One of the very first blogs I ever wrote was about the scanning the environmental landscape. I wrote about how using STEEPL can help you validate an idea.

The first process I go through when I look at investing in a business is to validate an idea. I simply use the STEEPL framework to see if the forces shaping the environment are in favour of the business proposal in front of me.

This week I made an investment in a fund (something I rarely do) and I thought it might be helpful to explain the process I went through in making the decision. I have to emphasize that this business angel blog should not be considered as investment advice. And to avoid any hint of bias, I will not name the fund I have decided to invest in as that would be wrong.

For the last few months, there has been one story which has been dominating the business agenda; the rising price of oil. The long term trends suggest that the demand for energy is increasing. The International Energy Agency has suggested that by 2030, the rise in demand will be around 50% of current levels. At the same time, the supply of oil, coal and gas is finite. Long term prices are going to rise.

However, there are other concerns on the energy agenda. It struck me when candidate Obama said that he would work to make the USA independent of foreign oil within 10 years. The recent trouble in Georgia has again highlighted the issue of energy security in terms of the reliability of dealing with a newly resurgent Russia.

All of the above (STEEPL) analysis got me to look at alternative energy as an area for investment. The issue then was would I invest in individual businesses in this space or in a fund? The concern for me was that although I have a good feeling for the long term trend, when it came to which sector (wind, solar, geothermal, biofuels, efficiency etc) I had no idea. The area is a very technical one and I felt that I do need expertise in making the right decisions.

So I then looked at funds in this area and assessed the different fund managers who operate in this space and then finally made my choice and decided to invest in a fund.

The reason for outlining this process was to demonstrate that as an investor you go through a funneling process. You start out looking at wide angles and then successively narrow your selection criteria. If you are pitching to an investor, you need to show that you understand this process and make them feel comfortable that they are backing the right skills within the right sector within the right long term growth area.

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We all agree that enthusiasm is a wonderful thing. Apart from networking, it is the characteristic I am most associated with. Enthusiasm is vital when starting a business and raising money. However, once you are running a business what is more important enthusiasm or experience?

Of course I am presenting it as if they are mutually exclusive (is it just me or has The Office made that term totally defunct to use?). They are not, but you tend to notice that experience in a field can knock your enthusiasm as you realize what the practicalities of a situation are. I hate managers who knock experience. You often hear people say that they are looking for fresh ideas as if there is something inherently wrong with old ideas.

I look at many business proposals where they claim to be solving a problem better than the current solution. Whilst this is true some of the time, it is not true all of the time. Some so called-solutions really do make me laugh. I do wish that professional integrity did not stop me posting some business ideas I see!

Dynamic managers often feel pressure to be radical in their approach and to start changing lots of things because they see change as inherently good. I always remember listening to a very successful pet supplies retailer. Whenever he appointed a senior executive into his business, he would urge them not to do anything for the first six months. This may sound very strange but I liked his approach and he is extremely successful.

The point is you denigrate experience at your peril. I have made the argument before that when you are looking to innovate into a new market place, you should at least learn to appreciate how things are done in that market at the moment and why. Which firms benefit from the status quo and how will they react to your innovation?

This brings me on to the main point of this business angel blog. There are certain sectors where experience is the most important ingredient for success. If you look at the airline industry for example, there have been a number of entrants into the market in recent times and many of the new entrants (not allied to an existing operator) have failed. What marked out these entrepreneurs was their huge enthusiasm for the industry but they lacked experience.

Food is a classic industry where enthusiasm tends to lead to many business mistakes. Most of us eat food at least three times a day. In the UK in the last five years we have started to spend more on eating food outside the home than inside the house and casual fast dining has become a huge growth area both in the UK and the USA (we really do adopt the eating habits of our cousins in the USA some three years after they become mass market there)

Food is one of those classic businesses where everyone has a great idea. Let me share a secret with you. Food is a notoriously difficult business to make money out of - it really is. The business is all about operational excellence. This excellence can be self-taught, but that will inevitably mean expensive mistakes along the way.

If you want to start a food business in the UK, here is my template for success;

1)     Go to the USA. New York is a great place to do this

2)     Just walk the streets and look for food stores (other than the ones that are already in the UK!)

3)     If you see something you like, spend ages in there. Make lots of notes and take photos (Cameras on Phones are great are they not?)

4)     Get talking to a really good food operator. Someone who really knows their stuff but is looking for an exciting opportunity.

5)     Jointly write a business plan

6)     Raise the money

7)     Go for it!

Enthusiasm is great and is vital. Experience is crucial. Together they make a winning formula!

“Enthusiasm in the workplace”

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As part of the competition, I thought it might be helpful if I wrote some business angel blogs about what I look for in an elevator pitch. Please remember though that I have deliberately stayed away from being the judge on this competition. The simple reason is that my opinion is just one opinion and I may be totally wrong!

The most important thing to remember about an elevator pitch is that it is brief. By definition you will only have 2 minutes or so. The two minutes can never be enough to do your business justice so the idea is to generate interest in your business and a desire to learn more. That is all you can hope to achieve.

As an introduction, it may be helpful to go through an overview of the buying process that all of us go through whenever we are buying something. Some consider that the framework known as AIDCA is overly simplistic and disagree with the model; however, for the purpose of illustrating a good elevator pitch I believe AIDCA is sufficient.

A is for Attention. The very first thing any successful pitch for anything in life needs to do is grab your attention. Sadly, this is where many great ideas fail. You see this on Dragon’s Den where luckily for the business pitching, they have some time where a dragon may have the patience to pick through the business and uncover a really good opportunity. In an elevator pitch, you don’t have that luxury. So make sure you get peoples attention with your opening statement.

I is for Interest. So you have managed to grab peoples attention, you know have to change that attention into interest. The Interest phase should answer the question “is it relevant to me”. You will lose a lot of people in this phase - but you should not worry too much about that. You just need to make sure you keep the people interested who should be interested (ie potential investors)

The next phase is about generating desire. Desire means that the person you are pitching to feels a compelling need to purchase what is being offered to them. In the case of an elevator pitch you are creating the desire for investment by spelling out the returns on offer.

In many cases when you are pitching you need to also demonstrate credibility. This is the critical phase when seeking investment. Again, if you look at an episode of Dragon’s Den, you can see this is the phase where most entrepreneurs blow it. Not necessarily in the pitch but in the interrogation phase. It is critical that you think about how you can demonstrate credibility so that desire is underlined by credibility. Another way to think about this is how is the risk minimized?

Finally, there should be a call to action. It constantly amazes me how many great pitches just end with, well, nothing! When you get to the end of the pitch make sure you have spelt out what you want the person to do next. It could be to buy your product. It could simply be where to contact you for further information etc.

Incidentally, I find the above framework really useful when composing a sales letter or a cold call pitch on the telephone.

I hope this is useful.

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Here we go again - and welcome!

The first business pitching last night was a company from North London with a business which provided instant paper blinds which required no tools for assembly. The pitch was simply great (Elevator pitch 10/10). They knew their market brilliantly and were able to convince me within the first two minutes that their was a demand for this (and it is large). The question is always about the detail and profitability.

The first issue was one on the patent on the product. It is always dangerous for an investor to go into a business which cannot be protected. Barriers to entry are a key requirement for ensuring a business is able to generate good products. As a result of the lack of protection they lost many of the potential investors. (This is a good topic for a future blog!)

The second issue was that the business team (three people) had only achieved one sales meeting with a major retailer in five months. This meant that they got crucified on valuation (they were offered £40,000 for 50% of the business). I felt for them. Had they just spent a bit more time selling the idea, they would have achieved a far higher valuation. I cannot stress this enough - you need to demonstrate to an investor that people want your product. (Incidentally, that is how I got into angel investing. I helped a few start ups get their first sales and then realized what had happened to their valuation as a result of my help! I then started investing.)

The second presentation was a low calorie and zero cholesterol curry sauce. It was a good presentation but because of my earlier experience of selling low calorie cakes I was very skeptical. The great thing is that she had actually sold the product. She sold a lot of jars after appearing on QVC. Brilliant, but you only make money out of selling food lots of times - the repeat purchase is very important and this has not yet been proven.

It was all going well but then she dropped a bombshell….

She was trying to transfer assets from one company to another whilst leaving the debts in the original business. This is too sharp for me as a practice. However, the Dragon’s all came out one by one. I disagreed with the reasons the Dragon’s gave for not investing but would not have invested in her because of my skepticism about the appeal of fat free food!

We then had a presentation from an investor looking for £150,000 for 10% of an energy efficiency business. I am sorry to appear slow but after the presentation; I still did not understand what the business actually was. The entrepreneur was honest, hardworking and passed that critical test of putting his own money (substantial) into the business. Having lost money on investing in businesses I haven’t understood - I was never going to invest in this one and nor did any of the dragons.

The final business pitching tonight was a ‘green’ business which made packaging from recycling materials. They had great customers and it is a business in the moment. I would have invested in this business as unlike the dragon’s I liked the fact that the entrepreneurs had a bigger vision. My only concern would have been that it seemed that the entrepreneurs needed a lot of help on the business. I was delighted to see that at the very end they managed to secure the investment and got one dragon to change his mind!

All the best until the next one!

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Following on from the posting “What Should You Earn” I thought it worth putting together a short note on this matter. There is always confusion about whether Dividends or Salaries are the best route and there are also a number of other considerations that at first aren’t always obvious. I asked for a little help from my friends at Littlejohn, a mid tier accounting firm, to give me some assistance in getting clarity on the position.

When considering how to extract profits from a company, an owner manager may consider taking a salary (which should attract Corporation Tax relief, but is subject to PAYE and National Insurance) or taking a dividend, which does not give the company relief from corporation tax but is only subject to income tax, at a lower rate than for a salary.  The most tax efficient mechanism overall will vary, depending on the level of company profits and the income level of the manager.

In many cases, the main (and sometimes only) issue that will be considered in deciding how to extract funds from the business is the immediate tax charge.  However, whilst the raw tax costs are important, there are other factors that should also be considered when planning a policy for profit extraction and remuneration.  Among other issues are:

• Ensuring a basic salary is received to retain entitlement to National Insurance based benefits, such as the State pension.
• Payment of non-cash benefits (such as Contributions to a Pension Scheme).
• Ensuring any remuneration paid is allowable in the calculation of profits for Corporation Tax purposes.
• The effect of the National Minimum Wage on any salary arrangements.
• The effect of receiving salary income on the recipients ability to make pension contributions.

Littlejohn have helpfully put together their thoughts in a short memo on the subject which can be found on their website http://www.clblf.com/articledetail.php?article_id=76&year

The issues involved can be complex and will depend on the specific circumstances of the manager and the company concerned, and therefore will almost certainly require some discussion before a decision is made.  However, as shown in the Littlejohn example, the basic position for a small company, rewarding a basic rate taxpayer is that a dividend payment will most likely be the most tax efficient route.

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x-factor

I apologise to my regular readers as I know I will come across as a complete hypocrite having so heavily criticized reality programs in the past. But I have to confess I simply love X factor. To be fair I only like the episodes until they get to the Bootcamp phase. It all gets a bit too contrite after that.

The first thing I like about the program is Simon Cowell. He is simply great. I love his honesty and the fact that because of the huge number of successes he has had in the music industry along with Louis Walsh (who is someone I would love to have a beer with) means that he has bags of credibility and you do listen to him as what he says carries weight.

I do have a problem with both Cheryl Cole and Danni Minogue being judges. My question is what qualifies them to be a judge on this show? Danni has not been successful enough in her own career to start finding other hidden talent and Cheryl Cole has simply not been around long enough.

Anyway the hilarious thing about this show (and there is a link to business angel blog I promise!) is that most of the contestants in the first series of shows are so bad. What makes us laugh is the fact that these poor people have been deluded by their family and friends into believing they have talent.

Some of them have even had voice tutors telling them how great they are - and then the bubble of confidence pops in a cruel and humiliating way in front of millions of people. But I love it! Parents of these would be pop stars (and they could be huge if parents arranged for tone deaf audiences) have never told their children that they are lacking in any musical talent. They have not been told that they will not make it and I think that is cruel. It is far worse to give people false hope than to be blatantly honest with them and tell them that their talent lies elsewhere.

This brings me on to budding entrepreneurs. It never fails to amaze me how many people I see who are brimming with confidence irrespective of reality. Most of them have had the benefit of an exclusive private education. Do not get me wrong, if one has the resources, I would always advocate the best education you can get. It is just that the one thing all top schools excel at doing is giving their pupils massive amounts of confidence. This is no bad thing but sometimes this confidence is badly misplaced.

You come across people who believe success is their birthright. I don’t believe that. I think success is down to making the most of the opportunities that come your way and that all of us are capable of being successful, but no one should expect it as a birthright. I worked for a long time with someone who was not very able but had bags of confidence which made people give him more and more responsibility. As a consequence he became the CEO of a business with turnover in excess of £2m, however he struggled to perform the role. He felt he had the ability to be in charge of an even bigger operation and rather than using the opportunity to learn and grow in his current role, his focus was all self-centered and on doing bigger and better things. And then it all came crashing down as the gap between his ability and his self-belief became evident. This crash proved to be very expensive for him.

At the age of 35, he found himself penniless, unemployed and homeless. Yet the amazing thing was he still believed that this was due to other people not backing him - he was a genius and people just didn’t realize that!

To be successful in life you do need to persevere and therefore you need bags of self belief and resilience. However, make sure you that your honest friends and family around you who are positive and supportive of your efforts are also able to be realistic and honest about your abilities.

Make sure you are not like one of those deluded X Factor contestants.

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I hope you have enjoyed the last few weeks of the reviews of this program. As you may know, I have my criticisms of the program but I am grateful as it has really increased the amount of interest that now exists in being an angel. This has got to be a good thing. The more angels there are, the more support hopefully there will be for would be entrepreneurs and society as a whole will benefit. This is my take on the program on the 25^th of August (my birthday!)

The first solution presented was a tool box which would fit on any ladder. As someone who hates DIY with a passion - this was never one for me but I really liked the father and son team who were presenting. They had a great sense of humour and I liked them. I did not understand the problem and the fact that they had not sold all of the units they had in ten months. They used the excuse that they were really busy with another business they run. The moment they said this, even if I was interested, I would have walked away at this point. I need to back entrepreneurs who are 100% focused on my investment.

Another fatal flaw in their pitch was their inability to listen fully to questions and answer questions. There is a fine line between enthusiasm and being over the top. This did remind me of pitches I have had where entrepreneurs believed they could badger me into seeing their point of view. This was a pitch where the entrepreneurs managed to snatch defeat from the jaws of victory! When pitching, please don’t forget to breathe, stop and listen to your audience. You are more likely to answer a question properly if you have listened to the question in the first place.

There was an unusual presentation from a sculptor looking for investment to complete his icon collection. He was very good and I liked the work he had prepared. His work was topical having just completed an image of Amy Winehouse.  The offer the entrepreneur made was also very compelling it was almost too good to be true! Upon questioning, the offer began to unravel but the entrepreneur knew his facts and was able to keep the interest going. Before the Dragon’s made their decision I had decided that I would back him. He ended up getting an auction going - brilliant. And he was smart enough to turn down a higher offer from one investor to take an offer from three combined investors. Brilliant - he decided to take smart money which would really add value to his business than dumb money.

It would not be fair for me to comment on a business which was seeking investment for an online furniture business as I am an investor in a competitor. www.mydeco.com I believe this offering to be superior and therefore my comments would be unfair. I will often do this at the beginning of a pitch before I hear too much. I think it is the ethical thing to do. There is nothing more disheartening than to say no after an entire pitch process when you knew the reason for saying no at the outset of the process.

I hate being horrible about people who put themselves through the Den. It is too easy to write this Business Angel Blog criticizing others whilst sat on a sofa. However, the person who came up with the solution for ‘soggy’ centers to frozen pizzas was really poor. He came across as dull and boring and failed to ignite any enthusiasm. He also made the fatal flaw of only having an idea. I define an idea as a business concept that has so far failed to establish market research, any proof of demand or have a sales plan. Simply having a patent or a manufacturing deal is not enough. I do not invest in ideas, only businesses. He had no sales strategy at all. Had he done some basic research, he would have realized that although there may be a gap in the market (people who have problem with soggy centers when cooking frozen pizzas), there may not be much of a market in the gap.

However, he was made an offer which he very wisely accepted. The Dragon’s took a punt and believed they could sell the product on the inventors behalf - lets see what happens.

Till next week.

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Regular readers will know that I am a huge fan of the elevator pitch. I have also been doing a great deal of work recently with a number of agencies and looking at different ways to support new and young businesses. Inspired by Techcrunch and New East Manchester’s, The EnterPrize I decided to run a little competition where you could win £5 000 for your businesses.

What’s the deal

• To participate in this competition contestants must submit a video pitch (2 minutes max) for funding your business
• Each video must be filmed in a lift / elevator
• Upload your video to Youtube or similar and then email me the embed link ( pvalia@businessangelblog.com)
• I will add your videos to http://www.wooshare.com/its_a_pitch where you can vote on yours and other video pitches
• The top 20 scoring videos on the 1st of November will then go into a final round where the winner will be judged by a panel of judges, (tba but will be made-up of a number of high profile entrepreneurs)
• The winner will be announced on the 11th of December 2008 at the EnterPrize Awards ceremony in Manchester
• If you enter you allow me the opportunity to raise funds for your business if you wish to do so*

Is that it?

Pretty much yep. The best pitch wins their business £5000

What’s in it for me

A few things really

1. Entrants get to view one of my investments www.wooshare.com

2. I get to promote my blog

3. I get to support a new and upcoming business

4. I get to see a whole host of interesting business that I may be interested in helping raise funds if they so need it

Good Luck

Oh here are the terms and conditions

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An Entrepreneur in the making ???

One of the questions I am often asked is “can you be trained in Entrepreneurship?” I go against the grain of most people’s view on this subject and believe that you cannot!

What is Entrepreneurship after all? It is having a desire to take massive personal risks in order to create wealth. Any other definition of this simply blurs into what a business person does. Not all business people are entrepreneurs but all entrepreneurs are business people. For me, the difference is the desire to take huge personal risks. How can you teach that? Perhaps you could train gamblers to become entrepreneurs by just giving them business training!

Business skills can of course be taught as can commercial skills. This is not the same though as the characteristics required to start a business. I have an MBA and I can say that it was a fantastic education. As a result of that course, I believe I am able to make much better business decisions. I am able to realize what can make a business tick and to quickly diagnose a business process. My degree in Economics was also extremely useful in making me understand how the wider environment can shape opportunities for business. I am a great believer in business education. However this education can never give you an aptitude to take risks. Yes you can be made to feel more comfortable with the risk you are taking, but this risk can never be a rational decision; it will always be an emotional one.

Yet there is a massive industry which seeks to teach and motivate entrepreneurship. I despise this industry. It always makes me laugh that there are so many ‘millionaires’ want to share their secrets with you on courses. All you have to do is pay a small fortune. I think they have probably become millionaires by getting people to pay for these courses! Ask yourself - if they really are successful, why are they spending their time selling these courses? Why not do it for free if they really are so successful.

The other aspect to this is what I call the motivational industry. If you need to go on a course to motivate you to take the biggest risk of your life - something is wrong!

Entrepreneurship is not for everyone. You either feel the calling or you don’t. At the moment it is seen as something trendy and of the moment. This is dangerous as such huge risk taking should never be a fad.

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You can only truly appreciate the magnificent view from the top of the mountain if you have been in the deepest valley

One of the hardest decision you may have to take as an Entrepreneur is when to call it a day. You are trying your best to get your product solution sold and you are getting great feedback. No one is saying no which is great but that is not the problem. The issue is that No one is saying yes!

It is very hard when you are at the centre of the storm to realize that is where you are.  The emotions involved are complex and the sense of failure is palpable. Last week I had to be the person to tell the Entrepreneur to give up the dream and it is a really horrible thing to do. You are effectively the person ending the dream.

What surprised me though was the sense of relief the person felt. Deep down he had realized for a few weeks that the game was up but as he was ‘leading the charge’ he could not be seen to be the one who was throwing in the towel.

Having ran a business in the past I can honestly say that it was the loneliest job I ever had. I remember going to an award ceremony a couple of years ago and many of the winners had done the customary thing and thanked their teams - they couldn’t have done it without them etc - you get the picture. Then this software entrepreneur won an award and went to collect it. His speech was the most honest of the evening (although not the most popular speech!) He claimed the award was for him and him alone. His team was well paid and was there for a jolly. As none of them were there when he was at his lowest ebb or had his doubts - they were not entitled to share in his greatest moment of joy!

You may have your problems with what he said - but there is a grain of truth in the fact that no matter how good you are to your staff - you must realize that the burden of leadership is yours alone.

This is where your board (if you have one) or your partner (if you have one) is invaluable. You need people around you who you can trust and who will tell you if and when time is up. I hope that moment never comes up. It is truly painful - especially when you have to face investors and tell them that you have lost their money.

It is equally difficult to adjust to a situation where you may have been a founder of a business but your skill set is no longer what the business needs to move forward. I have been involved in this situation both as the CEO of a business where my services were no longer required (although I was instrumental in getting the business started!) and I had to speak to one CEO and ask him to step down. I have also witnessed situations where CEOs are asked to leave. It is never easy. The one thing I would say is that those who have a good network around them (especially partners) seem to recover from these setbacks quicker than others.

One of my favourite quotes is from the late (and disgraced) President Nixon; “You can only truly appreciate the magnificent view from the top of the mountain if you have been in the deepest valley”.

In business as in life we have sweet moments and we have bitter (really bitter) moments. It is those bitter moments that make you appreciate the sweet moments.

If you are having a bitter moment, it will pass, it really will. If you are having a sweet moment, enjoy it. Do not be humble in your sweet moments - celebrate them with generosity and flavour!

It might be lonely at the top but it is a great view isn’t it?

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