Amongst the positive feedback I get for this blog, I also get occasional criticisms (also welcome) that the blog should only be about business issues and when I talk about the US election or the world in general, that it somehow dilutes the impact of this blog. Whilst I will always listen respectfully to any criticism, I have to say I think this line of attack is wrong.

In the Vice Presidential debate between Joe Biden and Sarah Palin (and yes like most men over 30 I do fancy her – and yes I do feel very bad that I do – she is someone who does not believe that Dinosaurs roamed the earth) Senator Biden was talking about the last eight years and Governor Palin said “this is all about the past”. The response was one of the best lines I had heard in the campaign (and yet was not reported). His response was “The past is a prelude to now”

Business opportunities do not exist in a vacuum. They exist through change and making the most of the uncertainty that change can bring. As someone who likes to look at the bigger picture as an investor it is important that I try to make sense of the world around me and the uncertainty that exists. By trying to understand the background, hopefully I will be able to predict the scenarios that may exist in the future and plan accordingly.

In the early 1980s, Shell was one of the first corporations to engage at a strategic level with scenario planning. One of the plans was to see the impact of oil at $10 a barrel. At the time, this seemed to be far fetched. Nonetheless, the scenario was flushed out and plans were drawn up. When the price of oil did drop to $10, Shell was well placed to exploit this changed scenario. They were able to steal a huge march on their rivals. They had planned for this change of events and did not panic when these events came to pass.

As such I think passionately that if you want to be a seasoned angel investor or a serial entrepreneur, you need to understand more than your own narrow field (although you do need deep expertise in that area). I have both an interest in the wider world and a professional desire to better analyse and comment on the world around me. One of the highlights for me in 2008 was being asked to speak at a conference in Canada. To position myself to speak at more events, I do need to be able to articulate my own views of how I see the world.

Although the views may be my own, they will be hopefully formed by reading lots of different sources and basing the views on logic.

I am away in Egypt this week and hope you will indulge me by allowing me in future blogs to share my analysis of the world. Although I may be convinced I am right, if enough readers to tell me they are not interested – of course I will have to change my views!

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Man we were cool in the 80's !

I am off to Egypt for a week and I have promised myself no email or even phone access for that week. It remains to be seen how long I am able to survive. I have not been without the use of a phone for more than 24 hours in over ten years!

It is a funny thing, but I remember getting my first mobile phone (through my employer Duracell batteries). It was very strange technology and I couldn’t get over how cool I must have looked – talking into a phone whilst driving on the motorway with my jacket on a hanger and popping into Little Chef for tea (I didn’t know what a latte was at this stage. Yes my perception of what I thought was cool then is very different to what I think is cool now! At this point I should apologise to those thousands of salespeople who live this life – yes it is still cool (especially white socks with dark trousers).

Again, I remember when emails started. Again it felt very strange to use this new technology. I was at Fujifilm and I remember how the sales team had a secretary who used to do the typing for us. The process was as follows

1. We used to first write something up on paper and then submit it to her
2. She would type it in draft and then let us have it back to check.
3. There would always be error so we would then make the corrections and then submit it back
4. We would then get a letter printed out on proper paper which we would sign and send

This was a little over ten years ago. It is amazing to think that a business which was producing cutting edge digital technology (1Mega Pixel cameras!) were not using laptops.

Again I remember when we did get a laptop, we only used it for sales presentations – and the sales team had to share one between four people!

My point is that the way we do things can rapidly become obsolete. And it is very difficult to know what technology will work. I remember getting my first text message (Thank you Mark Bryant) and thinking how stupid that was. I remember saying “that will never take off!”

If you are working on a new technology, my advice would be to learn from 3M Post it Notes. This is a classic case study of how a failure (glue which was too weak to stick) became a massive new market which did not exist before. The key thing that happened here was that what led to the success of the product was the company giving out lots and lots of these products as free samples. People were free to invent the way they wanted to use this product – and I think the result is that now you would be hard pressed to find any office which does not have Post it notes.

If you have come up with new a new product or solution, my advice would be to ensure that you have allowed enough budget to just give out a lot of your new solution. And let people to play with it. The most amazing thing about new technology is that we all different reasons for using it. The classic case is the iPod and the iPhone. The way the iPod was sold to me is very different from the way I perceive the benefits. I travel a lot and I like the idea that I can take my entire music library with me wherever I am.

When I run my sales training courses, one of the key things I try to teach is for sales people to appreciate the difference between knowing what you are selling and what your buyer is buying. This is very important when selling a new solution. If you let the buyer ‘get it’, you are more likely to get a sale!

Happy playing with technology

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I was asked the following question recently and I hope my answer satisfies the reader. If any of you do have specific questions for me, please do not hesitate to contact me.

You put in £10,000, company is then valued at £100,000, so your stake is worth 10%.

After several rounds of financing, company is now valued at £1,000,000.

Do you:

a) still have 10% of the company, your stake now worth £100,000?

Or

b) now have 1% of the company, the value of your original investment?

This is a good question and I can say that it took me ages to get my head round this. As an entrepreneur and an investor it is important you understand this.

Let’s take two examples – starting off with you owning 10% of the business above. It is easier to think of this in terms of the number of shares in issue. There are 100,000 shares in issue at £1 a share. So the investor owns 10,000 shares.

In example one, the business is doing well but needs to raise more money. The business now is making a profit of £50,000 a year and gets valued at £1m (pre-money valuation). The company raises £100,000 by issuing a further 10% of new shares. To raise this extra money, the company issues 10,000 new shares at £10 a share. The post valuation is £1.1m. The investor’s shares are worth £100,000 before and after the fund raise but in terms of % ownership

1. Before s/he had 10,000 shares out of 100,000 (ie 10%)
2. After s/he has 10,000 shares out of 110,000 (ie 9.09%) which is 10% less than the shares held before.

In example two, the business is not doing well and needs to raise a further £100,000 at a pre-money valuation of £50,000 (the company is not doing very well and in today’s climate, asset prices have collapsed – so this is realistic). This means that the shares pre-money are priced at £0.50 each. To raise £100,000 therefore, the business needs to issue 200,000 shares at £0.50. Before and after the event the investor’s shares are worth £5,000. But in terms of % ownership

1. Before s/he had 10,000 shares out of 100,000 (ie 10%)
2. After s/he has 10,000 shares out of 300,000 – (ie 3.33%)

I hope this helps as an explanation. Most businesses will have around three or four rounds of finance. As I may have mentioned in a previous blog, it is important not to get carried away with the ownership % as an investor, but what your shares are actually worth.

The other point to bear in mind is that when you are raising money, you are issuing new shares or selling shares that have been authorized but not issued; you are not selling existing shares that belong to someone. In that instance, the money raised, belongs to the person that has sold the shares not the company.

Feedback as always welcome

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One of the challenges facing investors and entrepreneurs alike is the whole issue of what constitutes ethical behaviour. Some business courses attempt to teach morality and ethics but I am skeptical about the ability to teach ‘good behaviour’.

Many people (the vast majority I would say) believe that ethics and morality derives from ones religious belief. I reject this view entirely and am very suspicious of people for whom morality is something that can be referenced against a book.

As an entrepreneur, you will face multiple judgment calls and occasionally you will be required to make calls which will have an ethical dimension. You will have multiple stakeholders to consider. Primarily, these will be trading partners, employees, customers and investors. Your actions need to look after all of them.

In my humble opinion, each person has their own code of ethics that they need to subscribe to. My code is governed by a very simple overarching motive; ego. I admit that it is very important that to me what people who do business with me think of me. I would not want to behave in a way that would lead anyone to cast aspersions on my business morality.

My favourite adage is “treat others as you would wish to be treated”. As an entrepreneur, if you can treat your angels with that level of respect you will never go wrong. To illustrate, let me give you a real life example.

I invested in a business recently, which went bust. A new company purchased the business from the receiver and was aided in this process by the founding entrepreneur (who was the person I invested in). There is nothing wrong with this – it happens all the time. As part of the deal, the entrepreneur was given shares in the new company. What do you think the entrepreneur should have done with this stake?

In this case, he did nothing. In another identical scenario, the entrepreneur divided up the stake he obtained to give the investors who had lost their money some chance of getting some money back. Again, I will leave it to you to decide, what the right thing was and what the wrong thing to do was in the scenarios above. What I can say is that if the entrepreneur in the second scenario wanted me to back him in another venture, he would have my support with no qualifications. He has demonstrated that he will look after the investors who have backed him.

Of course, the example works the other way around as well. If you act as an angel in an ethical manner, the entrepreneur would recommend you as an ideal investor!

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There has been a lot of sharp and vicious criticism of traders who have been engaged in short selling and I do feel that some of this is unmerited. I would like to use the blog today to stand up for an activity that every one seems to be attacking at the moment.

To go short in a trade means that you have sold shares or commodities that you do not have as you believe they will go down in price. Once they have gone down in price (if they do) you buy them back and hence make a profit. Going long is the opposite; that is you buy shares in something in the expectation that they will go up and then sell them if and when they do go up.

Shorting is very risky and there are two types of shorting. One is to go naked. That means that you sell shares/ assets that you do not have. This is very dangerous as you could be left with huge losses. The other short technique which is more common is to be covered. In this scenario, you would borrow the asset from say a pension fund as cover, sell the shares and then return the shares to the borrower having bought them back you hope for a lower price and hence having made a profit.

The reason why naked is much more risky is that you simply have to come up with the asset you have sold (unless you have an appetite for prison food!). With a covered short – you may be able to negotiate to carry on ‘borrowing’ the stock from the lender.

Hedge funds have in particular been very active in going short on shares recently. Especially on banking shares and so they have been accused of creating alarm and fear as the shares dropped massively in value (HBOS lost 60% in one day)

I don’t buy this for one second. Why is it only OK to profit from things going up? These smart operators did their homework. They realised that the business model for many of these banks were fatally flawed and criticising them is in my mind shooting the messenger. These banks were willing to adopt unhealthy level of risks themselves and yet were squealing when others used risk against them!

These speculators were prepared to take high levels of risks themselves and had things gone wrong – would not have asked the tax payer to bail them out unlike the poor banks that are now being saved by the state. I never thought I would see the day where George W Bush would be preaching to the democrats on the need for government intervention to save the financial system!

Personally, I find the whole thing dull and boring. I like to invest in tangible businesses and feel that wealth has been produced from my activity (as opposed to just money – which is merely a store of wealth). If people wish to indulge in high risk speculation – let them is my motto.

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Adam Smith (1723-1790)

I have always been curious and fascinated by Darwin and the theory of evolution. Whilst, not universally accepted as an explanation of where man came from, it has always been the most plausible explanation for me. I feel that as nations, we have evolved distinct patterns of behaviour and taste that have given certain nations an advantage in certain business sectors.

The theory of comparative advantage in Economics (espoused by Adam Smith) holds that if each country simply focuses on what it is best at producing, the whole world will be a better place. This is a much loved theory by those of us who believe globalization to be a good thing (which I think it is!). However, if this theory was to have been put to practice by the whole world, the Japanese would still only be selling rice and silk to the rest of the world as those were the only industries they had a comparative advantage in after the Second World War.

However, with the help of central government direction and massive investment, the Japanese (and other far eastern countries following their example), have developed a population with a real passion for electronic gadgets. It is curious how in Britain we look to the East for our technology and the West for our social, political and cultural influences. The fact that the local population are always on the look out for new gadgets and technology allows Japanese companies to innovate and experiment and maintain their lead as they know the local population will purchase the results of this innovation.

The Italians, who have long been considered ultra fashionable, have for the same reason developed the worlds biggest fashion houses. Having a local discernible consumer base helps these companies try out new fashions knowing that if they succeed in Italy, they are likely to succeed in the rest of the world. And if any of you doubt this proposition, I suggest you take a trip to Milan to see this for real.

Because of the empire, the British have had considerable experience in exporting capital which is one of the reasons why London has developed such a sophisticated financial centre and leads the world in services around capital export such as shipping and insurance.

Finally, the fact that there is no speed limit in Germany, explains, why they have been able to develop such powerful automobile companies. The consumer in Germany will value speed in a car as they will be able to put this technology to good use. In theory, why would anyone in the UK need a car that can do more than 70 mph? (The maximum speed limit)

If you remember that great film, Cool Runnings, you will know that the central joke was that a team from the Caribbean would take part in a winter sport! In the same sense, when you are looking at starting or growing a business, you would do well to explore countries or cultures where your product may have a latent advantage.

I invested in a start up called ICUE, ( www.icue.co.uk ) which allows you to download books on to your mobile phone. It seemed like a risky business proposition, but what persuaded me was seeing the market that existed for this type of service in Japan.

My advice from all of this is to get you to look at markets where your product is most likely to already have evolved or is cutting edge. If you are in renewable energy - find out what is happening in California. If you are developing a fast food proposition, make a trip to New York. If you are starting a new fashion label, see what people are doing in Milan.

I hope this advice proves useful.

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Readers of Business Angel Blog will realize that I was in Prague recently looking at companies to invest in. The trip was organized for me through the BBAA www.bbaa.org.uk as part of the EASY program.

Many of the companies that were pitching, were based in the IT space. A point to note for other companies looking for angel investment in the IT space in the ‘West’ is that your valuations need to reflect the valuations that your competitors (for funding) elsewhere are asking for. The beauty and the problem about the IT space is that it can now be based anywhere in the world. Why should angels pay for start up costs such as salaries and rent in central London or New York when they can invest in a similar business in Central Europe or China?

However, the main lesson from this business angel blog is directed at IT companies in terms of the way they look at their solution. Time after time, entrepreneurs from central Europe were telling us that their solution was unique. Had they done a quick search on Google, they would have realized that similar if not identical solutions already exist outside of their region. Entrepreneurs who see the world as their market place - also need to see the world as containing their industry. You need to simply recognize that the world is getting smaller and that brings massive opportunities to scale up and threats from every part of the world as well.

Many of these companies wanted to sell to multi-national companies. Herein lies another problem. By definition, multi-national companies can also choose solutions from many territories. If you are setting up a business like this, you simply have to check the world scene. Nothing will lose you credibility more than saying you don’t have competitors - only for competitors to be found by angels during due diligence.

This is where I hope that a future blog about national differences may come in handy. Increasingly with IT companies you are going to have to take advantage of inherent advantages that are hard to replicate by competitors. For example, being based around the Silicon Valley area gives you a huge network advantage that is very difficult to replicate. In the same way a fashion company based in Milan will have the advantage of having easy access to the talent they need to make the business a success.

With an IT business - you should spend a little bit of time thinking through how you can sell your location to an investor. Are your customers based near you? (they may need to be involved in developing the software) Do you have access to a pool of staff in the area? Is it a low cost location? Is it well placed to give demonstrations to European clients? ( A selling point for Germany/ Central Europe) Or International clients (A big selling point for Dubai)

Or you could always just hope that the investor does not search beyond the local area.

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Simple 100 day plan

I was talking to a few of the start ups I had invested in recently and some themes started emerging for me in terms of the ones that were successful and the ones that were not.

One of the striking characteristics of the successful ones was the planning that went into the launch. I know that you have probably all heard about the six P’s (proper precise planning prevents poor performance) or ‘failing to plan is planning to fail’ etc but what struck me was the quality of the plans that went into the planning for the first 100 days in particular.

By definition, if you have raised monies through a business plan - you have a plan! However, what I noticed was a depth to the plans that many of the successful businesses I had invested in shared. Here the entrepreneurs could see what they would be doing and were living the plan.

If you are in business and facing a difficult time or if you are starting a business, I think writing down a 100 day action plan would be a great start out of your problems or to see you through an effective start.

Writing down a 100 day detailed plan - hand in hand with a cashflow projection is a great way for you to start seeing the links between your actions today and your cash balance tomorrow.

Once you have written the plan, have it checked and ‘sanitised’ by a friend or spouse (in my experience the terms are mutually exclusive!) preferably someone who is not too close to the situation as they may always be able to add a common sense check to your plans.

The problem with long term plans is that I think they can be lazy and can make you just ‘wish’ a better future and hope that all is OK. As we have seen from the last few weeks, we do live in very volatile times. If you were working in the strategy team of a bank - I doubt if any of your plans which are more than a month old are still meaningful.

If you have a tight focused plan - it can be great to see the impact of variances to the plan immediately and therefore what you need to do to address that situation.

The danger with making plans which last longer than 100 days (you may feel that this is too long and you go for fifty days) is that it will lose focus and you add too many unknowns into the plan. You are also in danger of merely writing about the business rather than running it!

Happy running!

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When I was at school I used to love taking parts in Debates. I was a good speaker and I seemed to enjoy standing up in front of lots of people and just talking - perhaps this explains why I enjoy writing a blog!

One of the ‘rules’ of debating is that you are not allowed to introduce new material into your closing remarks at the end of a debate. It is a great discipline to get into as it forces you to make your strong case at the right time.

I have noticed that many people who pitch business plans could benefit from using the same discipline. There is this idea that you reveal your ‘killer fact’ at the end. Or you close with a ‘bang’. I hate this style I must warn you. Speaking to a few angels - they don’t care for it much either.

This style makes me feel stupid. I end up spending a lot of my time during the presentation focused on the wrong area! If you have a trump card - play it at the right time, which if you are pitching to an investor is towards the middle.

The structure I like is

1. Who you are (very briefly)
2. What is your business (explain it in terms of what you do for your customers)
3. How you make money (if this takes more than two sentences - forget it)
4. What makes you qualified to do this (In terms of who are the management team - spend some time on this)
5. The journey (how you got to this point)
6. The vision (repeat a bit from point 2)
7. The proposal

This should take no more than 15 minutes

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In a recent business angel blog, I suggested that now was actually a good time to start a business. I do though have some general words of advice for managing through the current turmoil.

My advice for businesses would be

1)     Have a great relationship with your bank manager. Banks have contracted balance sheets at the moment and will be cutting down on their lending and will be looking to offload loans to any business that looks uncertain. (My fund is certainly benefiting from this!). You really do need to try and have a great relationship with your bank. Keep them in the picture at all times. Ask for advice, explain your plans (but be cautious not to reveal bad news without having solutions to offer) and make them feel ultra comfortable. On the commercial side of banking, you will be amazed at how much authority individual managers still have.

2)     Preserve cash. Cash is always king - but at the moment it is the Emperor! Really hold on to as much cash as you can. Manage your outflows and cut down on anything other than vital spending.

3)     Do not cut back on sales or marketing spend. Customers need to know that you are out there. Advertising makes a bold statement about your belief in your business and the future. I consider it a vital spend for any small business. What you do have to do is be certain of the return on investment on marketing activities. This is what I like about Google advertising. Because of the downturn you can also get great deals on placing adverts.

4)     Make sure your service is as close to a mandatory spend as possible. The items that will be cut back on over the next few months will be discretionary spend. There are simple exercises you can carry out (email me for them) to get your service moving away from a pure discretionary spend towards a mandatory spend.

5)      If it is a discretionary item or service, make sure it is really clearly defined. What exactly is the consumer getting through purchasing your service? Clarity is what you need to sell easily. I am amazed at how complicated so many businesses make it to understand what they are selling and who they are aiming at.

6)     Develop nerves of steel!

Best of luck!

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