This week, as Draper Esprit begins trading as a FTSE 250 company, co-founder and director Stuart Chapman, shares the ideas and advice he has learned along the journey.
For me, everything starts in the summer.
I love cricket, so maybe that is not surprising but every big event in my professional life has happened in the summer.
I started at 3i on the 13th of July 1992. I remember that because if you started before the 15th, you got an extra day of holiday and that was important in your early twenties.
A few summers later, in 2005, Simon Cook and I were both at Cazenove, which had recently announced the merger of its investment banking business with JP Morgan Chase. Cazenove Private Equity, where we spent our days, had to either be spun out prior to the sale – either by Simon and I or others – or wound down. We were asked to prepare a paper with our recommendations by the December board meeting. Talk about turkeys and Christmas.
We wrote a business plan that argued strongly for selling the business. Cazenove was hugely reputationally sensitive and we warned against shutting it down as that may upset their major clients. We reached an agreement in January and got the handshake of the CEO, and we completed the buyout in June 2006.
Draper Esprit was formed on 30 June 2006, we went public on AIM on 15 June 2016 and then stepped up to the Premium Market on 23 July 2021.
People love saying to me: ‘if you were an entrepreneur by heart, why did it take you over 13 years to be one?’
I think the answer is that in the early parts of my career – from my time in London to my four years in Silicon Valley with 3i in the States – I was working in teams of six or so. It felt like a startup, even though I was part of a bigger company.
When I came back from the US in 2003, I rejoined the organisation and it was a corporate. And suddenly I wasn't in a team of six anymore, I was in a team of 46. It felt difficult to get things approved or get things done. One of the few mantras at Draper Esprit that I’m responsible for is 'make room for crazy' because venture capital is about that. If you do everything the same, then you're going to end up with the same.
Hence, in 2005, I joined up with Simon. On the week we bought out Cazenove, we had a Sunday barbecue and one of the partners came up to me and said: “my laptop stopped working. What you going to do about it?”
“What do you mean ‘what am I going to do it’?” “Well, you're the boss,” he replied.
Something dawned on me then and there that being an entrepreneur was mightily more than being in a team of six. You have to lead these people.
We each have our different analogies for successful scaleups.
Mine is always about the fastest possible water. If you imagine your startup as a kayak, can you put it in the fastest flowing water? Because if you can, you'll go downhill and you'll hit some rocks, but if you can keep going, then the tankers can't catch you. The big guys can't circle you and you will always be agile enough to stay alive. That piece of water can be described as luck, it can be described as market movements, it can be an advantage through regulation. There's lots of different things that can give you a push. But in all my time, I've never really seen a startup win from a standing start.
Simon and I knew that for young companies, everything is against you. Big companies have money; they have stuff; they have power; they have resources. As a young company – as the underdog – you’ve got guts, you got passion, you got heart. Plus, you've got a kernel of genius that the big companies have lost.
If you can nurture that kernel and build around that, then you can win the battles.
Risk is often beaten out of corporate culture
One thing that we can do to retain the startup feel and the agile, fast-moving nature is ban any language that holds an individual responsible for a bad outcome.
At Draper Esprit it’s always been the case that the investment committee is responsible for all decisions. What that means is the investors can take a risk, find something a bit crazy – something on the edge of what's been done before – develop it and bring it to the group and say, ‘shall we do this’? We make that decision as a group, which frees the investor to be brave enough to bring it forward.
The move to the public markets wasn’t always the plan.
Ultimately it was born out of two factors. The first was a general frustration with the limited partner fundraising process. Investors often wanted to dictate what stage investments we can participate in, with unnecessarily strict and arbitrary rules: one pound under, it was early, one pound over it was late. We just know that that's not true: the difference between early and late is not the size of the check. It's the size of the market risk versus execution.
The second factor was that we had already been shown another way: an old alum of 3i had gone through the process with Imperial Innovations. And so, we compared the difference between the two firms and how on one metric we were identical in that we had both invested about 750 million with a roughly equal returns rate. But while we had generated a lot of cash returned to shareholders by selling companies and they had generated less, we had to give ours back and were now suffering from having to raise the next fund. They got to keep theirs to continue to reinvest.
We felt like we were on the brink of losing everything.
In the summer of 2015, we had spoken to enough investors that indicated we would have support for an IPO. But by November when we were ready to go public, the mood had changed. Those investors were not so supportive of a new public vehicle. We persevered, Karen [Slatford, Draper Esprit’s non-executive chair] and I went to meet our prospective cornerstone investor on the day before Good Friday and both felt like we were having to pull him away from the edge. He was that pessimistic and black about the state of the world.
We felt we had lost our opportunity to go public and quite possibly lost everything because we hadn't been raised through the conventional model either. That was the low point in the Draper Esprit story, having to answer the difficult questions of: is there a future? And if there is one, where might it take us?
By the end of the Easter holidays, Simon and I went to speak to the same firm, but to a wider audience. The decision was that if we could float before the Brexit vote, which was in six weeks, they would back us as our cornerstone. We looked at each other and said ‘40 days? We can do this.’
It was super tight. On the night before we planned to list, we went to bed knowing we were £10 million short and that we had to make the call by 7.30am. At 4.30am we heard from the Chinese investment bank we had been pitching to—they would support us. We announced we would float on AIM and Euronext Growth that morning, eight days before the Brexit vote.
We had about 30 million pounds to prove the model could work
In that first year, we really did wonder if it was going to work. But following some good investments and a few exits, we went back to the market almost exactly 12 months later and raised just over £100 million. That was a pivotal point. We had gone from proving the experiment could work to believing that it can scale with hard examples and real results. From there it just took off and we’ve raised upwards of £100 million every year since. We don't doubt the model now.
The main market move won’t affect the day to day.
The investors still invest, our job is still to grow better value in our portfolio companies. At a more strategic level, there is so much more we can do for European entrepreneurs. There's an adage I have, which is 'you're trying to help the entrepreneurs get lucky'. And people don't like the word lucky because it's got a roulette sense to it. But I see it more through the lens of the Arnold Palmer golfing quote: the more I practice the luckier I get.
My hope is that the main markets provide us with more capital, more partnerships and longer relationships with these entrepreneurs as well as a platform that enables us to add more value.
My challenge to myself to everyone else in the business is that we're not done. We'll need to continue to take risks, we'll need to continue to fail. We can drive Draper Esprit from £1.1 billion to the next target of £5 billion but we’re not going to do that by doing more of the same.
What's the next genius idea? You need only look at the fund of funds concept: that was a 7–8-million-pound idea. And now it's 150-million-pound commitment, a phenomenal set of relationships that will take us into the future stronger than before. So, what's the next big idea? It can come from anywhere. That's what I'm more driven on now than anything else.
Entrepreneurs often feel like we're under attack.
Even if it's from ourselves. Even if it's just a gremlin on our left shoulder telling us there's something to worry about. But you've got to keep going, keep moving forward. Keep innovating, keep coming up with the next idea. And, for me personally, keep making the next summer even better than the last.