The Halo Effect — Australia and New Zealand’s best angel investors 😇
A conversation between John Henderson, General Partner at AirTree Ventures & Les Szekely, the first angel investor in HotelClub, Siteminder
In conversation with Les Szekely
Les Szekely
As a VC at AirTree, I talk to startup founders every day. Universally, they are concerned about the changing economic climate and its impact on early stage funding. With that in mind, I’ve set out to highlight the very best angel investors in Australia and New Zealand. The ones who are continuing to invest and who have a track record of past success.
Today I’m joined by Les Szekely, who started investing in 1999 and continues to back great companies to this day. Les was the very first investor in Australia’s latest unicorn, Siteminder, and remains on the board there. He’s also had success with HotelClub as well as an active portfolio of great Australian startups like Shippit, Oneflare, DesignCrowd, Rezdy, Deputy, DriveMyCar, BlueThumb and Bonjoro.
Indeed, Les has been so successful as an angel that he’s also become a VC, co-founding Equity Venture Partners with Howard Leibman. Les thus straddles the world of angel investing and VC and has deep insights into both.
John: Tell me about your background.
Les: My parents came to Australia as refugees in 1957; I was 4. I grew up an “outsider” so working hard and doing things differently were just normal. I had a >25 year professional career working 50 hour weeks as a tax consulting partner with Horwaths and then Deloitte.
John: How does a tax consultant become one of the most successful startup angel investors in Australia??
Les: While my career was in tax, business has always been my true passion. Even back when studying law full time, I started a very successful business selling ladieswear at the markets.
These days my focus is on startups; and I am big on the fact that a startup is just a particular type of business.
I got lucky in 1999 when I became “godfather” to the birth of Hotelclub which was founded by Leon Kamenev. I’d known Leon for many years. Our kids went to primary school together. He is an incredible man. He grew up in communist Russia and had a very tough upbringing. He moved to Australia as a refugee. He didn’t take the dole — he learned English every day while delivering pizzas at night.
At one point, Leon was working as an inbound travel agent. Lots of Russian travel agents were asking him for hotel rooms and he’d started selling them online. This became Hotelclub. I worked intensively with Leon over 5 years until Hotelclub was sold. You will never hear him speak publicly but Leon is “one of the greats” and went on to found Menulog amongst other things.
Believe it or not, Leon and I operated on a handshake for the whole Hotelclub journey, right through to its acquisition by the Cendant Group. We never had any paperwork!
I learned an unimaginable amount about startups by helping and watching Leon grow Hotelclub hyper fast from startup to exit over 5 years.
John: You were the first investor in one of Australia’s greatest technology companies, Siteminder. And you remain on the board to this day. Tell me about that journey.
Les: A mutual friend who had helped us with HotelClub introduced me to Mike Ford and Mike Rogers, two programmers who had an idea for helping hotels distribute their inventory. I knew from HotelClub that managing their inventory was a real pain for hotel managers. In that sense, I had a prepared mind.
The two Mikes were also exactly the type of founders I like to back: industry insiders looking to solve a problem they’d experienced (Mike Ford had a stake in a backpacker hostel in Qld) and having the technical chops to build it.
I invested in Siteminder when it had circa a dozen hotels on the platform and maybe $1000/month in revenue. I’ve been on the board since 2008.
John: Incredible. And today it is worth over $1 billion dollars. With the benefit of hindsight, was the first investment obvious?
Les: Yes and no. Mostly no. I knew from experience that the problem was real and I was confident the business model would work. I had no idea if we would be the ones to make it work, but I knew someone would.
But I had much less confidence about the other key risks: had we got the timing right and were these the right people? In 2020, I feel good about having taken those risks. But don’t get me wrong, there have been plenty of existential threats along the way.
John: You’ve been angel investing since 1999. That’s a lot longer than most. What has changed over that time?
Les: Back in 1999 everyone was skeptical whether people would even use a credit card online! There were no real VC funds in Australia and the jargon of VC and SaaS investing (“CAC”, “pipeline”, “CLTV”) had yet to be invented. This began to change rapidly with the “dotcom bubble” of 1999. After the bubble popped in early 2000 investment in tech dried up and this gave me the opportunity to back Hotelclub.
Back in the early 2000s, founders were much more likely to bootstrap without VC funding and none of the current ecosystem existed. This developed slowly with things starting to accelerate from about 2007 when the ESVCLP tax incentives started.
I am bemused by how “raising capital” has gone from being a necessary evil, to a badge of success, to almost being an end in itself. In the early days just about the only investors were HNW angels, then came the VC funds which were regarded as exotic ultra-high risk. Over the past handful of years we are seeing institutions piling in with their own in-house VC funds, accelerators, incubators etc.
John: How have you built your angel portfolio? Tell me about it.
Les: After Hotelclub my next deal (Siteminder) came via a personal friend who knew this had gone well. From there on I joined Sydney Angels and began actively networking. I have a strict rule that I will only invest post revenue, typically $300K — $500K. I have a strong preference for businesses to which I can add value — typically via a Board seat. I will follow on, often multiple times, if the business and my chemistry with the Founder are good.
The reason I take a board seat is not to monitor, but to be able to help. I only invest in a business if I feel I can actually help the business succeed. I seek Founders who want an exeprienced “partner”. Almost by definition founders are strong minded and in many cases this coincides with an inability to receive advice.
You can see my portfolio here — GrandPrixCapital. My only significant exit has been Hotelclub in 2004. I also sold down a little of my Siteminder equity on the last round. My experience is that “it always takes longer” and I have done numerous follow on rounds in several companies (eg Shippit, Oneflare, Bonjoro, SpareWorkspace, etc). In my view the best buying is often taking up pre-emptive rights in follow on rounds.
John: You’ve had more board experience than most. Tell me about how you see your role as a startup board director? What works well / not so well on startup boards?
Les: Ultimately, the founders and senior management are the key to a functional board. The quality of the discussion links directly to the quality of the information provided to the Board and the ability of the Executives to use the advice of the non-executives as an asset.
Personally, I hate formal boards. They are a waste of time at the early stage.
To me, the role of the board and board discussions is to encourage the founders to work on the business rather than in the business. When you’re so deep in the business, as most founders are (for example, many write the code!), it’s really hard to make the transition to becoming a manager and leader. The board’s role is to help the founders focus on the business, the long term strategy, their org design and so on.
Where I’ve seen boards not work is when founders doubt a board member’s intentions. If they feel like you’re just checking on them or protecting your money, the board quickly becomes dysfunctional.
John: Looking at your portfolio, I can see clear themes and the fact that you’ve invested very early but always with a deep understanding of the problem. Shippit seems like a clear example of this — tell me about how you came to invest.
Les: First of all, Will and Rob are exceptionally strong founders. Every angel is in the people business and they were obviously very good. Secondly, they solicit input and they are open minded to getting advice and help.
My experience from the travel sector was also very relevant. From HotelClub and Siteminder, I intimately understood the role of global distribution systems like Amadeus and Sabre in solving the problem of airline routing. Figuring out the optimal way to take a multi-leg journey from city A to B is completely analogous to shipping. A parcel needs to go through distribution centres, ports etc. in the same way a passenger goes through airports and changes airlines. In my mind, Shippit does for the parcel what the GDS does for airlines.
So, again, I had a prepared mind — I knew the problem was real, I backed Rob and Will to solve it and I hoped our market timing was right. So far it seems to be!
John: What do you look for in an angel investment today? Has that changed over time?
Les: My cheque size has crept up over time, I probably ask for more data than in the early days. Otherwise little has changed in how I invest. I look for the alignment of 3 things:
The right founders — can they execute and take advice?
The right business model — do the metrics make sense?
The right timing — is the market ripe for quick disruption?
John: Looking at your previous investments, it seems there are themes to your investing. How would you describe your preferred sectors, business models, founder profiles etc?
Les: As a broad generalization I prefer Founders who come from the following perspectives:
Industry insiders who have developed some solution to a problem for which they could not source good 3rd party solutions (eg Hotelclub, Siteminder, Rezdy)
Technologists who have encountered a problem for which they have built a solution (eg Uptick, Deputy)
Advisers who have discovered opportunities from working in financial or other professional firms.
I have specialized in B2B SaaS and digital marketplaces. I have particular experience and interest in SaaS and marketplaces related to tourism and financial products/services.
John: Tell me about EVP. At what point did you move from an angel investor to a fund manager? Why?
Les: Howard Leibman joined me as a partner in 2015 to handle the workload of a growing portfolio. In the early days we acted as the lead investor on several angel syndicates (eg DesignCrowd & Oneflare) but as our deal flow grew and threw up follow on opportunities, we needed more funds to take advantage of the opportunities. We also needed a bigger team to provide more help to our portfolio companies. There were also tax advantages to setting up as an ESVCLP so we decided to leverage our skills and set up our first public VC Fund.
Unlike most VC fund managers who tend to come from “the big end of town” our backgrounds are from working with smaller, earlier stage businesses. We think this gives us an advantage in being able to pick the winners and mentor them in their journey.
John: How do you mitigate conflicts between your role as a fund manager and your personal investing?
Les: The EVP VC funds have a minimum investment of $500K so they get first option on all deals in which a startup seeks >$500K. Below $500K I continue to angel invest. I am also Chairman of the Investment Committee for the 2 EVP Funds and a material investor in both funds so I have “skin in the game” either way. Having spent much of my career in the conservative world of chartered accountants I have never suggested to anyone that they invest in anything except on the basis that I have first made a big personal investment in it.
John: What are you most excited about right now?
Les: At the EVP level we have just launched capital raising for our $50M+ EVP Fund III. The performance of our portfolio confirms that Covid is accelerating the ongoing adoption of SaaS products and we are very keen to double down on the opportunities this is presenting. For example Shippit is surfing a Corona wave and will imminently raise a B round.
Personally I’m keeping a sharp eye out for startups which have been badly Covid affected but have a good future if they can survive. I hope to save some solid founders with good business models which are fortunate enough to be reliant on transaction based revenues in Covid hit industries.
John: What kind of diligence do you do? How long does it take?
Les: As an angel I usually make a preliminary decision after getting some data and a first meeting. Business “gut instinct” and “people chemistry” come first. The DD usually really serves the purpose of confirming or correcting first impressions.
With EVP, because of our responsibility for 3rd party funds, we always do a deeper DD which includes talking to customers etc. However, being a small and pragmatic team we can still make very fast decisions.
John: Do you syndicate/lead/follow etc?
Les: Both personally as an angel investor, and also from an EVP perspective (ie as VC investors), we like to be the sole investor or the syndicate lead. Given our highly activist style it makes more sense to have a material shareholding. When follow on opportunities in our portfolio companies arise which do not fit into our public funds we will syndicate investors to take advantage of them.
However as our portfolio companies have matured over time we are working with increasing frequency with other VCs. For example, we see AirTree as a potential coinvestor for several of our portfolio companies.
John: What would founders you’ve backed say about you?
Les: Hopefully they would tell you that I am very fair, supportive in practical ways, pragmatic and available.
John: Are you actively involved after investing?
Les: Yes — including a Board seat.
John: What should founders expect of you pre and post investment?
Les: Fairness. Clear communication. Fast and pragmatic decision making.
John: Has Covid19 changed anything about your approach?
Les: No.
John: How can founders best reach you?
Les: Send me an email via les@grandprixcapital.com.au
John: When should they approach you?
Les: When a business has been trading for long enough for me to see that it actually has at least an MVP product in market with arm’s length sales via channels/methods which just might be scalable. In other words they must have evidence of revenue traction. If they don’t have at least a good 1 pager or much better a pitch deck I straight away infer that they are just not putting in the effort.
John: What advice would you give to founders seeking their first angel investment?
Les: Be passionate, be honest, know the detail. Pitching is “sales” so unless you have sales experience practice your pitching with live feedback — preferably record yourself so you can see what you look like.
John: What advice would you give to a first time angel investor?
Les: If you are an amateur then co-invest with someone experienced and attend all the negotiation and DD process. That way you learn for the future and are less likely to make a mistake the first time. Unless you plan to spend a lot of time on your first investment start small so you can spread your bets and learn before going big.
John: What do you know now that you wish you knew when you started angel investing?
Les: I have learned to place relatively more emphasis on Founder personalities and I have a better understanding of the metrics and issues to examine when making investment decisions.
Other stories in The Halo Effect Series include: Matt & Aprill, Rowan and Suse.