My political career ended today at around 10am. My career in politics lasted around two weeks and it was great fun and I met some completely new people whom I was deeply impressed by.

Regular readers of my Blog will know that although I was never a big fan of Gordon Brown, I have been less than impressed by the actions of the new coalition government. They are shrinking the size of the state for ideological reasons; and I do not philosophically have a problem with that. But they are doing so at exactly the wrong time. I believe the UK will enter another recession because of the actions of the government.

When people say that this is the best thing for the UK in the long run, I remember what Keynes said “In the Long run we are all dead”. Someone losing their job is a massive tragedy for them and their family; they will not be comforted by the idea that their lost job is in the best interests of the UK economy.

So rather than complain about what is happening I decided to contact one of the contenders for the leadership of the Opposition Labour Party; Ed Balls. Two weeks I got involved in his campaign. It has been a strange experience but an inspiring one. My advice to everyone would be to get involved in a political campaign (whichever colour or views you subscribe to). You will meet some great determined and talented people and you should get inspired.

I met Ed Balls last night for the first time although I have been working on his campaign for two weeks. I really enjoyed meeting him and in a classic case of being in the right place at the right time, I was asked if I would introduce him and chair a major speech he was delivering today in the City of London. It was strangely nerve wracking!

Get me in front of hundreds of people to talk about business strategy or investing as a business angel and I will not have a problem. I realise I know enough to not embarrass myself; but talking to a room full of journalists and TV crews (live coverage on BBC news!) about something I know little about and you can imagine my fear. So at the end of talk, I decided any involvement I have in politics will be strictly behind the scenes! Hence my political career is over!

I do have to say though that I really enjoyed the talk that Ed gave and I felt inspired. He has bravely broken away from the consensus that we need drastic cuts to public expenditure. www.labourlist.org/the-growth-deniers—ed-balls-full-speech I also found him to be very keen to listen and learn what I thought were the key ways to support start ups and entrepreneurs. I wish him well and I will continue to support him.

As for advice from this blog; stick to what you know and are good at!

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Contrary to popular imagination the vast majority of Business Angels are not ultra wealthy. I do not know the statistics, but anecdotally, I would say that the most active angels are just over the threshold (in the UK, £250,000 of assets excluding your home). The very wealthy tend to either invest with VC firms or set up their own investment offices.

As such, angel investment levels are highly sensitive to stock market valuations and house prices; the bulk of angels’ wealth will be in these assets so that when these prices are high, angels feel wealthier.

But angels do have to be very careful about how they invest and it is a discipline that I have had to adopt in the same way that the UK is learning to cut its debt. There are effectively two bank accounts that I have to use; a capital account and a current account. Angels need expenses to live off and you get into a dangerous situation if you start dipping into your investment monies for your day to day expenses. It is far more dangerous though when you start using monies meant for your day to day expenses for angel investing purposes (as I did two years ago!).

I have now decided to stick to some golden rules around investing. I have now invested in over 27 deals and I will not be investing any ‘fresh money’ now until some of these deals start to pay out. (I am still active in 11 companies at the moment). Only monies from these deals will be re-invested. Otherwise you are trapped in the illusion of good money chasing bad. (Be interested in other angels opinions though).

The other area where I think people can sometimes get confused about business angels is that the angels do need to still earn some money (well most of us do). And the discipline you need in making others value your time.

These two things are related. I don’t want to sound negative, but if you have some business experience and you have invested in companies, you will tend to get requests from lots of people who wish to meet you and tap into your experience. It is a good thing and I do try to make some time for this. The problem is when you spend too much time on this – and your business activities do suffer. Sadly, I am still at the stage where I do need to earn an income to meet my expenses and therefore I need to ration the time I can make available for ‘free’. I have also realized that companies tend to benefit more from my advice and time when I charge for it!

It is true that giving something away for free tends to be poorly valued and therefore I hope this blog is of real value.

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“You guys have been hurt,” the entrepreneur was telling me. “I get the sense most angels have a $2-3 million dollar net worth and this downturn in the market has hurt you.”These were astute insights from a frustrated entrepreneur who invested a lot of time pursuing angel investors. He was smart, articulate, funny and dedicated; he just had lousy timing. No one was writing checks as he came to the front of the line in late 2008.

We’ve had quite a scare in the US as Senator Dodd drafted a revision to the SEC’s standard for an accredited investor. A revision made sense on one level, it hadn’t been updated in decades, but concerns grew quickly that any change, even applying an inflation rate to the threshold, would wipe out as many as half the angel investors in the country. We’ve dodged that bullet for now, but it sizes the wallets of business angels: many of us are investing with finite resources.

Angels make up a precarious bridge in the early-stage investing ecosystem. Venture capital has moved upstream in many markets, leaving a gap in seed stage funding. Angels fit nicely in this range; many of us have the time to contribute more than just money to a worthy startup. But angels who have been at it for awhile are feeling quite pinched due to a liquidity crunch. Lisa Lambert, VP Intel Capital, recently quoted statistics on Stanford’s Entrepreneurship Corner, citing the time to liquidity has grown from 2.6 years to as long as 8.4 years today; that’s something Intel can withstand, but early-retired business angels are feeling “tired and tapped out” waiting to get to an exit on their investments.

For me, besides impacting my personal net worth, the turbulence in the market has pushed my exit opportunities further into the future. Yes, this is supposed to be patient capital, but more time to exit also carries great risk. For example, one of my most promising investments is finding itself impacted by the Gulf oil spill. Talk about a black swan! No one ever imagined such an outcome.

I predicted that many of my angel peers would be spending more time supplementing their incomes resulting in less time for looking at deals. So far this year in Los Angeles, angel investment in early-stage deals is at record low levels. But before I get totally depressed, don’t let me forget to mention that we have 2 IPOs planned for later this year; one is expected to be spectacular, the other less so. News of these exits will revitalize the early-stage market and attract more business angels to join groups. But two deals won’t make many of us whole, just a relative few. And for those angels that do reap large rewards, I predict that money is coming off the table, as they say in Las Vegas. They’ll have waited over 9 years for this return, and many weren’t spring chickens when they made the investment. Some will, but I imagine many will pocket the proceeds and concentrate on their retirements; few will contemplate another 9 year cycle.

Is it the lure of making big returns, or the fact that so many of us are unemployable after our own entrepreneurial successes? Whatever the case, we’re attracting new members at a surprising rate, so much so I’m conducting a half-day training class later on this month; I’ve titled it “Angel Investing 101”. My challenge? How do I balance a candid assessment of the current trends, the ever extending liquidity timeline, while educating and inspiring them? The need for seed and early-stage capital is as great as ever, but the sustainability of the business angels providing that capital is in jeopardy.

Frank Peters
Newport Beach, California
July 5, 2010

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At University I read Economics and the courses that fascinated me were around managerial economics. One of the most exciting courses for me was looking at the relative industrial decline of Britain since the start of the twentieth century. The usual suspects include Trade Unions.

There was though a very interesting theory put forward though that the problem with trade unions in the UK is that they have always been too weak! The argument goes that in Germany where trade unions have management representation and see themselves on the board of companies, union leaders are able to help companies, because they have access to all the information and realise what must be done. It is also fair to say that along with most places outside of UK and North America, the German culture does not have the same obsession with maximising shareholder value.

The thought is that if companies find it hard to adopt hire and fire policies, they will have to take longer in the recruitment process, they will have greater incentive to train and to be very productive. It does seem that ‘left-leaning’ economies like the Nordic countries have much higher productivity than free-market economies.
What interests me though is the role that Trade Unions have played in recent innovations. Fax machines only really took off during a large scale postal strike in the UK in the mid 1980s. (By the way I would really like to meet the sales person who sold the first fax machine – that is a sales person!)
More recently in the US, the screenwriters in Hollywood went on strike for a long period of time. Of course television needs to carry on and the studios response set in motion an innovation we are all tragically living with now; reality TV. It is cheap to produce and needs no writers. Of course we had reality TV before the strike – but it was the strike that really got it to take off.
So lets see what innovations come out of the BA strike!

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The economic environment we are in is a big determinant on entrepreneurial activity. I am a believer that start ups which start in a recession can often do better than companies starting up in a boom. I do think though that the UK economy is going to be heading into another recession/ slump very soon.

It is important that entrepreneurs recognise the circumstances that they will be trading in. Starting in a recession is very different from trading into a recession.

My views on why we will go into another recession are just mine – and better placed people than me, will no doubt disagree. Firstly, the recovery the UK is going through at the moment is very fragile and although inflation is higher than the target range, it is predicted to fall sharply.

Public expenditure is coming down sharply in the UK. Some cuts (£6bn) have already been announced and another set of cuts will be announced on the 22nd of June. This will of course negatively affect total demand in the economy. Taxes are also set to rise, and if VAT goes up as widely predicted to 20%, it will have the effect of adding 1% to the inflation rate.

Sterling being very low at the moment against the US$ and Euro also adds to pressure on inflation (by increasing the price of imports). The ‘problem’ with this type of inflationary pressure (as well as with VAT increases) is that they are shocks to the inflation rate and don’t represent excessive demand. Nonetheless, the Bank of England which is charged with maintaining a low inflation rate may need to raise interest rates.

I hope they do not raise rates as I think demand is going to be considerably lower in the economy without a rise in rates. An increase in the interest rate would precipitate a recession.

The point of this blog is that if you are looking at starting up – now is a time to be a bit more cautious than normal. You may be better off starting in a year or two. Equally, if you are trading already – just be careful, we are most certainly in for a bumpy ride

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Every so often it is nice to be able to help out some of my companies with a quick plug.

This is a short film that was made for AngelsDen by one of the creatives on Wooshii, (a company I have invested in and of which I am currently Chairman) .

A few characters you may recognise within…

For more information on AngelsDen head to angelsden.co.uk Where entrepreneurs and investors meet

Video and Rich Media powered by Wooshii.com

Plug - If you want an online video, animation, presentation etc then head over to Wooshii where they will match you up with a ton of creatives, from all over the world, that can help you out. wooshii.com

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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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