WHAT’S the biggest mistake you’ve ever made? A tough question perhaps? Mine is simple – it cost me about thirty five million pounds.
One lovely morning in 2001, I watched the stock market prices on my screen. This was no ordinary day; shares in a startup I had backed just two years earlier were “listed” for the first time, and were being bought and sold on the open market. I was thrilled and proud: the traded share price valued the company, ARC International, at over £1bn. Fantastic, I thought, one of my companies had hit the big time! After earlier successive fund raisings to fuel rapid growth, I only owned 4 per cent, but this was still worth a staggering £40m, a 10 times return on my investment.
ARC designed microprocessors, also known as semiconductors or chips. As usual, my interest had been sparked by the quality of the management, and I was impressed by their tech guru, Jez San, who is a brilliant and lovely guy. To me, ARC also had an obvious road map, as there was another UK company, ARM Holdings, which had done phenomenally well in a similar sector. All we had to do was follow ARM’s yellow brick road. With the healthy share price on the screen, it was clear the City agreed.
Despite this, my intention was not long term. I wanted to sell my shares and to move on to other startups. Not very romantic, but if you back a lot of startups you need to take some good exits when they appear.
There was a problem, however. I couldn’t cash my £40m. Prior to the market listing I had signed a “lock-in agreement”, where I agreed not to sell any shares for six months. Why would I sign such a deal? Partly because the City wanted me to demonstrate a commitment to the company. They don’t always find it reassuring if the early backers head for the door too quickly. But I could have resisted. I signed it mainly because I thought, “It’s only for six months. Nothing can really happen in six months.” How wrong I was! Signing it was the biggest blunder I have ever made.
It seemed only days after ARC’s listing that the “tech wreck” began. Technology companies that had been the darlings of the daring suddenly became the demons of the desperate. Almost overnight, no one wanted to own companies that were loss making, and no one believed in any pots of gold at the end of the tech rainbow. ARC’s share price fell just about every day for the next six months. It was like Ernest Hemingway’s pack of sharks, eating the old man’s prize catch before he could get it onto the fishing boat: the market ate my wealth by about half a million pounds a day.
How did I feel at the time? You don’t truly know people until you see how they treat their underlings; you don’t truly know yourself until you’ve been under constant pressure. I realise now I was very stressed. I kept ruminating over why I’d signed the silly lock-in. Like a typical man, I didn’t talk about it to anyone. I wasn’t sleeping well, I was moody and irritable, and I was difficult to get on with. I found it hard to get too interested in other things in life. I played speed chess on the internet for hours on end as a means of escape.
Don’t feel sorry for me. I just lost money on paper, as I eventually sold out for a small profit. And a few years later, another chip company I had returned about fifteen times my investment. That time, I refused to sign a lock-in.
Richard Farleigh has operated as a business angel for many years, backing more early-stage companies than anyone else in the UK.