Judge this tech hero by his failed investments
First published in the Sunday Times on 26th February 2017.
It is always painful to lose money on an investment. Not simply because of the loss of spending power, but also because of the damage to one’s pride and confidence.
However, making a financial mistake can also provide a salutary lesson. Ideally, you never repeat that costly error.
No one is infallible, and the danger of success is that it can make one arrogant — and prone to overreach. Conceit is not a helpful emotion when judging business risk and reward.
Recently a share I own, the logistics business DX, fell by almost two-thirds in a few minutes after a profit warning and the announcement of a passed dividend. But, fortunately, my loss was not too severe because I had taken advice from my business partner of 16 years, Ben.
He is an accountant, and by nature more conservative than I am. Without consulting him, I had bought a chunk of DX stock at about 20p, thinking it was cheap. The yield was in the region of 10% and the forward price/earnings ratio was well under five times. I was interested in the business because I had always seen parcel delivery companies as “pick and shovel” beneficiaries of the ecommerce revolution.
Years ago, I had been a big investor and board member at a company called Nightfreight, which DX subsequently bought. I had made money before and thought I understood the logistics industry. Big error.
Luckily Ben did a swift and rigorous analysis for me, and it was a devastating indictment of the company and the sector. All the bad news was there: low margins and returns; lots of competition and gearing; and cashflow going the wrong way. I followed his guidance and bought no more shares after my initial purchase — but, sadly, I did not dump my holding, as I should have done.
I can console myself that at least I’ve lost only about 60% of my investment. Subscribers to the float of DX in 2014 at 100p are down 93%.
Quite why the chief executive, Petar Cvetkovic, and chairman Bob Holt are still in their jobs is a complete mystery; they have presided over the obliteration of almost £200m.
I suppose the big institutional shareholders who would normally push for change at the top have all baled out in disgust at the endless excuses and incompetence of the management. With any luck, a trade buyer will put the company out of its misery and bid for it.
This was an expensive lesson and I shall not forget it in a hurry. It was a reminder of the need to do detailed due diligence before deploying capital, and to seek the independent views of those you respect to test your investment ideas. Revealingly, the now- defunct private equity firm Candover also blew more than £250m on DX before exiting.
Of course, losing money is very much part of capitalism — the endless cycle of creative destruction,which brings innovation and human progress. I have suffered many losers over the decades, but not as many perhaps as Lucius Cary, a pioneer in early-stage tech investing. He claims to have more failed investments than anyone else in England.
While this is not such an impressive boast, it needs to be put into context. Cary reckons to have backed more than 150 early-stage tech companies since 1983 via his business, Oxford Technology. While many businesses have not worked, there have also been winners. He has been at it longer than almost anyone else in this country, and just keeps going.
In truth, venture capital is a high-risk endeavour, but vital for job creation and a prosperous future. It has been a crucial engine for the technology dominance enjoyed by the US. Cary puts small sums to work each time — perhaps only £75,000 — while actively supporting the businesses that he backs.
Cary, who previously founded several venture capital trusts, now employs the government’s seed enterprise investment scheme (SEIS) legislation to raise finance, which makes backing early-stage companies especially attractive from an individual’s tax perspective.
He makes fast decisions and deals with each proposition on its merits. He focuses on science and intellectual property; many of the investments have patents.
Inevitably, Oxford Technology adopts a long-term view, because most such projects take at least five to ten years to break through.
This sort of investing earns modest profits for the managers, compared with those who run hedge funds or do leveraged buyouts. But it is a vital part of our industrial ecology, and there should be more of it happening.
As a nation, we need to invent new tech superstar firms if we are to thrive in the 21st century. Investors such as Lucius Cary and his team are heroes for battling away in a tough niche, and I encourage high net worth investors to consider taking advantage of the merits of SEIS investing to support them.
There will continue to be losers, but let us hope there will also be the occasional giant winner. These are the companies that will generate tax, wealth and employment for our children.