My Favourite Failure: It should’ve been a slam dunk - Andrew Wordsworth

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0:40So if you're leading a growing business and want to spend less time on HR admin, then book a demo at personio.com forward slash secret leaders. That's personio.com forward slash secret leaders. There's a link in the show notes. I'd burned through a million pounds worth of equity. And yeah, personally, I saw it as my fault. And therefore, you know, what do I need to do to fix it? That's Andrew Wordsworth, who today is the managing partner of Sustainable Accelerator, an investment fund which has developed Europe's largest cluster of sustainability startups. But the first venture he backed and chaired went belly up.

1:23What's strange is it had all the ingredients to be a mega business. So what did they get wrong?

1:36Andrew was the managing director of Carbon Trust Enterprises, which was one of the Carbon Trust's commercial arms. His goal was to launch private sector startups that could move the needle on the environment and of course make some money. Their first idea seemed like a winner. Connective Energy was the first company I founded whilst I was part of Carbon Trust Enterprises, which was one of the commercial arms of the Carbon Trust. And Connective Energy was basically quite a simple concept in it was going to link up companies who were producing large amounts of waste heat, sort of like brick factories, for example, with nearby factories that needed low-grade heat.

2:16Seems like it was a simple, mutually beneficial value exchange, and the opportunity was massive. Two thirds of heat produced in the UK's industrial sector was being wasted. They just needed to find the right people and partners to make it happen. We recruited a guy who used to work at Eon to lead the business and thought, this is great. We've got somebody who knows the energy sector, is an experienced commercial person, and this big market opportunity. And yeah, in terms of the, it's quite a simple sort of engineering concept. So we basically, at Carbon Trust, our model was we would do the sort of the proof of concept and then went out to look for private sector investors.

2:58And we attracted a basically sort of a formula three-way consortium. So we had an investment from Triodos Bank and another one from Mitsui Babcock, the engineering company. So very simply, the thought was Carbon Trust would bring the carbon expertise and the market presence. Mitsubabcock brought the engineering presence and Triodos Bank brought the financing expertise. So when you looked at that sort of exciting management team, you sort of thought, what a cap table. We actually got all the three main things that we needed. They had the money. They had the partners. They had a strong, simple concept.

3:41but they just couldn't move leads down their sales pipeline it's basically sort of product product market fit and effectively what happened was a couple of things one in theory there was a kind of quite strong value proposition for each each of the parties people selling the heat and people buying the heat but i think ultimately what went wrong was a couple of things one waste heat has no value because people say we're just throwing it up the chimney um until somebody says can i come and buy it for from you and then suddenly um they go oh there's money in this so if you looked at the total value created i guess in theory said okay we'll just maybe split it we'll we'll take a third uh the the buyer can get you can get a third of the the price and the seller also gets a third.

4:37But it turned out that everybody got greedy and said, actually, hang on, well, why do you get a third of the upside? Because we were providing the CapEx for the pipeline. And then it turned out that the person selling the heat said, actually, I'd like to have 50 % of the benefit. And the buyer was sort of like, I see it's a lower cost of heat than me buying gas, but actually I'll have 40%. And then what was left just didn't add up to service the debt that we needed. So it's just a classic thing that, you know, as soon as you point out something has value, it just didn't work. And people said, that's fine.

5:18We're providing the design and all the sort of technical costs and everything, because you're sort of interfering with their plant. So they knew all our costings. A lot of them actually, I think some people actually said, oh, we'll just do it ourselves. We don't need you to have this debt financing involved. Besides product market fit, they made another major mistake, the person they hired as the managing director. Yeah, we got somebody who had a great sort of career within a corporate. But just because you've climbed the ladders of a large utility doesn't mean you're a great entrepreneur. And I think that was the biggest mistake I made was probably selecting the initial MD to run it.

6:05Again, you sort of realize that he spent more time preparing like board papers and preparing for board meetings than he did actually going out and selling. When you realize that actually, to be honest, when you've got something that's actually a relatively simple concept, it's just about people who can go out and sell. And yeah, almost nothing else mattered in that business. They got rid of the MD, which was a shock for him and the culture because it just wasn't something that the Carbon Trust did. Anyway, they weren't able to turn it around. They ran out of runway two years in. But Andrew did learn some valuable lessons.

6:39I guess the other one in terms of regret is not getting carried away with looking at spreadsheets. So yeah, come back to that product market bit is saying, actually, it's very easy to say, look, we'll do a third, a third, a third. So it's quite, yeah, I guess it's sort of that naivety that I probably had in thinking, well, this is blindingly obvious to me, but not realizing that at the end of the day, it's about people. And how you see the world is not how everybody else sees the world. And again, particularly on the investment side of things, you know, everybody has a sort of a massive Excel spreadsheet.

7:15And you just realize that actually, you can believe whatever it says. if you need an IRR of 20 % to get it past your investment committee, you just budge the assumptions so that it says you come up with a 20 % IRR. Although Andrew was worried about what this failure would mean for him and his team at Carbon Trust Enterprises, the failure wasn't terminal for them. They carried on spinning out companies, but Andrew took a very different approach to hiring. Seating to be impressed by the corporate stripes they'd got, and actually starting to look for real entrepreneurial talent. So people who are really hungry.

7:53Yeah, looking for entrepreneurs rather than corporate beasts. So that was one thing. I think the second thing was not undercapitalising companies. Yeah, come back to the whole thing. If we'd had four years runway, would the concept have worked or not? That was Andrew Wordsworth, who'd done well at university, then Esso and Bain. So this was his first real public failure. His advice is that building a company is harder than you think because you're doing things for the first time. So dust yourself off, reflect and learn from it. But go again. In his case, the fourth spin out from the Carbon Trust paid for all the previous failures and then some.

8:37Thanks for listening to this episode. I've been your host, Dan Murray-Surter. I'll see you next time. You