Insights
Previous entrepreneurs more likely to build big businesses than first-time founders
Risk-takers reap rich rewards
Having a failed business under your belt need not be a bad thing. Regardless of its success, the very fact of having started a business previously means that you are more likely to succeed in growing a large business, according to Tom Fleming, founder of UK-based venture capital fund, Venrex.
“People who have created a start-up before are simply more likely to build a unicorn”, Tom told guests at a recent Stonehage Fleming Future Wealth breakfast seminar: ‘Making multiples – outperforming as a Founder and Investor’. Failure, indeed, may be an advantage. “The fact they have failed shows that an entrepreneur must have been prepared to understand and embrace risk”, he said.
Furthermore, noted Tom, those with an aversion to risk often underperform with venture capital investment. “You are not going to respond well to venture money if you are uncomfortable with the feeling of being ‘diluted’. As your shareholding goes down proportionately, a founder can start to feel more like an employee and with it, lose some of the sense of being in control”.
According to Tom, performance can suffer if a founder feels unsettled by the presence of investors. “If a VC puts in half a million pounds for 20% of a business, the founders’ holding is automatically reduced to 80%. If for instance that share is split between three founders, they each own just over a quarter”, said Tom. “In the event of a further round of investment, suddenly the investors can end up owning more than the original founders. In our experience, that is where you can see underperformance”.
Those founders who embrace the risk they feel when investors come on board are those unafraid of trying new things, even if it means failing, explained Tom. “What we’ve learned from our outlier founders is that they constantly listen to their markets and have pivoted or changed their business plans accordingly – sometimes two or three times. Put simply, if you are risk averse you are less likely to build a big business”.
Venrex is a UK based venture capital fund that provides equity funding to start-ups and small businesses with a focus on technology enabled companies within the consumer retail and FinTech industries. Founded in 2002 by Mark Esiri and Tom Fleming, Venrex has invested in over 130 companies including notonthehighstreet.com, Orlebar Brown, Just Eat and Charlotte Tilbury. Venrex was a seed investor in Revolut, now valued at over 200 times the initial investment.
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