Striking Gold

The allure of gold has persisted throughout history. From opulent jewels to minted coins, our obsession with the precious metal has created fortunes, inspired great adventurers, destabilised economies and even destroyed civilisations. Yet in today's world of stocks and bonds, credit cards and internet banking, why would anyone want to own a metal that has little practical value other than as a decoration or adornment?

Paul Tustain, managing director of BullionVault, agrees that gold hasn't always looked like a great investment in recent years. "Everyone hated the market from 1980 to 2001. But the gold market historically picks up at the end of a credit boom, and this has been going on for some time now. Gold has more than doubled in the last six years, and it’s still about the only thing you can buy below its 1980 price."

The inspiration for the company came from Tustain’s own experiences trying to purchase gold as a personal investment, following the success of a previous business that developed software for the financial services industry. The process was more complicated than he'd anticipated. "I was interviewed by three Swiss bankers and it took ten weeks to get the deal done. Then, when I finally bought the gold, I read the small print and realised I didn't actually own the gold outright. I’d got some sort of gold derivative – not what I wanted at all.”

Tustain felt there must be a market in enabling private investors to buy, own and sell gold bullion, and the idea for BullionVault was born. His model was Betfair, a gambling website with which he’d also been involved. "It was hugely successful and I was intrigued as to how the same business model could be reapplied in a different industry." The appeal of Betfair was that it introduced private buyers and sellers of a commodity across the internet; by cutting out the middle man, it made placing a bet more efficient and cost-effective for the customer.

"I got the £2 million to go forward in record speed"

By adapting this model, Tustain has provided an affordable, secure and straightforward route for private bullion investors. BullionVault's customers – typically assiduous researchers and contrarian investors – are also attracted by the low costs. The company takes a commission – a maximum of 0.8%, but less on large volumes – and keeps storage and insurance costs down by storing the bullion in accredited professional vaults. The company has enjoyed rapid success, with 14,000 registered users in 68 countries and gross bullion sales of more than £3 million a month. "In 18 months we've become the UK’s biggest provider of privately owned bullion gold," says Tustain. "We aim to take more cost out of gold buying and make it one of the cheapest assets to deal anywhere in the world"

Which begs the question, why hasn't someone else done this? Tustain says he was lucky to be in the right place at the right time, with three elements combining – his desire to invest in gold, his interest in reapplying the Betfair model, and his experience in financial services software.

Before setting up BullionVault, Tustain spent a year gathering research data. He developed a gold information internet site, www.galmarley.com, and tracked the number of visitors and their feedback on what they were looking for in gold. "Receiving 1400 customer surveys told us there was a market, and what they said told us the shape of the product they wanted," he says.

He used £275,000 seed finance from his previous business to incorporate Galmarley in 2003 and build the BullionVault service, but needed a further £2 million to launch the site in March 2005. In that respect, he was fortunate in having good contacts in the financial services community. Several bankers liked the idea and advised him on how to structure his finance to suit both investors and the management team. The result was a tiered finance deal with £200,000 angel investor equity at the bottom, Tustain’s own £800,000 debt in the middle, and on top a million pounds of 6% convertible high ranking debt provided by those same angels. Clearly the £200,000 was high risk – but with Tustain’s own money at risk in the middle, investors knew that if things went badly wrong, the company would have been closed before his personal funds were exhausted, keeping the million pounds of debt safe. On the other hand, if the business worked, they benefited from the full upside on conversion. The structure also meant he kept his equity dilution down to 21%.

But wasn't he nervous about taking such a risk? "No, because I was in control, and the money was safely in gold, not depreciating machinery. But I was nervous in 2003 when I committed with the seed finance and employed people. At that stage the risk of total loss was much higher. "

By May 2006, one year after BullionVault's launch, the company was trading profitably. But it needed additional funding of £2 million to expand, in particular to employ multilingual staff to develop and support foreign language versions of the website. After attending a g2i presentation at the British Library in July 2006, Tustain worked with the consortium over the next two months to refine his business proposition for investors.

Equally as important as the introduction to the consortium's investor networks was the access to specialist Corporate Finance advisors. "It was very valuable to be able to put on the front of the business plan that it was drawn up in assistance with g2i and Grant Thornton. I knew the paperwork and formalities needed for fund raising require a lot of professional input and can be very expensive. They helped to make the process painless."

Tustain was given the opportunity to pitch his proposition at a g2i ‘Meet the Companies’ investor event in September. "I was then ready to do the round of investors. I got the £2 million to go forward in record speed. The money was in the bank by the end of November."

Tustain is now putting his expansion plans into action. As well as bringing in additional members of the team, he’s also focusing on PR and internet marketing, looking particularly to top more search engines. "Internet marketing is massively more cost effective than traditional means,” he says. “I probably won't ever buy a magazine advert again or do another trade show. It's much more efficient to wait for the customer to want to buy your product, let them go on the internet to find out about it, and discover you're the best and cheapest option."

So what advice does Tustain have for other start-ups? Firstly, he believes that ownership of your own technology is crucial – if you outsource, he argues, you lose control. So too is the quality of people you bring on board – Tustain didn't even incorporate his business until he had deals in place, including options, for his two key employees. "If you know how to find good people, you've done at least half the job of being an entrepreneur," he says.

Finally, he adds: "The biggest difference between those who start a business and those who don't is timing. Get started before you have a family. Only the bravest walk away from a good salary when they've got a young family – I'm glad I didn't have to."

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