Former Dragons’ Den star Richard Farleigh has opened up about the decision that cost him £35m.
The Australian-born investor is best known for his appearances in the Den between 2005 and 2007, which included backing Levi Roots’ Reggae Reggae Sauce.
Farleigh has backed, advised and co-founded more than 100 early-stage companies, including Net-a-Porter, but said not all his investments have worked out.
He recalled: “In 1999, I made a mistake that forced me to watch £500,000 of my money disappear each day for months.
“A brilliant founder called Jez San had just launched an exciting new technology company called Arc International, specialising in computer chips.
“I admired and respected Jez. He also knew more about technology than just about anyone.
“So at the height of the tech boom, I invested about £3m. With expansion and fundraising, my ownership was soon diluted to about 4 per cent, but it didn’t bother me much. I’d rather have a small stake in a successful company than a large stake in a failing one.
“Arc was ready to be listed on the stock market – I was ecstatic.
“My sweet spot had been taking companies from £0 to £25m, then selling out and moving on. But despite this, I declined an offer of £20m for my stake, believing I’d get a higher return once Arc was trading on the open market.”
It was then that Farleigh made his ‘fatal decision’ to hold on to his shares to reassure new investors.
“I signed a ‘lock-in’ agreement,” he said. “This prevented me from selling my shares for six months, but it was naive.
“Arc was promising enough, and the new investors were so enthusiastic that my commitment wouldn’t have swayed them anyway.
“I also overlooked how fast things can change in business. I thought, ‘Six months isn’t long; not much will change.’
‘Tech wreck’
“But then came the ‘tech wreck’.
“The early-2000s tech bubble burst, wiping out valuations overnight. A company I’d helped bring to life, valued at £1bn, with my stake worth a dazzling £40m, was now dubbed ‘unproven and risky’.
“Trapped by the lock-in, my shares plummeted by £500,000 each day. The total loss was around £35m.
“I was very stressed. Why had I signed that silly agreement? Like the stereotypical man, I didn’t talk about it. My sleep and mood suffered. I was irritable and difficult to be around. I spent hours playing speed chess online just to escape.
“Thankfully, despite all of this, I kept enough cash in reserve, so I consider myself lucky compared with many others who were decimated by the fallout.”