EUVC #236 Andrew Noble, Par Equity

0:00Hi, everybody, and welcome to the European VC podcast. I am David and I am joined by my dear co-founder, Andreas, as usual. Today we have Andrew Noble with us. Andrew is a partner at Power Equity, an early stage venture fund backing health tech, climate tech, industrial tech companies. Power Equity invests in the north of the UK, applies a hybrid investment model, basically an angel approach meeting VC, and focuses on B2B IP rich companies to create outstanding results. Power Equity has a total of£213 million in AUM and an established portfolio of 77 companies, 48 in the current portfolio and 29 exits.

0:41Notable investments include Integrated Graphene, AEM, Fuse, Current Health, Delta DNA and ICS Learn. If you're listening in and you love our show, don't forget to drop us a review, follow the pod and subscribe at eu.vc.

0:59Tear down this wall. It's more than just an ally. This is a union of values. United and determined, we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. New beginnings. Let's start acting. This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. All right, Andrew, we are just coming off of the funniest pre-talk for any episode ever, I think. So let's try and see if we can keep the mood high and the energy flowing. So, Andrew, tell us, how did you first get into venture?

1:49Oh, thanks, Andreas. Thanks, David. Absolute pleasure to be here. So thank you very much. uh i've actually had two cracks at the whip uh getting into vc over the years but my journey into venture really starts in 2008 and um i have to say it needed a fair amount of hustle and good fortune so in 2008 i was 24 i've never been to university i was a professional ski racer of all things with the british ski team i was splitting my time between um some of the ski slopes of amazing mountain ranges all around the world and also the wonderful city of Edinburgh, which is where I grew up. In the summer of 2008, I'd actually just returned from a training camp in Chile and I'd had yet another injury.

2:35If you know anything about ski racing, when you injure yourself, they tend not to be sort of little niggles. So to paint a pretty grim picture, I've managed to put the femur, the bone in my thigh muscle through the knee and into the top of my tibia. Pretty painful. But what that meant was that I was back home in Edinburgh. I had a hell of a lot of time for reflection. A lot of my contemporaries and friends were leaving university, going off, getting real jobs in London and elsewhere. And I was starting to realize that maybe, just maybe, a career which involves breaking bones and wearing a tight Lycra suit.

3:18You know, it wasn't such a smart choice after all. Look, I've got a bit of a curious outlook. You know, through this time, I developed a bit of an interest and an appetite for just entrepreneurial stuff. My dad had made a few angel investments and I really enjoyed reading those business plans, you know, digging a bit deeper on these entrepreneurs who had new innovative technologies that they were seeking to bring to market, disrupt those markets, grow businesses, build teams, create value. It got me really excited. I invested. We talked a little bit about how much money I made from ski racing prior to us coming on here, Andreas.

3:58The little savings that I did manage to build up, I decided to invest in these young companies. Thankfully, they worked out and I got positive outcomes from them. um that entrepreneurial spirit also crossed over into very bizarrely um i ended up buying a a toilet block on the outside outskirts of edinburgh i converted that into an outdoor advertising site that to this day is probably still the best deal i've ever done so you know i really started to develop this entrepreneurial spirit right meanwhile i was still actually recovering from my injury. I kept going with the skiing. I competed in the 2010 Olympics, which was fantastic.

4:42But eventually, at some point, you have to grow up and get a real job. And of course, I now had this taste for early stage investing. So the immediate focus was VC and PE. It might not come as a surprise to you. There aren't that many VC and PE firms looking for someone who can throw themselves down a mountain in a tight Lycra suit. So I had to hustle a hell of a lot to end up with that dream job it does sound like the profile of a good founder though um but yes you're right on the investor side it's not necessarily where what people are looking for no yeah 100 so i i you know that took me to job interviews in london hong kong and eventually uh you know it got to the end of 2010 and i was getting quite desperate I was literally offering myself out for free.

5:30And I met this guy in Edinburgh called Paul Atkinson. And Paul is a physicist by training. He's a serial entrepreneur, serial angel investor. And it just so happened that Paul had co-founded Par Equity in 2008 with three colleagues. And they were needing some cheap labor. So it was a marriage made in heaven. I joined as an intern pretty much for literally for beer money. And that was my that was my big break into into VC. I should I should add that I spent three or four years cutting my teeth at Power Equity. It took me just through that curiosity, that enthusiasm for building networks and knowledge.

6:10I then decided to do an MBA, did that at INSEAD, joined McKinsey in London, where I spent a few years. That was a fantastic experience, lots of great projects and people that I worked with. However, that entrepreneurial itch was still there, right? So I left McKinsey. I founded a tech business. I then founded a search fund backed by some McKinsey and Power colleagues. And ultimately, all of that led me back to Power Equity, where I rejoined the team in 2019 as a partner. And since then, I haven't looked back. I personally really am automatically enthusiastic when I meet people that have a, let's call it strong sports background, whether that's then professional or not.

6:57If it's something that I can see must have taken blood, sweat and tears. That's a characteristic that I really, you know, think is important in anyone. and it's very transversal to venture and company building and being a good employee in general. So I'd love to ask you just, Andrew, could you reflect a little bit on that? Do you think that that's something that the non-sportsmen tend to think is a good quality? Or do you agree that there's definitely a grit to being a sports athlete that's very, very transversal? There are attributes of being a sports person which can bode well in a business career, right?

7:38So, like, in our environment of early stage tech and growing and building big businesses, you're going to take a lot of punches. And it's going to be hard work and not everything is going to go right all the time. And you've got to deal with a ton of adversity. And I think if you come from a sporting background, you have dealt with considerable setbacks. There's often no hiding place. You have to look at yourself, you know, as to why you might have failed. and I think that perseverance and tenacity can come through, especially when you're trying to build things, whether that's a VC firm or an early stage tech business.

8:16I actually want to bomb the script already and ask you about this, you know, have this funny experience, you know, intern at a firm, go do an MBA, work at an MBB, start a startup, then you start a fund and go back to that same firm, right? Which is kind of curious. And I think what's really interesting is that moment when you go fund manager yourself, when you launch a search fund, and how that relationship with Par kind of stayed alive during that process to now you coming back to the firm as a partner. I'd love if you could shed a bit more light on that period of your career, the launching of the search fund.

8:57What was that about and how that kind of panned out to today? Yeah, I think that's a really insightful question, David. So when I launched the search fund, I learned all about search funds, well, as much as I could during my time at INSEAD. And I had a number of peers who went off and did search funds at different parts of the world. That was fantastic. I decided to launch a self-funded search because it gave me the greatest degree of freedom. But I had the support of people in my network who were willing to contribute to that deal or the deals that I brought them and we worked on together. and I found that that gave me great flexibility, but also the advice and support that I needed.

9:34Why did I do that? Well, ultimately, I wanted to be more of an operator. I wanted to build something. I wanted to have more agency and I think I found that I didn't have enough of that at my time at McKinsey. How that brought me back to Power Equity? Well, my search thesis was really around Scotland. I was trying to leverage a lot of the network that I had in this part of the world to buy a business where the owner operates or was coming to retirement age and needed to move on and didn't have that kind of that talent to hand the reins on to someone else who's already in the business. So that's what I tried to position myself as.

10:10My wife and young child at the time, we've moved back to Edinburgh. I was working on this. I was hot desking out of the Par Equity office. I, of course, was leaning on Par Equity and Par Equity's extensive network to find the deal flow. We worked on a number of opportunities. I mean, I looked at three in the space of 18 months. I looked at 300 opportunities. I met with 50 owner managers. We put offers on three companies. Ultimately, for reasons that I won't go into, the third company that we tried to buy fell over for four days prior to completion. And at that point, the offer came up from my colleagues at Power Equity to rejoin Power as a partner and come in and help build Power as a business.

10:53And that almost opened my eyes because in many ways, I was looking for a business to buy and take on and grow as an owner, but actually it was sitting right under my nose with four colleagues who I know well, and I could help grow this business into something more meaningful. And that was 2019. And for the last four years, I've been really rolling up my sleeves and enjoying building a VC business. Beautiful story. And I want to take us straight into the pivotal moment. So share with us a pivotal moment in your life and describe how it has shaped you today as an investor. Yeah, amazing. So I love this question, right?

11:29So the pivotal moment for me was when I came out of McKinsey and wanted to start this tech company. I wanted to start a business in the sports betting industry of all places. The premise of the business was really his business model innovation, right? And I thought and still believe that I could drive down that customer acquisition cost, making that business highly acquirable for any of the incumbent operators. If you know the gambling industry well enough, the cost of acquisition is astronomical, right? It can be anything between 50 and 400 pounds per customer, depending on that channel. And what we were trying to do was use a novel business model to drive that down to about five or 10 pounds customer acquisition cost so that eventually you grow out that user base and it just becomes a really acquirable asset for these larger operators.

12:23So I started that business. I invested capital in it. We built the prototypes. We're nearing first hire as a bit of a sidebar. I even had the great pleasure of pitching this business to Paul Graham and to Jessica Livingston of Y Combinator fame. That's probably a story for another time, but it was great fun. But really, over this three to four-month period of working on the business, navigating the industry, really understanding the revenue drivers, the cost drivers, it became increasingly clear to me that the operators in this industry were preying on vulnerable customers in ways that I hadn't even previously thought about.

13:03right? And they were not only thinking about how they can increase the share of wallet, but how can they increase that size of wallet, you know, really tapping into what is a highly addictive feel-good chemical called dopamine. And gambling is an addictive product, really. So when I was reflecting on it, I felt increasingly uncomfortable about growing a business, making lots of money out of other people's misfortune. And I decided to quickly fault the business. Now, what did that process teach me? Well, I learned a lot as a leader, as an investor about what I wanted to be, and ultimately lit a fire in my stomach.

13:40How did that manifest itself into what we do today? Well, through my work and with colleagues at Power Equity, it definitely drives a mindset for profit with purpose. So how is that coming through? Well, we, Power Equity, help launch and then sit on a steering committee of ESG VC, which is a pan-European project to improve ESG credentials of early stage businesses. We do that with a number of our peers like Beringia, Atomico, Lakestar. It's also what's driven us to become B Corp certified as an organization ourselves. And it's also why we are allocating a significant portion of our carried interest in our new fund to be channeled towards initiatives which can improve the tech ecosystem in this part of the UK?

14:25EUVC being one of them. So thanks for that. 100%. The disclaimer in the beginning did not state that there is not meant to mean that we're getting 2 % of energy. Kerry, we're not just to make everything clear. Take a start.

14:56Andrew, I want to get us into our take a stance on him. I would love to ask you to take a stance on the following quote from Fred Dresden from Stripe. And he says, A founder turned VC who knows how to invest is probably the best VC you're ever going to get. But it is not obvious that this statement extends to operators. Yeah. So, I mean, I picked this quote because I think it's a really interesting topic to double click on, right? What Fred is saying is not wrong, but I think there's a fair amount of, let's say, amusing clickbait out there online on LinkedIn about what a good VC should look like.

15:37And I think the reality is much more nuanced. For me, a good VC is a program. It's not about an individual. It covers multiple funds, we would hope. It involves strategies that need to evolve over time. And it needs to serve dozens of portfolio companies that have different requirements over a 10 or 15 year period, at least. So there's no doubt, and we've seen this from our own experience operating Power Equity, that exited entrepreneurs can mentor others to navigate that scale-up journey. And as Fred says, they know how to invest and they know how to make, and if they know how to invest, they can make fantastic VCs.

16:22However, my challenge to that is the degree of relevancy. So how relevant is that individual to the portfolio company that's working with by stage, by industry, by technology driver, the network that they bring, and also the timelines that we're talking about here. I mean, if you started and grown and sold a business 10 or 20 years ago, just how relevant are those learnings that can be applied to new companies today? So I believe very simply to help your portfolio, you need the right people in the right seats with the right incentives at the right time. And that's our no-star at Power Equity. And we've taken that approach ever since we started the business in 2008.

17:06And we tried to build this angel network around our model. So we fuse that angel group together with the professionalism, the rigor, the scale of a VC firm. So fast forward to today, we've got close to 250 angels in our network, many of whom are based across our geofocus. They've got relevant expertise to our portfolio, either as exited founders or operators and tech firms, or even executives in industry. And it's important to note that this is an evolving collection of talent, right? So over the 15 years, we've evolved this group and we're continuing to fill the top of the hopper in terms of those skills and expertise that we can bring to bear with our portfolio.

17:53And it's a melting pot. I mean, it turbocharges the investment activity that we have, and it improves the portfolio outcomes. And we see that really in a number of ways, right? It gives us better access to deals. It enhances our diligence process, avoids that groupthink that we as an investment team might have. And we can leverage that network to manage the portfolio. So right now we've got about 40 operating partners across our portfolio, helping us to solve some of the portfolio's biggest challenges and steer them in the right direction. So for us, it's about the model rather than necessarily the individual to get the right outcomes.

18:37Andrew you've um you know par equity actually not you par equity is focused in the north of UK which is quite interesting right but the fact of the matter is that most VCs free in Europe actually right are actually based in in the UK specifically in London right um so it's really interesting to know and to understand how you guys have evolved over the last years, which have been a few, to double down in the Northern UK. I'd love to just give you kind of right now the time to expand a bit on that. Yeah, I mean, you're absolutely right. I mean, I think what's quite interesting is the development of the European tech ecosystem and with that, the VC community alongside it over the last five years, especially.

19:24I think as an early stage generalist tech investor, it's really hard to have a pan-European strategy these days because there are so many things bubbling away in different parts of Europe, right? Getting access to his very best deals is tricky. And it's obviously why we're seeing more VCs move into verticals or geofocuses in their strategies. In our case, we're based up in Edinburgh. We think the north of the UK is super interesting. and we've, over the last 15 years, evolved our strategy to make it as compatible with the strengths of the northern UK ecosystem as possible. Just taking a step back, I mean, north of the UK, I mean, a lot of people forget this.

20:07In its own right, it's a trillion dollar economy, right? That is the equivalent of the eighth largest country in Europe, 20th largest country in the world. We've got incredibly strong academic institutions in this part of the UK, many of which date back to the 1400s. They've got particular strengths across STEM subjects. And also, I mean, we were talking about it before we came on air, but the north of the UK has a really strong engineering and manufacturing heritage and experience that we're trying to tap into as well. So all of this lines up really nicely with our investment strategy, which is to support early-stage B2B IP-rich companies in those fields of health tech, climate tech, and industrial tech.

20:55So we marry those two up really well. And Dave, just to touch on your point about where the VCs are located, like 70 % of VCs are based out of London. Very, very few are in the north of the UK. I think a really good stat from the BBCA, which I saw recently, is that of all the capital that's deployed in the UK, which is something like$25 billion nowadays, 82 % is deployed within two hours of the VC firm. And there's a whole bunch of compounding reasons for that, right? So you've got high deal sifting rates, you've got network effects, and then you've got a combination of FOMO and also deal syndication.

21:35And these all compounded together just make it really hard for VC firms in London to focus on opportunities in the north of the UK. What that has done is it's created a dislocation in the funding landscape in the UK alone. So only 9 % of that 25 billion goes to companies in the north. And that is in stark contrast to the amazing work that the Scale-Up Institute does, where they've identified there are actually 50 % more identified scale-ups in the north of the UK than there are in London. And so a lot of this work that we've done, and particularly with the launch of this new fund, is that we've discovered this gap is most prevalent at Series A.

22:15And we hear it from our portfolio companies, we see it in the data, and we see it in our own returns. We've realized close to 30 companies now that covers about 170 investment transactions, and we can see where the gaps in the market are in our geo focus. And that's been a huge catalyst for the fund, which I'm delighted to say we've made a substantial first close on, brought in some amazing LPs, many of whom are from the angel community as well, that we've talked about. Could I ask you, Andrew, and this is a super difficult topic for me because on the one hand, I can definitely see the argument that as a VC, you should just be in the main capital.

22:59That is, you know, where everyone will have to come through at some point. Any great founder from the north of UK can just hop on a train or take their car, drive down to London, meet the VC ecosystem there, and then they can go back and build their company where they are if that's needed. But there's no reason not to be headquartered where everyone can kind of get to and where the financial center is. And I'm putting it like this because I've definitely seen that in Denmark as well. The numbers that you're presenting here are, you know, I'd almost say that percentage wise is the exact same as in Denmark, right?

23:37The industries that you're stating are strong in the north of UK are almost identical to the industries that are strong outside of the capital of Denmark, Copenhagen. But we're seeing the same concentration of VC dollars inside Copenhagen. And so I've been with a team that tried to raise a fund for the outskirts of Denmark or whatever you would call it, or the non-Copenhagen part of Denmark, right? And so I'm very used to that whole storyline that you just told. But now being on the LP side of things, I can definitely also see the argument from the other side, that if I want to do a fund in Denmark, I think that the funds that I would be looking at are probably the ones that are primarily headquartered in Copenhagen, to be honest.

24:25So far in London, for sure, it's also the ones in London and not north of UK that we've gotten to kind of engage the most with. And so far, we've also only invested in one which is London focused or at least London headquartered. I'd love to ask you to kind of maybe instead of debunking the strength of the capitals, try and say, OK, where do you see that there are some truths to that statement? that as a VC, you might as well be in the capital. I think there's a strong argument for both, Andreas. I think it depends on the stage, the type of company that you're looking to invest into as well, the strategy that you have.

25:10There's no doubt that London has the capital and the talent to grow big, big businesses, right? We at Par Equity have been successfully investing outside of London for 15 years. Like we've proven that's possible. We can make really good returns for investors by doing that. We've also done that. And you consider that our biggest exit has been$400 million, right? So we haven't had to build some of the biggest companies in the world to make fantastic returns for investors. That's not to say that we can't and we won't, but that hasn't happened yet. And we can still deliver. And that's also kind of the finding that I have come to myself, that I think that what you might call, or I at least would call the purebred VC model of going for companies that really do, I wouldn't even say shoot for the stars, but that have a completely unbounded upside there.

26:11If that's the plate, you're probably best situated in one of the capitals. But if you're looking for those overlooked opportunities, and oftentimes also, if I may put it like that, a bit niche in terms of understanding and network and so on, because it's not the traditional founder profile. profile, the traditional ventures type style business profile, those you need to be embedded in ecosystems that are not flashy and are not well susceptible to the typical, what in London might, I don't know if you call it a London hipster style, but in Denmark, you'd say that, well, outside of Copenhagen, you definitely, you have some people that I would say, I don't like people from Copenhagen.

27:00I don't want some flashy Copenhagen guy coming in here with all his money, splashing it around, saying we're going to grow to a billion. And I imagine that you have some of the same characteristics in the UK as well. Yeah, there's definitely an element of that. I think in the world of tech, though, there's less of it. I've seen less of it in our experience. I think the other thing to say is, Andreas, we've got to think about what is our role as a VC firm? And ultimately, I see us doing three things and we need to do them really well. And one is like helping these companies out with their strategy.

27:34And that's something that, you know, we've got 19 people in the team at par, 10 in the investment team. We can provide that in spades in different areas, right, as well as the network that we have. The second is that network. So like bringing people to the table at the right time to support those companies. And the third is capital events. and I include sort of fundraising opportunities, but also exits too. And when it comes to fundraising opportunities, it's really our job as a VC to connect the portfolio companies with other VCs in London and elsewhere. And that's something we're really working hard to do to help those companies tell the right story so that they can raise the sufficient capital that they need to grow substantial businesses much bigger than the$400 million exit that I've already alluded to and really build some exemplars in this part of the UK.