For the latest Smart Cookies Breakfast Club,  Tim Morgan (founder of SouthWesternVC) answered audience questions relating to investing in startups.

Tim Morgan is the founder of SouthWestern VC. He is an investor in and advisor to early-stage tech startups including Teller, Neuro AI, Penfold, Tickitto and MyNestBox. He is a board member at YLD and investor in residence at SetSquared Bath.

Prior to this Tim founded London and New York based startup studio Mint Digital and exited tech startups Picklive and Stickygram. Prior to Mint, Tim worked in M&A. He has sold companies (including his own) for more than £150m.

You can watch the replay below or read on for a summary.

Q1: Are there notable differences between a Business Angel and a VC Investor?

Tim’s answer: “So theoretically, there is no difference between me and a business angel. You could say that. Whereas, there is a difference between business angels and venture capitalists. The big difference is, is that venture capital fund has a 10 or 12-year lifespan normally.

So they’ve raised money with a promise to deploy an amount of capital over a fixed timeframe with various terms attached. So they might say, ‘We’ve raised £100 million fund and we’re going to write £10 million checks into health tech startups at the Series B level, and we’re going to do one a year for 10 years.’

The cadence of them is a lot more frequent than that but that will give you an idea of the rules of a venture capital fund. And in return, the managers will take a fee of, say, 2% of 100 million. So they might take £2 million a year to manage that fund. The reason I say it’s professional, is that once that money is raised, that is the purpose of that fund.

It doesn’t have any other things going on. Whereas, a business angel or somebody like me, there is no requirement to deploy capital. If I didn’t see a good investment for 20 years, then I don’t invest any money for 20 years.

So angel investors, generally, hop in and out of it. It’s an interesting point though because you do get more… Business angels, as you can imagine, you have the complete range of people in there, in so much as, some of them are making their first investment, some of them only invest in people that they already know. Some of them are much closer to a venture capitalist, i.e. even if it’s not a legal requirement to deploy capital, there is some mindset, where they’re thinking, “Right, I’m going to be really a professional investor and I’m going to invest money every three months into tech startups.”

So there is a difference between angels and venture capital funds. The angels themselves can be a lot more erratic. So even though venture capital funds themselves can be very different, Angels can be really, really different.

So you meet someone that says, “My friend, Sally, is a business angel,” and in and of itself, that could mean she’s invested in one company, it could be that she does one company a month. It could be that she invests £10,000 a go, it could be she invests £1 million a go.

So you get a real mix on the business angel side. It’s almost too broad of a term actually because theoretically, anybody could be a business angel”

Q2: How invested are you in the startups you put money into? How do you measure your level of personal/mental investment in the businesses you work with?

Tim’s answer: ” I would say that I don’t make many investments but when I do, I try and go hard to help them as much as I can. The first two years of the startups journey are very difficult and lonely. And present a bunch of challenges that certainly, for most first time founders, they’re unfamiliar with.

So they’re presented with things where they have to act quickly and make good decisions that are somewhat unfamiliar to them. I don’t force this on them but if I can see an opportunity to help them, so for example, hiring, sometimes it’s product development, go-to-market, sometimes it might be an introduction to someone that I think might be a customer or something like that, then I’ll try and do that.

So my mentality actually, is that I do think about them all the time and the other thing is that I try and make myself available to them. So it often involves a phone call late at night, for example, or on the weekends, which is that I think if something has come up and is a challenge, it’s often something that actually can’t wait. It’s something that’s causing disruption to an entity that has a fairly short timeframe to achieve something.

So as much as possible, I try and move problems out of the way so that the founders that I work with can concentrate on what I perceive to be the real challenges, which are really around product and market. So if I can grease the wheel so that they get more time on those fronts, then I feel like I’ll be succeeding.

I do that because I think I want to be helpful but there are many investors who… It’s not that they don’t want to be helpful; it’s just enough hours-in-the-day problem. So if I invested in 10 times more startups than I do, then there wouldn’t be enough time. There are other things that I need to take care of as well. So really, that is the currency – how much time do they have?

The other thing is often skill set. The type of person you just described, as an angel, does exist for sure. But there haven’t actually been that many large tech exits in the UK, full stop. It’s a growing number and very bullish about the direction of it but it’s not like Silicon Valley, where there is a rich ecosystem of exited founders or early employees who had options.

That is still somewhat unusual. So a lot of business angels in the UK have made their money in a different industry. So they might have exited a manufacturing company or a distribution company but they realized that technology is a new frontier or where the growth might be and they’re interested in it. But in those cases, if a founder asks one of those people, “Can you help me hire a machine learning engineer?” Presumably, they wouldn’t know any more about that than the founder. In fact, they probably know less.

So ultimately, it depends. What’s good, I suppose, is that most founders know what they’re getting into at the start. You know which type of investor you’ve got because they’ll normally tell you. Some of them will say, “I’ll provide you with capital,” and then that’s it. “Just keep me updated, that’s all. I just want to know what’s going on,” or others will say, “I’ll provide you with capital but also I can help you with X, Y and Z. I’m always at the other end of the phone. Please let me know if I can be helpful.” So going back to your first question, you just get this range really.”

Q3: What are the top qualities an investor is looking for in business owners? Are there any qualities that, if they weren’t there, would be a big no?

Tim’s answer: “The first one is quite nebulous, I suppose, but it’s the ability to get stuff done. The number one trait for founders inside and outside of technology… So if there is a secret sauce to people who I think are well suited to it, it’s that they are a combination of impatient and action-oriented.

If you put those things together, then stuff happens, right? You meet somebody in May and they’re a startup founder. You ask them what they’re working on and they tell you. And then you meet them again in June and the problems or challenges that they face has changed. It’s not exactly the same as it was in May.

I work with founders at the early stage and I realise there are some things people can’t do without capital.

There are some things that people can’t do without capital. So if I see them in May, I don’t expect them to have hired 10 engineers by June because I know they haven’t got the money to do that. But there’s always something you can do to move the needle because startups involve an awful lot of uncertainty. So the first characteristic is are they consistently and persistently moving forward? And it doesn’t mean that they’re succeeding; it means that they’re finding out. They’re reducing the uncertainty and the risk in what they’re doing because they have more information or they’ve made some form of progress in some meaningful way.

So that’s the first thing. And by the way, these are just personal to me, right? If you ask 10 versions of me, you’ll get 10 different answers. I like people who are somewhat like an underdog, I suppose. I’ve never really formulated that but I think one characteristic that I see that works quite well is if somebody really feels like they have something to prove. I think if you’re somewhat indifferent to the outcome, then you’re likely to have a lukewarm outcome.

So I don’t know if you call that passion or some form of, “I really want to achieve this and not just because I woke up one morning and thought of it but because there’s something more about realizing my full self, in fact.” And because that’s the stuff that doesn’t go away when it gets hard, right? That’s something that I look for.

And then another big part of it is if you’re going to be a successful founder, you’re going to have to attract capital, you’re going to have to attract talent, i.e. hire people. And you’re going to have to attract customers. So you have to be somewhat compelling. And I realize, again, I’m not the sole arbiter of what’s compelling but I will make my mind up in terms of, do I think this person could persuade people to invest? Do I think this person could persuade talented people with other options to join their company? And do I think this person could persuade a customer to choose them over a competitor?

The hard thing about all of that is really, in engineering, you’ve got to Nic because I think investing is part art and part science. So you’ve kind of gone to the art, which I think is the most interesting thing because at the earliest stage, there’s no real due diligence; it’s really about a person.

And maybe a market as well. So to be fair, there is another side of it. But mostly say about a person and you have to make your mind up very quickly. So oftentimes, when people say no, when angels say no or when venture capitalists say no, it isn’t because they don’t like the person or they don’t like what they’re doing or that they’re certain it’s a no, in the same way as if I said to you, “Nic, do you want to drive to Newcastle tonight and watch basketball with me?” you’re probably certain you don’t want to do that.

In most cases, these nos at the early stage are, “I don’t know enough about this and I haven’t got enough time to invest in finding out.” Because if I spent 30 hours with every single opportunity or founder that came across my desk, which I think is a reasonable amount of time to really get to know them, to really understand, then there wouldn’t be enough time in the week.

So that timeframe is compressed. The lesson of it is actually, which I’m trying to get across is if someone says to you no and they give you a pretty lame reason, it might just be that what they’re really saying is, “I don’t know enough about it and I don’t have enough time to find out enough about it or about you to make a good decision,” which again, is why often, some of the best sources of early-stage capital are people that you know or people who are known to people that you know.

And I realize that’s dissatisfying from a nepotism perspective. I completely understand that but the reason for it, is the familiarity and trust . So the first person who ever invested in a venture of mine, was my boss. I had worked with him for four years. I had resigned from the company and I told him what I was doing. And why is he saying yes? At that point, he doesn’t really know what the company’s doing. He doesn’t ask many questions about that.

It’s because he’s worked with me for long enough to know that I’m sincere, I’ll try hard, I haven’t just woken up one day and thought about it. It’s something that’s been brewing. And that really is a big part of the challenge is how quickly can I get to know this person so that I can make that judgment? It’s hard.

Q3: You’ve mentioned you invest in early-stage startups – how much influence do you think you have on the growth and direction of those startups?

Tim’s answer: “I’d like to say as little as possible. There’s absolutely no master plan where I meet a founder and I think, “Right, I’m going to spend the next six months steering you in this direction.” That just doesn’t happen. It’s more like I assess them and I think this one is a good one for me. And by the way, the “for me” part is interesting as well. Sometimes, it’s a good match, right? There’s nothing more to it than that.

But no, I try not to do that. If I think they are going off course in certain ways, I think it is incumbent on me to mention it to them. But not in front of other people, not to give them a hard time about it. The reason it’s incumbent on me is like anything. It’s the right thing to do if you notice something and say, “Actually, I think this will be better positioned in this way,” or, “We’ve obviously thought about this in a certain way but I think maybe the strategy should change,” or even some new information has come to light. “I’ve found this out. I’ve done some research. I think maybe you should consider that.” But never to try and grab ahold of the steering wheel.

Mostly because in every single case, I believe them to be better drivers than me. So it would create a worse outcome if I was holding the wheel, for sure.”

Q4: How much does an investor want to see of a startups financial planning? If you’ve built a 5-year financial model for your startup with KPIs, cashflow P&L etc, how much of this do investors want to see?

Tim’s answer: “The detail is valuable for one reason only, which is it forces you to have thought about it. I don’t really care too much what the plan says. As long as you have thought about it. I don’t expect the plan to be correct. Five years is far too long by the way.

So if you were to accurately predict what would happen just for the next two years, you will be a genius if this is early-stage stuff. Five years is so far into the future, but I think it’s a great exercise for any founder to think like that. So I don’t look at the five-year plan and think, “Wow, so this is what’s going to happen to this company.” But I do look at something like that and think, “Wow, these people have really thought about it. They understand fundamental principles, like gross margin versus net profit. They understand the amount of capital intensity required in this business.”

It’s like writing something down. All I care about is that they’ve thought about it properly and that they’ve bashed it around a little bit because by doing that, you will uncover challenges yourself. And that’s really the exercise I want to do. That’s the value of a plan, rather than someone who is actually able to accurately predict exactly what’s going to happen. It’s much more a demonstration that you care and that you understand.

Q5: The next question is from a viewer who’s business is becoming a B Corp: ” I have changed my articles and associations to reflect my purpose which approximates how I do business closer to being a CIC. In my AA I state that profit and shareholders are not the primary objectives of the business.

How can I make myself investible when I’m moving in that direction and many investors will be looking for profit and return?”

Tim’s answer: “I think you need like-minded investors. So there’s actually quite a lot of people these days who are B Corp evangelists and cheerleaders, who are high net worth. So ultimately, for some people, it’s a tick in the box and for others, it’s off-putting.

Obviously, there’s still the minority but it’s almost like picking a sector in a way. It’s like saying “I’m going to do something in health tech.” Well, that automatically removes a big majority of investors because they don’t know enough about say, biotech.

But hopefully, it’s offset by the fact you’re increasing the passion or the likelihood of someone who does care about that stuff from investing. It’s becoming increasingly common as well. So they shouldn’t feel that they’re the first person to suggest something like this. They certainly shouldn’t feel awkward about it.

Q6: In a tech-enabled startup product, what key elements are you looking for? Is it scalability, tech choices, north star strategic levers?  What are you looking for from a tech/company perspective?

Tim’s answer: “We’ve spoken about people and now we’re talking about tech. There’s something in-between those two things which is the market. The market is as or more important, especially in the early stage, than the tech. How big is the market opportunity? The one exception is deep tech, as some of the things I’ve been involved with require a degree of technical understanding that very few people in the world have.

So there are some areas of certainly a biotech, some areas of machine learning, some areas of actually regular software engineering, where there is a skill set that is hard to find. And the test will be, if I put a job out for this tomorrow, how many people would be able to build it? In those cases, the tech is very important, right?

But it’s less about how much do I know about this stack, and it’s more about, again, how much do I know about this person? Is this person at an elite level within their field? So really, I would assess the tech via the people building the tech if that. Very, very few startups don’t make mistakes. So normally, there’s a bunch of cycles, where something that’s being built is torn down again. It’s very rare that every single technical decision is the right one.

Obviously, if it exists, the proof of any tech is the use of it, right? Here’s an example, which I hope will be helpful, if you’re going into a tech-enabled market, so you don’t necessarily meet the technical skills to succeed, so if you take, say, a Deliveroo type of a product, right? Then the question, as well as who’s building it, is what other competitive advantages does this company have other than the tech?

So if the tech itself isn’t like a deep moat i.e. a bunch of teams could replicate it with enough time and capital, there has to be something else about the business that is defensible. Otherwise, if the founders are right about the business i.e. there is a good opportunity there, then immediately, any engineering team, within a company, or new engineering teams, will replicate and try and compete.

That is absolutely guaranteed to happen. So you need some form of long term defensible advantage. And if it’s not the technology, it has to be something else. It really does. It can’t just be that you’re the first person to have had the idea because if you are proved right, someone will replicate it if the technology is trivial.”

Q7:  CookiesHQ builds product for startup founders, but those startup founders are really good in their market, they’re really good at what they’re doing but they’re not tech people.  They have full IP, they have full ownership of the code.

Are they viewed differently when their original MP is built by an external company? Are they viewed differently from an investment perspective, compared to a tech founder that is building their own product?

Tim’s answer: “The answer is yes but with a big asterisk or caveat attached to it. So any tech startup founder, who has come in to raise some money who has persuaded… So imagine, you’ve got a non-technical CEO and they found a technical CTO, who is very competent incredible. And has built V1 of the product in their spare time or without raising any money and has taken that to market and has had some modicum of traction. Imagine if it was profitable and they didn’t need to raise any money.

It’s incredibly rare but if that happened, there are a lot of hurdles there, that that non-technical CEO will have had to have overcome. Whereas, if they use a third party, the main one they need to have overcome is access to capital. So if they happen to be rich or they happen to be able to find money to build, then they can do all those steps.

So it’s a different journey. The big risk, if you are that solo, non-technical CEO, you might understand the market perfectly; you know everything there is to know about the insurance market, but you don’t know a software engineer or you don’t know one well enough to build something for you… I don’t think you can force that because putting together a founding team – one of the biggest risks in any startup is that they fall out.

So the more familiar the founding team is the better, or just have one founder. Some people don’t like that. I think that’s absolutely fine. And in fact, I think outcomes can be better. So this false marriage of two people, I think is worst of all. And that’s why I think there is and there will always be a market for third parties to build this stuff because ultimately, what the founder needs is proof. They can’t have proof without product. Otherwise, they’re just using words. It’s much easier to use pixels to show someone how it’s going to work.

Get people excited about it, get customers using it maybe. All those things de-risk a proposition and make people more likely to invest. So I see it more like it is just a case of horses for courses. If you’re at home today and you used to work at a tech startup and you know lots of engineers and you’ve known one for six years and you start a company together then obviously, there’s no need for a company like yours.

But if you’re not, it’s not the case that therefore you can’t enter the tech entrepreneurship ring because you evidently can. And I think what CookiesHQ does is a valuable part of that. I’ve also seen it work. I know that it can work. It creates questions later on down the line and I hope you don’t mind me saying this, Nic. Because ultimately, say if you’re raising capital, normally, the idea is that you build your team in-house or there’s some transition arrangement.

But very frequently, there have been successes, where V1 of the product has been built by a third party to get up and running, to prove something, to validate it, to get more money, to potentially bring it in-house and go from there.”

Q8: Which direction is the South West investment scene moving in?

Tim’s answer: “I think it’s definitely on an upward trajectory. There are later-stage companies that have raised a lot of money. There are significant people moving from other parts of the world, who have significant growth experience, move into South West based companies as engineers or executives. And they bring talent and skill set that then they impart on the people that they work with, who are more likely to be living in the South West.

So I think the trajectory of South West startups, both financially, headcount wise, talent-wise, is all in the right direction. It suffers from the… The results, unfortunately, in our game are generally measured in exits and exit sizes. It’d be great if Bristol had a big IPO or something like that.

And I think it will, it’s just a question of when. So I think the scene is good. I think lockdown and the end of offices… I don’t think offices will end completely but they’re definitely going to be less important than they were, will be really good for the South West.

This might be – and obviously, I’m biased – but I think the South West of England has somewhat paradise characteristics, in that it is accessible, it has decent weather, it has big cities which have culture in them. It’s got good academic institutions. If you just run that filter through most parts of the UK, most places fail those tests.

And it’s still affordable. That’s the one thing that might change, the cost of living. I’ve been saying this for years, since I started SouthWestern. Overwhelming, setting aside the actual choices I’m making with people I work with, if I was sitting at a roulette table and there was a square mark at the South West, I’d put a big stack of chips on it because if I could own a piece of the region, I think you can have appreciation in that area. I think it’s on a good trajectory.

The hard thing about all of that by the way is obviously, there will be many failures in there. It doesn’t mean that you can’t lose if you’re in the South West; you definitely can and most people will. But overall, the trajectory is very positive, I think.”