FACES OF IMPACT: BARNABY WIENER, ANGEL INVESTOR
The following interview with Barnaby Wiener, Treebeard Founder and Trustee and ClearlySo Angel Investor, was published on the ClearlySo blog on 7th December 2018 and can be found on the ClearlySo website here.
When did you start angel investing, and how did you discover impact investing?
I started in 2015. Initially it was primarily through Treebeard Trust and the Association of Charitable Foundations. I attended a little seminar on social investment, and through that, I was introduced to ClearlySo.
Did you get into general angel investing before you moved into impact focused?
No. I’d never done any angel investing. But my day job is investing in public markets, so it is sort of related. Essentially, my journey was 20 plus years of investing in public markets, and now 7 years of more what I would call systematic philanthropy through Treebeard Trust, a charitable trust that I set up with my wife. Impact investment, in a sense, is somewhere between mainstream investment and philanthropy, and that’s how I stumbled upon it.
What is more important to you, impact or financial return, or both?
It slightly depends. Generally, I’d say both, in that I don’t believe you have to, nor am I particularly willing to, compromise on financial return in order to achieve impact. I think there are opportunities that can deliver both. Now, there are some things we invest in through Treebeard Trust where we are accepting a discount on the return side, or just higher risk, in order to achieve impact. But, most of what we invest in, I’d say, doesn’t require compromise. I think it is important, from a philosophical stand point, if impact investment is to really work and take off, we have to demonstrate that you can achieve impact without diluting returns. Because otherwise, it would just remain a very marginal part of the whole investment/philanthropic universe. I feel like both are achievable.
Are there any specific causes of impact that you care most about, and why?
Not really. I definitely don’t have specific causes. I think there are an awful lot of social and environmental issues that require tackling, and I haven’t begun to figure out which is more important. It’s more a case of evaluating every deal I look at on its own merits, and just thinking, “Is there a real impact angle here?”. Both in terms of, “Is there a genuine problem that it is addressing?”. Secondly, “Is it actually addressing the problem?” rather than looking for specific issues.
Could you share a bit about your current portfolio?
We’ve made roughly 30 investments, of which I think ClearlySo accounts for about half.
I’ve had one that has gone by the wayside. Apart from that one, which has now been written off, they are all still live, with varying degrees of progress. Then on the debt side, we have one that may be impaired, but otherwise they are all servicing their debt. It’s probably too early to talk about results, in as much as the early stage equity investments are probably unlikely to yield positive results, I would think, for five years or more. Though I am not investing with a view to needing an exit.
Are there any particular highlights or lessons learned that you could share?
I guess the one thing I have learnt more generally from doing it over the last three years is how much comes down to the founders and the team behind it. I think that evaluating a business based on the business model and the competitive environment, etc., when it is very early stage, is not quite a waste of time, but certainly there is limited value to it. When you are evaluating mature businesses, which is what I do for my day job, it’s very different. Firstly, because these are businesses that have been going for, in some cases, decades if not centuries, there is a lot you can analyse. Whereas a lot of companies we are looking at here, by default, are either yet to get off the ground or are so early in their development that it’s hard to evaluate them. They are also often disruptive, so they are coming up with a new approach, a new model, so it’s actually hard to evaluate the competitive environment too. Therefore, quality of founders is really critical. That’s probably something I put even more focus on now than I did.
How do you pick the right companies to invest in?
Firstly, I look at the impact. Does this sound like a good impact? I don’t actually spend a huge amount of time analysing that. It’s almost a gut instinct. Is it a real problem? Does this feel like a workable solution to it? I find, maybe naively, that I can reach that conclusion quite quickly.
Then, the bulk of my time is thinking about whether the commercial model is going to work, because ultimately, if the commercial model doesn’t work, there is no impact. I spend a lot of time thinking about the team, and their experience and their abilities. Not just the founder or founders, but the people they have around them, advisors and other members of the team. I also think a lot about the hurdles that they have to get over to get the business off the ground: product development, route to market, selling cycle etc. There are a few that I’ve looked at which I’ve ended up not investing in, not because I don’t think that they are strong impact, but just because I feel like there are some big challenges to overcome.
What are the benefits of being part of an angel group like ClearlySo Angels?
I like the fact that you can bounce ideas off people and share the due diligence. But in a way, it’s not so much about reducing the workload as enhancing the quality of due diligence. It’s not like I’m going to say, “Oh well, Stephen and David have looked at this, so that’s fine for me.” It’s more that I learn from the questions they ask and sometimes they may have insights from other things they have looked at.
What are the red flags, or warning signals, for you to not invest in a business?
The first one is the balance sheet. Most companies will have a great story to tell about the problem they are solving and give you some forecasts for their future profitability. But what they very rarely do, unless forced, is actually show you exactly what the balance sheet looks like today. It’s surprising how often you find that a company is raising £500,000, but it’s actually got debt or other liabilities of £300,000, so all it is really doing is re-financing.
Generally, I think most businesses fail because they run out of time/money, and so that’s the first thing I am thinking, “How much capital does this company need to raise to give it a reasonable period of time to make progress before the inevitable next capital raise?”. Balance sheet and investment requirements, again, making sure that those numbers add up.
I am very wary of founders who are overly promotional and aggressive in how they pitch their idea, also too aggressive on valuation, because I feel it is a sort of partnership we are entering into as angels. I only want to enter into a partnership with people who are going to be straight and be honest about the challenges they face.
Are there any entrepreneurs or businesses that you had the chance to invest in and you turned it down at the time, and then later on thought, “Actually, I should have done that”?
No. I’m more inclined to regret situations where I have invested and then looking back think, “That was silly.” I feel there are enough opportunities out there, and what matters is being disciplined about the ones you decide to invest in.
Sometimes I think it is slightly random and comes down to whether you have the right chemistry with the entrepreneur. I mean frankly it is a psychological thing as well. On the basis that you are quite likely to lose everything you invest in any one particular business/entrepreneur, it’s important not to bear any animosity to that person.
How important is it for the company and the Board to keep the investor community updated?
The poster child for communication is Commonplace, where we get a monthly update. It is very clearly formatted with the basic financial information and an update on key business trends. That’s tremendous. I don’t think you need to send monthly updates, but I do think quarterly, or the minimum six-monthly updates are a good discipline.
There have been a few who, when you hear from them, you know one thing for sure, and that’s that they need more money, because that’s the only reason they ever communicate. It is frustrating. At the same time, I am mindful that it’s really tough trying to get a business off the ground and they’ve got a lot on their plate, but I do think regular reporting is a good discipline.
When is the right time for a founder to seek investment versus self-funding or bootstrapping?
I quite like it when companies bootstrap for a bit to get the business off the ground before seeking investment. If you take, say, Harry Specters, I really like the fact that they had been going for five years before seeking to raise capital. Although, to some extent, it has constrained the growth of the business, I feel like there is probably a lot they have learned in that time. A lot of mistakes made which they have learned from. I think that’s positive.
The flip-side is, I can think of cases where founders have been very reluctant to accept too much dilution, and therefore they either don’t raise enough or try and fail. But I really feel for them. You are never going to get it right, and they’ve obviously got to continually be thinking, “How much capital do we need to give us a cushion, but how long can we wait before we’ve got a better story to tell, and come up with a higher valuation?”
In general, it really depends, because I think there are some businesses where it’s actually quite important for them to really go for it, and not hang around. Particularly if it is in a space that is likely to become crowded, or is crowded, and it’s a bit of a land grab.
Would you be less inclined to invest in a business where the founders hadn’t put any money in themselves?
What I would be worried about is actually founders being diluted too quickly. One company I invested in that went under, in hindsight, pitched the valuation too low. They basically gave away 75% of the business to the investors upfront. I can’t remember how much they raised but I think the whole thing was being valued at about £600,000 or £700,000.
I sort of honed in on that and thought, “That’s a really low valuation. Let’s look at their forecast. If it works, this is going to be a multi, multi, multi bagger”, which is actually quite a short-sighted way of thinking about it. In hindsight, they should never have given that much of the company away, because they might have been in a position to go and raise fresh capital instead of going under.
Another thing that puts me off is if they have been “flogging the horse” for too long. In one case I can think of, it had been 20 years and, as a result, by that stage of the capital raising the founder only owned about 8% of the company. I am not sure it is necessarily going to affect motivation, but I’d rather the founder retains a pretty significant cut.
What do you think a founder should look for in an angel investor?
Aside from money? Well, I think in an ideal world, obviously, if you can find someone who can bring something to the business, that’s fantastic. Apart from capital, I think any relevant experience or connections are very useful. Then, the other thing that I think is really important is shared vision. I think you want investors who buy in to the broader vision of the company. On the basis that most founders that we deal with are passionate about the impact of their business, then obviously you need to make sure your investors are aligned with that. The final thing I’d say is, you want angel investors who are going to help you navigate the tricky process of institutional fundraising, where I think naive founders can end up getting completely legged over by rapacious VCs.
How important are boards, and what should a founder look for in a Board member?
Well, you can have an angel investor who is basically passive, and as long as they provide capital that has obviously got some value, as long as they don’t become a pain or a distraction to you. But a board member must be able to bring something to the table. I think there is nothing worse than a board member who just takes up space. Particularly one who is full of bad ideas. Basically, I think you want Board members who are firstly, sensible people who have good judgement. Secondly, have some relevant experience that they can bring to the table. Ideally, have useful connections, because I think for a lot of early stage businesses, what is so critical, getting the foot in the door of key customers or key influencers.
Interview conducted by Quynhnhu Nguyen and John Lloyd of ClearlySo; editorial support from Jessica Duveen of ClearlySo.