By guest authors Irina Patterson and Candice Arnold
Irina: How many investments have you made in the past 12 months?
Paul: Four. It’s probably a reflection of the fact that we’re a group of individuals who invest together, not a fund. When we set it out from when we knew the numbers we were aiming for in terms of membership, what we knew about those individual members and what their investable funds would be on a yearly basis, that’s the number we came to. But we’re not limited, we’re not restricted, and it’s not a minimum we need to get to. It just feels right for a couple of reasons. The first is that if we’re making four investments a year of $1 million each, that’s $4 million in a year that we’re putting into businesses. And that seems to fit the aggregate investment interests from all of our members. But the second – and most important – thing about that number is that we don’t want to drill ten pipes and make sure that three come back with oil; we want to put down only three pipes in precisely the spots where we know there’s going to be oil.
There are some investment entities that have a much more diversified strategy. But we don’t have that because we get so involved in the companies that we invest into. We like to think that everyone we invest in has the opportunity to go and make good return. You know, that’s yet to be proven. But we don’t just invest in four businesses in a niche, we’ll invest only in the leader or who we think is going be the leader.
I also think that if you make ten investments a year over four years, you’ll have 40 companies. It’s very difficult for anybody to give time and attention to each of those companies. After the same amount of time, we’d have 12. I think that’s a much more manageable number for us as a group to be able to influence and to grow and to give the right attention to, and I think that’s important.
Irina: On average, how many pitches do you receive a year, and who looks at them?
Paul: We get about 1,500 pitches a year. I look at all of them. There’s a screening process at work: call, screen, pitch, due diligence, decision – it’s quite straightforward, and deliberately flexible. For every 100 deals or every 100 business plans you look at, there are probably only ten that really pass a sniff test. And you know the sniff test is: Do they understand the market they’re getting into? Do they have insight? Is it a strong management team? Is this worth a look by the investment committee? Only 5%–10% pass that initial sniff test. So, then you’ve reduced that 1,500 number down to, potentially, 150 or 100. Out of those 150 or 100, I’ll get on a call with them, I may schedule some management presentations. And you find very quickly that there are probably some aspects of the business they haven’t thought about. There’s insight that we can bring, and most of the time that’s okay. When it doesn’t quite work that way, go back and have another think about it, and come back when you’re ready.
We drill down pretty quickly. And we like to think that over the past – particularly since we formalized this in the past couple of years – that we’re getting pretty good at that. We’re getting pretty good at being able to identify what’s got potential and what hasn’t. And so our lens, our focus on business plans, is a lot sharper these days.
Irina: How do they usually present to you?
Paul: Face-to-face meetings . . . once a month on average but entirely dependent on deal flow and deal quality.
Irina: So, somebody has to be in the same city?
Paul: Yes, or they’ll fly in; we work it out. Chris, Joe, and I sit in New York City, James is in Canada and London, and Thomas is all over Europe. We try and make as easy as we can, but we do insist on a face-to-face meeting or at least two of those. If you’re spending that kind of money and recommending an investment to yourself and then to others, you need to be sure.