How to grow a successful business by Rupert Lee-Browne, CEO Caxton FX on 27-Feb-2012

Rupert Lee-Browne, CEO of Caxton FX, talks to Roger about how he started the company and brought it to its current successful position in the market. He shares his strong views on the importance of SMEs to the development of the UK economy and, particularly, how they can lift the country out of the current crisis. Rupert also financed the development of Caxton FX in a novel way and he discusses an alternative for medium-sized businesses to raise capital rather than relying on banks or giving up equity - as well as the value of the BBC and the English language!

q: How did you come to start Caxton FX?

a: From a very early age, I always had a slight 'itch to scratch'. I started with the usual paper rounds, worked in restaurants and so on and always had a strong work ethic.

When I was young, I started one or two rather bizarre businesses, but did eventually go into corporate life. I didn't really enjoy it and my employers didn't really like me working for them either. There was always that mutual feeling and from my side there was always that itch to do other things.

I studied at university here in London. Having graduated, I trained in the media at a fast-growing buying agency – it was a tough training, but I worked under some guys who went on to do extremely well. Following my stint there, I did some consulting work for people like the BBC and the Daily Mail General Trust. I then got involved setting up a dot com business with a celebrity restaurateur. It was sort of a business-to-business precursor to Ocado - an online ordering system, but without the delivery side. We raised a few million and developed a reasonably successful business. It was a bit of a roller coaster of learning and I managed to get out of it with a few bruises, but not badly hurt.

After that, I did another piece of consultancy - this time for a currency company. Some investors had put money into the project without really understanding the business. They needed to understand it better, find out whether it was scalable and what exactly could be done with the business. That turned into an IPO and I was heavily involved in making sure that it floated OK.

When the project was finished, I realised what a fantastic business model it was. Most SMEs, particularly in the start-up phase, have problems with cash flow. The currency business has perfect cash flow - money comes in before you send money out. So, cash flow works extremely well and bad debt is more-or-less non-existent.

At that time, in late 2002, it was an unregulated business and I had some people behind me who were prepared to invest in my next project, so I drew up an extensive business plan. However, the closer we got to the launch, the investors dropped out for one reason or another. So, there I was with a great plan and no money.

I decided to go with it on my own in early 2003 - me, 25 grand and a telephone. I put one ad on Google and, 25 minutes later, I had my first deal. It was a real start from nothing.

q: Did you have a particular interest in finance?

a: I never saw myself as a finance geek or even being involved in the City. I think that helps. It means that we don't do things the same way as others - my concentration has always been on customer service.

When I entered the market, it was - how to describe it - 'a bit mucky'. There weren't so many currency businesses then and they weren't what I would necessarily describe as entirely ethical in their approach. There were a lot of hard sales tactics, with the objective of getting the money from the client today and moving onto the next as quickly as possible.

That isn't the way to build a sustainable business and, what amounts to ripping off old grannies, was not what I wanted to do. It struck me that there was a market niche for a company that provided excellent service, very good rates and looked to the longer-term, being prepared to take smaller margins and make less money, but at the same time building the business. I was always interested in long-term growth, rather than building the business and flogging it three years down the line.

Customer service remains the key to my ethos. One of my KPIs [key performance indicators] is the number of letters and e-mails that I get from clients praising Caxton or someone particular in the business. I always encourage people to send me e-mails when they are named for doing a particularly good job and I circulate them as examples of the sort of business we want to be doing. That builds the engagement with both customers and all of us within the team. Of course, team engagement leads to better customer engagement.

q: How do you find the challenges of leading, given that you regard yourself as a challenging employee yourself?

a: There hasn't been any Damascene change. When I started the business, I was always very focused on getting things done - and slightly quicker than actually necessary. I wanted results, and I wanted them rapidly, but whilst focusing on customer service. If we found that people joining us didn't move quite fast enough or do things quite well enough, then it was clear that things weren't going to work.

We discovered that this was not a good way to build the business. Staff turnover is not good - it is unsettling for both customers and the rest of us. I realised that we need different skills at different levels in the business and, as it changes, so we need to change. I always considered myself as a rather poor manager - always wanting things done now and done well - so, about four years ago, we brought in a Director of people at Board level. Her job is to make it is all about communicating properly with people sure that the people we bring in are the right people. There is a robust process and, once we have found the right person, we need to be sure that, in their six months' probation, that they are assessed every month so they understand the business, what is expected of them and receive the right training. After the probationary period, she continues to manage them to make sure that people are achieving the best they can, that they are fulfilled in their job and can see a career path. As a result, our 'churn' has dropped dramatically - people don't want to leave, we are adding new people and we all understand the culture we are trying to achieve.

I have learned that it is all about communicating properly with people. That is the key issue.

q: Did the business develop gradually or were there some step changes?

a: It always developed gradually. It was always about that one extra client trading with us and then another coming along. In effect, there are waves - one year may be slightly better or slightly worse, but it is managing that which is important. Enabling us to grow without stifling it and without pushing too hard.

I have been involved with some private equity backed businesses and, in the long-term, I don't see the onus placed on the businesses by such a relationship as being beneficial to everybody concerned. Understanding that there are waves and remaining sufficiently flexible to allow growth when things are positive and being able to rein back in when things are tighter is critical.

Because of the nature of the business, despite renting an office and equipment, we were profitable from day one. There was one year when we dipped slightly below par due to investment, but that in itself was a critical decision.

q: You resisted private equity for developing the business and issued your own bond?

a: Yes. It was a very interesting exercise indeed. Bearing in mind what is happening in the lending space as a whole - we have, for example, recently heard that lending to small businesses has dropped 6% in the last year. This is absolutely shocking, given where we are in the economic cycle.

What the economy needs is for banks to be lending to small businesses much more than last year. Every small business needs capital to help it grow. Typically, if you take the manufacturing cycle, to make the proverbial widget, you the economy needs banks to lend to small businesses need to go through a certain time cycle and that includes having to pay your rent and staff. So, before you can sell your widget, you need to borrow working capital to get through that cycle. Every business, at some point, needs such capital to get through the cycle and if we want the economy to grow, we need to let businesses grow.

If businesses grow, there is a greater tax take, more people are employed and they are paying tax too as well as putting money back into the economy - and paying VAT on the goods that they buy. It is a really simple logic.

As an SME, we are in the same position as other growing businesses. We found that in order to grow faster and further, we needed extra capital to fund that growth. We have an excellent portfolio of products, the right people on board, so all the bits of the puzzle were coming together to enable further growth.

We had options. We could have sold some of the business to private equity firms or external investors, but I am not convinced that, particularly in this business at this time, we want to take in such investors. So, we chose not to fundraise using this route.

q: What about bank finance?

a: Bank funding was another option, but we are in competition with the banks and added to which we all know the state of SME lending in the UK at the moment. With banks, the tighter the regulation becomes, the more risk averse they become and the more their decisions are based on 'box ticking' to satisfy the compliance requirements. As a result, banks make decisions based, not on the needs of the borrowing business, but rather on the minimisation of the risk to the bank. This is logical from the banks' point of view but, frankly, not good for the economy.

We considered bank finance and it was certainly was offered to us on acceptable terms, but we chose a different way.

q: How did the idea for the bond arise?

a: I was convinced that there would be another way to raise funds from investors without a complicated structure. After a bit of digging, I learned about corporate bonds. This was a method firstly used by a couple of other companies and I thought that it was a great way for us. Having found the right lawyers and advisers, it was a fairly simple process.

Not being a financial geek, I was not interested in complicated financial instruments. The bond is a means of borrowing small amounts from our partners and customers and not relying on one or two large lenders. It really suits us - we have around 200,000 customers, so we asked them to lend us a fixed amount over a four year period and we would pay them a certain amount on a regular basis (the 'coupon') and, at the end, pay back the amount borrowed (the 'principal').

This is a really neat way of raising funds. The bondholders benefit because they are getting a much better return on their money than the banks would offer, and they are repaid the money at the end of the four years. We benefit because we don't have one large lender imposing unnecessary constraints on us and with the ability of foreclosing should they get cold feet. The bondholder needs to trust that we will pay back the principal at the end of the term since it is unsecured debt. However, it is less risky than equities where, if the company goes bust, you are last in line.

I believe that this is the way forward

I truly believe that this is the start of the way forward form SMEs - well, more Ms - you need an existing trust from people and a reputation and, of course, the cash flows and signs of sustainable growth. You need to afford not only your growth, but to be able to pay the coupons and the final sum at the end.

Given all the problems that the country currently has and that there is a trillion quid in deposit accounts doing nothing, this is the perfect 'big society' option. The regulation is already there - it isn't perfect, but it is workable. In order for us to issue the bond, we had to prove everything to our FSA-regulated advisers, the business plan and figures are checked and all that would be required to make this a more wide-ranging option is some form of insurance in place. If the government were to back up to, say, £5000 of an individual's money, then it is all possible. It is about the people helping the people.

q: Do you think that this is a service that you might offer others?

a: Probably not - it would distract us from our core business. It is something that should be taken up, though. This is a fantastic opportunity for everyone to benefit and companies to get the capital they desperately need to grow.

It needs government to pick it up and run with it. It needs to be low cost and enable businesses to borrow a few million to build and produce ten million in return.

q: Who are your customers and what are your main products then?

a: We have a remarkably diverse range of customers. At the start, my aim was to service reasonably well-off individuals who were doing things internationally - buying or selling a house, business or boat, for example. That then extended into the corporate SME side - directors of such businesses were using us on a personal basis, so they started to use us for their business requirements too. That then extended out and the business grew.

The currency card came about almost by accident. We wanted a product or service to enable us to talk to our currency transfer customers on a more regular basis. At that time, prepaid cards were just starting, but they were a pretty low-grade products. Very expensive, designed largely for the un-banked and not good value. The focus was on taking money from the customer and not on any long-term relationship.

We jiggled with the figures and found that we could, indeed, offer a good product in the form of a travel card. You load your account with currency (Euro or Dollars) and use it at point of sale like any other debit card. We also offer a Sterling card where you get the exchange rate at the time of the transaction, rather than buying in advance. It is a product for the times - it is good value and backed by a good service from our call centre here in London - managed by us and not outsourced.

q: How does the corporate client currency side help businesses mitigate their risk?

a: It is quite simple really. Let's say, for example, that you have a container load of goods arriving in 6 months. If you were buying from a UK company in Sterling, then you would know how much that was going to cost you - if you had agreed that the container load cost £10,000, then, after the 6 months you would pay £10,000. If, however, you are paying a supplier in Euro, for example, then exchange rate fluctuations will mean that the €10,000 may well be worth quite a different amount in Sterling then compared with now. The value may go up or down, of course, but business is about mitigating risk, so it is worth being able to fix that cost now to be sure.

That is easily done - you can fix the rate today so that you will not be affected by fluctuations by buying a forward contract. There are also currency products that are known as 'options' which could be seen in some ways as an insurance policy on currency fluctuations. With these, you might benefit from a change of rates in your favour - but not lose out on the downside. Like all insurance, there is a premium to pay for this, but so long as the risks versus rewards are thoroughly considered, it can be a very worthwhile product.

Of course, it applies equally to things that you are buying or selling. If you agree to sell your widgets for €10,000 when they are made in 8 weeks, again, you cannot be certain of what that will net in Sterling when you actually sell them. Buying a forward contract or an option gives the business that safety and certainty.

Some people consider that they can predict the markets and that they 'know' which direction particular currencies like the Dollar will go - up or down. However, no-one knows with any certainty what will happen to currencies – if you recall in 2008 - 2009 the rapid change in values across the globe, from Euro to Yen, you will realise how change in Euro value from 1.5 to 1 to the Pound - if only we could make such predictions with any certainty.

What Caxton FX offers is a much greater level of understanding and analysis so that risk can be minimised.

q: We have talked a bit about SMEs being the growth engine of the economy - how do we actually achieve that, do you think?

a: Call me strange, but I have a desire to see the economy doing well. Partly, of course, because if the economy is strong, my business will do well as they are connected. In order for the economy to grow, we must invest in the fast-growing SMEs.

I have a desire to see the eonomy doing well

There is a lot of noise around entrepreneurs and start-ups. There is a lot of encouragement for start-ups - particularly if it is young people. The reality is, however, that most start-ups fail and that we all make mistakes when we are young. It is great to think for the longer-term, but we need to put the focus on building and growing the established businesses that have been around for more than about three years, have a proven model, are making money and are growing. It is tragic that we are seeing lending to this sector drying up.

q: What do you think of the government's mentoring initiative?

a: Every little bit counts. It is a cheap and effective way of doing it. If you or I who have experience running businesses can help a smaller, developing company, that is great news. Again, it is part of the 'big society' - people helping each other to improve.

q: How do we identify these growing businesses to help?

a: I would say that we want such companies to be doing something 'more physical' rather than being more service-based. The latter tend to be less scalable. Manufacturing tends to be scalable. It needs to be specialist and value-added.

Look at Germany - when the recession started, they encouraged businesses to keep staff on regardless of whether or not there was work. They provided state-sponsored training programmes for when there was 'down time' and encouraged people to stay on and learn even more skills. That was a fantastic thing to do. Germany has played it right.

It needs to be more about the ability to manufacture things rather than another advertising agency or lawyers.

There are other important areas too.

we are not investing in our education system

There is education. Oddly, we are not investing in our education system particularly well.

There are other things - like the BBC. Think back to the Battle of Trafalgar. It was (excuse the pun) a real watershed. It proved that the English were supreme on the seas and enabled the country to grow and prosper hugely. The current hiatus in the global economy gives us a huge chance to export the English language and our culture - the things that made us great a hundred years ago can still work in our favour. The BBC is one opportunity to do this - promote and grow the UK as a centre for excellence - tied into our education system.

The country needs to leverage its assets - its education, language and those potentially fast-growing, medium-sized businesses that will help the economy grow and the country to get out of the current doldrums.

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