7 Investor Insights from Lead Investor — Nick Pendleton
Nick Pendleton is an experienced angel investor, NED, entrepreneur & ex-FTSE100 Executive. He is the lead investor in Questhunter, a marketplace for escape rooms.
1. As an early stage investor, what questions do you always ask when looking at a business and its management team?
It’s important for any investor to remember that every business is unique, in the same way that all individuals are unique. Different industries have different characteristics and dynamics, therefore I am always wary of applying a one-size-fits-all approach.
Having said that, there are some important indicators that I’ll look at when deciding whether or not to invest in a company. I call these the ‘six M’s’: market, management, model, momentum, money and me. Of these, ‘me’ is perhaps initially the most important — the company has to strike a personal chord with me or be in a field that I have some experience in. Ultimately, if the company’s mission doesn’t strike a chord with me, or it’s not something I can add value to, there’s no compelling reason to get involved. I have to factor in the risk profile of the individual business too, and consider where it fits within my portfolio at that point in time. Ultimately, many of these factors are outside of the control of the company and team, and come down to luck of the draw!
Beyond this, I will always ask investee companies if they can show evidence of bootstrapping — a skill that too many early stage companies neglect due to the ready availability of capital. Too much capital, too early tends to cause problems later on.
2. What is the biggest lesson you have learned in investing in early stage companies?
I have probably learnt the most from company’s challenges, rather than their successes. For example I have found that one of the most important factors for success is a compelling reason to buy the service or product, ideally right now. There is inertia in any market, from fintech to ecommerce, and this makes the environment for startups more challenging than ever. This means a significant business case, compelling routes to market, landmark current customers, and legislative drivers to act are vital to move people to action.
Another important lesson, for founders as much as investors, is that the core team must be resilient. You need a plan A-Z, not just a plan B, because you can guarantee that the existing strategy and business case won’t reflect reality. They must also have the core skills and capability to deliver. This sounds obvious, and many investors will be happy to plug skills gaps. But in my experience, you shouldn’t assume the team will grow and fill the gaps you have spotted, or temporarily filled.
3. Are you sector agnostic when it comes to making investments as long as they meet your criteria?
Defining sectors is challenging in today’s business environment, as technology causes industry lines to blur. Rather than looking for companies in specific sectors, I look for those that fit my criteria. Having said that, there are two sectors that I’m particularly cautious about — oil and gas, and life sciences — because of the long development and sales cycles and the regulatory risk involved.
When I am considering potential investee companies, I will categorise them according to the four seasons, either ‘spring sprouters’, ‘summer bloomers’, ‘autumn colours’ or ‘winter perennials’. Spring sprouters are those responding to and leveraging a new trend. These companies are the disruptors, and you need to find the ones that are under the radar and doing something a bit different in order to make a strong return.
The summer bloomers are more binary bets, and often involve the existence of some IP in order to succeed. The benefits of them succeeding are usually huge, but it’s highly probable (if they don’t have a good summer!) they will fail. Thanks to EIS and SEIS UK tax breaks the downside of these investments is only 50% of your overall investment, but the upside is unlimited.
Autumn colours are companies that are exploiting opportunities in well established markets often caused by digital disruption. The risk with these companies is that there’s an adjacent player that may be better placed to solve the problem.
Winter perennials are building ‘better mouse traps’. The companies are mostly using tech to solve a problem better than incumbents. With these companies, you’re not betting on the market or demand, just that customers will be compelled to switch.
For me it’s important for a portfolio to include companies across all of these ‘seasons’.
4. Can you tell us about some of your favourite companies in your portfolio?
I have most recently invested in Quest Hunter, the escape room marketplace. This is a business I’m particularly excited about. Originating in Japan, Escape Rooms have taken off all around the world in the last few years. Quest Hunter is tapping into this fast-growing global but fragmented market. Escape rooms are often run by lean teams of one or two individuals who are not experts in marketing or customer service. They are happy to partner with a platform to provide seamless customer support and the needed flow of new customers.
For consumers, Quest Hunter provides the ability to find the right escape room — for a corporate team building event, kids party, or night out. Dedicated players also need to find new rooms as they generally wouldn’t replay rooms they have already been to. They are usually happy to share their expertise too, reviewing rooms as you would do for destinations or hotels on TripAdvisor. I was drawn to invest in Quest Hunter because it is already successful in two countries, and has plans to roll out to three more — creating a localised network city by city. Available in 15 cities so far, it could easily scale to service 150 cities, creating a £6m business. Partnerships with companies such as Hotels.com or similar could help expedite it’s expansion.
My two other consumer facing investments are going from strength to strength. Kymira Sport is an exciting company that has developed infrared sportswear. Its patented material captures the body’s heat and converts it to a targeted region, which is then remitted back into the body, increasing circulation, improving metabolism and energy production. It’s already being used by professional sports teams including the England rugby team.
Hopster is a video streaming app for children. The app-based Hopster TV appeals to parents as an alternative to purely-passive TV viewing by adding an interactive learning element. Last year, Hopster won the 2018 KidScreen Awards for Best Screening Platform and it’s already hugely successful in over 30 countries.
5. How did you discover Funderbeam?
I initially discovered Funderbeam when Andrey Kalinchuk , CEO and Founder of Quest Hunter, was looking at investment platforms to work with. He asked me to come to a meeting with the team and I was impressed! In a crowded market, Funderbeam really stood out. They have a strong base of investors on the platform, and are active across many different countries — something that other platforms do not offer. The secondary market offer that they’re developing is also really interesting.
6. What book/podcast do you most frequently recommend to friends and family and why?
I’m a big fan of lots of the BBC Radio 4 podcasts. A particular favourite is Great Lives — where guests talk about the life and achievements of a public figure, friend, or someone they respect. You never fail to be inspired and learn something new.
One of my favourite books is Good Strategy Bad Strategy by Richard P. Rumelt. There are a lot of poor strategy books that only cover theory, but this one is comprehensive and covers application too.
7. Tell us something people are surprised to learn about you?
My parents were both entrepreneurs and were pioneers in the music business. In fact, my Dad founded the world famous Marquee Club in Soho and the world longest running outdoor popular music festival, the Reading Festival — these venues were the equivalent of an incubator programme for today’s music industry! The Rolling Stones, Pink Floyd, David Bowie, Elton John, The Who, Jimmy Hendrix, Cream, Fleetwood Mac all played their first gigs at our venues. One thing I learnt from being immersed in that world was that it’s not always the technically best musicians that make it; luck, timing, marketing and management are vital. Success isn’t a god given right. I still chair our remaining family business in this space, Entec Sound & light, which is now 50 years young.
In terms of personal achievements, I’m most proud of being invited to help a 500 year old institution, the Royal Mail, turnaround its business performance, modernise and achieve a successful IPO — a once in a lifetime opportunity. I would love to think some of my angel investments may make such a contribution to modern life and still be relevant in another 500 years!
You can learn more about Quest Hunter, the fundraising campaign where Nick is leading here:
