Irish investor Nicola McClafferty knows more than most about start-ups.

She spends a lot of her time dissuading entrepreneurs from going down the venture capital route. “There are so many businesses for which VC is just not the right model,” she says, joking that this is not necessarily the message she should be getting out there.

For those unfamiliar with McClafferty, she is a director at one of Europe’s leading tech venture capital firms, London-based Draper Esprit.

Saying “no” a lot goes with the territory. As a tech-focused European VC, Draper Esprit deploys about €100 million annually, investing in start-ups at the growth stage, ready to expand. But only a small fraction of the pitches that darken the door of Draper make the cut.

Irish success stories backed by the publicly-listed VC firm include Movidius, acquired by Intel for €300 million in 2016, and e-commerce analytics firm Clavis Insight, bought by UK firm Ascential for over €100 million.

Recent Draper collaborations include a €9 million investment in Sweepr, the company led by Irish entrepreneur Alan Coleman (founder of BriteBill) which aims to provide voice-assisted technical support for smart home appliances. McClafferty is a team leader on the deal.

To succeed and get a return on its capital, Draper needs to partner with companies that have global ambitions, led by founders and teams that can deliver.

“We believe in Europe’s potential to grow the companies that will shape the future. We’re here to help that happen,” according to the mission statement on Draper’s website.

But perhaps unusually for an investor, McClafferty has seen both sides of the coin.

In 2011, she broke out of the VC mould for the best part of five years to set up her own company, Covetique, an online marketplace for second-hand couture from Gucci to Prada. Online fashion retailer Asos was an early backer, rowing in behind Covetique with a seven-figure deal, with Asos ultimately buying it out.

Now she is back from the coalface of running her own start-up, with new insights to share.

“Somebody else is just going to do this if I don’t”

At 38 years of age, McClafferty is an old hand in the VC world. After studying International Commerce in UCD, she worked in tech banking and later Benchmark Europe, now Balderton Capital, in London from 2006. 

But then the idea for Covetique took hold. She joined forces with former investment banker Bobby Devins to set up the second-hand fashion website, based in the UK.  

Sellers were typically busy women with high-end designer brands like Chanel, Stella McCartney and Christian Louboutin languishing in their wardrobes.  “You re-sell your car, so why not re-sell the items in your wardrobe,” McClafferty was quoted as saying back in 2013.

And Covetique, a sort of upmarket eBay with a proper retail returns policy, took the hassle out of selling on unwanted fashion.  Designer items were collected and authenticated before being repackaged and sold on at a discount. As these were often high-end brands,  price tags could stretch up to a few hundred pounds. The business took a cut of sales.

Celebrities and the very rich were among Covetique’s clients. 

“I sort of felt that there was this opportunity in the market. And then I sort of sat on it for ages and eventually got to a point that I was like, somebody else is just going to do this if I don’t,” she tells me.

In 2012, Asos, the leading UK online retailer, pumped in seed money in exchange for a 30 per cent stake in the venture.

“It was challenging. I mean, ultimately, we struggled to scale it. It was quite a high-touch model. A lot of heavy lifting. VCs don’t like those models.”

Competition in the market for pre-owned, luxury consignments intensified. Realising the business wasn’t going to be the success she had hoped it would be, she sold out.

I ask McClafferty if she thinks she may have been ahead of the curve, given the heightened focus in the past few years on sustainable fashion and reselling, an angle worked by Covetique. While she agrees that sustainability is increasingly a sales catalyst (which she views as a positive development), she is unwilling to shirk responsibility for any vicissitudes of the business, preferring cool-headed analysis.

“It was challenging. I mean, ultimately, we struggled to scale it. It was quite a high-touch model. A lot of heavy lifting. VCs don’t like those models,” she says.

In what way, I ask?

“We physically touched product. We had a lot of operations. It wasn’t all digitally happening over here on the internet. We had a warehouse, we had a team, we had people. We didn’t buy the product. It wasn’t like we had to fund stock but we did physically hold it because we curated it, we did authenticity checks. We checked the quality of the pre-owned (clothes), we double-checked.”

A hard model to scale but not impossible, McClafferty accepts. She cites the RealReal, the US online pre-owned luxury consignment store founded by Julie Wainwright, which raised $300 million in an initial public offering (IPO) last June. “They’ve been very successful in that market. And that’s what we were kind of going after, but I think ultimately, we just struggled to scale it and achieve the growth. You know, with hindsight, we probably underinvested in some of the infrastructures early on – that combined with market timing and just being able to raise the capital we needed.”

McClafferty is not focused on the past. “I wouldn’t change a thing. I’m obviously back in VC now, but I’m very glad to be back in VC, having had that experience.” 

Her career has come full circle, and it happened more or less by chance.

“Running a business gives you a different perspective. It aligns you a bit more with entrepreneurs.”

After Covetique, McClafferty left the UK and was back living in Dublin where VC work is thin on the ground. Feeling at a bit of a loose end and wondering what might be next, she caught up with Brian Caulfield, then managing partner of Draper Esprit.

Draper had just successfully launched on the Dublin and London stock markets, raising over €100 million. The firm was looking to broaden the team and he convinced her to come aboard. She puts it down to serendipitous timing. A big believer in the public company model, she joined Draper in February 2017.

She laughs recounting a previous meeting with Caulfield years earlier when she tried pitching her business, Irish woman to Irish man, over a coffee. He didn’t bite. “I don’t know if Brian remembers,” she says.

Having touched upon her own career, our conversation turns to the brass tacks of venture capitalism, from pinpointing the ingredients of success to finding the right exit strategy.

Francesca Comyn (FC): Did your experiences in Covetique have an effect on your approach to venture capital investments?

Nicola McClafferty (NM): Yeah, 100 per cent. In truth, I don’t think having run a business necessarily makes you a better VC investor. But it does give you a different perspective. It aligns you a bit more with entrepreneurs.

I do find that when I am talking to companies and entrepreneurs, that there is a level of “okay, you can kind of get me a bit more, you know.” I have had to fire people, I have had to stand up in front of a room and tell my team that pay is going to be delayed. They are the really tough things that you do when you’re starting a business and running a business.

FC: Has it given you a better sense of whether someone doesn’t quite have it in them to succeed?

NM: I think you can just kind of spot that in general as a VC. You know, I spend a lot of time talking to entrepreneurs about this, which is probably not necessarily the message I should be saying, but basically I tell them: here are the reasons you shouldn’t raise VC.

“It’s my job to convince the team, it’s a good investment. I have to believe that but we make that decision as a group. And then we always take board seats.”

FC: What kind of war chest have you at Draper?

NM: Across the firm, we are a group of investors. We invest our balance sheet which makes us different to a fund, so we don’t have a limited or neatly wrapped up fund size. We deploy about €100 million a year.

We continuously raise and recycle capital from exits onto the balance sheets. That’s our model, across our team, across the partnership.

Our job, as individual investors, is to invest in our own areas. Between me and my colleagues, we each have areas we tend to focus in on. We are both geographically focused and sector-focused. I run our consumer business, for example. But I also sit across B2B software. And one of my other colleagues runs our digital health business, other colleagues would spend more time looking into deep tech. Across the team, we have areas where each of us has more experience. I mean, as an individual, you are looking for deals and you are leading deals, but we make decisions on investments as a team.

It’s my job to convince the team, it’s a good investment. I have to believe that but we make that decision as a group. And then we always take board seats.

So you know, if you’re asking what decisions we make, I’ve done two deals, one of which we announced quite recently in Ireland – Sweepr – that’s a deal that I did. We know Alan (Coleman, Sweepr’s founder) and that team for a long time. We spent quite a lot of time on it. We decided to do the deal, we made the investment. So I joined the board there. Each of us who leads investments sits on multiple boards for companies that we invest in. It’s a very, very, long-term relationship with these companies.

FC: Obviously you’re looking to make a return.

NM: Yeah, it’s a gamble.

FC: But what course does it take? Is it typically a five year or 10-year cycle? Does it vary much?

NM: The fact that we’re a public company means we don’t have a very defined strategy compared to a fund coming to the end of its life and having to exit. I mean, that’s part of the reason why we went public – to remove that dynamic. So we should only be exiting companies when it is the right time for the company or the market is telling us it’s the right time, and not because we’re in year eight or nine and we really need to be selling these companies.

But you’re right, when you take venture money or you know, any institutional funding like this, at some point, there needs to be an exit or a liquidity event. And that can be selling the company, it can be an IPO or it can be an M&A sale or an IPO. The time frames of that, I mean, probably the average is a seven-year time horizon. There are companies that we have had in our portfolio for 10 years plus and there are more examples of companies where the exit has been shorter than seven years.

FC: You’re happy to have companies that will grow steadily rather than – everyone wants stratospheric success. But I suppose in that model, there’s room for different types of growth?

NM: Yes. We’re still venture capital. So we look for high growth companies. If it is a company that is going to grow 20 per cent year-on-year for the next few years, it probably shouldn’t be raising venture money. I mean, we still are looking for 10X-plus returns over that time horizon and we are looking for businesses that can scale rapidly to build a global company.

What our model gives us is flexibility. There’s been a lot of unhealthy focus on this hyper-growth at all costs. The whole idea of growth at any cost is definitely not what we focus on, but high growth is important; sustainable growth.

We expect our companies to be loss-making because we want them to be investing for growth. So long as we are very comfortable that, under the hood, there is a fundamentally profitable business there. So you know, if things kind of hiccuped in any way or the market became slower, you could in theory dial down the growth and start to generate profit. That’s the best-case scenario in a company and that’s what we look for when we’re making these investments.

“What is important links back to market size. To build a big business, to penetrate a new market, you’ve got to be doing something different.”

FC: What else do you look for actually? I know that’s an obvious question, but it’s always pertinent.

NM: The first one is really whether a business and the team has both the opportunity and the ambition to be a global-scale company. That’s what we look for. Is the market size big enough that we can really, really build a very large business here? We’ve got to believe there can be a very significant business.

And secondly is what those founders want to do with it.

We look to the team. We look for their knowledge, background and expertise in the space that they’re in. Their ambition, you know. Then so much of it is also just down to fit with the team because if you are going to sit on a board and work with this team, or this founder, for seven-plus years, you gotta make sure you like each other and respect each other and all of that, so that plays a role.

And then for us, because we don’t do seed, we tend to focus more on the growth stage of a company. That means we look for commercial traction and growth; businesses that have paying customers and growing, repeatable revenue coming in.

Whether it is a growth stage company that’s coming out of Ireland, Spain or France, we will look for evidence that they know how to internationalise. What we’re looking for is commercial traction. 

And then we’re looking sort of under the hood.  If it’s a Series A deal for us, there’s maybe less history in the business… that’s doing €1 to 2 million in revenue, you look for evidence on product and product-market fit.

If it’s more of a Series B deal where we might be deploying a larger cheque, a €10 to 15 million cheque, what we’re really getting into is understanding the unit economics of the business.

FC: Does novelty of concept tend to be important?

NM: What is important links back to market size. To build a big business, to penetrate a new market, you’ve got to be doing something different.  So having something unique, that can come from IP (intellectual property), you can have some pretty deep IP. Not every business we invest in is necessarily deep IP. Sometimes that uniqueness is just the way the founder perceives the problems and went on to execution. 

We do have to ask, what are we doing with this? What’s the really defensible bit here? What’s the hard-to-do bit? “I’m another x” isn’t going to be the thing that gets us excited, but if it’s “I’ve seen this gap in the market, I’m going to go after that…” You know, as I said, it might be a very novel technology, but it might just be that a vendor spots the gap. And they’re going to exploit that. 

FC: By creating an efficiency somewhere.

NM: Yeah, it could be that, you know, having a clear space. And that’s not to say every business doesn’t have competition. Of course, they do. 

Everything we do is obviously high-risk, but we look for whether there is a problem in the market that nobody else is solving or solving well enough. 

And if the business solves that for enough people, that’s where uniqueness and defensibility come in. That point, about defensibility, is an important one. 

Can you defend your position in the market? Again, sometimes that can be about protecting some IP, but very often it’s just about being first in the market or being the best in the market. 

FC: Geographically where is your focus?

NM: I’m obviously based in Dublin. But I am not exclusively Ireland. The UK and Ireland are probably where I spend most of my time but equally, there are other consumer businesses emerging in other markets that I also end up covering. In consumer, we’re pretty strong in France and in the Nordics, but the UK and Ireland would be my primary focus.

“I think if you compare the Irish policy environment to the UK, we are definitely multiple steps behind.”

FC: And what about the investment scene in Ireland? Among entrepreneurs, there seems to be a lot of dissatisfaction with the capital gains tax regime, for example. It’s seen to stymy business and innovation.

NM: Yes, it is. Our policy environment is not optimised for incentivising and building large growth companies, we don’t adequately incentivise founders to take very meaningful risk. Things are structured in a way that is pretty punitive. It’s pretty punitive on employees that choose to work with Irish companies, which makes it much harder for earlier-stage Irish companies to compete with some of the international multinationals.

The kind of tax regime and the tax structure around early-stage investing is also not optimized. 

Ultimately, it is entrepreneurs that are drivers of our economy, they are the drivers of future employment in business. I think if you compare the Irish policy environment to the UK, we are definitely multiple steps behind.

But I’m starting to get a sense that things are changing a little bit. There are a lot more initiatives now. I mean, my colleague, Brian (Caulfield) is obviously involved in Scale Ireland (a new Irish lobby group for start-ups), which plays a big part in trying to influence policy, to put more focus and help really balance our economy from a whole multinational space back towards indigenous companies by incentivising those entrepreneurs and innovation.

“This industry has always had a problem with being able to back female-led IT companies but it’s changing.”

FC: What is the investment landscape like for women at the moment? Are the numbers still low in terms of women founders being funded?

NM: Definitely it’s low. This industry has always had a problem with being able to back female-led IT companies but it’s changing. I think finally it’s top of the agenda.

FC: Is the problem that there are too few women approaching VCs or is it that they are not being taken seriously or is it a mix of both?

NM: All of the above. And not enough female investors. There’s just this idea of: “You don’t look like me or sound like me, and I don’t see the world in the same way as you, therefore it’s not a good business idea.” I think that that has been a narrative that a lot of female founders have found themselves on the other side of, and again, there are not enough female voices around the decision-making table, making these investments, to influence that. And also just yeah, a lack of companies coming through.

“The easy thing is to blame the pipeline and say ‘we don’t see enough of them’. It’s kind of true. But we need to do more than just wait for these companies.”

FC: Is there a lack of success stories to point to?

NM: There’s that. This business, and venture, has historically been very technology-focused. Of course, it still is, but there are more women now coming into entrepreneurship, more women from technology backgrounds. You look at the levels of investment in female-led companies at the seed stage now, it’s really starting to improve. It’s still very, very small. We have a hell of a long way to go. But you know, we’ll see those coming through more and more and if they’re getting funded at seed we’ll start to see more female-led companies come through for the growth stage too.

There’s much more of a conversation now happening at the VC and investor level around bias that existed. 

In Ireland to be fair, we punch well in terms of senior female VCs, proportionately. I don’t know what the numbers are. But if you look across most of the large VC firms, there are more senior Irish women in there than in the UK, proportionately. But look, the important thing is, it’s a conversation that’s really happening. We talk a lot more about wanting to back more female-led companies.

The easy thing is to blame the pipeline and say “we don’t see enough of them”. It’s kind of true. But we need to do more than just wait for these companies. I and others make sure we spend a lot of time doing as much as we can to encourage success. So you know, we do mentoring and have the conversations. Even if we’re not writing the small cheques at seed stage, we’re making it a little more accessible.

“I love this job. I love the breadth of this job. That’s a thing I think I missed in my own business; you sort of go really, really deep, really, really focused.”

FC: In terms of investment, I’m wondering what sort of trends you are seeing in business and tech. What do you predict to be future trends or growth sectors?

NM: I think we will continue to see lots more innovation. I mean, you can roll out the clichés about the future of work. But I think there are still really, really interesting tools that will bring further efficiencies to the workplace, to the enterprise in particular, taking AI (artificial intelligence) increasingly into the corporate environment. And more automation across the board, no question. We’re seeing that automation, whether that’s in manufacturing or on an industrial level or whether it’s more on the services side of things. So automation is a theme we will be particularly focused on.

Sustainability is another theme that we’re really focused on too and I personally am spending time looking at this, not necessarily just in the fashion space. I asked the questions, “Where will the interesting investment opportunities come from, what are the businesses that are going to help?” Sometimes that comes from a brand perspective in terms of how we are thinking about sustainability and reducing our carbon footprint. Sometimes it’s actual technologies that can really support the sustainability agenda.

*****

It is this pace and dynamism that keeps McClafferty hooked on the VC environment. No bones about it, this is a home from home to her. “You know, the truth of the matter is I love being back in VC,” she says.

“I love this job. I love the breadth of this job. That’s a thing I think I missed in my own business; you sort of go really, really deep, really, really focused. That’s what you have to do obviously; it’s your business. It’s your entire focus. And what’s brilliant about this job is, we can’t get too deep in too many businesses, but it’s the breadth and the variety that we get to work with.”