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Faces of Impact: Stephen Murdoch, angel investor

by Quynhnhu Nguyen, John Lloyd & Jessica Duveen

This is the third in a series of interviews being conducted with members of the ClearlySo Angels – the UK’s leading group of high-net-worth individuals and families dedicated to investing with an impact lens, creating social and environmental impact alongside financial return.

To read the previous interview with CSA member Kim Morrish, click here.

When did you start Angel Investing? And how did you discover impact investing?

So, I invest with my wife, Melissa. We have been early stage investing since the early 2000s. The world was very different back then, and there was nothing called impact investing, at least that I was aware of, but we were interested in those kinds of ideas. My wife and I met in Cambodia in the 1990s, when I was a human rights lawyer, and she was working in the same organisation. So, from our professional get go, we were interested in positive impact in the world. While we weren’t investing, it was pretty easy to go from human rights to impact investing. It was a no brainer. And, by the way, I’ll say that I think impact investing has a far larger positive impact on the world than human rights law.

I would also say that impact investing has made investing far more interesting, rather than just dry, trying to make heaps of money regular investing. I’m not opposed to making money, by the way. I think it’s important to get that message out there, that impact investors are not opposed to making money. And, in fact, I like making money. That should not be frowned on, and it should be encouraged, if it’s done the right way. But making money without values is soulless and sometimes worse than soulless.

On that note, what is more important to you, impact or financial return?

It’s impossible to parse out the two, they’re completely interlinked and entwined, so they’re equally important and they should be. After all, the more successful your investment, the more successful the business. The more successful the business, the better and more sustained the impact.

So, I understand where people are coming from when they ask that question. It’s asked all the time. But I think it’s an old mindset question, really. I don’t think people in 10, 15, 20 years are going to be asking it.

What specific impact, or cause do you care about the most and why?

For me, the thing that makes me most wound up is climate change. So, alternative energy, energy storage, the circular economy that will also reduce carbon emissions; all these things are interesting to me.

But I’m also interested in improving mental healthcare, which I’m very involved with. I got to know an entrepreneur by the name of Dr Andreas Fonseca, when he pitched to us at ClearlySo Angels in November 2014. I really got sucked into his world. His app—Thrive—not only helps with stress management but, more importantly, it prevents and treats clinical anxiety and depression. Today Thrive has about the same number of daily users that a therapist would typically be able to treat over the course of her whole career, and Thrive’s numbers are climbing all the time. So, sometimes an impact story, for whatever reason, really grabs you and that one grabbed me.

Are you willing to share a bit more about your portfolios?

We’ve done most of our early stage impact investing through ClearlySo Angels. In terms of our ClearlySo Angels portfolio, we’ve invested in 18 companies to date. I think one of the reasons why being part of the angel group has been good for us is it’s given us real exposure and hands-on experience to investing in impact companies. So now that we’re five or six years in, we understand how to do that much better, and we feel far more comfortable doing that in other geographies and with larger ticket sizes. The ticket sizes tend to be smaller in the Angel space, so we’re now also in bigger, later-stage companies with different risk profiles and in different geographies.

In the ClearlySo Angels group, is there also a benefit of having the community, the comradery and the sharing with the group?

I think the social aspect is really important. I’m sure you guys have experienced certain things that you do in life that creates self-selecting groups. When we were human rights workers in Cambodia, it was self-selected for a great group of people and we’re still very good friends with them 20 years later.

It’s going to be the same with this group, I can tell. The people who come tend to be bright, interesting people with great values. So, you’re already in a room of people that you know you’re going to share a lot with, so that’s been great—that’s been one of the best aspects of it. You can say it’s fun and it is fun, but the key element is values match. And so, we can talk about other angel groups, where the values match wasn’t there, and they did seem stuffy and they were ultimately really unappealing to us. I think the people who are interested in the impact space, also tend to be fun people, who can just be relaxed and have a good time.

Of course, the enjoyment can be dangerous because you make too many investments and ones you wouldn’t otherwise do. That’s to be guarded against.

Does being part of a group help when it comes to understanding different sectors, and helps expedite and speed along a diligence process on a particular deal?

Yes, I think heterogeneous groups, in general, operate better. One of the great things about CSA is that you get people from different backgrounds, professionally or personally or religiously, whatever metric you want to take, and that makes the group better and makes you better as an individual investor. If we were on our own doing this, not only would we not have as good a deal flow, but we wouldn’t be as smart either. Any number of times, at the CSA post-pitch Q&A session I’ve found myself thinking, “That was a good question, I didn’t think of that. That’s also a good question, I didn’t think of that.” It’s not just the wisdom of crowds, it’s the wisdom of this crowd.

How do you pick the right companies to invest in? What are some of the challenges?

I think at this stage, it’s like so many people say, that Silicon Valley cliché, which is to bet on the jockey not the horse, and I think it’s true. I think that what really matters is that you’re picking the right entrepreneurs and trying to get a bead on them as fast as you can. Because whatever they’re telling you in the pitch is not going to be true. It’s not that they’re lying, everyone in the room, including the entrepreneur, knows that their route to market, projected finances, and everything else, is not going to be as they envisioned. It’s going to be far harder than they think, they’re not going to make as much money as they thought, and it’s going to take longer. It’s good old Donald Rumsfeld’s known unknowns and unknown unknowns. It’s the latter that nail you whether you’re invading a foreign country or starting an edtech business. I mean: do you believe your builder when he or she tells you how much the home renovation is going to cost and how long it’s going to take? No. And with an entrepreneur it’s like that but worse.

So, what you need is an entrepreneur who reduces the unknowns. He or she really knows the space and therefore sees where possible solutions lies, and at the same time has the passion and the emotional resilience to stick with it, because it’s going to be entirely life consuming for them and even harder than they think. You have to choose somebody who you think is going to stick with it. There has to be luck as well, and market timing and various other things, but basically they just have to have the right stuff, which is hard to spot, difficult to define, and comes in many different packages. Let’s face it, we investors are gambling, and we’re gambling primarily on people.

How much does the initial pitch, or first impression, count to all of that?

I think it matters a lot, actually. I wouldn’t want to tell the entrepreneurs how much it matters, because then they’d get even more nervous. But that doesn’t mean that the pitch has to be perfectly smooth and polished like some television advert. You’re allowed to be human. A human who is passionate, knowledgeable and trustworthy.

Some things are immediately off-putting, though. Coming across as arrogant or not trustworthy, for instance, are immediate deal killers. But some other characteristics are harder for the potential investor. For instance, not having great social skills. Then, as an investor, you’re really trying to read through—does it matter for this kind of CEO? What if sincerity and subject matter expertise matters more? Is it a super sales-y position? If so, then social skills matter more. If technical expertise matters more than social skills matter less. There’s not one type of CEO. Some are super ‘nerdy’ and not particularly socially smooth. That might be okay. Even better than okay, actually.

What are the red flags, or warning signals, for you to not invest in a business?

Just so many. The entrepreneur not knowing their space well enough is an immediate non-starter. Not being trustworthy. If I get a whiff that I don’t really trust a person—especially in this early stage where it’s just an idea and a few people in a back room—it’s a no for me. Also, if I get a sense of narcissism; narcissists are dangerous, they really are—they’re dangerous when they run a country, and they’re dangerous when they run a company. And narcissists are attracted to certain positions, including founding companies and charities. Entrepreneurs need to know when they’re bad at something, be able to listen to others, take good ideas on board, and hire people who are better at various activities than they are. Narcissists aren’t very good at that. And, plus, who wants to be around them?

I think another flag is if they can’t listen, forget it. It’s not that I always have great wisdom, but someone around here is going to, and the entrepreneurs are going to get it wrong a bunch of times, because what they’re doing is hard, so they have to be able to listen.

What do you think the hottest sectors are for impact investing at the moment?

I really think energy has just transitioned so fast. When you look at the propositions around solar and wind, they’re just huge companies now that have huge contracts. It’s no longer an angel space, for sure. But I still think the biggest opportunities are in the clean growth sector: transport, construction, energy, heating, grid services, etc. These areas are underfunded in the UK, drastically, and we have a duty to step in to fill the gap. It’s an opportunity, too.

When you do focus on a certain area you begin to see trends, such as home energy storage and grid services. So, as an angel it’s helpful that you guys at ClearlySo Angels are really doing such a great job of vetting and narrowing that funnel down.

Have you done anything crowdfunding wise? I’m curious as to what the opportunities are like with crowdfunding versus an angel group?

Crowdfunding just doesn’t interest me. It interests me as a phenomenon and technology, and I think it’s a great match for many early stage companies’ funding needs, but as an investor you don’t get to kick the tyres when investing through crowdfunding. You don’t meet the company or do proper diligence. Where’s the fun in that? Doing diligence is like being a reporter, except you represent money rather than readers. It’s one of the best aspects of the activity: you learn so much about the world and meet interesting people and feel like you’re helping. With crowdfunding you’re just reading a webpage and then clicking on buttons. No thanks.

This is not one of your questions, but it came up earlier and I didn’t talk about it. One of the things that’s great about ClearlySo Angels and makes the process pleasurable, is that you feel like you get a sense of the young entrepreneurs of London and the UK.

That’s one of the things that gives us all energy. For me, I’m 50 years old, so seeing the younger generation and how they want to change and positively impact the world is super heartening and I think that is what makes it addictive, in the large part. It’s not just your peers who are great and fun to be around. But, it’s also the entrepreneurs, who, sometimes in a grim world, can make you feel better about it.

Are there any kind of trends, or sectors, that you think you missed the train on, from an investment point of view?

That’s a good question. I’m worried that I’ve missed the electric vehicle angel stage. There will be technologies around it, and we’ve seen some, but I think that’s come and gone and I missed that one, which pisses me off. It’s not true for home energy storage or grid services, the circular economy, or robotics with many different kinds of applications: these are currently more available to early stage investors. The circular economy and clean growth in general will continue to grow. We’re investing now in a great coffee bean waste-to-fuel company called Bio-Bean through ClearlySo. How many other areas beyond the obvious, like plastics, will become circular? Many, and there will be heaps of impact investing opportunities.

I think there are certain places where there are plenty of angel investing opportunities, but some where there are too many. For example, when I first started investing through ClearlySo I thought educational technology would be interesting. But, I think every teacher has a cousin who likes to make apps, therefore there’s a gazillion tech companies out there. So, I pretty much try to stay away from edtech.

When do you think there’s a right time for a founder to seek investment versus self-funding or boot strapping?

Founders need to find investors who have the right risk profile for the stage of the company, and that can be hard. Most angel investors become fatigued with risk after they’ve been doing it for a while. Who wants to keep losing money? It’s almost inherent that once an investor has a portfolio that his or her risk tolerance decreases.

But at the earliest stages, the founders need to self-fund just so they’re not going to investors with only an idea. You’ve got to be pretty risk tolerant as an investor to fund just two people and an idea, unless you know them well already. But once the founder has a prototype and perhaps even some kind of commercial proof it can be time to find the right angels. In the very early phase they need to find the angels who are as deluded slash optimistic and risk tolerant as they are. And then there has to be an overlap of interests—whether it’s in education technology, environment, health, or whatever it is.

I think everyone needs to get very small amounts very early on from, as they say, friends, family and ‘fools’. Then, I think, a really sweet spot for the angel round is when they’ve got a product that’s pretty good, a minimum viable product, as they say. Much further along, that is, real commercial traction, is probably too late for an angel, but a good product and some proof that the market is interested, or should be interested is about right. Fortunately for entrepreneurs, many angels are almost as crazy in terms of optimism as they are; it’s our greatest failing and can lead us to losing shed-loads of money, especially when you add in a compelling impact element. That’s when we invest with our hearts rather than our minds. Ideally, it’s best to do both. Please don’t ask me how often I successfully do this.

Does it put you off if the entrepreneur didn’t invest their own pocket into their project?

If they did have their own money then, yes, I would feel really weird about that. In fact, I wouldn’t invest if they didn’t also invest. But, mostly the entrepreneurs who come to us in reality don’t have heaps of their own money: otherwise why would they be here? I think it does help if they put some money in and if they can afford to put in just £5,000, then they should. In addition, investments from family or friends helps. Anything that makes Christmas dinner or its functional equivalent much more uncomfortable if the business doesn’t do well.

What do you think a founder should look for in an angel investor?

I think values alignment for sure. If you’re a proper impact company do not take money from anywhere, because the traditional investor, or the traditional fund will want an exit in a certain amount of time. And that can mess with impact. So, I think what’s really important for them is patient capital, with the right values, for sure.

You need to get in front of people who can afford not to have a return for a good number of years and in fact can afford to lose it all. You need somebody who is high-net-worth, obviously, but the higher in worth the better. And somebody who cares about your space. There are so many angels out there who are going to have great contacts for you as an entrepreneur. Obviously, you want that super smart money that comes in and can introduce you to persons in the space you’re operating in. But, most of the time, that’s not most angels, so you can’t be too picky. If you can’t find perfect, at least find investors whom you respect and like being around, and who want to help.

How important are Boards and what should a founder look for in a Board member?

I think boards are extremely important and probably more important than entrepreneurs realise. Even if you don’t get people who have heaps of experience in your sector specifically, you should get people who are willing to sit down in the boat and wholeheartedly row alongside you. It matters a lot, because being an entrepreneur is a tremendously lonely experience and I think it’s helpful having other people to bang ideas around with once a month—and I do think they should have monthly board meetings, at least until they’ve really proved it, and then go to once a quarter. So, yes, I think it matters a lot.

Also, when you’re early stage don’t pay board members anything, and don’t give them equity for their service. That really bothers me; there’s a weird sense of entitlement to this in the UK, whereas it’s not as true in the States. People hate losing money more than they like making money. That’s probably unhealthy and irrational, but it is true. Having people on your board who have invested and don’t want to lose their money will focus their attention more than people who have a 50 basis points upside. Your board should feel the pain alongside you if things don’t go well.

How important is it for the company and the Board to keep the investor community updated?

Well, you’re right, thank you for prodding me. Obviously, entrepreneurs are doing a great many things all at the same time, so they can often forget how important it is to communicate to their investors. I can think of examples in our portfolio of founders who only communicate with investors when they need more investment capital. It’s usually because things haven’t gone to plan. This really doesn’t help the entrepreneur’s cause. Personally, it makes me resentful and not want to reinvest.

Angel investors like to help, and not just financially; moreover, they expect things to go wrong. So, entrepreneurs have got to put aside the embarrassment and pride, and be open and communicate even when they don’t need more dosh. Because if you’re doing a good thing still and it’s not a hopeless cause, people will roll up their sleeves and help straight away. They’ll also understand your story better and trust you more if you keep them informed, telling the good news and the bad all along the way.

I think that’s all the questions I have. Thanks for coming in, Stephen.

Interview conducted by Quynhnhu Nguyen and John Lloyd of ClearlySo; editorial support from Jessica Duveen of ClearlySo.