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Picking winners? How our team weighs up investment opportunities

Tom Bradley joined Oxford Capital in 2015 and is responsible for investing the funds raised by the firm’s Growth EIS. What does he look for in an entrepreneur and their business, before taking the decision to back them?

This blog is aimed at qualified financial advisers. It should not be construed as financial advice and it should not be used as the basis for any investment decisions. Investments with Oxford Capital should only be made on the basis of our full Information Memorandums and application documents. 

Nobody, least of all an investment manager, likes to equate investing with gambling. But there are certainly some parallels. When we invest in a company, the outcome is uncertain, there are hurdles and risks further down the track, and there is always a risk of failure. But we are not choosing companies based entirely on guesswork – our approach to investing helps us pick companies that have potential to succeed.

In racing, a seasoned punter will only back a horse after asking themselves four key questions –

  • Is the horse fast?
  • How good are the jockey and trainer?
  • Do the distance, course and conditions suit the horse?
  • Do the odds offer adequate reward for the likelihood of success?

We ask ourselves similar questions about investing. We will not back a company until we have built a detailed understanding of its chances of becoming valuable. Sticking rigidly to this principle, and asking all the right questions, can potentially reduce risk and increase returns.

Is the horse fast?
Part of the skill of early-stage investing is assessing whether a product or service has the potential to take off. For a company to achieve stellar growth, it usually needs to be either doing something that could not be done before, or doing something ten times better than anybody else.

The taxi app Uber went from a standing start to a $50bn valuation in a little over five years, because it developed an innovative product that nobody else was offering and which customers instantly warmed to. No need to stand waiting on the street. No need to carry cash. A choice between cost and comfort. Uber’s 8m users clearly find this experience a lot better than hailing a cab the old-fashioned way.

We recently invested in Push Doctor, another company with a great product that is changing an old-fashioned market. They offer online video appointments with GPs through a website and a mobile app. Patients can book an appointment within minutes, and see a doctor any time between 6am and 10pm, 7 days a week.

Of course, good products don’t develop themselves and they don’t sell themselves. The company needs to have a clear purpose and a genuine desire to serve their customers by providing great experiences. We will carefully consider the execution ability of a management team – do they have the right ethos and the ability to build a successful company around their product?

When a company has already started to sell its product, it becomes easier to assess product quality. Rapid revenue growth or customer acquisition is a clear indicator that the company is gaining traction. Of course, this sort of measurable success also increases the value of the business and the competition for the deal.

How good are the jockey and trainer?
Companies do not make things happen, solve problems or work hard. People do. The quality and credentials of CEOs, senior executives, board members and the team around them are a crucial factor in our decision to back a business.

If we really rate a CEO, it can increase our confidence in a company. Talented CEOs are in high demand, and rarely end up in charge of companies with little chance of success. Without stretching the analogy too far, A.P. McCoy doesn’t ride many seaside donkeys.

The concept of the trainer is also important. A jockey might take most of the credit on race day but the horse is prepared by a team and the jockey is advised by a team. However strong the CEO, you should not invest in businesses where this team dynamic does not exist and where the CEOs do not listen to the team around them.

It is often said in technology businesses (usually in relation to key programming staff or ‘developers’) that the difference in productivity between the A+ people and the B+ people is greater than 100%. In other words, great people are worth more than twice as much as the ones who are just good, let alone the ones who are average or poor. Our experience bears this out. Working with the best people can be totally transformational.

It is also important to avoid personalities that seek conflict. There is a very high correlation between hard work and success, and huge amounts of energy are required to succeed in the early stages of growth. If energy is wasted by internal politics and conflict, then a company’s chances of succeeding are diminished.

Do the distance, course and conditions suit the horse?
To win, a horse needs to be not just fast but well-suited to the conditions on race day. When we evaluate a company, we will look closely at the size, pace of growth and competitiveness of the market the company is operating in. We need to understand the company’s capabilities in the context of what others are doing in the same sector. That said, for early stage investing it doesn’t necessarily matter if the market conditions look difficult, so long as the management team has the tenacity needed to overcome the obstacles ahead. For example, our portfolio company Linkdex operates in the highly competitive and rapidly evolving market for Search Engine Optimisation technology. But we weren’t put off investing, because we had confidence that the company and its management team were well-suited to the challenge. Market dynamics become more crucial as a company matures, not least because they can have a bearing on the eventual sale value.

Do the odds offer adequate reward for the likelihood success?
Put very simply, a great company only has potential to be a great investment if the price is right. If spotting the potential for success is the first key skill of investing, then constructing a sound deal at the right valuation is surely the second. There can sometimes be an argument for paying a premium for a stake in a truly promising business. But to have a chance of achieving a high return, the discipline of realistic valuation is every bit as important as the ability to select strong companies.

What happens when the race starts?
Having identified a strong company and an attractive deal – being on the right horse with the right odds – it is also critical to have a race plan. Success, they say, is what happens when preparation meets opportunity. The characteristics that allow a company and its leaders to both stick to their values and mission but also to respond quickly to opportunity or adversity are to be highly prized.

Early stage companies can prosper if they are able to move faster and more decisively and work with greater focus in the pursuit of their goals. The only thing that you know for certain when you invest is that things will not work out as forecast. The context always changes and those with the talent and flexibility to survive in that environment are the ones we try to invest in.

Spreading the risk
Of course, early stage investing is not about pinning all your hopes and dreams on a single horse. We invest in a diverse portfolio of companies operating in a variety of industries. This diversification can help to mitigate the risk of this kind of investment. Some companies may fall at the first hurdle. But others have a chance of making it to the finish line in true style.

This blog originally appeared as an article in EIS Magazine. You can read more about the Oxford Capital Growth EIS here.

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