I founded Star with my brother Ben back in the 90’s as one of the UK’s first ISP’s. On Friday the company was sold to Claranet for $88m.

In between, it has been a long and winding road for the business. We set up Star as an ISP because we felt that it was an exciting and emerging market. We liked the idea of tapping into this new thing called the Internet. We also liked the idea of a recurring revenue business that would generate monthly fees in perpetuity (assuming we looked after our customers!). Our previous business had been a hardware distribution business and we knew how difficult that could be, having to start again every single month, and also dealing with small and every reducing margins.

We decided to focus on the SMB market with Star as we felt that the ISP’s at the time were focused either on the consumer or enterprise markets. But we soon realized that there wasn’t much money to be made in simply offering a connection.  There were already quite a few companies with much larger budgets to spend on both their networks and their marketing that would always be able to do this better than us.

So we thought long and hard about how we could stand out in the market and be able to charge more for our services and came up with two main principles:

*Customer Service – provide some real hand-holding in the form of great customer service

*Innovation – offer more than just a connection and help customers to really get the most out of the Internet

We always stayed true to these principles and they helped us to prosper in what was an increasingly crowded and commoditizing market.

Our first product was a single box to connect any network to the internet that we called NetStar.  The box included a mail server, a firewall, an IP-IPX Gateway and made what was a complicated process much easier to deal with. NetStar won a number of awards including Internet Product of the Year in 1996.

In 1998 we launched a range of additional services called NetTools, which included an Internet-level anti-virus service. We felt there was an opportunity, with viruses now piggy-backing on email, to build an anti-virus service within the fabric of the internet that could address the problem closer to the source. The service did not require updates or look for an exact match like traditional AV software and instead tapped into multiple data sources including the reputation of the sender, movement patterns, and within the email itself to dynamically recognize new threats.

The anti-virus service was so successful that we set up a new company in 2000, MessageLabs, to scale up this technology and build out the operations on a global basis.

This led to some difficult years for Star as many of the best people and resources were (rightly) drafted into MessageLabs as it was seen as the bigger opportunity.

In 2008 we were gearing up for an IPO with MessageLabs as the company was now a global leader in anti-virus and anti-spam services with revenues of $150m. We were advised that it would be best to sell Star so we could take MessageLabs to market as a pure-play SaaS story.

We took the opportunity to buy Star back from our investors and, towards the end of 2008, MessageLabs was sold giving us the time and money to put back into the business.

In 2009 we set up Notion Capital and Star became our anchor investment for Fund I. We believed that Star had a great opportunity to reposition itself as a broad-based Cloud Computing provider where customers could migrate all their communication and computing needs. We also felt that Star could really help us with the evaluation of new technologies and act as a potential route to market.

Thanks to the great work of the management team and the whole company Star was really delivering on this vision. The business moved beyond the £50m in annual revenues and was back growing again. This all culminated in its sale to Claranet last week. So much of this market is now all about scale and I’m sure the two companies are the right fit and will be stronger and more successful together.

Star has now had the exit that it deserves and I’m sure the combined group will go onto to great things together. But my overriding memory of Star is as a mothership.

Star nurtured so many great things. The business taught Ben and I that the best way to stand out and maintain margins was to innovate. It took so many people who were inexperienced and rough around the edges (myself included) and taught us so much about building Internet businesses. So many of those people have gone onto great things and Gloucestershire is now well and truly on the technology map. Star also came up with and nurtured the idea behind MessageLabs, a company that went on to a $700m sale to Symantec and still stands as one of the largest SaaS transactions.

At the same time as doing all of this Star was a solid, reliable and growing company in its own right. It never had the buzz or the amazing growth of some start-ups. But it was a company that you could trust and that really looked after its customers.

For me Star really was the mothership and I’m going to miss it much more than I realized now that it’s gone.

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I wrote a post a few weeks ago about how algorithms will be driving more and more parts of our lives in the future.

One example of how businesses are using algorithms was with a VC called Correlation Ventures. Correlation has specific criteria for evaluating new opportunities and they feed the data into an algorithm that tells them whether to invest.  The firm relies on this method to make better decisions and also make the process more efficient and less time consuming on both sides.

I’ve not heard of many VC’s using these machine based methods and it made me think about how far you could take this and whether early stage investment decisions can be made in a scientific way.

The most important thing an investor does is try to pick the best companies and then strike a deal to gain a stake in them. I believe the way that we do this is constantly evolving based on a combination of experience and market forces.

I’m always thinking about how I can identify the very best companies to invest in so I thought I’d try to review my process in the hope of putting some more structure around it.

For me there are three cornerstones to a great opportunity – team, product and market.

1.    Team

This is the most important thing and drives everything else. I really believe that the team you build is the company you build.

There are many aspects to team and there can be a danger of looking for too much, especially in an early stage business. I believe that the single-most important factor is to have founders who are compelling, driven, passionate and bright. In short to have founders who can ‘fill the room.’  To get this piece right is so important and, in my opinion, the biggest driver of success in a start-up.

2.    Product

I want to feel that the company has an idea that really meets a need and makes their customers lives better. I also want to see that the product ‘walks the walk’ – even an early version needs to looks great, be easy to use and demonstrate some real innovation.

Beyond that, it’s great to see a roadmap that shows a clear sense of priorities, that the team know what ‘they want to be the best in the world at’ and that decisions are set in the context of customer feedback and some real conviction about where the market is heading. I also like to see the product leveraging recent technology developments that provide the opportunity to approach a problem in a new and improved way.

At MessageLabs, the market had changed because almost all viruses started to piggyback on email to spread much faster and to more people then before. At the same time the internet infrastructure had become good enough to run some less demanding applications from remote data centers.  These developments made it possible for us to deliver an internet-level anti-virus service that scanned email while it was in transit and used a range of techniques that would not have been possible with PC based software. We also decided, from an early stage, that the one thing we never wanted to compromise on was being the best at stopping threats and this drove our decision making on product priorities.

3.    Market

The company needs to be entering a market big enough to deliver good returns to its shareholders. As a VC that invests mainly at the ‘Series A’ stage we want to believe that the company we’re investing in has a market that could deliver an exit of at least $100m. We also want to feel that this kind of exit would be possible without any overly aggressive assumptions on market share – this would usually mean less than 10%. Very few companies manage to eke out a market share of more than 10% so it makes sense to assume it will be below this level.

I also like a market that has two characteristics – A) Widespread dissatisfaction with the status quo and the incumbents and B) Recent developments (usually technical but could also be political, economic or sociological) have paved the way for a new generation of competitors.

The banking sector is a great example of this where almost everybody is frustrated with banks and the internet, as the great transparency enabler, has opened up all kinds of new possibilities.

The X-Factor

I want to feel that the business is strong in each of these areas and that tells me it could be a racehorse. In the best opportunities, the way these ingredients combine together will also be more than the sum of their parts and you just have a feeling that this is something special. I call this the x-factor and it’s not something you can really explain or measure.

What Next?

The next stage for me is seeing where our racehorse is on its journey and what kind of speeds it’s achieving.

In my world, I like to see a business with meaningful revenues, fantastic growth, healthy margins and a representative group of committed customers. Customer commitment is demonstrated by the money they are paying, the feedback they are giving and the length of time they have been on the service or are contracted to be on the service.

The Deal

Once I’m satisfied that the traction suggests my racehorse has made a good start on its journey to the promised land I then start to think about the deal.

The deal is simply the instrument that allows me to buy a stake in the company and its future success. It’s difficult to value an early stage business in a scientific way. There is value in the three attributes of team, product and market. There is also value in the traction that the business has established.  But working out exactly what that value should be is a difficult thing.

I like to feel that I/Notion can bring a good deal of added-value to the table and we are therefore never likely to be the highest payers. The most important thing is that both sides should come out of the process feeling good about the deal, feeling aligned on what they are trying to get out of it and looking forwards to working together.

Structured Instinct

So this is how I go about selecting and investing in start-ups. It is by no means a perfect process and I’ve made my share of mistakes. But I like to think that I’ll keep learning and keep improving.

I still believe that early stage investing is more about instinct than anything else but that you can bring some structure to it and you can keep refining that structure as you go. Maybe the best way to describe it would be structured instinct?

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I was giving a talk to the Chairman’s Network recently on exactly this subject and I think it’s a pretty interesting one. So I thought I’d try to summarize my talk.

The first thing to cover is whether our economy needs saving. I think this is a fairly easy one. The UK’s economy (together with most of the world) has been flat for at least two years and is not even keeping up with inflation. And this is off the back of the worst recession we have ever seen. So in conclusion the economy has really been in a bad way for several years now and clearly needs saving!

I then thought about who else could save the economy? The government could try to reduce their spending to reduce the deficit but we have seen that this just leads to further decline and does nothing to address the growth that is so desperately needed. The government could also try to spend more in an effort to kick-start some growth and increase employment. But the trouble is that the government doesn’t have any money so this is hardly a sustainable strategy.

What about the finance sector? Until 2008, London’s reputation as the world’s leading financial centre had been growing and growing, creating lots of jobs and generating huge profits in the process. However, as we now know, this was built on sand. Bankers were driven by greed and short term profits, selling products that no-one understood and encouraging people and companies to take on debt that they couldn’t afford. The house came crashing down and the industry will never reach the same heights again.

If you look more generally at big corporations they are experiencing similar difficulties. Profits are generally being maintained by cost cutting rather than any significant growth, as organizations struggle to adapt to the challenges of globalization and a stagnant economy. There are of course exceptions to this and I don’t want to be too downbeat – but it’s difficult to see big business as the answer to our problems.

When you start running through these potential sources of economic growth you very quickly realize that we need to be looking elsewhere for hope and recovery.

This is where the entrepreneurs come in. Entrepreneurs are change agents. They are the innovators, the creators and the growers. They are not happy with the way they find things. They want to change the world or at least their little piece of it. They believe in a better future. God knows we are desperately in need of these things right now.

I think there are four main things that an entrepreneur needs to be successful and have written about this before. Those things are funding, people, a supportive government and the right attitude. I think entrepreneurs need our support more than ever and there are ways we can do that when you look at these areas.

On the funding side why not put a little of our saved money into an early stage business? I mean where else are you going to put it these days? The current generation of investment opportunities have let us down so why not invest in the next generation? Plus there are more and more tax breaks being introduced that make this even more attractive.

In terms of finding the right people I think schools and universities should provide more teaching on entrepreneurship and, wherever possible, have entrepreneurs themselves play a part in this. Entrepreneurs love to tell their story and to give back.  The earlier kids can start to learn about starting their own business and be inspired by people who have the more likely they will be to go ahead and do it.

In the technology world there is also a problem with not enough people learning to write software. When I was growing up it was all about learning Japanese or Mandarin as the best way to ensure career success. I would say the most important language of the 21^st century is computer coding and that the more people learning how to do this the better it will be for our economy. We can all encourage schools and universities we are connected with to focus more in this area.

I actually think the government has done some good things in terms of supporting entrepreneurs. They have expanded the EIS scheme, entrepreneur’s relief and launched the entrepreneur’s visa to name a few initiatives. What I now think is even more important is for the government to get out of the way and make it as easy as possible for entrepreneurs to build their businesses.  I’m thinking especially in terms of employment law and other time wasting regulations and bureaucracy that make building a business even more difficult.

Attitude is probably the most difficult and also the most important thing to change. I still think for most people that being an entrepreneur and starting your own business is seen as an overly risky and reckless pursuit. Americans feel very differently about this and believe that starting your own business is the most amazing and rewarding thing that you can do. This has been passed down through the generations and I think we need more of this attitude and recycling if we are to create an environment that fosters entrepreneurship.

So I think there are ways we can help individually to help create a better environment for entrepreneurs. But there are also initiatives that we could either create ourselves or lend our support to which can also make a big difference. Here are a few examples of great initiatives that are creating more entrepreneurs in the UK:

Seedcamp – now celebrating its fifth birthday, Seedcamp is Europe’s leading accelerator program and seed investment fund. They have now invested in 73 start-ups from across Europe, almost all of which re-locate London, creating more than 800 jobs in the process.

Code Club – they are creating a nationwide network of volunteer-led after school coding clubs for kids. There are now 217 clubs in the UK and they have an ambitious target of 25% of all primary schools by 2011.

Tech City – the government’s initiative to encourage the growth of the tech cluster in East London has helped drive a big increase in start-ups in the area from 15 in 2008 to more than 200 in 2011. You can argue about what contribution the government has made but, either way, it’s an area with a huge amount of start-up activity creating thousands of jobs.

Tell Series – this is a monthly series run out of London Business School where proven entrepreneurs come in to tell their story to the next generation. It attracts great speakers and the events are always packed full of people.

I’m sure there are many other great initiatives out there or just good ideas that haven’t yet been launched. I believe we need to support these initiatives and turn our ideas into reality because they can play their part in creating more successful entrepreneurs. Alternatively we can always just go out there and start a company ourselves!

Either way I’m convinced that entrepreneurs are by far our best hope to kick-start the economy. And of course we all benefit from a stronger economy. So let’s get behind our entrepreneurs in any way we can because who the hell else is going to save our economy?

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