a fantastic and somewhat fortuitous journey to be part of.
If I look at our current portfolio now, the business that is showing the greatest signs of return is Interactive Investor, which is also the most mature. This was very much an atypical venture investment, because it had been around for a long time when we invested. We backed it in 2014, in our previous fund, at around the £20 million valuation. Last year it passed a £700 million market valuation and we hope there is still room to grow from that point. It’s getting to the point at which you could say that it was not just a good return notionally, but in real terms.
With regards to my favourite, it depends which day of the week you ask me. All our portfolio companies go through different phases, they all have challenges and none are straight lines. Like having children, you don’t like to tell anybody you have a favourite investment.
As well as offering consumers a better user experience and better value, we like to back businesses that are doing something truly differentiated. A business that I’m incredibly passionate about is a business called Farewill, which is digitising a difficult area; death and death services. It’s digitising an incredibly archaic and old-fashioned industry. Wills tend to be the preserve of high street lawyers or accountants or financial advisors and 70% of UK adults don’t have one.
Bringing down the cost and demystifying the complexity for as low as £90 for a digital will is incredibly compelling. They are also evolving other products, the likes of probate, which again, is an area that has had very little cost transparency and is overdue an overhaul. They’ve done an exceptional job so far. 1 in 10 wills in the UK is made through Farewill, and it’s a business with an extraordinarily intellectually strong, dynamic team that fundamentally are trying to make a difficult subject better for all those involved in it. It’s certainly one to watch and a team that I enjoy working with very much.
What’s been your worst investment so far?
Thankfully in the current portfolio, none have been written off yet, but as I said earlier, we don’t expect all of them to succeed. If none fall by the wayside there is not enough risk. We’ve certainly fired some blanks in the past. In our last fund we invested in a business called Borro that was trying to disrupt the lending space with their high-end asset-backed lending service, like a digital pawnbroker.
They were providing much-needed cash flow, in particular for the art industry. A lot of dealers had very specific pieces that were coming to auction once or twice a year and they needed to free up the cash flow. They built a really interesting business. The challenge that business had was one, the complexity made digitising hard. Two, its cost per capital was stubbornly high.
It was regarded as a bit of an esoteric asset class, and as such, providing debt became quite difficult and the cost of capital never came down. It’s a business that still exists to this day but it never really hit the heights for us. In effect, we lost money in that business when we and other investors weren’t prepared to keep ‘kicking the can down the road’.
An important discipline to have is that where you back a business that you were at one point incredibly passionate about, you don’t want to see it fail, there is a temptation always to throw good money after bad. At some point though, you have to draw a line. I would say if I am reflective and self-critical on that business, we certainly invested more times than we should have, as did other investors. There was a fundamental proposition that the consumers were buying into, but ultimately, it was a model that couldn’t be scaled digitally and we should have recognised that sooner. A painful lesson and an expensive one for me personally, but it’s one of those things that you take the learnings from and move forward.
What’s your book recommendation for investors?
There are a lot of investment self-help books out there and there are numerous venture capitalists that have written, Ben Horowitz being someone who has written some good books. I personally always find real entrepreneur stories far more valuable. ‘Warts and all’ autobiographies of the journey.
I’d say the single most inspirational entrepreneur’s book I’ve read in the last few years was Shoe Dog, the story of Nike and Phil Knight. It’s an amazing story of perseverance and resilience, and it really shines a light on how challenging it is to become a successful entrepreneur, from one of the most successful in history. I would say any aspiring entrepreneur as well as investor should read that – it really does shine a light on the challenges and the belief that you need to run a great company.
What’s the one bit of advice that you could give to help people become more successful investors?
When you’re looking at a proposition, go into every conversation with a cynical eye. Falling in love with an investment proposition too early can cloud your judgement. Depending on the stage at which you invest, you also need to adjust your level of inquisition and cynicism.
Try and stay objective all the way along and compare. The only way to see what great looks like is to see a lot of different companies. So if possible, try and see a breadth of opportunities and then when that exceptional one comes along, it hits you in the face, because it brings you something quite different. You need to see a lot to really identify the jewel in the crown, and that’s what we try and do day-to-day.
Tim Levene is CEO of Augmentum Fintech Plc