I seem to be back in investing mode. In the first two months of 2010 I have done the same amount of deals than in all of 2009. I just think that the time is good for Angel investing at the moment. Here are my reasons

1. Interest rates are so low. Money in the bank will only earn around 1% at the moment. Inflation is around 3%. So in real terms, you lose money by putting money into a bank! Might as well invest in something

2. From April the top rate of Income tax will be 51% in the UK. Angel investing through EIS means you get 20% tax relief back immediately and after three years all of your gains are free of any tax. The high tax rate also means that your downside is now limited to just 30% of your investment. This risk reward ratio makes angel investing more attractive.

3. Valuations are realistic at the moment. In the past, many entrepreneurs think that you can just stick a pre-money valuation of £1m on any idea (and to be fair to them, have found idiots like me who have accepted those valuations).

4. Given the recession, many business plans do not make the assumption that growth is to be taken for granted now. Cash flow forecasts are much more realistic. And with money being so tight, businesses have to be clear with the value proposition that they are offering.

5. Any business that can survive and start to lay foundations during these times should do well when the upturn does eventually materialise. They will have lower cost bases and hence can quickly turn into profit when revenues appear

6. Most investors are very nervous about business plans that require several funding rounds. We know that it is very difficult to raise money at the moment. The flip side of this is that we are seeing businesses that realise they have to generate cash quickly. I am seeing fewer business plans where there is no expectation of profit in the first two years.

What has changed though is my approach to investing. Time will tell, but I think I am getting better at investing. In my next blog, I will look at the criteria I am using now compared to my approach in the past.

In the meantime though, I trust you have found this useful. If you are a business looking for funding, hopefully the above gives you a feel for where other businesses are at the moment.

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We are without a doubt living in a time of volatility and business planning departments everywhere are frantically busy trying to create scenarios and the impacts that they have on cashflows.

Sadly, small businesses do not have that luxury (or curse). Many companies do suffer from paralysis through analysis. The other danger is of course that you read to widely and therefore get confused by what each different economist says.

It has widely been evidenced that past performance is actually very poorly correlated with future performance in numerous fields. So as a small business you have the ability to sometimes just plough your own field. But to add to your confusion, what do I think is going to happen.

The British and US economy is heavily dependent on consumption (it makes up some 70% of the GDP). Consumer demand depends heavily on disposable income. In turn on an aggregate basis, this depends on

1. Employment levels. Unemployment seems to have stabilised around the current level of around 2.3m and in the US seems to have peaked

2. Taxation. Disposable income is obviously dependent on this. Tax levels will have to rise significantly. There is no other option.

Much is made of public spending cuts. However, most public spending is related to the state of the economy and is mandatory, with an increasingly elderly population, it becomes difficult to contain let alone cut spending on health, pensions and other welfare. So no matter what governments say, cutting public spending remains a very hard thing to do.

I also expect the next government to be a weak government (in terms of the majority it will enjoy), and in that situation it is easier to raise taxes than cut spending. (Ironically, the lobbying power of a department is stronger than all taxpayers!)

Therefore taxes will be raised with VAT going up to 20% (if the conservatives win) and Income tax and Capital Gains tax going up if Labour hold on to power.

3. Disposable income is also heavily related to the level of interest rates (this is not true so much for North America where most mortgages are fixed for a period of 15 years plus). In the UK most mortgage holders are on variable mortgages.

So if you have a £100,000 mortgage a 1% cut in interest saves you £1,000 a year. Interest rates have come down by about 3% from their recent peak (if you have a £300,000 mortgage which is common in London, this is a massive saving of £9,000 per annum)

Interest rates in turn are dependent now to a large extent on the level of expected inflation. Inflation is set to soar. This is for a variety of reasons including the silent rise in the price of oil (it is back to $80 a barrel). And a weak pound will lead to inflation as it means the cost of imports becomes more expensive. Finally, if VAT does go up to 20% that will add about a full percentage point to inflation.

For these reasons and because of the huge government borrowing levels, interest rates will have to rise.

The impact of rising interest rates and taxation will dampen consumption. Our best chance of avoiding a ‘W’ shaped recession is to hope for a growth in exports. The chances of this do look good actually. Our largest markets, the US and Europe, are recovering and a weak pound makes our exports more competitive. I am doing my best through increasing my sales in Canada!

So , what does this all mean?

In my opinion, consumer demand is going to soften and possibly lead to another downturn. So if you are starting a business you will need to be aware of this scenario. So look for something that allows businesses and consumers to cut costs or to have a cheap treat. Or, really look to overseas markets. You would be surprised to learn how much help is available to UK based companies to help them export.

Or the best advice may be to simply ignore yet another prediction!

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I was one of those lucky students who loved my chosen subject at University; Economics. (Whilst on this subject my advice to anyone going to University is to always choose a subject you love rather than one which you think will enhance your career prospects – unless the subject is Media Studies – we all enjoy watching TV. I am not worried about Media students writing in to complain as they only do texting!)

One of the subjects which I really enjoyed covering was Marxist Economics. If you have not studied Marxism, I would really recommend it. I disagree with the conclusions, but the analysis tools are seriously first rate. One of the main thoughts in Marxism was about the accumulation of wealth. To generate wealth, labour has to be exploited.

This argument which is now about 150 years old is still compellingly relevant. Other ways of explaining this have come to pass and are more widely accepted because they seem less ‘offensive’ or stark. However, the truth remains exactly that.

Whatever field you are in, your pay or level of remuneration will ultimately depend on two things. The value you can add to your employer and your bargaining power. If an organisation decides to pay someone £1m a year, it will because they believe that the employee will add considerably more value than that and their bargaining power will get them to that level of pay.

The development of the trade union movement can be explained as thus. The bargaining power of individuals was a lot less than that of a group and they were engaged in ensuring that more of the value ‘created’ would go to their members rather than to the employer.

The interesting thing to note from Marxist Economics was that they believe that it was in the interests of capitalism to maintain high levels of unemployment. The rationale for this being that the bargaining power of individuals is not that strong when there is mass unemployment. Statistically this does hold true.

What is the relevance of this to the Entrepreneur?

Firstly, many entrepreneurs fall into the trap of paying too much money for ‘talent’. They feel that because of the insecurity of working for a start up, they have to offer a higher salary. Secondly, they also think that as a small business they are in a weaker bargaining position.

A further point is that salaries should only be offered at a level which means that the employee is adding value to at least three times the level of their salary. In sales, it is common to expect a sales person to generate sales at a level which is at least ten times their salary.

If a sales person generates £1m of sales, that would probably equate to around £300,000 of gross profit – and therefore a salary of £100,000 would still hold this equation.

However, many start ups feel compelled to offer very attractive sales packages. And here another bit of economics comes in handy. You have to remember your marginal cost. Revenue is not the same as profit. There are many deals I know of where the better a sales person does, the greater a loss the company will suffer.

I was working for a start up in 2000. I was a good sales person and was one of the companies top earners. However, the company fired me (a story for another time) and the real reason was that they wanted to replace the first set of sales people with another set who were on very different packages.

Anyway – back to the main point of the blog. Always remember that wealth creation is based on being able to sell at a greater price than you pay – and that is also true of labour.

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Most people will be happy to see the back of 2009. It was not a good year to be a banker or be in the ‘money’ space at all. A lot of Fund managers have had a very rough time although equities have had a good run in the last 12 months. As for the angel scene, it has been active mainly because other sources for funding have dried up.

This year I invested in two businesses – www.wooshii.com and www.adventus.com

I am confident though that next year I will be making more angel investments. However, one of the key lessons for me from the year was that as an angel investor you are better off making an investment through an active network. I have to be honest and say that I have found UK angel groups very disappointing (post investment). They are like estate agents – once the deal has been done, they seem to show very little interest in how the company is doing or looking after the interests of shareholders they introduced to the deal.

As such, I have yet to join an angel group in the UK; don’t get me wrong, they do excel at introducing you to companies and showing you a great range of companies in a short space of time. I have come across a different model in Halifax – which I love and as a result I have joined my first angel network (which is called the First Angel Network!). They only present four companies a year – and all of their companies get funded (if you are a company presenting through a network – before you part with any money ask how many companies get fully funded through their network)

My investment in Adventus was made through this network – mostly because I was highly impressed with their post deal diligence and care.

Things do appear to be getting better although I have a funny feeling that this is all the calm before the storm. Within the next six months there will be an election in the UK and it looks likely that there will be a change of government (although I think there will be coalition or much weaker Labour government rather than what everyone thinks will be a strong Conservative government) The next four or five years in the UK are going to be horrible – whichever government is in power. VAT is currently 15% but I believe if the conservatives win it will be 20% by the end of 2010.

Capital Gains Tax is currently 18%, but if Labour win, I am sure they will be raised significantly. Either way, taxes will have to be raised significantly and spending will be curtailed. Our finances are simply awful and after the election urgent action will be needed to address them.

2009 has actually been a very good year for me although it has been a lot busier than expected. I am looking forward to 2010 but my advice is to approach the next year with caution and a back up plan. We are set for some serious changes.

And I hope to stick to one of my resolutions; to write at least one blog a week

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In a recent blog post “The Business Plan - what are we looking to see?”, Chris Padfield a regular contributor to this blog wrote that he looks for companies that can defend an unfair competitive advantage. Chris is someone who probably sees more than 100 business plans a month – so I am always interested in what he has to say.

Michael Porter when writing about looking at which industries were attractive for investment developed the five forces model. This looks at a number of things which play a decisive role in determining profitability in that industry. One of the five factors is barriers to entry and another is threat of substitutes. These two factors are ways of describing protecting unfair advantage.

In Economics, there is a highly theorized ‘perfect’ market. This state is known as perfect competition. Amongst many characteristics, there are no barriers to entry and as a result of this (and other factors such as perfect knowledge), all companies earn the same return on capital. As soon as one industry makes a profit higher than the average, other companies come flooding into that space thereby reducing their profit until it again comes back to the average.

Much of micro-economic policy is driven by a desire to create conditions as close to a perfectly competitive market as possible. Companies of course do as much as they can to earn as high a rate of return as possible. In a competitive market (coffee shops for example) they do this by convincing consumers that their offering is at a premium and therefore they should charge more. (Starbucks were horrified when in blind tastes in the US, McDonalds outperformed them in the taste of certain coffees!)

As a business angel you are only interested in investing in businesses if you believe that you can earn significantly above the normal rate of return. If you cannot, you simply would not take that level of risk as an investor. You therefore want to know that the business has an advantage over other competitors in the market place. This could be a new technology, a new process, incumbency, a brand etc.

Much of marketing is an exercise in persuading you to pay more for a product than it is inherently worth. I like brands and am willing to pay a premium for certain brands. But when it comes to performance it is hard to argue that a Boss shirt will outperform a Marks and Spencer shirt. And yet there will be an eight fold price differential.

Business angels will want to see that you have an advantage over competition which means you can justify charging more for your product and hence earn a superior return on their capital.

They also want to know that you can maintain this advantage. Many great companies were the first into particular sectors, but were not able to defend this advantage from their competitors. As an investor you would quite rightly be worried about that advantage being eroded before you were able to earn those extra profits.

I hope this helps.

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There are two main reasons why I never pursued a career in finance (or the City as we in England describe it). One; the city would not have had me. Two; a career in finance appeared to be dull as heaven. (I have been told that heaven is only for people – so the idea of spending eternity as a vegetarian – sounds a bit dull)

Business to me has not been about making money; money is simply the measure of your success in a business venture. It is rather like saying to an athlete – why work so hard for a gold medal – I can buy you one off the shelf. It is about trying to persuade consumers to purchase your product because you have convinced them that your product/ service will be good for them.

People in the city tend to be obsessed about making money for the sake of making money. Don’t get me wrong; they are vital to the interests of the UK economy. The city generates some 25% of the tax revenues for the UK. This idea of introducing salary caps is too be resisted even if people and companies can not be persuaded to reign in their excesses. And the conservative party should be thoroughly ashamed for not defending the rights of people over the age of 18 and companies to enter into private arrangements over what they should be paid for a service that is vital to the national interest.

But the main thing I wanted to say was that people in the City tend to take themselves way too seriously. It must be all that training around money – and yet when they do relax and party – they tend to do so in the most obnoxious and loud way possible. It must be the Medical student syndrome. Those of us who went to University with medics will know what I mean. Because they had to study a fair bit, they had fewer opportunities to party – and they seemed to make up for it when they did party. Scary to think, that I now rely on those people to help me when I am at my most vulnerable.

As an entrepreneur your greatest asset will be your personality. Make sure therefore it is a good asset. One of the things that will help you is the ability to be able to laugh at yourself and not take yourself too seriously. I cannot stress that enough. Friends who have known me for a long time (or at least before I began my career as a business angel) are more important to me now than they ever have been in the past. They know the real me – not the person who writes business angel blog (although I try to be as honest as possible). And as soon as I do my pompous routine – they put me back in my place.

I always remember one day borrowing a car from the taxi business I had invested in. I went to pick up my then six year old son in the taxi. He was thrilled that his Dad was a taxi driver. He loved telling his friends at school about that. He is now nine and finds the idea of me being an international investor and entrepreneur really dull!

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1. Never underestimate your internal strength

I have a confession to make which I am not particularly proud of; when I first got to Halifax, I had a bit of a wobble and I wanted to come back home after just two days.

It became clear to me after just two days that the purpose of my trip was not going to be met and I do lead a rather spoilt and charmed life in London so the idea of having to ‘rough it out’ did not appeal. However, with most of us, there is an inner strength that can kick in and make you make the most of a situation.

I left Halifax with a massive smile. I had achieved a great deal and will be going back this month as I managed to get engagements to get some work done. Most entrepreneurs have bags of inner strength and I was surprised that I did find that ability to ‘snap out it’. If you are thinking of being an entrepreneur, look back at situations in the past where you feel you had to find some inner strength to deal with things going against you. If you did – then you have at least one of the qualities needed to be an entrepreneur. The only thing I can promise you is that things absolutely will go against you when you start your own business!

2. Realise how important it is to feel connected – Facebook is a must have for those on extended leave

Being away from home is not easy. I have always questioned the value of social networking sites such as Facebook. Why not just phone people? My view has now completely changed!

I was using Facebook a lot and it stopped me feeling cut off from the world of my friends and it was great to keep up to date. Again, the lesson here for entrepreneurs is obvious. When you start a business, it is lonely and because of the hours you have to put in you will have little time to keep up with all your friends. That is when Facebook can be invaluable as it helps you keep up to date with what your friends are up to and ensure that you do not feel isolated and cut off. And a big thanks to my friends for helping me with Facebook.

3. Setting SMART goals really does work in keeping you happy

Before I went to Halifax, I set myself some unrelated goals for my five week stint there. One was to lose some weight (5lbs) and the other was to learn Italian (through a brilliant 8 hour CD course loaded on to my iPod). These goals were able to really motivate me and make me feel a sense of achievement. I was also able to say that I would have paid a fortune to go away somewhere for five weeks and learn a foreign language and lose some weight. I have now decided to go to Italy next year for six weeks – and immerse myself in the language and the culture – I simply adore Italy (the history, the food, the people and the culture).

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I have stayed away from writing too many blogs recently about politics as I was getting feedback from some readers that I was writing far too much about politics rather than about business. I think that was a fair point, but it is hard to ignore the events going on in England at the moment.

My parents were from India and the thing that you realize very early on when you try to get anything done in India (even trivial things like getting a phone connected or a driving license issued) requires the greasing of palms (or bribes being paid). It is accepted in countries like India that corruption is a way of life. And it is not a ‘third world thing’ either. Italy celebrates its corruption. The size of the black economy there is estimated to be a staggering 30% of GDP. There is honesty to this approach though.

What I have always found disconcerting is the British approach that we are somehow above reproach. With the publication of the MP’s expenses in the British media this week, we have found out exactly how greedy our politicians have been up to this point.

It is simply disgraceful that the politician in charge of law and order thought it was OK to have the taxpayer pay for pornographic movies, or for her sisters house to be paid for as she claimed to have been living there. The Minister in charge of the Police was claiming to be living at his parent’s house (when his own home was only 12 miles away) so that he could claim a second home allowance. The whole thing stinks. What about the Foreign Secretary who thought it was OK for the state to be paying for his baby’s pram?

The defence that all politicians have jumped to has been that what they were doing was within the rules. How many of these same politicians were lambasting Sir Fred Goodwin for doing the same thing? The other difference is that somewhere along the line, something must have kicked in which made the politicians realize they were doing something wrong.

The Inland Revenue has a good and robust test for allowing business expenses. You have to demonstrate that your expenses are wholly, exclusively and necessarily for the purpose of your business. For example, a barrister can claim the cost of a wig, but not the cost of a black suit as that can be used for other purposes other than wearing in a court of law. I would like to know how Keith Vaz MP felt it was in the interests of the taxpayer to purchase leather chairs worth £2600 at their expense.

There is a business point here. It is about moral leadership. You cannot respect a CEO or an entrepreneur who is cutting back on staff pay or numbers whilst enriching themselves at the companies expense by for example having moles removed from their garden (yes – it is true!). How hard will it know be for the government to ask us to pay more in taxes and ask us for restraint in the public purse when they themselves have been showing no such restrant.

I have always had a very low regard for politicians and this episode has done nothing to change that opinion. There are some notable exceptions such as Hillary Ben and David Cameron (you may argue that he does not need to because of his private wealth – but the richest MP in the Cabinet still felt compelled to claim £1.09 for a Pizza)

What this episode has demonstrated is that although business people make a good target to attack for politicians, we as a group can rightly claim to have a higher ethical code that the one that has been demonstrated by them over the last few years.

Britain is a great country with a very generous and liberal people, but do not think there is no corruption here. There is – it is just a very British version of it – legal, organized but still utterly wrong.

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I meet a lot of people these days who tell me that all was going very well with their investments or their business until the credit crunch happened. There is no doubt a lot of truth to this; Amano is an example of a great business which was a victim of the credit crunch. However, I do think that the recession is a very good excuse to hide many a folly.

A lot of the investments I have made over the last few years have come undone by the economic downturn. However, if I was being brutally honest, many of those businesses had deeply flawed models. The recession merely put them out of their misery.

Most fund managers simply benchmark their performance against an index such as the FTSE 100 or the S&P 500. If the index is down 40% - but they are only down 30%, they can claim that they have outperformed the market by 10%! This is no comfort for you as an investor if you are paying someone to be down 30%.

I think angel investors need to take the same approach. The fact that an investment has failed simply because the market has declined is of little comfort to angel investors. In other words, a business that relies predominantly on benign economic conditions is perhaps not the best business to invest in.

Some of the businesses that I have invested in are still doing well. Of course, things are harder than they were – but the management teams have found a way through this turmoil that we are in.

Equally, I think investors (I, for one) am using the recession as an excuse to explain our failures. I would rather blame this thing called the credit crunch for my lapses in judgment than my own inability to spot something which was actually flawed at the outset.

As the title says – recessions can be great for playing the blame game!

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April is a great time of year. Spring is in full swing and we look afresh at new opportunities and we have the energy to revisit old promises we made to ourselves. In the spirit of this new month, here are my top five business ideas for you to look at and follow. Feedback is welcome – and if you do make a success of any of these ideas – please feel free to include me in your shareholder list.

1. Adjustable umbrellas. As a tall person, one of my bug bears is walking across London and bumping into umbrellas that are being held by people a lot shorter than me. I have a few contacts in Government and am pleased to announce that later this year they will be passing legislation to make sure that umbrellas are held at a distance of 8ft from the ground. Shorter people will have to have a longer umbrella than tall people. This will offer huge business opportunities in a low cost product area.

2. Widi roll outs. As Wi-fi becomes ubiquitous, there is a great opportunity to create narrow width. A new company has created Widi devices. These allow you to ‘bend’ bandwidth in an area so that internet access has to go through the Widi device that you ‘own’. You can then charge up to £5 per hour to allow users to have access to wi-fi that you get for free. This might sound like extortion, but I have been told it is perfectly legal. The company is called Computer Access Safe Houses (C.A.S.H) and they are looking for Franchisees in the UK. I have permission to sell areas on their behalf. Please feel free to send me cheques payable to CASH. Each area is available for just £1,000.

3. Green Tea bags. I did not realize the damage that tea bags can do to the environment. We go through a huge amount of tea bags every year. I came across this company last week at the International Food Exhibition show which had a great product. The solution originally came from someone working as a steward at TWA (the airline). Basically, it is a reusable teabag because it is waterproof. The company is called TWA Tea. Again, please contact me if you are interested in learning more.

4. Digital fax machines. I used to work for Duracell, and when I was there one of my customers refused to believe that computers would take over the world. He had a great business selling fax machines. Working in isolation, he has come up with a way that you can actually send documents from one place to another without you ever needing to actually send hard copies through a fax machine or the post. It looks great and I am sure it can work. The company is called For Fax’s Sake. Again, I am happy to send you details if you like.

5. Spring Fuel. One of the sectors, I have, experience of is beds and a colleague of mine contacted me last week to let me know of this very green and worthwhile business. He wants to use discarded bed springs en masse to generate electricity. As he is starting the business this month, he has come up with a great name for his business – April Fuel.

All the best

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