Simon Porter: Why founders are the key ingredient to VCT investment – www.professionaladviser.com

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Simon Porter: "We frequently have our minds changed about a business after meeting a founder, and a key factor that cannot be conveyed on a PowerPoint slide is the character and passion of the founder (and their team)."
Venture capital trusts (VCTs) give investors the opportunity to share in the growth of some of Britain’s most exciting and entrepreneurial smaller companies. Investing in a VCT helps these companies to create jobs, prosperity and economic growth.
It is not surprising to see that 770,000 new businesses were registered throughout 2020. The UK has a fantastic entrepreneurial culture, and whilst Covid has created difficulties for many businesses, the disruption it has brought has also presented a wealth of opportunities and provided a catalyst for new ones to start.
As venture capital investors seeking out the growth businesses of tomorrow, we have the delight of meeting with the next generation of entrepreneurs. Over the past 18 months, we have seen an increase in the number of opportunities presented to us, with a larger number approaching us through word-of-mouth endorsement from our network of founders.
A VCT sits in the gap between angel investors and larger funds and are often the first institutional investor in a business. A typical VCT invests in a few successive rounds over a two- to three-year period.
To ensure that VCTs are effectively evaluating the best investment opportunities, a face-to-face meeting with the founder is an essential element. Of course the business plan and financial model are important when evaluating a proposal, but without hearing the founder talk about the business, they provide an incomplete and possibly misleading picture.
We frequently have our minds changed about a business after meeting a founder, and a key factor that cannot be conveyed on a PowerPoint slide is the character and passion of the founder (and their team).
In taking forward discussions with a potential investee company, a lot of the focus will inevitably be on the founder. What is their background? Can they build a team? How will they cope with the inevitable setbacks? It was interesting to hear this approach endorsed by the co-founder of Airbnb, Brian Chesky, on the BBC recently when he said: “I’d rather work with great founders on a not great idea than not excellent founders on a great idea.”
Attributes 
So, what do we look for in a founder? First, we expect them to be committed and motivated. If they cannot summon enthusiasm for what they are doing, then others will not. Passion in business can be expressed in different ways, and in the best founders it is highly contagious. A marker we look for is management teams having a substantial stake in the business themselves, which means that they are working at building value for themselves and not for their investors.
Founders who know their limitations and are receptive to constructive criticism, which requires a level of maturity and humility, are also popular.
A powerful example occurred with the leadership of Popsa, a user-friendly photobook app which enables users to produce a photobook in six minutes. The tech-savvy founders developed a fantastic digital product but were aware that they didn’t have the expertise to execute the print and logistics of the physical albums. To address this knowledge gap, they appointed an experienced chairman with a stellar background in the print industry who has since proved instrumental to the success of the business. By showing humility about what they didn’t know, the founders addressed the knowledge gap, expanded their leadership team, and improved their offering.
Pivot
Another indicator of a great founder is the ability to pivot their business to take advantage of an opportunity. One of our entrepreneurs, Kara Rosen at Plenish, did this brilliantly when she reorientated her business from cold-pressed juices to plant-based milks, the latter of which was not even in her business plan when she first came to us. We like our founders to be open to new ideas and different ways of doing things. This extends to the boardroom, where we see the role of the Board as being to challenge and sense check, holding a mirror up to founders and helping them evaluate and nurture ideas.
We consider ourselves founder-friendly investors, and thoroughly enjoy working side-by-side with the entrepreneurs of our portfolio companies. While we do not run these businesses, we provide an ecosystem of support that helps them realise their full potential.
It is a privilege to meet a huge number of passionate founders, and my interactions with them make me incredibly optimistic about the future of UK small businesses.
Simon Porter is investment director at Pembroke VCT
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