29 November 2022
In Conversation is a series of articles and films featuring Richard Blakesley, Founder of Capital Pilot, the fund ratings system. Richard discusses the current issues with the fund market, the need for diversity in funding portfolios and how a broken system can be made relevant and help build a dynamic, diverse Society.
“We want to Redistribute Wealth”
It's a slightly cheap headline, which is really trying to demonstrate the fact that there is an enormous amount… trillions, literally trillions being invested in parts of the financial markets where there is very limited, actual, real economic growth and at the very opposite end of the spectrum, you've got the place where all the economic growth is - startups. That's where the jobs are coming from; that's where the real potential increase in GDP lives.
There is a tiny amount of money being deployed into that sector. It's because there is a fundamental gap in the ability of the big investing institutions to be able to place money into early-stage businesses.
So, we've got to try and find a way to bring that huge wall of capital - that is there, that is ready - and enable it to look for new opportunities in an asset class where historically it's been unable to play.
There must be a problem; what is it?
The problem here is scale; early-stage fundraising is a low-scale business as it takes an awful lot of human resources to make an individual investment, and the individual investments are small.
VC funds cannot place loads and loads of money into investments because they’re constrained by their human resource. At the other end of the scale, you've got institutions that can only write a hundred million, two hundred million, five hundred million pound checks because it's not worth their while, in the context of their trillion dollar funds, to make smaller investments.
That's the nature of the problem.
It's effectively the VC marketplace being unable to scale to the point where the big pension funds and insurance funds are able to invest and make it worth their while. As much as there’s lots of government intervention in terms of identifying the opportunities for pension funds to invest in liquid assets - like early-stage technology businesses - it's about more than legislation. We need to change the way the market operates.
You mention it’s currently impossible for large institutions to invest in early-stage startups. Why?
It's currently impossible for a number of reasons: first is the scale problem, the fact that large institutions have to invest large amounts of money and the VC industries and individual VC funds are small, so you cannot fit two hundred and fifty million pounds into a fifty million pound fund - but there are a couple of other reasons as well. Currently, big pension funds, and big insurance funds need some degree of liquidity. They need to be able to buy and sell their assets, and they also need the ability to value the assets in their portfolio. Both of those things are difficult but not impossible when it comes to the early stages.
The key focus of what we’re trying to do is to fix the scale problem, to fix the liquidity problem and to fix the valuation problem all at the same time.
What needs to change?
A couple of things need to change; first of all, there needs to be a recognition that the early-stage fundraising marketplace is inefficient. That it is, by the way it operates - it's biased as It's so human resource intensive. So until these things change, then the ability for capital to flow into the marketplace is not going to change.
An inefficient marketplace cannot attract capital to it. What we need are ways in which we can solve these problems of scale, liquidity and valuation - and that's all about data. That is the key thing that needs to change - the capture of data rather than the retention of data by individual players in the market.
It needs to be captured and shared for the greater community.
How can Capital Pilot facilitate this change?
What we've come up with is the idea that you need a rating system to bridge the gap between large-scale capital and small individual investments.
Now, that rating system, in exactly the same as any other rating system has been historically set up, is about creating data rather than trying to find data that exists already. This is because data does not exist about startups. Startups are startups; they don’t have multiple years of local track record - they don't have significant revenue history and their business models are new, so it's difficult to make a correlation.
But, if you can create a rating system for startups that are generating data, then you can use that data to create benchmarking, indices and valuations. Also, and this is one of the key things we’ve been focussing on, to use that rating to drive investment directly.