By Laurence Garrett, co-founder & Partner of Highland Europe
I first met Martina King at a dinner in Cambridge when she had just joined Featurespace as CEO. I remember being struck by Martina’s honest appraisal of Featurespace’s situation: market-leading technology, but still looking for suitable commercial applications.
The company was born out of years of research from the late Bill Fitzgerald, a Professor of Applied Statistics and Signal Processing at Cambridge University. Bill founded Featurespace to fund his PhD students, one of whom was Dave Excell. Those in the tech space will know that Prof Fitzgerald’s research led to a life-long friendship with Mike Lynch and contributed towards the academic foundations of companies like Autonomy and Darktrace. Featurespace left the Engineering Dept in 2008 when Betfair selected them to build the first adaptive behavioural analytics fraud system.
In 2013, the business wasn’t at the sweet-spot of our investment strategy, given its relatively early traction. Whilst growth was impressive, scale is very important to our partnership – revenue scale typically demonstrates market fit and commercial demand for a product, reducing an investment’s risk to sales execution and addressable market size. But we stayed in contact with the business and, in early 2017, looked at it again in detail. By then, the situation was very different.
Real stories from a complicated investment process are rare, so I wanted to share why we are now partnering with Featurespace and their respective investors as part of a new £16.5m funding round — and what happened along the way.
Over the course of the past four years, Martina and the board had transformed Featurespace into a vertically-focused risk management software provider, delivered on-premises or via cloud, with proven applications in the payments, travel, insurance and gaming markets. By leveraging state-of-the-art machine learning and adaptive behavioural analytics, Featurespace’s central ARIC platform (‘ARIC’ stands for adaptive, real-time, individual, change-identification) detects new fraud attacks in real time, dramatically reducing false positive alerts – and thereby slashing the number of legitimate transactions being blocked.
The ARIC platform is robust, secure and scalable, having processed billions of transactions for various technologically-demanding companies like TSYS, William Hill and Betfair, to name a few. Markets like payments are significant revenue opportunities, given the extent to which traditional rules-based systems struggle to cope with the volume and increasing complexity of fraud attacks. The annual global associated costs of card fraud alone is estimated to be greater than $40bn annually (Source: Nilson Report, 2016).
Customer contracts are more complex than typical enterprise software solutions and we spent considerable time understanding their terms and conditions prior to making an offer to invest. Rigorous, upfront commercial and financial diligence in an investment process provides us with confidence to move forward when we issue a term sheet, which we regard as a true statement of intent from Highland Europe and not just a request to learn more.
On receiving our initial term sheet, Martina was very gracious in explaining its deficiencies. We listened carefully and responded accordingly. However, despite negotiations, our offer was still not the best and two other firms had beaten us on valuation. Our team was disappointed, but happy in the knowledge that we had moved as far as we felt comfortable doing. Pricing in our world is clearly an art not a science, and it is important to stay true to our strategy and limit ourselves to what feels rational.
We waited on the side-lines for some six weeks to see what would unfold before calling Martina for an update. Once again, I was struck with Martina’s honesty and directness. Our competitors were still undertaking much of the formative analysis that we had completed many weeks before. We held our terms and, with the promise of moving quickly, started our final, confirmatory diligence.
And confirmatory diligence means confirmatory. At Highland Europe, we are not looking for discovery diligence. If there are things to discover, we should do that before the term sheet is sent. Our confirmatory work is focused on what we learn from trusted technical experts (SeedCloud), legal experts (Osborne Clark) and our own customer reference work.
From there on in, the process was smooth and we closed the round.
Relationships are key to our business and are a vital ingredient in any of our success stories. A great relationship requires a combination of respect, thoughtfulness and candour. It was evident along every step of the investment process that Martina and the team have these qualities in abundance. Our partnership is thrilled to be working with Featurespace – it has all the great ingredients we search for when making an investment, and we look forward to working hard to support them on their journey to success.