High Stakes Entrepreneurship

It’s 6am in December 2012 and I’m sitting in our office waiting for a prospective angel investor to arrive. Normally I hate getting up early in the morning but I’m currently so stressed out and not sleeping I would be awake anyway. I’m on my second coffee, because caffeine gives you confidence. The confidence needed to convince an investor that this business that I don’t enjoy, has big buck competitors closing in and is still miles off being able to launch is worth investing in.

We have just three choices, sell the business, get a big investment or close down and take a £50,000 personal loss. Plus we need to decide within the next couple of days or else Christmas will be upon us, nothing will happen and the £50,000 loss will become £60,000.

Here’s how it all unfolded – I’ll leave you to decide what mistakes we made.

The idea was simple. We create a website that displays data found on a bunch of different websites, attach a simple filtering tool and charge the websites a fortune for the privilege of having their information on our site.

That’s exactly what CompareTheMarket do with car insurance, Zopa do with houses and Skyscanner do with flights. A true arbitrage, you’re not creating anything you’re simply acting as an intermediary between two entities. Making it easier for the user to compare companies and easier for the companies to get in front of users. Win win.

It’s also what we did withhhh (drum roll..) Exchange Traded Products.

Umm, what?

They’re normally called ETFs and apparently there was a big need to be able to compare them.

ET what?

ETFs are simply a collection of financial products grouped together, given a name and sold on the stock market. For instance you might have an ETF that contains the stocks & shares of all the FTSE 100 companies.

But there might be 7 different companies selling a FTSE 100 ETF, all identical except that each one charges slightly different fees. Our website would be the only place you could go to compare them and choose the cheapest.

The beginning

We started with the best intentions. I always tell people that you shouldn’t dive into businesses that are expensive. Have a clear plan of attack and know exactly when you’ll start making money. We had a plan, or rather we had a plan to make a plan.

The Plan: Hire someone on a 1 month temporary contract to discover what ETFs are, see if there really is a need for a comparison website and work with us on a business plan.

We hired Brandon, a 22 year old American who had just finished his third university degree at LSE (yes third..). We agreed to pay him £250 a week for the month with the understanding that if the project had legs he’d have a full time role with it. He would work from home or coffee shops and we would meet up regularly.

Brandon was a brilliant find. We’re trying to break into the buddy-buddy world of finance and realised we had a real image problem. How do you make a group of young guys starting a brand new company look professional and reliable? Brandon is the answer. Here is the opening to the first email Brandon ever sent us.

“First, I would like to express my pleasure in having the opportunity to work with you on your venture.

As I understand my ‘job’ over the coming days to be, principally, coming to terms with the enterprise and a host of related information, I figured I would write this to allow you to evaluate my progress and maybe, in the process, raise a few points for discussion.

Some of this was likely covered in yesterday’s meeting. I apologize for repeating (and am beginning to see the high value of minute takers). Also, much of it is likely to be entirely dreamed up by me. I hope you will appreciate my unknowing inventiveness and set me straight where need be.”

You can’t possibly doubt the professionalism of someone who naturally writes like that.

Let’s create a prototype

Although Brandon’s research is encouraging, we’re still in cheepo mode and decided to outsource the building of the website to India. We found a team, they sounded competent and agreed to build the site for £1,233*.

He started working on the functionality of the website:

etf mockup

The design so far is pretty rubbish, but all the functionality is there and while the Indian team are programming we hired a design firm to come up with an awesome, professional look and feel. We paid them quite a lot, about £2,000 but for that they spent a lot of time getting to know the business and putting themselves in the shoes of our users. Once we had a design we liked it should be simple for the Indian team to change the look of the site, right?

ET new site

It’s meeting time. Brandon and I arrived at bank station, suited up with our folders under our arms. Brandon give me a few pointers, the jist of which is that he doesn’t want me to say very much because he thinks I’m not very professional. I give Brandon a similar talk, basically saying that he shouldn’t be too technical or he’ll send them all to sleep. He responds that as the CEO of an ETF provider, the guy we’re meeting with, they will be really passionate about the technical details of ETFs. I raise an eyebrow.

I had been reading recently that Zulu warriors would drink coffee before battle to give them courage, so I drink two espressos. And we enter the building.

I can’t really remember anything about the meeting, it was a blur of espresso filled nervousness and talking. But we apparently made a good impression. They tell us they love the product and would definitely pay us the £20,000 a year we want except that their compliance department doesn’t let them work with non FSA regulated companies.

Although this sounds bad it is exactly what we wanted to hear. We now have what amounts to a conditional ‘Yes’. Getting FSA regulated is tough and expensive but we don’t need to bother we just need to find someone who is already regulated and team up with them. Now go into any meeting with a prospective partner and say “if you team up with us we’ve already got our first customer lined up who will pay us £20k a year”.

This is the proof of concept we had been waiting for. After 5 months slowly planning and building the concept it’s now time to power up the jet packs and dive in properly. Before meeting any potential partners we have a serious credibility problem that needs to be addressed.

Build some credibility

Start working full time for the company

“What you weren’t working full time on it before?!”
Umm No?! Work full time for a company that didn’t really exist yet? I had infact been spending most of my time working on other projects, there’s no point dropping everything for a company that might not go anywhere. But now we have that proof of concept I’m all in. We have high hopes, our business plan is predicting we’re going to be millionaires and business plans are always correct, right?

Get an office

Despite Winston Churchill regularly holding meetings from his bed, saying that your office is your bedroom doesn’t go down to well.

I thought getting an office would be difficult. It wasn’t. It was actually much easier than renting a flat. No pesky references of proof of income needed. I negotiated £1,450 a month plus VAT for a 6 person (6 small people) office on the 12th floor of an office so fancy James Bond killed someone in it. We also got the first month free with no deposit needed.

Strangely a fully managed office in a skyscraper in the city was cheaper than a do-it-yourself office above a kebab shop in Shoreditch.

Bishopsgate-Broadgate-Tower-External

Write some employee contracts

Up until now we have been trying not to spend any money which meant our ‘contracts’ were all verbal (yes that’s allowed) but now we need written contracts because surely any future partner would investigate us during due diligence. (noone ever did). We also raised Brandon’s salary and put him on a long term contract.

Make the site look like it’s from the 2012

The site looks pretty in a screenshot, unfortunately when you use it it feel really clunky. Worse our Indian programmers have vanished off the map, the team we hired tells us that the programmers who built the website have all left the company and noone else knows how it works. So we hire an in-house team to continue the work.

Create an awesome business plan

My one tip for raising money or for getting big companies to take you seriously is to create an awesome business plan. If you can have a good looking documentation and business plans, that goes along way towards to making people think you’re not the usual 23 year old cowboys. What normal 23 year old produces a 69 page business plan out of choice?

ETF business plan

Grow the team to get all this extra work done

A 69 page polished business plan takes a long time, a very long time. We have set a meeting up for 4 weeks time and we need to be ready for then. We need lots of intelligent, proactive people to work on it. People who don’t need too much guidance and can produce top quality written material. The sort of people who are normally very expensive or are already in jobs…

Actually it turns out that people really want to work for small startups. There’s something quite cool about being a tech startup and a lot of people really want to get involved. So we got in a bunch of interns, some of them on minimum wage and some on a volunteer basis. “That’s so mean getting people to volunteer to write your business plan!” – The thing is we’re a small company who isn’t bringing in any money and we can’t afford to pay them anymore but what they’re giving away in salary now they’re hoping to gain in the future growth of the company.

arbing_office_interns

September 15th, let’s meet our potential partner

I’m now on 3 espressos of liquid confidence, Brandon and I have learnt a lot about not talking over each other and we’re clutching thick, nicely printed business plans. We’re ready to kick arse. We absolutely smash a meeting with the top people at a city broker. A few days later they give us the thumbs up and we start drawing up joint venture contracts.

Boom. Everything is going so well. We haven’t spent much money and we’ve got a partner who will invest money to keep us afloat while giving us the credibility plus a potential client. All we need is that partnership agreement signed, how long can that possibly take?

You may have guessed it but it’s downhill from now on.

We would have a meeting, agree on some terms and send it off to our lawyers. They would rip apart what we had done and point out all of the flaws. We entered into an endless cycle of contract drafting. The drafts go round and round. It’s like monopoly except that each time the draft passes Go we’re the ones who have to pay out.

contract cycle spiral

Danger Zone

We’re leaking money fast. Our monthly expenses are up to £10,000 a month and we’re still not making money. How long can we keep this up while we argue over the nitty gritty with our ‘not so soon to be’ partners.

Our legal fees are growing. I’m getting less and less sleep. Working harder and harder and my bank balance is shrivelling. What’s worse is that it is now December and we’re starting to hear rumours that Bloomberg are going to launch a similar service.

High stakes choices

Back to 6am in the office. The day before we had laid down an ultimatum to our ‘not ever going to be’ partners. We can’t continue like this so either buy us out or we go elsewhere. They said they would buy depending on the price.

The angel investor arrives, finally after he got lost and went to the Gherkin by accident, he likes our set-up and is sold on the concept. I tell him we’re waiting for an offer to buy us out. He’s keen that we take his money.

The buyout offer arrives and it’s really not great – we would have made more by spending the last 8 months focusing on our other businesses, it’s nowhere near the millions our business plan predicted.

What would you do? Continue working on something you didn’t enjoy with a chance of making a fortune, or sell out and regain your life?

Let me put it another way, would you bet £50,000 and another 3 years of your life on a 20% chance of making £1 million? That is high stakes entrepreneurship.

We sold**. 3 weeks later*** the money hit our account. We popped some sparkling water to celebrate.

Who won here? Well the buyer didn’t. They bought the project and did exactly nothing with it. We didn’t, I don’t even like sparkling water. In fact the only people who won out were those low paid interns you were feeling sorry for earlier on. Part of the buyout deal was a job for Brandon at the buyer with a hefty pay rise. One of our other interns went on to work for the ETF provider our first ever meeting was with. I understand they’re both doing really well.


*That was after the exchange rate, it was a round number in USD.
**Due to the confidentiality section of our sell-out I can’t tell you how much we made, the brand name, or show you the final website design. Sorry!
***We broke the never ending cycle by ignoring our lawyers warnings. If there is a 0.1% chance of something costing us £100,000, the expected cost is £100. If the iteration takes another week it will cost us £2.5k in running costs and another £500 of lawyer time. Much cheaper in the long run to have a leaky contract.

Total cost breakdown – For those interested

CostAmountDecription
Staff Salaries£27,822All the in-house staff
Office£9,200We continued using the office afterwards for another business
Legal£6,750Lawyer fees
Design Work£4,079Outsourced design work
Website£1,650Outsourced Programmers
Technology£1,190Computers, domain names, software, printer
Other£1,525Recruitment agencies, whiteboard, office accessories
Total£52,216
  • Alex Tee

    That’s probably my greatest fear outsourcing to India – any other experience outsourcing the tech work other than this?

    • http://www.arbing.co.uk/ Sam Priestley

      Yes I have done plenty of outsourcing. To be honest, I’ve never had a good experience outsourcing to India but that might just be luck (that’s over about 6 different teams). What seems to happen quite a lot is that your point of contact isn’t actually the guy doing the work, he’s outsourcing again. Sometimes there is a chain of three or four people between you and the actual programmer. Each person is taking a cut and the end guy is earning a pittance.

      I currently have a guy from the Ukraine who works with us full time for various projects. Initially we paid him a salary but he was so good that he’s now a full partner in the business ventures. He is seriously leagues above everyone else we’ve had.

      • Alex Tee

        Thanks for sharing your experience! I’m assuming you found those guy in India through sites like freelancer.com?

        I only outsourced once to do the design for my Shopify store who I found through their Shopify partner portal and it was a rather pleasant experience & affordable too. However, I never dared to outsource to India after seeing the reviews from all around the internet having unpleasant feedback.

        Not long ago I read about an answer on Quora recommending finding a tech partner from in East Europe as they are more passionate about it. I’m glad to hear worked it worked out just as you planned.

        Really thank you so much for answering so many of my questions!

      • Rion

        I belong to the Dev community in India. Its a cultural problem here that society considers freelancing as “not so worthy” or unsecure work, heck most of the population doesn’t understand what it is. On the other side there are tons of companies bagging huge projects from US/Europe and handing out handsome salaries. Now this situtation makes it obvious that good Devs will stick to large companies who offer more pay packages than what they would earn via freelancing. The same observation that Alex mentioned above. A few good rebels who don’t like to be bossed arround are still into freelancing but they are like needles in a haystack and you need to be lucky to find them.

    • Alexander Reider

      Alex, Please contact me for outsourcing possibilities in Ukraine. My company does a lot of outsourcing work for Europe and USA. I am based in Toronto Canada. 647.920.6155. a.reider at gmail

    • http://www.jamesattard.com James Attard

      Hello Alex, Sam – any business that decides to outsource to India, even its non-core activities, is at some point at risk. And this is not because India tech is not good – actually I know many great engineers.

      However people doing international business often miss the point that the culture difference plays a great role for the deal to be successful. One can also relate this to interns and students who come from a low-maturity level of culture-ship – same problem – whether lack of commitment or passion to your business goals.

      So what are the alternatives to outsourcing in India or using interns? One can use European lean outsourcing startups such as in the Mediterranean (Malta for instance) or eastern Europe. The advantage of outsourcing to companies in Malta is because of high level of commitments and quality, English being their native language, and overall very nice people.

      I suggest you to keep in touch with me – myself and the team I manage, do outsourced work based in Malta – from infrastructure management, technical and business consultancy, to managed services.

  • Daniel Blank

    How did you come up with the ETF idea? Where did that come from?

    • http://www.arbing.co.uk/ Sam Priestley

      A friend who worked in the financial markets told me that there there was a real problem with transparency in ETFs and that a business that helped solve that problem would go down very well.

  • Theodis Butler

    excellent story!