Venture capital is about capturing value by backing ambitious people and believing that, with help and guidance, they will quickly amass the knowledge and experience to match that raw ambition.
It is a people business – finding incredibly smart, connected people who have an exceptionally strong idea in their head about how they want to succeed in property.
For me, the property world has never been about making money simply by pushing paper around. So it is with venture capital: it is much more creative than that. You are making your money by investing in people who are going to create things – buildings, jobs and, yes, money.
There are many in the property world who can understand how to source, buy and manage transactions, and there are many with entrepreneurial flair. But the secret of a successful venture capital investor is to be able to find and recognise those with a combination of both these two talents. This is one of the property world’s dark arts. Many firms out there will back a promising property deal – even a brand‑new company’s deal – but the number of finance houses prepared to back a start-up property company is very limited.
Let’s return to the all-important question: “How do we judge whether or not the right combination of property knowledge and entrepreneurial ability exists?” We used to have a joke that whenever we were contemplating investing in a property company, we would request that the prospective entrepreneurs should have psychiatric tests: if they passed, we wouldn’t invest. Successful entrepreneurs are driven individuals but often are wired very differently from the average person.
The ideal prospect for corporate investment comprises two or more executives wanting to start up on their own account.
Ideally the prospective entrepreneurs would have a few years’ post-qualification experience, so that they have good market knowledge and can demonstrate a believable track record. However, such people will be at the stage in their personal lives when they are beginning to settle down and most likely will have a partner or spouse, a large mortgage and children either existing or contemplated in the near future. Finding entrepreneurs who are brave enough to set out on their own at this stage of their lives is a challenge. This is the best time for them to be contemplating running their own business – but in terms of a partner, a mortgage, etc, it is the absolute worst time for cash flow.
We are approached regularly by prospective entrepreneurs who say that they want to start up on their own, but when we examine their business plan we find buried within it six-figure salaries for themselves. This single discussion tends to weed out 90% of the potential entrepreneurs that are looking for backing. Of the remainder, there are those who are prepared to mortgage their grandmother or do whatever it takes to give them the financial flexibility to become a true entrepreneur. This is the stage at which it becomes really interesting.
The next stage to achieving venture capital backing is based on getting the trust of your prospective backer. The investor and investee must like and trust each other. Once the investment is made, very active nurturing is required – substantially more than a typical non-executive investor – and that means talking hourly rather than daily.
After 25 years of backing people, I know what does and doesn’t work. I don’t like crocodile people – people with big mouths and small ears. I like people who listen to other people’s points of view and people who can deal with an unusually high degree of independence and say in their business. We also like people who are driven to succeed, but who understand they also need to be part of a team. So, start rewiring your brain and thinking outside the box.
Ray Palmer is founder and chief executive, Palmer Capital
