Humble beginnings
Born in Kyabram, Victoria, Australia, Farleigh had a tough upbringing, as the son of an alcoholic sheep shearer with a large family of 11 children. He was sent to a foster home at the age of three and was described as “backward” by one of his early teachers. He went onto earn a 1st class honours degree in economics from the University of New South Wales. After a brief stint with the Reserve Bank of Australia, he cut his investment teeth at the trading desk of Bankers Trust, where he spent 10 years.

His stellar performance didn’t go unnoticed and he was headhunted to work in Bermuda running a hedge fund. This was the time when bonds and derivatives were giving out massive returns. Farleigh was very successful and built a powerful investment team. He made more money than he could have imagined at the age of 34, and instead of continuing to invest and risk other people’s money, he started investing his own capital, which he found to be more rewarding.

A chance meeting with David Norwood came from their common interest in playing chess, and this lead Farleigh to take an interest in UK-based technology startups, in which he invested from his own private fund. They then became involved with spinouts from Oxford University and UK-based technology companies, and set up an advisory business, IndexIT, which they sold for £20m to Beeson Gregory, now Evolution.

Investment philosophy
The underlying investment philosophy comes from his experience in the financial markets. For example, many people believe that market prices are somehow flawed and that opportunities are easy to find. This is a mistaken belief. Farleigh is interested in genuine opportunities and the logic for their existence. Studying market behaviour can point to key trends, indicators and investment opportunities.

For example, markets are usually slow to react to major changes or “big ideas” as information spreads gradually and reaction is delayed by inertia/scepticism.

Analysing key information and market trends forms the basis of all Farleigh’s investment strategies. These are encapsulated in his forthcoming book about the lessons and experiences learned in investments, entitled “The Secret Rules of Investment”.

In the stock market he believes that there is a greater chance that small companies are mis-priced because of a big variation in their quality and management. Consequently, there should be a higher reward for doing your homework and selecting the right company.

He also believes that in order to grow, small companies have to raise money at a discount because they do not have access to normal capital markets. So if you invested in 100 smaller companies, you should expect a higher return. Diversification is key for the investor because of the higher risks.

Farleigh’s interest in stock markets, where the information on blue-chip listed companies is widely accessible, lead him to research more and more into smaller companies which were not well researched. This lead him towards more smaller companies and then to private, startup companies. Ten years of experience in investing in private startup companies and the lessons learned from them are finely tuned and honed into a systematic investment portfolio.

Identifying underlying values, taking calculated risk
Sometimes you have to give credit to the underlying value. With Clearspeed a lot of money was already expended (previous VC investments) in building and understanding some core technologies. However in the dark days of the tech crash most other investors were not interested and Farleigh lead a last minute rescue package which kept the company going until it had a successful flotation on AIM, raising £11.1m and valuing the company at £31.2m.

Selecting the right management
One of the most important rules of investing is in choosing the right management team. Farleigh says, “You can tell in the first few minutes if the management team is sharp or not, and whether they have the relevant experience or not.” He adds, “This is an evolving skill, built up from the numerous teams in which I have invested over the years.”

“Good competent management teams have often done it many times before, and usually come with track records and recommendations. A good sign is when they are taking some risk as well, such as by taking equity rather than high salaries.

According to Farleigh, ‘there is currently a big supply of IP from universities’. It is far easier to find IP than the management team that can take the IP to the market. More than 50% of his company portfolio of around 50 came out of universities. The biggest impact has always been the people; they make the difference to the success of a company, not the underlying technology, which is usually pretty good anyway.

If a company has some revenue, fantastic, but generally he invests in pre-revenue companies with a good shot at winning big revenue later.

Pre-exit versus post exits
Unlike most VC investors who head straight for the exit door as soon as they can, Farleigh has often stuck around. He stays invested because in many cases he believes that the management team will use the exit funds to continue building the companies and their long-term valuation.

Sometimes he doesn’t have a choice, as existing investors will often be asked to sign lock-in agreements, which prevent them from selling for six or twelve months. This was very tough in the case of ARC for example, which was once valued at more than $1 billion at flotation; with the tech-wreck the value dropped rapidly to well below its net cash position. Farleigh saw his £45 million post exit stake shrink to less than £5 million within a very short period. Fortunately he still made a small profit.

Tips for entrepreneurs
Farleigh sees hundreds of business plans and thinks that most of them are undifferentiated “me too” technologies. He prefers “disruptive technology” that will make a difference to the market or the business model. Proximagen Neuroscience was a good example of a company that had unique IP that was disruptive. The drugs discovery firm was spun out from Kings College, London and floated on AIM, raising £14.5 million.

With the passing of the tech crash, most of the rubbish ideas have gone and now is a good time to start looking at new opportunities.

He stresses the importance of a well-written Executive Summary, which should not be more than two pages long, and must contain all the relevant, pertinent points for a company, such as:

• What IP does it have?
• Who is the core management team and what is their track record?
• Any revenue or how close to revenue is the company?
• How much is the company looking for and some idea of what equity the management is willing to exchange in return.

These points can then form a basis for further discussions.

Current investment criteria
He likes to invest in companies with disruptive technology, which are best in their field, possess unique IP, which have clear upside and have the potential to be a market leader through a good proven management team. He is not very keen on companies that are going to face heavy competition.

Farleigh is not your typical angel investor who gets involved with the operational issues of the investee companies. He prefers to have regular one to one meetings directly with the core management team and expects them to fill him in with all the relevant details, warts and all. He usually leaves the management teams alone if they are doing a good job, but gets involved, when things don’t pan out according to the plans. Sometimes investors, especially angel investors, overestimate what they can do, especially when the management team is tuned to other issues. He adds that board meetings tend to be very formal and could be quite stifling, but they are OK to get consensus.

He is very driven, and has a great desire to prove himself. The advantage of Farleigh’s mode of operation is that he doesn’t have to have extensive discussions with an investment committee before writing a cheque. As an example, he cites a recent investment in a company, Radiation Watch. It has a disruptive technology and a 12-month lead over the competition in producing mobile radiation detectors with digital recording and wireless connectivity. The management team in this case came from the relevant industry and the valuation was attractive.

Farleigh adds that he didn’t ask the management team for their house as a guarantee or demand a board seat or unfair equity share, or a punitive term sheet. He invested $1 million with another co-investor who also put in $1 million, after meeting the management team for just one hour.

He considers relationship with VC as important, but using his experience in derivatives trading means that he doesn’t take prisoners (headline prices) very lightly. He cautions entrepreneurs to keep all options open for as long as possible and to be wary of investors that drag things out while the company’s funds diminish. Also watch out for fees for carrying out due diligence and unreasonable demands from the original founders, like unfair term sheets.

Hobbies and interests: tennis, chess
With such a wide portfolio of companies, it is surprising that Farleigh has the time for other interests. Home House, a private members club in London, is an example where he used his investment acumen and went against the advice of the so-called experts in this field.

They said it wouldn’t work, it was on the wrong side of Oxford Street, too expensive etc. But Farleigh and a colleague went ahead and renovated the old French Embassy mansion in Portman Sq, London, it to its original form. Now Home House is a great successful private members club with more than 2,500 members. Home House was recently sold with a handsome return.

Farleigh lives in the principality of Monaco, which he represented in the chess Olympics for 2002. He has three children and his wife is a fashion designer. He is a follower of professional tennis championships and plays tennis regularly. He doesn’t have much time for much else, but when he gets a chance, he also likes enjoys skiing and travelling.