Paul Davis addresses SCIE students
Christchurch based entrepreneur Paul Davis enjoys markets because they are such good teachers. “They constantly help you check whether you are right about the world, or not,” he says.
Davis presented his entrepreneurship insights at a Science and Entrepreneurship class, run by powerHouse, at the University of Canterbury.
He has had a lifetime in the classroom of the real world as an engineer, software developer, venture capitalist and hedge fund manager based in Silicon Valley, London, Sydney and Port Levy on Banks Peninsula. He describes himself as lucky to have surfed three waves of technological revolution: Mainframes, PCs, and the Internet.
Davis started his career studying mechanical engineering at Stanford University in 1976. He was distracted by a mainframe terminal that the education department had put in the dormitory as an experiment. Paul and his dorm-mates figured out how to use it for games. Davis says he “happened to be the guy who first accumulated 100 hours of online time”, and was recruited to help other students use the terminals for the first time in computer science courses. From there, the artificial intelligence division of Stanford Research Institute (SRI) engaged him to babysit the mainframe. Before that, the most significant jobs he had had were pumping gas and clearing tables. Disliking the institutional nature of the research institute, Paul began working summers as an engineer and labourer building ski lifts around the US and Europe. However, discerning after a few years the limited opportunities for innovation and growth in this industry he left and returned to Silicon Valley to look for work.
Venture Capital
Looking for his next opportunity, Davis had placed an ad in the local paper: “Creative engineer who knows programming looking for work.” Near the university on Sand Hill Road some early London-based venture capitalists had set up, and they hired him. This start-up had written out of the box project management software for the soon to be launched IBM PC and his role was technical support – which included everything from answering the phone to copying and mailing floppy disks to fill orders. In those days, little was known about PC software business models, and Davis was drawn to learn the art of making sales. Realising he needed to understand more about accounting and law and wanting to spend time in New Zealand, Paul came to Otago University to do an MBA. He ended up intrigued by finance, and going back to London to join the firm of VCs who had sponsored the California project. He found himself managing a later incarnation of the original out-of-the-box software, but it was unable to gain traction. “In the end we were out-spent and out-programmed,” he says.
After freelance projects in Hong Kong and back in New Zealand, Davis began a PhD at Bond University in Australia, writing software to price options, train money market dealers, and accompany economics textbooks while pursuing his studies. He also developed software that could model liability profiles for banks which lead to being hired by Bankers’ Trust to build dealing systems and to run a portfolio investing in technology companies.
Before joining BT he was at Melbourne University for a year, and started up the first Australia-based Internet Service Provider, connect.com. This was exited for 40-times its original value to a modem company, which then sold to AAPT, ultimately bought by Telecom New Zealand. This experience led him to heading up the technology incubator Nova Pacific Capital which was listed on the Australian Stock Exchange (ASX). During his three years at Nova he saw more than 400 business plans, of which he selected 24 for due diligence, 12 for negotiations and four for investment.
Gaming
By this time, online gaming was emerging in the hacker community, and Davis backed a start-up launching a multi-player online game network. This also couldn’t reach breakeven when a major corporate again outspent the start-up. He realised one of the great dilemmas of the internet – monetisation of content. “You need to provide people with something they are already used to paying for,” he says.
He took this lesson to heart in founding E*TRADE Australia. This company, the first internet broker in Australia launched in 1998, listed in 1999 and eventually acquired by ANZ, was his most successful exit.
Davis then founded his own firm to manage a large university superannuation technology investment fund, launch the Technology Investment Fund on the ASX and create the long-short global equity hedge fund Intercept Capital. For ten years his small team used proprietary software and shoe leather to beat markets around the world from an office in Sydney and his farm on Banks Peninsula.
Processor-intensive evolution
Davis describes the next two great technology waves as biotechnology and solutions to support resource management like food, water and energy. “The world must shift from material and energy intensive consumption to processor and storage-intensive, and that’s a big shift,” he says.
When approaching investment, he looks for three things: the insight that has defined the problem the start-up has been created to address, the quality of the fix embodied in the solution, and the business model describing how the company will attract customers and how they will pay.
The odds for start-ups are not good, but they are getting better with more knowledge and entrepreneurship education, he says.
Critical success factors
Every start-up needs to balance the magic of technology with marketing and sales and finance – a “three-legged stool” ensuring the start-up is equipped for all key business functions. Entrepreneurship is best done in teams, he says – no-one can cover off all three competencies to the quality needed for success.
Of the 10 start-ups he has spearheaded “a few have gone really well,” he says.
“I would encourage anyone thinking about being an entrepreneur to realise that it’s something you get better at and the more times you try the more likely you are to get runs on the board.”
He advises budding entrepreneurs to get good at solving big problems. “Pick important problems that will last for a while,” he says. “Find the problem that people are willing to pay to get rid of.”