M8 Capital Uncovered, Part II: due diligence

In this second piece about M8 Capital, Mic Wright and Oliver Milne take a closer look at what exactly is going on in the firm’s own financial structures.

In Part I of our investigation into the mobile-focused venture capital firm M8 Capital (pronounced “mate”), we looked at its involvement in the death, takeover and rebirth of the company now known as Rummble Labs. Rummble’s ousted founder Andrew Scott responded to The Kernel’s story on his blog.

The post is long, complex and occasionally self-justifying. You can read it in full on the blog but, for your convenience, here it is, condensed, using Scott’s own words. (Click here to see biographies for the full cast of characters, or wait until you have finished reading to see them at the bottom of this page.)

Rummble redux

“Via an introduction from Joe Neale, I met with the M8 Capital team a few times in Q1 2010 …  they seemed enthusiastic for Rummble’s vision and I was particularly impressed with Joe Kim, who was articulate and clearly experienced in business.

“I will give some credit to Joe Kim at that time for having conviction enough to consider investing in Rummble and consequently engaging in negotiations, despite the swirling problems, in order to get us off the proverbial sand bank…

“I think as a brand new early-stage VC firm – Rummble turned out to be their first investment – which had limited experience dealing with scrappy, dirty start-ups, the Principals – at that time having had virtually no hands-on experience either investing in or running such companies – struggled to understand some of the decisions that had been made … to simply keep the start-up afloat.”

Scott notes that the 2008 banking crash caused a serious shortage of UK angel investment and that, along with other major issues, took its toll on Rummble’s attempts to regain momentum. He claims “the bootstrapping corner-cutting-to-survive nature of Rummble at that stage … came as a bit of a shock to [M8].”

Despite the trickiness of the negotiations, Scott says M8 agreed in principle, after due diligence, to invest £750,000 for 22 per cent of Rummble. He recalls: “This was fantastic news. Finally something seemed to be going Rummble’s way.” Hindsight, as they say, is 20/20.

The potential investment from M8 was exactly the size of capital injection Rummble needed to push its consumer-orientated strategy forward. Scott says: “I would have retained control of the business but also had the runway to truly deliver on an improvement to our user experience … building on top of a platform which was, in my view, more advanced than any of its peers.”

However, as The Kernel detailed in Part I of this report, the deal became fraught. This is not unusual for negotiations of this kind but the fall-out was more serious than most clashes between investors and founders. Within weeks, Scott had lost control of his company because, he claims, he was “honest”.

To his credit, Scott admits in his post that his explanation “probably sounds ridiculous”. He recounts:

“A minority shareholder, John Rand – who had been doing part-time work in return for later post-funding pay – had also been doing Rummble’s bookkeeping to save on costs. Just before I signed the personal warranties – which had me vouch for the accuracy of our accounts/books as part of the investment – I did a final and thorough rechecking of all the accounts…in the process, I identified circa £20,000 of additional creditors which has not been included on the balanced sheet which had, two weeks earlier, been sent to M8 Capital.”

Having confirmed the error, Scott says he sent M8 a recalculated balance sheet with notes detailing the reasons for the changes. This appears to have been the chink in Rummble’s armour that M8 had been waiting to exploit. The original deal was off. Scott says M8 “felt the financial management of the company was so poor that they would only be able to do an equity investment rather than the convertible loan [which had been agreed] and would now require 75 per cent [of the company], instead of 22 per cent.”

“I, of course, made mistakes … not being ruthless enough in culling projects, nor taking a far more radical approach to try and reposition Rummble’s relationship with M8 Capital…”

Scott’s tale encouraged The Kernel’s investigations team to delver further into M8′s own governance and financial arrangements and its relationship with the Kuwaiti-backed AGC Equity Partners – one that is publicly kept relatively quiet.

Due diligence, inverted

M8 Capital Partners is a toddler. It was incorporated on the 24th of May 2010 and its accounts, from 24th of May 2011 and 2012, show the company has £1 in assets. These documents are signed on behalf of the board by Karen Milliner, acting as director and company secretary.

Milliner is an employee of M&N Group Ltd, which provides chartered secretaries for many firms. Milliner is listed as a director for 238 companies according to records held by the website due diligence website Duedil.com and Companies House.

M&N Group also advertises services for incorporating offshore companies to “minimise their overall tax liability” and the level of information registrars of companies are required to divulge.

M&N also provides chartered secretaries to AGC Equity Partners limited, M8′s shadow middle-Eastern parent company.

The address confirmed in the accounts of M8 Capital signed by Milliner is 250 City Road, London. M8 Capital gives its office address as 4th floor, 86 Jermyn St, an address it shares with AGC Equity. 250 City Road plays “home” to 26 companies, but its only real tenant is the accountancy firm Lubbock Fine and parent group Russell Bedford.

M8 Capital is wholly owned by a single shareholder, a shell company called Guardheath Securities Limited. Its registered address is above a greasy spoon in Kingston, South London. The shell company was created by five shareholders: Naresh Shah, Geoffrey Goodyear, Rohit Majithia, Pankaj Nathalal and Russell Rich, all of whom are chartered accountants at Lubbock Fine.

Lubbock Fine specialises in corporate governance. It boasts of expertise in creating shell companies, highlighting potential benefits as avoiding the costs of “ever increasing regulations . ..and escalating costs”. It says many of its clients find no need “to maintain the huge overheads of a functioning office facility” – i.e., they don’t need to actually exist in any tangible form.

Lubbock Fine is part of the global Russell Bedford group which maintains offices Bahrain, Dubai, Costa Rica and Kuwait. It also acts as accountants and auditors to the aforesaid AGC Equity Partners.

Another link between M8 and its Kuwaiti sugar daddies is M&N, which is praised on Lubbock Fine’s website: “[Our] association with M&N Group goes back many years and their greatest strength is the speed at which Karen and her team attend to all our secretarial needs, something we rely on heavily.”

The relationship between AGC Equity Partners and M8 Capital appears to be kept deliberately vague but the links are clear – facsimile duplication of staff, shared company secretaries and accountants show the two are yoked.

Investing firms spinning out specialist subsidiaries is not uncommon, but it is irregular to to see companies not openly acknowledging the link. This approach to corporate governance can hardly be said to embrace transparency.

Perhaps that’s because M8 is not a traditional venture capital firm, as most European entrepreneurs would understand the term. With only one limited partner of Middle-Eastern origin and a staff of questionable past experience, is M8 an attractive, value-add proposition to potential investees?

We put the concerns and questions raised by this report to M8 Capital by email and phone. The firm was unable to provide a spokesman and instead referred us to its PR representatives. The statement below appears to be little more than a simplistic explanation of what VCs do:

“Like most VC funds, M8 fund is an independent legal investment entity. It is offshore of the UK and invests globally. It has investments in the UK, US, Europe and Asia.”

You’d almost think M8 was being deliberately unhelpful, wouldn’t you? In Part III of our report, we’ll examine M8’s portfolio companies and get their side of the story, considering whether M8 is the sort of VC you want on your company board.

* * *

Cast of Characters

The unusual suspects: the individuals behind AGC Equity and M8 Capital

Joseph Kim
General Partner, M8 Capital
Venture Partner, AGC Equity

The elusive Kim is intimately involved with the operations of both M8 Capital and AGC Equity. While he has significant experience in the Far East, he is rarely seen at London events. He is chairman of the Rummble Labs board and was previously an investment banker at First Boston, a Credit Suisse-owned capital firm, and Senior Managing Director at Peregrine Capital.

While Kim is the senior point man for M8 Capital, he appears to be less qualified than comparable individuals at other London-based venture firms. While he holds the CF30 financial services qualification, the lowest certification available, comparable London VCs at Index Ventures and 3i hold CF1, CF4, CF11 and CF30 certification. The lower the number, the harder the qualification is to achieve.

Joe Neale
Principal, M8 Capital

Neale is the only M8 Capital staff member who is not also listed as an employee of AGC Equity. A call to AGC suggest he is, in fact, an AGC employee and based at the Jermyn Street office. He was previously Head of Online Presence and Engagement at Symbian and a Content Manager for MySpace.

Walid Abu-Suud
Co-CEO of AGC Equity
Co-Director of M8 Capital

Kuwaiti investor Abu-Suud spent 18 years managing investments for the Kuwait Investment Office where he claims to have been responsible for $14bn in equities, fixed income and private equity investments for the state-owned Kuwait Petroleum Corporation. He also served on other state committees in Kuwait. Prior to his public sector work, he conducted equity research at JP Morgan.

Laurent Souviron
Managing Director at AGC Equity and Partner at M8 Capital

Souviron is a former Managing Director at Morgan Stanley, London specialising in mergers and acquisitions. More recently he was the Managing Director of the Sun Group, a London-based private equity firm specialising in emerging markets.

Sachin Gupta
Associate at AGC Equity and M8 Capital

Gupta has a background in working for European private equity firms including Electra and EQMC Europe Capital Development Fund. He started his career in investment banking at Dresdner Kleinwort Wasserstein.

Sid Thekkepat
Associate at AGC Equity and M8 Capital

Starting out as a management consultant with London-based business consultancy Oliver Wyman, he was a project manager working on NFC, healthcare and cloud efforts at Vodafone.

Ryan Janssen
Associate at AGC Equity and M8 Capital

One of the youngsters, Janssen was previously in corporate finance with Ernst & Young’s London office assisting with due diligence and portfolio management.

Larraine Loh
Associate at AGC Equity and M8 Capital

Chris McCafferty
Founder and CEO

Chris McCafferty is the founder of Kaper, a PR firm to which The Kernel was referred after directing the findings of our investigation to M8 Capital. He is a previous head of Corporate Communications at MySpace and MSN. Kaper is a subsidiary of the newly founded Karma Communications Ltd.

Part III of our report will examine M8′s portfolio companies.

Editor’s Note: Andrew J Scott is a contributor to The Kernel.