The 2007-2008 financial crisis was an inflexion point for the UK technology industry. Talented students and MBA graduates were catapulted into the world of employment at a time when opportunities were relatively scarce.
“It was the biggest change in the past 10 years. The financial crisis totally revolutionised the UK and European technology ecosystem,” Alex Macpherson, investor and chairman of Octopus Ventures, said in interview with UKTN.
Various factors seemingly contributed to the maturity of the sector. Fewer bright minds wanting to, or being unable to, enter the world of traditional employment meant technology companies were able to recruit talent more easily. That generation, Macpherson added, also had a greater sense of responsibility and shied away from say, banking, because of the stigma attached to it at the time.
“The financial crisis also coincided with a tech boom and if you wanted to start a business back then it was made easier and cheaper and you were able to scale in a more capital efficient way,” he noted.
Other events also seemingly helped turn the buzzing melting pot of ideas into tech businesses. The arrival of the App store in July 2008, for example, meant technology-driven solutions could be packaged into applications for consumers to download and use on their smartphones.
At that time, Octopus Ventures had been running for approximately eight years and was part of a new wave of investment firms set up by serial entrepreneurs. It’s for this very reason that Macpherson has faced the same challenges as many of the founders he’s backed to date, having birthed, built and sold his own business.
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He founded Katalyst Ventures in 2000, creating a private angel network which would later become Octopus Venture Partners. Over the following seven years, Macpherson is credited with leading the business as CEO until its sale to Octopus took place in the Summer of 2007. Since then, the amount of assets managed by the ventures team has risen from a relatively modest £20m to over £500m.
Today, Octopus boasts a varied portfolio of “tech-enabled” businesses, some of which have become synonymous with UK tech success. It backed Magic Pony’s Series A before it was snapped by Twitter for a reported $150m in June 2016; invested in Swifkey’s Seed, Venture, Series A and B rounds before it was acquired by industry giant Microsoft for a rumoured $250m; and supported SleepTech firm Eve Sleep, which went public in May last year.
Venture capital investment, Macpherson said, is like a marriage, but emphasised all VCs will eventually want a divorce – aka their returns. As someone who’s been backing companies both in a personal and professional capacity for over two decades, Macpherson acknowledges the hard work associated with building and scaling a business will never change, hence why he admits he’s on the lookout for “unusually talented” entrepreneurs.
“You want people who are prepared to take on the challenge. Someone who has the inherent belief that what they are doing is really going to change and create something special in their operating industry.
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“If I think back to when we met Swiftkey in 2010, those guys had a clear vision and understood how to go about executing. They had incredible maturity.”
Successful entrepreneurs, he continued, are often self-aware enough to know what they are good at and what they lack. They’re not, he added, afraid to hire someone who is ultimately better than them. “It’s about being comfortable with that level of self-doubt.”
Eyeing the opportunity
Macpherson said he thinks deep tech, science and digital health are some of the biggest opportunities in today’s market.
“These areas are attracting really special individuals and that is exciting to us. It’s here where you can build industry defining businesses.”
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The competition between large and small tech industry players is unlikely to go away, but Macpherson doesn’t believe startups are operating at a disadvantage to the likes of Google, Amazon or Facebook.
Ultimately, he said, young companies have the opportunity to stand out, to build propositions which add real value to consumers and to do so in an exciting manner. They are, he believes, in an advantageous position when it comes to attracting talent – particularly if they offer intellectually stimulating roles.
Owning up to mistakes
Part of the trick to successful investing is acknowledging when mistakes are made. “We are still making investments where we get it wrong. It’s part of what we do, but the trick as an investor is to minimise and recognise this.”
There’s also the fear of missing out on a potentially great long-term opportunity. Take Digital Shadows, for example. Famed for its proprietary cyber technology, which combines human analysis and data analytics to monitor for cyber threats, reputation risks and data leakages across the visible Internet and deep and dark web, Digital Shadows has so far raised $48m.
“We were late to Digital Shadow’s Seed round and we would have loved to participate.
“Maintaining relationships with founders is important to us for this reason. In Digital Shadow’s case, the team came back to us at Series A. We really liked what they were doing and their proposition, but we were slightly concerned about them expanding to the US a little early. We passed and with the benefit of hindsight, that was a mistake.
“Digital Shadows went out, they executed brilliantly and when got back in touch about their Series B, we invested,” Macpherson said.
Guiding a team
Although Octopus Ventures claims it operates a somewhat laxed ‘laissez-faire’ approach, not interfering in a portfolio company’s affairs unless it can really add value, Macpherson says teams and people will always be at the heart of what they do.
“A founders relationship with an investor will not be tested during the good times. It’s only when things get rocky that the relationship may become strained. We operate on being upfront and transparent and I think that’s appreciated by entrepreneurs.”
Despite the deluge of pitches – Octopus receive approximately 5,000 a year – Macpherson insisted the investment team will always look to answer the same questions: what can we do to help this company improve? How can we help make our entrepreneurs great?
“It may be that the management team are nailing it and the best thing we can simply do is get out of the way. We’re there to challenge entrepreneurs, ask what’s next, guide them and look at the next horizon.”
It goes without saying that the ‘horizon’ will not be the same for every business, but the end goal (success) should be and that’s where savvy, experienced and reliable investors can truly add value.