Tuesday 14 March 2017 3:25 pm

FinnCap chief executive Sam Smith on IPOs, MBOs and the value of skin in the game

FinnCap is a unique business grown from unusual circumstances. The leading City broker was established in 2007, when Sam Smith, its chief executive, orchestrated the management buy-out (MBO) of a small broking subsidiary of a private client stockbroking firm. Most significantly, FinnCap is now almost entirely owned by its employees – something that was a vital outcome for Smith.

Speaking at a recent Leap 100 Power Breakfast, the entrepreneur said share ownership remains “massively important” to her. “Ten years ago, we instilled a culture we’ve still got – everyone bought into a common purpose. If people put their own money in, it makes a huge difference to how engaged they are. It even dissolves internal factions, because people understand that someone else’s performance will affect their wealth.”

While Smith was securing the buy-out (a three-year process), her team grew from five to 28. “The people who had joined us had come on board on the basis that they may get an equity stake in the business. They were entrepreneurial people willing to take a risk for the potential of a big gain.” Smith spent hours with spreadsheets making sure everyone was offered the same shareholding – “I was on the same footing as my PA; everyone was offered a fair share.”

Of course, things weren’t all plain sailing. In 2010, having invested £500,000 of her own earnings and bonuses into the MBO, Smith found herself with 48 hours to raise £2.5m to purchase the bulk of the remaining shares. “Because of the split we initially made, we quickly ran out of that initial 50 per cent to share around new employees, and there was 50 per cent that could be used to drive the business faster if in the right hands. We managed to raise the money in 24 hours, which gave us a chance to create a really good, egalitarian culture.”

Now, FinnCap offers new employees very low-interest, long-dated loans so they can purchase shares. There are a small number of option schemes but now rarely used (which Smith says don’t work nearly as well as buying shares), and the firm continues to build a culture driven by skin in the game. It is the Number One Nomad to Aim-listed businesses – just this month it introduced Anglo African Oil & Gas to Aim in a £10m listing.

Having both raised money herself and done so for numerous other growth businesses, she says the greatest mistake people make is understanding what it is they’re pitching. “Actually, every source of capital needs the same pitch. The biggest mistake is misunderstanding that it’s not the product the investor is buying; they’re buying a share in you.” The ultimate question any investor is going to have, she adds, is why they should put money in now.

Smith says it’s easy to forget that you’ve got five minutes to make an impression, and probably only 30 minutes overall. “A lot of people don’t know their financials well enough, and the issue is that you may find yourself in front of that same VC or fund manager five years later, and they’ll remember you.”

And on the subject of IPOs, she says they “work best when there’s under-promising and over-delivery. Fund managers are people – they do understand that things can go wrong; the worst thing is to spring a surprise. Your IPO should be the worse price you ever raise money at".

Recently, FinnCap set up FinnVentures, which helps inject capital into private companies and connect them with institutional and private investors. “We’re seeing increasing numbers of VCs who have done partial exits themselves, in sectors like fintech, and want to help other companies grow. There’s a lot of money going in at the early stages, and that simply bodes well for IPOs.”

And on 28 March, FinnCap will be hosting a female founders forum, with a roundtable on access to funding and mentorship. For more information, go to: www.finncap.com/news-insight/female-entrepreneurs-funding-growth.