Every iconic founder story tells of prevailing over the odds, overcoming difficult circumstances or is a stimulating tale of triumph that inspires new generations of founders. Bill Gates was arrested not once, but twice for driving and speeding without a license, then dropped out of university to start Microsoft. Brian Chesky of Airbnb was deep in credit card debt, had nightmares, sold cereal boxes with Obama's face at Democratic conventions, and was only just accepted into yCombinator. Travis Kalanick lived with his mother and collected unemployment benefits before selling his startup RedSwoosh for $23 million and then going on to found Uber. Mark Zuckerberg dropped out of university, convinced his parents to re-mortgage their house to fund Facebook before receiving angel funding. Jack Ma was an English teacher, rejected for jobs at places like Kentucky Fried Chicken, before becoming a tour guide; meeting Jerry Yang (Yahoo), who gave Jack angel funding to launch Alibaba.
What these entrepreneurs have in common is that they developed survival instincts with strong support from their families. Most of these companies would not exist if it weren't for the tenacity and determination of the founder, despite many obstacles and the voice of reason to "get a steady job." One thing they all have in common is that they didn't listen to that voice and simply give up.
I had a chance to spend the morning talking to one such iconic founder last week, whose story is on that same level of impassioned and extraordinary.
James Carroll, Founder of THOR Photomedicine, the revolutionary UK biotech company conducting research and developing medical lasers in photobiomodulation (PBM).
James Carroll is the founder of THOR Photomedicine, a UK company making a Star Trek style medical laser that accelerates healing. For people who are familiar with the sci-fi series, when a crew member is wounded, the doctor aims a low intensity laser beam at the injury and the tissue heals instantly. Yes they make those, but it is not instant like on TV, but you get the idea, a special kind of light that is applied to the patient and they heal faster.
Doctor Beverly Crusher applies the medical laser for dermal wounds on Commander Riker for accelerated healing in the sci-fi series, Star Trek: The Next Generation (1987-1994)
It is universally agreed by scientists working in this field that this is a medical breakthrough, yet mainstream medicine and the general public are mostly unaware of its existence. The treatment is called PBM Therapy (short for photobiomodulation) though it is also known by dozens of other names such laser biostimulation and Low Level Laser Therapy (LLLT), but now a core group of scientists and the National Library of Medicine have come to some agreement and photobiomodulation (PBM) is here to stay.
PBM Therapy is based on the use of low intensity laser or LED light to accelerate healing and reduce inflammation. It is non-ablative, does not burn nor heat the skin, and works more like photosynthesis in plants, (i.e. where light is used to produce energy so the plant can survive and grow). In PBM Therapy, mitochondria (the cell’s ‘power house’) absorb photons in the red and near infrared spectrum causing an increase in energy, a reduction in stress and improved cellular signaling.
Like all the best scientific breakthroughs, PBM Therapy was an accidental discovery. In 1967, a Hungarian scientist and professor, Endre Mester, wanted to find out if the recently invented ‘laser ray’ might cause cancer. He shaved hair from the backs of mice, divided them into two groups, applied low intensity laser beams to the skin of one group of mice to see if they would develop cancer. They didn’t. To his surprise, the hair grew back more quickly in the laser group, so he called this effect ‘laser biostimulation’. Since then over 4000 laboratory experiments have since been published, and over 500 clinical trials published showing that PBM therapy improves the speed and quality of tissue repair (e.g. skin, bones, nerves, the brain, spinal cord, eyes), reduces inflammation and induces analgesia.
Hungarian scientist and Professor Endre Mester is considered the Father of Photobiomodulation. He first experimented with photobiomodulation (PBM) on mice in 1967.
Researchers around the world have brought it into academic prominence, with several hundred papers a year published every year on this topic by well known research groups that include the US military, NASA and Harvard Medical School, yet it remains a secret from most medical doctors. James Carroll seems to be on track to change that.
James Carroll, Founder of THOR Photomedicine, speaking at the United Nations headquarters on May 6, 2014. Watch video here.
Like many founders before him, James had to overcome many obstacles, and like many companies THOR did not proceed along a predictable path. He struggled at school with undiagnosed dyslexia and left in 1978 at the age of 16 with a handful of low grades. Despite failure at school he talked his way into an apprenticeship in electronics at Audix (a public address and broadcast systems company), attended college one day a week but failed his exams. He took the year again and failed again! Despite this, James rose rapidly through the company thanks to a couple of mentors. “Mac", a former soldier with high standards was tough on James, requiring his work to meet military specifications. Later, John Freeman the company’s Technical Director adopted James as his protégé and had him lead a series of ‘revolutions’ within the company; implementing ISO standards in design, developing new production control processes, and eventually creating a technical support role within the sales department. Little did James know it, but this was the beginning of a substantial training in how to run a future biotech and medical devices company.
"The Rocketts". James Carroll is pictured in the center with bandmates Gavin (left) and Simon (right),
aged 13. Later they would go on to become BBC's Young Entertainers of the Year in 1976.
James left the company in 1984 for his first entrepreneurial venture when he convinced a friend to make him 50% co-owner of a sports and classic car restoration business. This is where James discovered one of his ‘superpowers’ - an ability to rewire vintage cars without an electrical circuit diagram. James also recalled in our chat together that in his earlier life he had the ability to play almost any musical instrument by ear. As a teenager he and two friends formed a band and became BBC Young Entertainers of the Year 1976.
"If you told me then that I would eventually become founder of a medical laser company and publish 30 academic medical papers, and that nine of them would be with Harvard Medical School, I wouldn't have believed you." -James Carroll, Founder of THOR Photomedicine
However, just as the car restoration company was taking off, there had been a fire. An employee was draining a fuel tank when suddenly it burst into flames. Before long, seven cars were on fire, along with the employee who had been covered in fuel; James smothered the employee in flames with the dust sheet from a car and they escaped around the back before the acetylene bottles exploded. They were underinsured and everything was lost, so it was back to electronics where James took on a job as production manager at a transformer manufacturing company. Here, he introduced computer driven test procedures by teaching himself how to connect an Apple III to test equipment via RS232 ports and wrote programs in Apple Basic to perform the tasks.
Back in the industry, he learned that making money for shareholders was important skill, and that quality or profit necessarily need not be compromised; both could be achieved, and that these goals could be symbiotic. The transformer company performed well and the owners accepted an offer for the business. James received his next piece of advice from a mentor, “you will never make much money just by being an engineer, you need to learn how to be a salesman”.
With a new suit and some grooming from a recruitment agency James discovered his next ‘superpower’. At the interview, the recruiters noticed James had moments of energy and enthusiasm that they found infectious. James had always been shy and self-conscious (and still consider himself as such). Being an inspiring introvert is an awkward superpower to have, but James managed to turn on the enthusiasm for a Pitney Bowes sales team interview; he got the job and underwent the renowned company sales training. Eighteen months later, in 1987, with a bit of sales experience behind him, James left Pitney Bowes and bought a franchise with a friend to sell government grant consultancy. One of their first clients was a medical device company that made lasers which healed wounds more quickly. At the time, all the UK research was based on lab rat studies, but clinical cases from Eastern Europe, showed its effectiveness on humans and James realised that this would become the future of medicine and had a vision of this treatment being used in every department of every hospital in the world.
The Royal Highness Princess Zara Phillips using a Thor laser device on one of her horses. She is one of the dedicated clients of THOR Photomedicine.
This was an opportunity too good to miss, so he abandoned the government grant franchise and talked his way into the laser company. However, that business struggled and failed in 1991, so he and two of the engineers founded THOR Electro-Optics Ltd to develop their own products. Within a year this was closed, due to lawsuits for claimed copyright and patent infringement by the people who purchased the assets from the previous business. James and his wife were also being personally sued and as potential personal bankruptcy became imminent, they became eligible for “Legal Aid” and the plaintiffs withdrew their legal suit. THOR was restarted and the next chapter of the resurrection of the company began.
With no previous medical industry experience, progress was more than any of the three partners had imagined. James was making enough sales to make a comfortable living and things were going OK. Then about ten years later the US Navy purchased a THOR laser to experiment on nerve regeneration. This became a spinal cord regeneration project and James attended a conference where other research groups showed that PBM therapy reduced infarct size after a heart attack, and improved neurological deficits in rats following a stroke.
Manchester United is one of many high profile clients of THOR Photomedicine.
James was aware of laser for healing wounds and sports injuries but this was something else. Seeing where this was going, James went to his partners saying they should write a plan and raise capital because this was going to be big. His partners objected, telling him that VCs would take over the company and fire the founders and “probably bankrupt the business anyway”. (See my previous blog post on Why Founders Get Fired From Their Own Companies) Eventually, James persuaded them, they raised £650K ($1M) in angel money and loans but investors decided that a "more experienced" CEO should run the business. As predicted, the new CEO fired the two of the founders, (tried, but failed to remove James), and, 18 months later, in October 2007 the angel money was all spent and THOR went bankrupt owing £1M to creditors.
James decided to start the business again, for the third time, but by himself. He bought the assets from the liquidator with a mix of cash and profit share over 3 years and set a target date of 1st January 2008 to relaunch. He secured a £100,000 line of credit which he used to keep the keys to the building, the lights turned on, the web site running, and the staff from finding other jobs . Everything was a negotiation, old suppliers need to be persuaded to deliver, telecoms reconnected, FDA approval and CE marks needed transferring, all by 1st January 2008.
The US Navy acquired a previous generation THOR laser in the early 2000s, and discovered its effectiveness on spinal cord regeneration.
THOR was back in business as THOR Photomedicine Ltd, but the global economy was imploding. It wasn't the ideal time to restart and attempt to bootstrap a company, especially given the failure during good times in the previous two years. Every month that went by it looked like they would never make monthly payroll; but every month, the sales were dragged in, products somehow built and, if the UPS bills were paid, they could ship. “It was a white knuckle ride for all of us, every day,” says James, “the faith, resilience and resourcefulness of everyone in the company was tested many times over those years, but nobody buckled”.
As founder and CEO, the most important job is looking after relationships; staff, suppliers and customers. This is a mixture of honest updates and constantly restating the mission and vision:
James tells me: “Everyone was clear that we were here to heal tissues and relieve pain, and that we were going to put a PBM system in every department in every hospital in the whole world (somehow). Napoleon was reputed to have said, the job of a leader is to define reality and give hope. Sometimes the reality was that we had run out of cash, but there was always another reality; we were owed money which we would collect (somehow), and we always had prospects close to ordering, so we borrowed my wife’s tax savings. People needed our lasers, I would say, they just did not know it yet. These were the realities I would talk about, and it gave everyone (including myself) a reason to be hopeful. Back then, and even to this day, everyone in the company gets a Monday morning email report on sales and cash (our sales department gets this every day, including weekends!”
“Kicking off in a global recession, with our suppliers owed £1M and just £100K to get us started felt like a high wire act with no safety net, but what else was I going to do? A life not working on my mission was not an option for me.”- James Carroll, Founder of THOR Photomedicine
In the first year, the company made revenues of just £500K- not enough to be viable; but each year they gained an extra £200K in sales until 2015, when sales jumped from £1.5M to £2.4M. Now Thor is on target to more than double that in 2016, which should put them over £5M in sales. (10x its 2008 figure).
THOR now has many prestigious clients including Harvard Medical School, US Navy, Royal Air Force, British Army, Manchester United and even her Royal Highness Zara Phillips (gold medal winner and granddaughter to Queen Elizabeth ll).
The biggest purchase to-date has been from Nike. They recently ordered a whole body light pod called NovoThor to help Nike-sponsored athletes improve muscle power, reduce fatigue and accelerate recovery after training.
Nike recently acquired the whole body light pod NovoThor to use on their athletes to train for the Olympics.
PBM Therapy is best known for treatment of musculoskeletal conditions (e.g. back pain, neck pain, tendinopathies, osteoarthritis, ankle sprains). Interestingly, the treatment with the most evidence is a side effect of chemotherapy and radiotherapy called oral mucositis, a condition where cancer patients lose mucosal tissues (lining of the mouth, throat and esophagus) leading to such severe ulceration and pain such that that patients cannot eat, frequently having to be fed by tube). There are now 32 randomised controlled trials that show that PBM therapy is effective at preventing or significantly reducing these side effects.
Other diseases James and his academic friends are collaborating on include traumatic brain injury (e.g. concussion), reducing infarct size dramatically after a heart attack, treatment of non-healing wounds (e.g. venous ulcers, diabetic ulcers and pressure sores) and various forms of severe nerve pain (e.g. burning mouth syndrome, shingles and post hepatic neuralgia), depression and cognitive enhancement (i.e. speed and accuracy in memory tests of healthy students).
I asked James what the most impressive research he has come across so far and the answer was unequivocally: dry age-related macular degeneration (AMD). James maintains a biblical collection of medical research on PBM Therapy going back to the 1960s and even has built a personal search engine, which he has nicknamed "Thorgle". He told me of published studies showing that his lasers were was able to stimulate the production of stem cells simply by treating bone marrow with light. Theses extra stem cells had significant effect on infarctions of the heart (heart attack), and is a potential treatment for traumatic brain injury, ischemic infarctions (stroke) and Alzheimer's disease.
James Carroll has created his own private personal search engine with extensive research on photobiomodulation that goes back to the 1960s.
Although there has been a few literature reviews dismissing PBM Therapy as being ineffective, this has more to do with the authors lack of knowledge about dosing. The optimal treatment parameters (i.e. wavelength, irradiance, interval, time, pulses and location) for effective treatment are not always adequately understood. Sometimes less is more; just like photosynthesis, plants need a period of darkness to release carbon dioxide. In a similar way, the body needs a period of downtime to let the activation of mitochondria, stem cells and white blood cells do its work after PBM therapy. The PBM dose response is dependent on the density of the light and the dose rate. Too little, and there is no effect, but too much can be inhibitory. This has become James’s area of academic expertise and why he is included on so many research papers despite his leaving school at 16 with a handful of low grades.
James is obsessive about treatment parameters so not surprisingly THOR also makes range of laboratory systems called BioTHOR.com specifically for universities to accurately experiment all the treatment dimensions and dose (i.e. wavelength, power, area, timed various pulse regimes). James says this is the Formula 1 racing department: "Like Mercedes, Ferrari and Renault, we use development of extremely accurate laboratory equipment to inform our next generation of clinical products."
James is also co-founder of another photobiomodulation (PBM) company Lumithera Inc., which is angel-backed. “This is a patented treatment for the leading cause of blindness in the developed world, (dry age related macular degeneration),” he says, “millions of Americans are going blind with this disease and nothing else works on on it. Lumithera have treatment data on over 100 eyes, some with one year follow-up data showing patients have sustained clinically meaningful improvements in visual acuity. We also have OCT scans on 43 eyes with that show a reduction in the presence of the fatty deposits (Drusens) which are the hallmark signs of this pathology." ISO certificates have been awarded, clinical instruments design is complete and placebo controlled clinical trials are in progress. LumiThera is closing its series A financing round and the company plans to launch its Series B financing round in August.
Acorn Computers, founded in 1978, was a revolutionary UK computer corporation that once rivaled Apple, but failed to scale globally after being acquired by Morgan Stanley in 1999.
There have been many UK corporations in its history that have failed to scale after a period of tremendous growth (e.g. Acorn Computers in the 1970s-1980s); however, with James as the captain and CEO of THOR Photomedicine, I feel that he has the right vision and competence for this early stage technology which has potential for a £multi-billion revenues (whilst improving lives and potentially saving the NHS and international healthcare markets billions too). As a Harvard professor put it, “James is the world's leading ambassador for photobiomodulation,” and I think could put the UK back on the map of global iconic companies.
THOR Photomedicine is still 100% owned by James Carroll. His goal is to have photobiomodulation (PBM) therapy established as a part of standard care for 100 diseases in 100 countries by the time he is 100 years old (7th May 2062). The first will be with Lumithera for dry age macular degeneration (AMD), then oral mucositis in cancer patients. There is a long list of options for No 3. In the near future, we might even all have a THOR laser device in our first aid kit in the form of a light emitting bandage.
By Sierra Choi
I was talking to a founder friend of mine this past week, whose company is based in London, and he told me that since the days of Margaret Thatcher, the U.K. had been in the mindset of thinking they are really an extension of the U.S., as opposed to its progenitor. This certainly wasn't helped by former PM Tony Blair who had been affectionately known as former President Bush's lapdog in all events leading up to the Iraq War. I remember this time in the U.K. quite vividly, because I was doing my M.A. degree in London and wondering how in the world could Mr. Blair support an unsubstantiated war? I asked my founder friend if he thought it would be possible if the U.K. can reclaim its identity post-Blair? Why does the U.K. not have its own search engine, social network and eCommerce site? Where is the UK's Google, Facebook and Amazon?
According to the Office of National Statistics in the UK, there were around 924,000 unemployed men and 766,000 unemployed women from Oct to Dec of last year with 6.18 million women working part-time and 2.25 million men working part-time.
19 million people aged 16 and over are not in the labour force.
10.12 million people in the UK are either working part-time or unemployed.
Currently, Britain has a population around 64 million. This means that currently 35.9% of Britain's population is working full-time (23 million people).
This is interesting for many reasons because I think one of the longer-term goals of any startup should be to create jobs for people in its community. Although one of former PM David Cameron's legacy had been reduce overall employment, there is still a large segment of the population that remains unemployed, underemployed or simply not in the workforce- whether or not that is by choice.
Fifteen years ago, in 2001, Prince Charles set up a non-profit that acts as a kind of accelerator for people in their 50s+ to start businesses via the Prince's Initiative for Mature Enterprise (PRIME Cymru) in order to battle employment challenges for people aged 50+. I wrote in a previous post that although in the media there is the cult of the young entrepreneur, that it is actually people in their 50s who start the most amount of businesses in both the United States and in the U.K.
There could be a myriad of socioeconomic and psychological reasons for why this happens.
For instance, in other nations such as South Korea, many people save up money from their jobs or careers then decide to open up a business after they have gained enough funds to do so and a great percentage of this population tends to be female. Many women in South Korea aged 60+ use their lifetime savings to open up a coffee shop franchise which is one of the reasons why Caffe Bene became more popular and ubiquitous than Starbucks (which is owned by the Shinsegae group in South Korea) in the region. I also know a few people who had high profile jobs on Wall Street who decided to open restaurants in San Francisco, New York City and Seoul. In fact, I surmise that for many people who had extensive experience in the financial districts, this is the number one thing on their to-do list after they "serve time" on Wall Street.
Starbucks is owned by the Shinsegae Group in South Korea, which is one of the many reasons for Starbuck's decline in the nation as opposed to other cafés such as Caffe Bene, which is franchised by individual owners. The Shinsegae Group is one of the few elite Korean chaebols- corporations that have a Godfather-like presence in their population that can have the power to suppress foreign companies from entering the country or crushing budding small businesses and startups.
In a parallel trajectory, many women and men aged 50+ are starting businesses in the U.S. and the U.K. Having been the child of working class parents who were workaholics, I have personally witnessed the trials and tribulations my parents had faced starting multiple businesses; their successes and failures, and they had never received help from any group nor organisation. I can safely say that in the U.S., small business owners are often the most overlooked segment of the population, who are taxed the most, and collectively contribute to their communities more than any single corporation.
California is the state with the highest percentage of supplemental poverty in the United States.
In the top 500 corporations in the United States, the way to traditionally avoid their civic duties has been through the legal methodology of tax avoidance. Google (now Alphabet), Facebook, AT&T et al have all been incorporated in Delaware, despite having nothing to do with the Delaware community, and then become comfortably headquartered in California, where the income imbalance has created a landscape in which an annual $75K salary in San Francisco is now considered in the poverty range, pushing many residents towards homelessness and poverty. In fact, out of all 51 states, California has the highest percentage of supplemental poverty at an astounding 23.8%, followed closely by the District of Columbia (Washington D.C.) at 22.7%. Not ironically, these are also the states with cities with the most amount of gang violence. In fact, despite the happy-go-lucky facade of Hollywood; Los Angeles, CA is only second to Washington, D.C, as the murder capital of the United States. San Francisco doesn't make this list, simply because of its small size of 121.4 km² compared to Los Angeles 1,302 km², but in this SF region of approximately 46.9 square miles, there probably is more economic disparity there than in parts of South Africa.
However, there are a handful of companies that are actually incorporated in the state in which they have their headquarters, such as Apple and Cisco, which are both incorporated in California, and Microsoft, which had been incorporated in Washington State (note: Microsoft was incorporated in Washington State in 1981, reincorporated in Delaware in 1986, and then finally reincorporated back to Washington State in 1993) that have a sense of duty to their communities and I think that is something to take in consideration when a startup goes through the process of incorporation; just because everyone else is doing it, and incorporating in Delaware, or moving from U.K. headquarters to the U.S., doesn't mean you have to.
British actress Emma Watson was implicated in the Panama Papers, for legally looping through tax havens to avoid paying more tax in the U.K.
Although Apple has been criticised by Europe for sheltering money in the British Virgin Islands, as many other multi-national corporations, including prominent U.K. individuals as well, such as the actress Emma Watson, who were exposed in the Panama Papers, I think former Chancellor George Osborne's proposed tax law of making Britain competitive in corporate tax by lowering to 15% would be able to address a lot of the tax-avoidance behaviours of many corporations. Certainly his proposed tax regime has raised a lot of angry voices in the E.U. where there has been a dialogue of "who can make a bargain towards the lowest"; I think that corporations that choose to be incorporated in London, as their European headquarters (although not paying 0% tax as in the British Virgin Islands) would be more motivated towards social reform, if the U.K. makes it attractive for companies to be headquartered in London as opposed to elsewhere. Currently, as of 2015, London already has in place a 230% tax refund for startups and small medium businesses (ie, SME: less than 500 staff, less than €100 million turnover & less than €86 million gross balance sheet assets) and a 150% tax credit for R&D expenditure, but lowering overall corporate taxes will certainly be more attractive for large, multi-national corporations.
What does this mean? It means that if you are a startup or business with less than 500 people with less than €100 million turnover & less than €86 million gross balance sheet assets, that the U.K government will pay you to incorporate and start your business anywhere in Great Britain.
Although there have been some corporations, such as Google, who has been taking advantage of this scheme by legally setting up small subsidiaries in London as separate entities within all their departments, creating the illusion that they are a cluster of small and medium sized businesses instead of a large corporation. These kinds of actions by corporations damage the ecosystem of small businesses by taking away funds from which they were intended. However, I think overall, the government under David Cameron and George Osborne has provided enormous support to small and medium sized businesses in the UK so that the majority of UK startups do not feel a need to incorporate in the British Virgin Islands or Delaware, United States as tax havens.
But what about job creation? One of the arguments of the Brexit camp was to limit the amount of migration so that U.K. businesses will have the best choice in talent acquisition. This is certainly a plus for people outside the E.U. who were previously behind the queue after E.U. residents for job visas. However, as I mentioned before, I think it's important in the overall education of the entrepreneur that wherever he or she will be headquartered that it is in their prime directive to create jobs within their own community.
Whereas London has created a wealth of jobs in the past 6 years, I think it is important to keep in mind that the people in the U.K. should not be dismissed as not being talented enough to be part of a startup or new business venture. Once a kind of technocratic elitism takes over, the result has been blinding social and economic inequalities that often lead to violent crimes, as witnessed in California, where Silicon Valley and Hollywood are headquartered as the tech and entertainment capital of the U.S. It isn't about a few people receiving pay into the millions whilst the rest suffer in poverty- and the excuse is, well, the few people receiving pay into the millions "earned" it. As a startup entrepreneur, I think it is necessary that we must also think about how we can also symbiotically create wealth in the community and eradicating poverty, and most often that is the most effective in R&D spending and talent training. Bottom line: we need to invest in people.
It is true, immigrants work hard, work longer hours than anyone else in order to become financially successful and often bring an unique mindset to solving problems in which the rest of the population have simply accepted as fate. Immigrants start the most amount of businesses in the U.S., and they often start the leading corporations that will become iconic into the next generation. However, I also think that it is in the long-term interests of any company to take time to train their employees and to create stable jobs for people in their own region as opposed to the practices by some U.S. on-demand companies to exploit their own population for cheap labour (eg, Uber et al).
For startups headquartered in London, I think it is important to ask, "how can we create 100K or even 1 million jobs for people in the U.K.?" This will require capital and investment in people, training people, allowing the 50%+ of U.K. citizens who wish to have a full-time job, but find they are "outsourced" to positions abroad or face a lifetime of prejudice and ageism. This sort of thinking, this "siliconism" or "siliconization" of the privileged technocracy has lead to great economic disparity in the United States, but it doesn't have to be this way in the U.K. Simply put, we need to invest in people, and not constantly date around for the next best thing and going on a Donald Trump's-The-Apprentice-style firing spree.
Queen Victoria was the ultimate Philosopher Queen and in her 63 year reign lead many social and political reforms including the Education Act (1870) which allowed all children to be educated to The Public Health Act (1875) to the Trade Union Acts (1871, 1876), and the Reform Acts (1867, 1884) which broadened suffrage for women. She also launched a national museum, created alliances with many nations and broadened Britain's political influence.
It is in every startup Founder's interest to become a Philosopher King or Queen in the tradition of Plato whilst keeping a Confucius eye of events. Are we going to leave people in a better position than we found them, or will be become like Silicon Valley, and create an unsustainable wealth divide that leads to massive statewide poverty?
This is not a question for only the Founders in Britain and the E.U. to consider, but for Founders in every state and nation.
By Sierra Choi
(Note: a family of 4 with an income of $75K (£57K) in San Francisco is considered in the poverty range)
In Sept 2012, we wrote an article called “Patterns, Predictions and Profits: the Powerful Case for African Private Equity” - White Lake Group's macro investment thesis at that time for Africa. The title speaks for itself - investment professionals always have a view – and we were pounding the table in support of African PE, albeit with some risk caveats.
Let’s assume at that time we “bought” African PE as a long-term investment. Would it have been a good deal? When I was a stock market equity analyst or even as a PE investor, the process was first of all in the form of an investment thesis, which is essentially a set of assumptions based on which triggers are pulled.Then as time unfolded, we monitor (in the case of listed equities) to see if they come true (in the case of PE you try and control what you can, to make the assumptions come true). In this article however, I will re-analyze the assumptions we made then, to see if they have proved true and restate how I feel on African PE now as well as its opportunities and challenges.
Am I up or down and will I Buy, Sell or Hold my African PE position assumed bought in Sept 2012?
Of course there was not and still isn't a PE index for Africa that I could buy over the counter. A full study would need to be done on every PE fund of that vintage in Africa to ascertain returns to date. Perhaps Cambridge Associates or Harbourvest can help out here. My belief from looking at 4 funds I know reasonably well, is cash on cash it would be still down or neutral at best (mainly due to the stage in the cycle (just at the end of investment period) - only a couple of exits and on the flip side also some write-offs, with unrealized returns looking better than that. However I always take unrealized returns with a pinch of salt. Adjusting this to the currency weakness effects of a dollar denominated fund and I would say I am down or barely breaking even. So let’s say we are neutral to 10% up – which based on an expected risk-adjusted IRR expectation for African PE of 30-40% is not where we need to be. The cash generative side of the PE cycle should be just ahead though.
However now what to do - Buy, Sell or Hold? (Theoretically of course, as PE is so illiquid and the secondary market always heavily discounted).
Let’s examine our original macro investment thesis to see if it has come true and continues to be true.
The Macro Opportunities as of 2012:
1. Commodity boom – Continued high prices of oil and precious minerals sourced in Africa bringing continued revenue to these countries.
Were we right or wrong?
WRONG – On two fronts actually. First, oil has crashed from over $90 a barrel in 2012 to $49 as of today and this is after a current two-month rally from $35. This has put the economies and currencies of oil exporters like Nigeria (fifth largest exporter in the world), Algeria and Angola under serious pressure. Palladium and platinum which are mined almost exclusively in Africa have dropped an average of 32% over the four-year period. So Government revenues from commodity sales taxation which could have been used for badly needed infrastructure projects in Africa are falling away, not to mention the associated jobs from the marginal cost producers.
On the second front – even before the price drop –, Nigeria, that being the country population as a whole, was not benefiting from the oil funds glut. Yes the richest few and the corrupt were, however taking Norway as an example where oil funds are collected by the Government and invested for the good of the country as a whole – Nigeria is a long way from this ideal.
In short the earnings gap in emerging markets, due to lower priced soft and hard commodities, has not been offset by an increase in spending from the western world, even as they experience more spending power due to this same price drop.
2. Economic growth will keep ahead of the rest of the world.
Were we right or wrong?
NEUTRAL – It turns out that the target set for Africa to beat by the rest of the world over the past 4 years (which they duly did) was quite modest, outside of China (which has now also started slowing). However over the past 12 months there have been alarm bells on African growth. Declining commodity prices and economic difficulties in China, Africa's key trading partner, are driving down African economic growth. The International Monetary Fund (IMF) was forced to revise downwards its growth forecasts for Africa twice in 2015.
Add to that now - some other new macro speed-bumps:
However, with that said, African growth outlook (IMF set 2016 prediction at 3.5%) is still brighter than for most of the developed world (1.5-2%).
3. A continued and improving stable environment for business and growth in Africa.
Were we right or wrong?
RIGHT – With some caveats. Since 2012 some elections have thankfully passed with minimal violence, most recently Uganda where Museveni prevailed, albeit with grave doubts as to the absolute fairness of the election. To say that Governments in Africa are approaching the transparency level of the western world is still a stretch. Every day here in Kenya the man in the street bemoans the corruption of the Government of the day. We had violent protests on election reform with deaths only last week. So the improvement has stabilized and consolidated but is not continuing at the pace set at the beginning of the decade from what I can see. Old habits die hard. Though we have always maintained that this risk can largely be managed.
4. A growing middle class in Africa will be a consumer product companies dream.
Were we right or wrong?
NEUTRAL to WRONG – it’s all relative as it turns out. So is the growing middle class thesis proving true?
In 2011 a paper from the African Development Bank Group (AfDB) found that the number of middle-class Africans had tripled over the space of three decades to 313m. This study defined the group as those with a daily of consumption $2-$20. However reading the study more closely revealed that 60% of the so-called middle class went into a category of individuals with a consumption level of $2-$4 per day. Hardly a group that has much discretionary spending power.
Then last September, Standard Bank examined the middle class of 11 countries that make up >50% of sub-Saharan GDP finding that the middle class in these countries was just 15m people. Adding to this information nuggets such Barclays pulling out of Africa and Nestle shedding 15% of its African workforce in June 2015.
My own ‘on the ground’ evidence here in Kenya would at first glance give credence to the theory that the middle class growth is true. I shop in a local store where milk or cheese cost more than a store in London. There are western style malls popping up all over Nairobi and the roads are jammed full of expensive SUVs. However I have to balance that against the fact that I run a team of 14 well educated accountants who earn per month at the lowest level a fraction of what their European counterparts earn. These workers are in the middle class as defined by AfDB however I know they do not shop regularly in these malls or buy these products. These malls are supported mainly by the elite of Kenyan society and expats.
So yes discretionary spending is rising in Africa however we are still a long way from what would be considered a western world middle class discretionary spending power.
5. Shift towards urbanization driving consumerism and thus economic growth
Were we right or wrong?
RIGHT – However this is not necessarily a good thing. Cities in Africa continue to expand, slums expand, consumerism rises and traffic continues to worsen. From the Asian experience urbanization means people live longer, have fewer children and consume more discretionary goods – pushing economic growth. In a decade the population of Nairobi has gone from 2 million to 4 million people. If the Government can manage the social issues of urbanization (youth unemployment, slum proliferation, increased crime), the scene will be set for increased economic growth. The jury is still out on whether urbanization will be a good thing for Africa.
6. Communication improvement – proliferation of the mobile phone will lead to increased economic activity
Were we right or wrong?
RIGHT – Unprecedented growth. For example in Kenya, Safaricom 3G covers 80% of the country with pans afoot now to roll out 4G. A bigger factor is the rise of MPESA - more on that below. This rise is one of the fundamental reasons that the African economies will continue to improve despite all the headwinds.
The following were the risks we pointed out in 2012 and a review of where they now stand:
Factors which had a huge positive impact which we did not foresee in 2012, and are still proving to be a tailwind for African PE:
M-Pesa proliferation – this has become a pseudo banking and saving system allowing greater commerce for many Africans. Trade has increased greatly because of this.
New technologies developed in Africa now can take over the world. What natural advantages has allowed a country like Kenya to compete in technology development?
Actually it is more pertinent to ask – what natural disadvantages has given Kenyan entrepreneurs the need and drive to develop their own business models and technologies not seen anywhere else in the world? What problems do Africans have, to induce such technology advancements that can then be applied to the rest of the world?
Here are some examples where a geographically specific disadvantage is leading to technological innovation.
Conclusion – Buy, Sell or Hold?
Hold and selectively add. Be patient. Mitigate those risks where you can. Support your management teams strongly.
I would continue to Hold African PE from my Buy in 2012. Theoretically, I am just about breaking even – having bought the market at that time, not deal picked and in places I am feeling some real pain. Of course the currency depreciation from the Kenyan shilling to the dollar is punishing.
However, with quality fund managers who really work on plugging management weaknesses in their portfolio companies (middle management is the key weak area which can make a difference), drive strong governance, controls and process disciplines into cash management and growth – the future is still bright. I would selectively add in areas – a few tech VC plays and middle market buyouts (large cap is crowded with only so many deals for Actis, KKR etc to chase and drive prices) and add a sprinkling of debt/mezz deals with strong protections. East African would be my geography of choice. In summary African private equity continues to ripen slowly. The challenge for funds will be to see which can win the available quality deals without overpaying, and which can take the diamonds in the rough and make them shine.
By John Rowland
John is currently in Kenya as a consultant CFO for Bridge International Academies and Managing Partner of the White Lake Group.
In the near future, it is possible that there will be a ratio of 1:1 for the euro and sterling. Although this has negative consequences for Britons and Europeans whose money won't stretch as far as it previously did; this however, has positive consequences for UK and European eCommerce companies that want to expand their outreach to demographics that are now buying from these companies due to the favourable exchange rates stemming from the lower sterling and euro.
The euro has been steadily rising against the British pound post-Brexit and is following a similar pattern to Jan 2009, and there is a possibility that a near 1:1 ratio of the currencies might be in the foreseeable near future, if the EUR/GBP recaptures the 0.86-0.88 level.
With the Bank of England's plans to cut interest rates within the month, this will further project the possible likelihood that the FTSE will reach new highs into 2017-2018. Mark Carney, the Governor of Bank of England joked that currently we have an "economic Brexit post-traumatic stress disorder."
One of the advantages of a lower sterling is a stronger GDP. With announcements of interest rate cuts and lower corporation taxes, the FTSE has barely blinked an eye and is business-as-usual, potentially moving into new highs by Oct 2017-Feb 2018.
However, despite the sterling taking a steep fall, this will be mainly beneficial for many UK companies and industries, particularly in eCommerce and hospitality. Just as news of Brexit hit, the UK-based Asos site was down due to the heavy volume of traffic it had from customers around the globe who were taking advantage of the lower sterling. South Korean shoppers tweeted, "“Now is the perfect time to shop directly from the UK due to the falling pound, though things may change tomorrow." The sales of European goods were said tohave doubled via the China-based eCommerce site ymaou.com after the U.K. referendum. The steep fall in sterling is attracting more online shoppers to shift from Japanese and Korean products to British ones. In addition, more tourists are projected to flock to the U.K. to shop for luxury items. U.S. shoppers, writers and analysts have dubbed the U.K. referendum, "Brexit Sales!"
It is also up to the next Prime Minister to ensure that the U.K. still has access to the single E.U. market to prevent an interruption of overseas investment and retain its position as the number one destination for foreign direct investment (FDI) in Europe. Currently, the top five nations to invest in the U.K. are the U.S., France, India, China and Japan.
To counteract the potential fallout from businesses that might now be apprehensive about investing into the U.K., in an unprecedented move, Chancellor George Osborne also recently announced plans to cut corporation taxes to less than 15 percent from 20 percent to stimulate Britain's competitive economy.
What does this mean? It means that the lower sterling will potentially raise the overall GDP of Britain. Although it is uncertain for how long the British pound will drop, this is an ideal time for UK eCommerce startups to launch their international marketing strategies and further capture the U.S. and Asian demographics. Despite the next Prime Minister having a lot of burden on her shoulders, London is strategically still the best place to launch a startup.
By Sierra Choi
[Disclaimer: This post is not intended as any FX nor stock market advice and is for educational purposes only.]