Mike Lynch on backing winners and making bucks

Mike Lynch, one of Britain’s most successful software entrepreneurs, tells Raconteur what to look for when investing in technology companies


The last few years have been pretty busy for Mike Lynch. In 2011, HP spent $11.1 billion on the acquisition of Autonomy, the Cambridge-based knowledge management and pattern recognition software company of which he was co-founder and chief executive.

However, less than a year later, he stepped down and became embroiled in a public row when the American conglomerate levelled accusations of “accounting improprieties” at Autonomy and threatened legal action against Lynch and former chief financial officer Sushovan Hussain. HP claimed that it had been effectively duped into paying $8.8 billion over the odds.

The US authorities are still looking into the matter, as is the Financial Reporting Council, but in January the UK’s Serious Fraud Office closed its investigation on the grounds there was insufficient evidence to pursue the case any further.

Mike Lynch - Autonomy
HP spent $11.1 billion on Autonomy, a company Mike Lynch co-founded

Meanwhile, Lynch – described variously in the Financial Times and The Sunday Times as the “doyen of European software” and “the closest thing Britain has to its own Bill Gates” – still had £500 million from the HP deal, and it may have started to burn a hole in his pocket.

Despite having too many extracurricular activities to list – he has held posts with everyone from the BBC to The Royal Society and Council for Science and Technology, which advises the government – he set up Invoke Capital in 2013.

The organisation has access to $1 billion in capital, but has backed just three businesses so far: Darktrace, a cyber defence company; Taggar, a social augmented reality platform; and Sophia Genetics, a Swiss-based company that specialises in data-driven medicine.

Working with former colleagues from Autonomy, Lynch is on the hunt for more investments and has elected to focus on early-stage European tech companies with strong potential for growth. But it’s not quite as simple as that.

HI-TECH IS BEST

“Tech covers a whole range,” he says. “If you look at a website, that’s actually much more like a retail business or a branding business. At the other end of the spectrum, you’ve got people developing new microchips, which is obviously incredibly technical.”

Lynch is interested in the latter type of business because they’re what he got to know during his own career, but also because he thinks it’s easier to predict which of them are likely to be successful.

“Let’s take a non-tech example,” he says. “If you didn’t know what a loom band [the rubber bands and bracelets that have been a playground craze] was, then you might think the person who invested in them was a genius. But were they really a genius? Or did they just invest in the thing that happened to ‘win’?

It’s not rational to invest in a small company that can’t compete with the brand, distribution network or R&D budgets of the established players

“A lot of social media investments are like that. You can go back and find that there were a hundred companies like [whichever one happened to be a success]. And if you changed the names, you wouldn’t know which the successful one was.”

Lynch looks for businesses with an “unfair advantage” that differentiates them from the crowd. Otherwise, he says, it’s not rational to invest in a small company that can’t compete with the brand, distribution network or R&D budgets of the established players.

The good news is that when an exciting new company does come along, it’s a joy to work with. “You can actually affect the outcome if you’re an active investor in a small company,” says Lynch. “You can get in there and use your experience to make a difference. And that’s also what makes it fun and interesting, because you carry on learning.”

But there’s bad news too: the really good ones don’t come around very often. “About 90 per cent [of the investment opportunities] we’re brought, when you look at them, there’s nothing that clever or different. Of the other 10 per cent, about half have some beautiful, wonderful piece of technology, but it’s of no use to man or beast. It’s about the last 5 per cent that have something clever and useful,” he says.

EVALUATE THE PEOPLE

In those situations, Lynch says, the next step is to evaluate the company’s people and work out whether it’s wise to back them. “You might have a natural entrepreneur and you just know this person is going to be successful – those are the ones we love,” he says. “Or you can have some brilliant inventor, but who frankly couldn’t run a whelk stall. As long as they don’t mind working with someone, that can be OK. Sometimes the person has had a good idea, but won’t listen to anyone. Sadly, those are the investments it’s a good idea to run away from.”

Another thing he’s wary of is the “me too” mentality that sometimes fuels technology startups. “If someone came up and said ‘I’m going to do a fizzy sugary drink’, you might think that Coca-Cola already has that sewn up. Whereas, bizarrely, in tech people continually do this. By the time you’ve heard of Facebook, it’s too late to do ‘Facebook but Better’.”

He also advises caution when it looks as though a market might be becoming frothy. “Every so often you see money coming in from elsewhere, perhaps the property sector. Generally, it makes very poor tech investments, so when you see that money coming in, it’s time to sell. There’s quite a lot of knowhow in the tech sector and I would be very wary about going into property development because I’m sure there’s a lot of knowhow in that sector too,” he says.

Similarly, Lynch warns against being caught up in what he calls “buzz” about a sector or specific companies that are on the rise. But, he adds, when that buzz is excessively negative, it should be ignored too. He once learnt that the hard way. “It’s difficult to imagine that this was the case, but there was a period for about two years when the whole internet advertising thing was declared dead and the industry analysts said it was all over. Stupidly, I listened to them and killed a few things that actually would have been very valuable,” he says.

But it’s when he goes on to explain the enduring characteristics of people that Lynch becomes most animated. “As humans, our motivations are still similar. We love, we have anxiety, we fear, we’re hierarchical animals and we like to live in groups. You can immediately transfer that idea. A group of 20 year olds turn up in San Francisco and don’t know anyone; it doesn’t take many steps to get from that to social media.”

Keeping sight of this, Lynch believes, is a decent policy. Investing in tech companies, and much else besides, always comes back to people. “The technology is just something that enables people to do things,” he says. “But sometimes that’s forgotten.”