Faraday – Where to start?

I guess it’s never easy to write a first blog post … and even less so when you want to share something about the business you’ve already been running for years. In which case, with which lesson learnt do I start?

After giving it some thought, we decided to start from the beginning, more precisely, the moment in which we still had hardly any knowledge of what would motivate us to start and all the little milestones in between. This was roughly seven years ago now. We also want to use this first post to lay out the themes we’re looking to touch upon and how it’ll be of use to our investors and/or entrepreneurs.

Today, Faraday is one of the most relevant and active investors’ clubs in Spain. We have 192 Partners that have invested around € 10 million in 22 investee companies. To this date, we’ve been able to offer our Partners a total of 12 divestment opportunities in six different portfolio companies, with exit multiples on money invested varying from 1.3X (11 months) and 10.7X (57 months) and obtaining total net profits of more than € 1 million. However, we’ve also had two companies go bankrupt. With one of them we lost half of our investment, recovering the other half in cash. These aren’t bad figures, but they’re certainly very cold… and of course, there’s always more to it than numbers.

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The initial idea…

After years working in investment banking, strategy consulting and hedge funds in London and Madrid, it was ultimately a cute little something, at the time still inside her mother’s belly, that inspired me to get up the courage to dare to do what I really wanted (become an entrepreneur!). There were high risks to consider, but I felt I owed it to myself to rise to the image that I wanted her to have of her father and to teach her about things like … courage! Emboldened by this vision, I resigned from KPMG’s M&A department to focus full-time on setting up my own company… I had a couple of ideas in my mind, but after a month and a half assessing the viability of those ideas, the concept of Faraday started to take shape more and more.

As everyone knows, moments of crisis are fantastic opportunities to come up with new business models. This is especially relevant when we consider the drive in innovation and technological capabilities acquired by the industry over the last years and the rapid shift in consumer trends thanks to the internet and smartphones, among others. On the other hand, during such a crisis, which primarily hit banks, these same businesses had a very difficult time obtaining financing (crisis aside, it has always been a complicated feat, given the elevated risk profile of emerging, innovative tech firms!). In addition to this, it is difficult attracting professional investors to invest in companies in such early stages, due to the small amounts that can be allocated (it is tough for a fund that manages € 100 million to manage investments of only € 100,000 or € 200,000, or for a fund with less than € 15 million to be able to pay the salaries of its employees!). The investors active within our ecosystem at this moment, or at least those that dared to enter at these stages, tended not to be professional investors. Rather, they were Business Angels, small clubs composed of friends or small funds that had no one that managed, analysed or promoted these investments full-time. During that time, many spoke of what’s called the “Equity Gap” and indeed it was not easy at all to close financing rounds between € 150,000 to € 1 million.

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Now or never!

Personally, I’ve felt a passion for entrepreneurial activity since I was 13 years old (though I better leave these anecdotes for another post!). With this in mind, all my academic and professional developments were set out to accomplish the ultimate objective: to acquire knowledge that would help me achieve entrepreneurial success with a greater degree of certainty. In my particular case, my learnings, aside from including business strategy, also incorporated many notions from the world of entrepreneurial investment (both public and private), valuations, financial instruments, analysis, etc. With Faraday I could finally combine my two passions: entrepreneurship and investment … and, above all, I could contribute to alleviating the pressing need for private financing. This is something I’ve seen as essential to help companies with a large competitive potential to flourish. It is thanks to these kinds of companies and their inherent innovation and effort that we are able to compete at service, product and design level, etc. generating quality jobs and immensely positive consequences for our economy and society.

But… how do we do that?!? We believe it was important to give the investor an alternative, to work directly for the small investor, who then and still today, finds himself confronted with the following problems:

  • He/she doesn’t have enough investment capital to form part of a Venture Capital fund (with minimum tickets of € 50,000 and at times up to € 250,000, depending on the fund)
  • He/she doesn’t have the necessary contacts, experience or investment capital necessary to invest directly (which results in a lack of investment deal flow, difficulty analysing these opportunities and/or investment tickets that are lower than € 50,000, in which case it is difficult to negotiate good conditions)
  • He/she wants to get involved and support the investee companies, but he/she doesn’t have any visibility on his/her own availability in the medium term
  • He/she wants to learn and make decisions him- or herself, but be guided by professionals who deal with the management and empowerment of these investments on a full-time basis

Resolving these issues is therefore, how we aim to provide our Partners with the necessary expertise, skill, commitment, professional and personal ethics … as well as a passion for what we do! We seek to earn their trust and we reject any further income from other entities, most importantly, from our investee companies. This way we avoid conflicts of interests and the loss of focus on the service offering that we provide to our Partners.

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Our wager was…

Ultimately, our supposition was that if we managed to prove that these types of investments, professionally analysed and managed, were profitable in the medium term, then many Partners would dare to invest directly as Business Angels (outside of Faraday), after investing the first few rounds with us. Their requirements would then be similar to the knowledge and experience acquired investing with us and they would enter in rounds prior to our entry (i.e. 6-9 months of revenue generation). This would lead many of our Partners to discover their calling as Business Angels and our work would to continue increasing the number of investors that want to support these type of start-up projects with elevated risk profiles in the medium term. These projects also present a first, very positive result of our activity that further contributes to creating a rich ecosystem of financing sources for the best start-up projects.

Furthermore, our point of view has always aimed to encourage competition. We believe that competition helps us all improve. In our case, we predict that if we prove that our model is profitable in the medium/long term and our Partners are happy with our service, new “Faradays” will emerge, providing more alternative routes to traditional financing nationally. These new alternatives for Business Angels and Venture Capital funds will help to further consolidate a sector that has been comparatively small when brought to bear on global investment volume. That said, one must not forget that this sector has in fact, the most capacity to increase entrepreneurial competition and improve regional living standards due to a variety of reasons (which will be addressed in another post!).

These two main objectives are being met each time in greater depth, indirectly resulting from the “cold” (but very important!) numbers that I was referring to in the beginning. They have served as fundamental motivations encouraging us to create Faraday and continue to positively contribute to the quality and cohesion of our innovative entrepreneurial investment ecosystem. As a crucial aspect, these numbers also reflect the results derived from the trust that our Partners have offered us and demonstrate our commitment (possibly stronger than that of the CEOs of our investee companies, truth be told!). It is ultimately our mission, vision and our values that guide and motivate us, that reinforce the energy and effort that has contributed to our Partners trusting in us when we had no figures to show as of yet.

This is where I’ll stop talking for now, I think I’ve already gone on for too long. I simply wanted to share Faraday’s personal and professional motivations. What moves us and what we fight for. Subsequent blog posts will include articles and video blogs on aspects that we consider relevant for the small investor interested in investing in entrepreneurial and innovative initiatives, as well as those entrepreneurs that have a company that meets our criterion, combining technological content (e.g. valuation, metrics, legal clauses from Partner’s Agreement, etc.) with more personal aspects (e.g. resilience, managing emotions, importance of values, etc.). We hope our new (though belated) initiative will be of interest to many and will contribute to the further building of our ecosystem.

My warmest regards!!

Gonzalo Tradacete Gallart, CFA

Managing Partner & Chief Investment Officer