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Friends with benefits: is seeking startup investment from former colleagues a wise move?

Written by Adam Pescod on Tuesday, 03 June 2014. Posted in Investment, Finance

As far as initial investment goes, a former employer or work colleague can be a useful first port of call for an entrepreneur. But is it the best approach for all startups?

Friends with benefits: is seeking startup investment from former colleagues a wise move?

Entrepreneurs are rarely blessed with a pot of gold to help get their startup off the ground. They may have devised a money-making idea but they could lack the financial clout to commercialise it all on their lonesome. Even if it means sacrificing a portion of one’s beloved business, seeking investment becomes a necessity.

Whilst the first question may be ‘how much?’ or indeed ‘why?’, attention eventually shifts to ‘who?’ Where does one turn for the money that is going to help propel their venture forward? It may be tempting for an entrepreneur to treat things on a ‘first come first served’ basis but there are inherent dangers in adopting this stance. Particularly when there’s equity at stake, it’s risky to leap before you look. It can reap significant rewards to assess what else an investor can bring to the table besides cash and whether they share the same vision and level of ambition for the company as its owner.

Former colleagues and employers may therefore be a sensible first contact for an investment-hungry entrepreneur. This is especially true if the ex-workmates have experience of building a business from the ground-up. It’s something that Eric Partaker, co-founder of Chilango, the Mexican restaurant chain, can definitely relate to. Partaker and his business partner Dan Houghton held executive roles at Skype before going in a totally new direction. Growing up in Chicago – which boasts the second largest population of Mexicans in the USA behind Los Angeles – the half-American, half-Norwegian entrepreneur fell in love with the cuisine.

And it was upon moving to the Norway office of McKinsey & Co, the management consultancy where he worked before Skype, that he had his brainwave. “That’s the moment the light bulb went off,” says Partaker. “When I was in Norway, there was no great Mexican food so I thought I should do something with that idea someday.” Chilango now has seven outlets across central London, a city Partaker says was perfect for his venture. “The London restaurant scene is intensely competitive, which I relish,” he says.

Chilango’s first investor was Tom Spathis, a former colleague of Partaker from his McKinsey days. Not only could Spathis stump up the necessary cash but being a familiar face also had its perks. “He was somebody whose opinion I trusted and that I looked up to when I was at McKinsey,” says Partaker. “He would be able to tell me if the idea was good or not and give me some feedback on where I was getting it wrong. It wasn’t simply him writing the cheque.”

Spathis was soon joined by Saul Klein, the pair’s former boss at Skype, founder of Seedcamp, the startup accelerator scheme, and partner at Index Ventures. As well as investing a chunk of his own money into Chilango, Klein introduced Partaker and Houghton to Mark Esiri and Tom Fleming at Venrex Investment Management, which is now Chilango’s biggest and lead investor. Ambient Sound Investments, the founding engineers of Skype, were also bowled over by the ambition shown by their former colleagues and invested in the firm in spite of their technological bent. “The fact that they invested couldn’t better illustrate the benefit you get by being able to take advantage of a past working relationship,” says Partaker. “These guys couldn’t be further away from Mexican food and restaurants but they believed in us and what we were doing.”

Partaker suggests that securing investment would have been more challenging if they’d had to approach unknown VCs or private equity firms. “One of the massive benefits you get by going to people within your network is that you can ask ‘what do we need to do to make this a success?’ rather than ‘what do I need to say to you to convince you that we’ll be successful?’,” he says. “You are not having to sell yourself. You are just having to collaborate on the idea’s potential.”

Chilango has gone on to build a board of investors that reads like a Who’s Who? of the restaurant sector. Partakers says a large part of this is down to “cold, hard networking” but 12 members of the board are nevertheless people with whom either himself or Houghton have had a past connection. This combination of industry expertise and longstanding relationships has put Chilango on course for great things and the obstacles that Partaker and Houghton have faced along the way have undoubtedly been overcome with less difficulty than they might otherwise have been. “If our investor relations had been based on cold hard cash without any passion or belief for our past experience, we would have found ourselves alone,” he says. “But it was because they’re based on something far deeper than that – an element of trust – that allowed us to weather those storms.”

It’s a similar story for Zia Hayat, founder of Callsign, the personal identification app. “I needed something built that was solid from the ground-up from day one,” Hayat explains. “I built the first version of the platform, which has never seen the light of day because it was very badly written. I therefore needed to raise quite a lot of cash so that I could bring in the right people to build the platform.” Hayat was essentially seeking some experienced hands to ensure his venture didn’t sink before it sailed. “It was crucial for me to find people who could essentially mentor me as well as give substantial amounts of cash,” he adds. “You need people who have been there and done it and also have got a bit of clout essentially.”

The first person Hayat spoke to about Callsign was Steve Dempsey, a former colleague from Accenture who, it’s safe to say, fitted the bill perfectly. He explains: “Steve was known at the time, and is still known, as being quite savvy when it comes to investing in start-ups and tech start-ups in particular.”

Hayat admits that securing the investment and services of Dempsey was far from a foregone conclusion but he is nonetheless grateful that his old pal decided to come on board. “I thought he may be sceptical because I knew from Accenture that he was quite a hard taskmaster,” Hayat says. “But when I sat down and explained what I thought this thing could do, he was sold on it quite quickly. It then just became a question of how much money he would plough in.” A friend of Hayat also managed to hook him up with an investor based on America’s West Coast and after a fleeting trip across the pond, the entrepreneur came back with another chunk of cash.

Hayat has since gone on to raise seed capital to the tune of $3m from Qualcomm, Deutsche Telecomm and Atlantic Bridge. Asked whether this would have been possible – at least in such a short timescale – without the initial support of familiar faces, Hayat is diplomatic. “That’s a very difficult question. I do believe in making your own luck,” he says. “If I put my Zia lens on I’d say ‘of course I would, I’d have gone and got someone else,’ but of course bringing those guys on board has massively helped accelerate the whole thing.” 

About the Author

Adam Pescod

Adam Pescod

EB's former editor, Pescod was tasked with ensuring these hallowed pages are rich with excellent, engaging and error-free stories, all written with the entrepreneur in mind. Pescod previously plied his trade penning pieces about pubs and pints. He is also a sucker for alliteration. 

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