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!

Related posts

• Dragons Den. Series 6 Episode2 (2)
• Which structure? (2)
• Where do I start in raising money? (1)
• What I look for in an elevator pitch? Part 1 (0)
• What does negative equity mean? (1)

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

Related posts

• Business Angel Blog in North America! (0)
• Which structure? (2)
• Where do I start in raising money? (1)
• What should you earn? (2)
• What is a hedge fund? (1)

There has been much talk about the nightmare of negative equity returning to haunt the UK property market in the press over the last few months in the press. What does this all mean and what is the impact it is likely to have on entrepreneurs looking to raise money?

There was an interesting statistic published last week. 39% of start ups require just £10,000 or less to take them through to profitability. I appreciate that business angel blog is aimed at businesses looking to raise slightly more than this amount but it is an interesting statistic.

An overwhelming number of businesses get funded from family and friends. The ability of most people to help start ups is linked to the value of their property and hence negative equity will have a strong and negative effect on the number of start ups that are able to access this vital line of funding.

Most people when buying a property will borrow money to make that purchase. Let’s say someone buys a property for £150,000 (more or less the average price of a home in England). They borrow 85% of the value and make a 15% deposit. I bought my first place with a 95% mortgage! This means that the equity they have in the property is £22,500. If the price rises by 10% to £165,000, and the debt remains the same so the increase feeds straight through into the equity element. The equity is now worth £37,500 – this is an increase of almost 90% (this is known as the leverage effect).

As the homeowner feels wealthier – they may be inclined to re-mortgage and use that extra wealth to fund a start up. (You should never as a rule use borrowed money to invest in a start up – but people do).

All very well so far. But what if the property price instead of going up 10%, falls in value by 20% - as it has in the last year in England? Suddenly your property is only worth £120,000. Your debt is £127,500 and hence you have £7,500 of negative equity. This leads to financial insecurity and hence an inability to help friends and family who need some money to start a business.

The irony is that when in a recession, more people lose their jobs and hence would like to give entrepreneurship a go – but find the lack of funds available a real barrier to start

Related posts

• Starting up - the first 100 days (0)
• Dragons Den: Series 6 Episode 5 (2)
• Dragons Den - Series 6 Episode 3 (0)
• Which structure? (2)
• Where do I start in raising money? (1)

I wrote a blog sometime ago about the markets and the effect it is having on business activity at the moment. When I was writing, equity markets were down about 20%. They are now down about 40% from their peak. What do I think now?

The first thing to say is that we are not dealing with rational behaviour. The markets are behaving in a completely emotional manner. There is nothing wrong with that. Angel investing is an emotional decision to a large degree and a rational analysis would lead you to the conclusion to not engage in this very risky activity.

I would have said that the FTSE 100 below 5,000 represents great value. It got to 3,755 and is now around the 4,500 mark. Does it represent a bargain now? I would have to give politicians answer and say it depends on your time horizon and your expectations, but yes it does look like good value.

Therefore, entrepreneurs looking to raise money at the moment will have to look at the reality of the valuations they seek given where the market is at the moment. They need to be around 35% to 40% lower than this time last year. This is not just to bring you in line with other asset classes; it is also to reflect that your revenue lines will be a lot lower than you could have projected a year ago.

We are in a recession; it is real. The problem is that most people under the age of 40 in the US or UK have never experienced a recession and so are ill equipped to deal with it. Before I get too smug, this is ‘my’ first recession. During the last one, I was safely insulated at University. I only read about it.

But the psychology of a recession is already shaping up. And it feeds off itself. People stop spending and fear being laid off. This then leads to lower spending and hence job losses and the economy is trapped in a vicious cycle. It is for this reason that governments need to boost the economy at this time by spending on new projects and creating new jobs. The problem facing both the US and the UK is that we have had our national finances very poorly managed for the last ten years and government debt levels mean there is little room for government help.

Since I wrote this blog – interest rates are down to 3% - I wasn’t expecting them to get to that level so soon. I now expect interest rates to be between 2.5% and 3% before Christmas and about 2% by June next year. Happy days!

Again, the problem is that banks are not lending so even if rates got to 2%; it is no good to anyone if they will not borrow. I have many examples of banks reneging on lending commitments. This is going to choke off the only route for growth left. I have defended the banks in the past, but feel it very hard to do so at the moment.

In conclusion, I am pessimistic about 2009. I do think that the foundations will be placed though for a very strong recovery in 2010 and we in London at least will get a big boost from the Olympics.

Related posts

• No related posts.

I went to a great Investor event last week where I got to see some very promising businesses that were looking for funding from angels. The event was organized by London Business Angels and I was pleased to see that the downturn has not seemed to dim the enthusiasm for either the businesses or the investors.

Six businesses in total presented and I do not think it would be fair for me to comment on the companies in detail but I saw a couple of businesses that were very impressive and I am looking into perhaps making investments in them. Please note that nothing I write in this business angel blog should be considered as an invitation to invest. The details of the companies will remain anonymous and I cannot make any recommendations for you to invest.

There was one business which was in the cork for wine bottles market. The presentation delivered was fantastic. I hardly drink at all so it was not an area I have knowledge of. But the presentation followed a very simple format

1. It explained the problem with the current solution for corking wine bottles

2. It demonstrated the size of the market (in excess of 1bn corks a year)

3. It then showed how their solution solved the problem in (1)

4. The company had achieved accreditation from reliable sources to verify the solution (and advanced orders)

5. The credentials of the management team and the finances were then outlined

I will be looking into this business in further detail. The management team was credible and I thought the downside was very limited.

There was another great business in the metal shaping sector. Again, this is a business that I know nothing about. The presentation followed a similar format. My concern here was I felt that the business needed a lot more cash to take it to profitability than they had outlined. This reinforces a point I have made from an earlier blog; Dilution: Death by a thousand cuts.

Businesses often need to have more than one round of funding. As an investor, you look for positive reasons for companies needing more cash rather than simply running out of money as that will dictate the terms of the new cash – and hence massive dilution for existing investors.

Related posts

• Which structure? (2)
• Where do I start in raising money? (1)
• Inflation and Investing (2)
• Business Angel Blog in North America! (0)
• The fallacy of great ideas! (3)

Beware the crowd

You may recall from my blog last week – more tales from New York that one of the things I really liked about the network I met was that they insist their members make a minimum amount of investments each year. I have been on both sides of the table when it comes to raising money. There is nothing more disappointing than putting in a lot of work into a pitch – to discover that the people you are pitching to –don’t actually invest. I promised to expand more thoughts – and here they are.

One of my biggest sources of frustrations about this ‘business’ is that you can spend a lot of time on the wrong group. You meet a lot of people who are complete time wasters. Before you, as an entrepreneur put your heart and soul into working on a pitch, please do run your own checks on the network you are pitching to. How many deals have they completed? What does that represent as a percentage? How many members actually invest (the 80-20 rule may kick in). You are totally entitled to ask these questions.

I remember a great episode from my days involved in University Politics. I ran the Student finances for a year as a full time elected official. Elections were held each year to choose delegates to attend the NUS conference in Blackpool. At the hustings, around 50 people turned up. A candidate, Enda McCarthy, asked everyone to stand up. He then went through this brilliant pitch which even after almost 20 years I am in awe of…

His pitch was

1. If you are a candidate could you please sit down
2. If you have nominated a candidate could you please sit down
3. If you have already made your mind up who you are voting for, please sit down
4. My name is Enda McCarthy, I would like to be your rep at the conference – please vote for me.

He made the fourth statement to the 12 people that were still standing.

I would admire anyone who had the bravery (or stupidity) to the same at a pitch to a network. (If it goes horribly wrong – please do not sue me).

The point I am making is a serious one though. Whenever you do a pitch to a number of people remember you are probably only talking to 20% of the people there. If you can find a way of isolating them and delivering a highly relevant message your chances of success may be a lot higher.

Best of luck

Related posts

• Which structure? (2)
• Inflation and Investing (2)
• Cross Border Investing (1)
• Canada: It rocks! (3)
• Business Angel Blog in North America! (0)

I got asked a very good question from an entrepreneur last week

“[I am} doing an internet based start up. I have received a verbal commitment from 3 separate investors for a 1/3 each. Our initial ask is for $300,000, they have said they would like to see 25% for each portion of the investment as early investors. I am not sure if this is exactly fair and equitable for everyone involved. I also see a future round of investment to grow nationally in 3 - 5 years depending on the buzz around our company. My main questions are what is the best way to structure a seed investment like this as for as type of corporation, percentage, and dilution stipulations?”

The offer above gives the business a pre-money valuation of $100,000 and a post-money valuation of $400,000.

You can look at this question one of two ways – either by starting at the end or starting at the beginning.

An investor will want to exit the business in no more than 5 years with a projected earn out of 10x their money. That means that the business will need to achieve a sale price of $4m – which means you will probably need to be generate quality profits of around $500,000 a year (I can write about what constitutes quality profits in a later blog). However, given that you will probably dilute the initial investment (it is irrelevant if the initial investors follow on) by about 50% in my experience, their 75% will become 37.5% (and your 25% may become 12.5%) this means that 37.5% of the business needs to be worth $3m – so therefore the company needs to get a valuation of $8m and hence profits of around $1m a year.

Looking at it from the other point of view (the beginning), the question I always ask myself about the pre-money valuation is – does it accurately reflect the cost of building it from scratch. Let me give you an example based on something that happened this week.

I saw a great business plan and pitch this week, with a pre-money valuation of £5m. I asked the entrepreneur – how much it would cost me to get to the same point he was at now and he very honestly replied “about £150,000” so my obvious response was “why are you therefore asking me to pay £5m?”

Depending on who you are (in terms of background), you can get away with very high pre-money valuations because you can rightly argue that you have a ‘market value’. If you are an entrepreneur with no experience – sadly, there is no premium to pay. Recently I invested in two internet businesses – one with a pre-money valuation of £10.6m and the other at £460,000. The only difference between the two was the level of management experience – so it makes a big difference. There is also the question of how long it would take to get there – and how defensible the idea is from competitors.

In terms of dilution – my advice would be to simply look at what else is being done in your sector – talk to the experts in your field.

You can also have claw back deals. These deals stipulate that once the investor has achieved a certain rate of return, they can ‘earn’ back a certain percentage of shares. You can also have deals which give investors (or certain specified investors) their money back early – which can also trigger a claw back.

For example, if the initial investors get their money back within three years (paid for from profits – not money raised), you could ask that their shareholding drops to 10% each (they may be very happy with that as they will have had their money back and still have 10% of a business generating good profits.

Having said all of this – in this climate if you get investors in a start up situation – take the money!

I really hope this helps

Related articles by Zemanta

• Reasonable pre-money valuations for startups

Related posts

• Which structure? (2)
• What should you earn? (2)
• What is a hedge fund? (1)
• Talking to a Bank (2)
• Controlling your costs (4)

I hope you can sense from the blogs of the last few days, how much I have been enjoying my time in New York. I hope you do not mind that business angel blog seems like a diary at the moment – but I trust you do find some of the lessons and the observations useful.

Yesterday, I met with Paul Sciabica, Executive Director of New York Business Angels. It was a very useful meeting and gave me a sense of how similar angels think and work out deals. The process was explained to me in terms of submission to actually getting a deal done.

They have a three step process which you can see on their website www.newyorkangels.com and the model does seem very straightforward. I picked up two interesting points though. If one of the members of the Angel network in New York has already agreed to invest (or has invested) you get fast-tracked into the second stage of the process (overcoming the first stage is the hardest). This does make a lot of sense.

I trust certain angels – even to the point where in the past I have done deals, simply because they were involved. I also realize that some angels have done deals with my companies because they trust me. As such it makes sense for you to really try and get someone from an Angel network on board with what you are trying to do and get a commitment from them to invest. Ethically, you can not offer them any inducement to do this. Angels need to know that they are getting the same deal as everyone else. I will not negotiate better terms for me than people I bring into a deal at the same time. And I certainly expect the same in return.

The second thing I really admired about the New York network was that they insist their members make a minimum amount of investments each year. I like that a lot. I have been on both sides of the table when it comes to raising money. There is nothing more disappointing than putting in a lot of work into a pitch – to discover that the people you are pitching to –don’t actually invest. This has inspired me to write another blog!

ANother food based business that I had to visit

After my meeting with Paul, he also suggested that I check out a new burger joint called Shake Shack which is on Madison Avenue. I cannot believe it but I queued for 40 minutes at 3.30 in the afternoon for a burger. I have a confession to make. I don’t get the whole gourmet burger thing. I have always held the narrow view that a burger is a burger. How wrong I have been.

This burger was simply fab! It was just really good. Simply because the meat was fantastic – there was no rocket science to it. I was told that people queue for an hour at lunchtime just to have the burgers here. Readers – if you are ever in New York – please visit this place. It on 23rd St East, Madison Avenue. And I promise you I am not a shareholder!

Finally, I went to Hoboken, and saw some canvassers for Obama. I ended up volunteering, making a few friends and selling some wrist bands for Obama. It was great fun. Ignoring the politics, I have just found it very easy to get involved in things in New York. It is easy to make friends here. I got involved totally by accident – but simply loved it. (Hence the photo)

I am writing this blog from Newark airport as I leave New York for Canada and for the National Angel Conference. I hope to report more from there. I am very sad to be leaving New York. I have really enjoyed my time here. I will probably have to make an investment here – to give me an excuse to keep coming back!

Related posts

• Business Angel Blog in North America! (0)
• Business Angel Event (0)
• Beware the crowd (0)
• Which structure? (2)
• Where do I start in raising money? (1)

When I invested in Amano, the founders told me that they found inspiration from a chain based in New York called Cosi. I was walking around the World Financial Centre (next to Ground Zero – which was an emotional experience) and came across a Cosi store.

It really like was meeting the mother of the girl I have fallen in love with! I was pleased to see how busy it was and how it looked very similar to Amano and yet was definitely an American version of it.

The great thing about this experience was that it brought to life a couple of blogs I recently wrote; one on national advantages and the other on not having an idea. Amano is a great example of taking a look at what New York has to offer in terms of fast food and then seeing what needed to be done to adapt it for the UK market.

I then went to a great restaurant which is built under a bridge next to the Grand Central Station (Pershing square). Those Americans! They see a place in a prime location and carve a restaurant out of it! Mind you, I am pleased to say that around the London Bridge area (where I live) they have made the most of the arches there with a Nando’s (why does that business work?) and a Wagamama (yum!) creating good sites.

Finally, I would like to share a great experience I had on Sunday morning. Americans are a very friendly bunch and it is not strange to just get talking to complete strangers. When I was in a Starbucks (same one as I wrote about on Monday’s blog) I spotted an accent which was definitely from Liverpool. I got talking to the person and we ended up having a good conversation. We are meeting tomorrow to discuss some business.

The person told me that there was nothing strange for him to pitch his business to a stranger in a coffee shop. He was ready with a great elevator pitch – and his business cards. People who know me in the UK would say I am a friendly guy and I will go up to anyone and talk to them. But I have never had anyone ready to pitch to me in the UK by random.

Again, this is something that seems to be engrained in the US psyche. Every meeting with anyone is an opportunity so you should be positive and prepared. In the UK we are more reserved. I do like that in places but when it comes to business we do ourselves serious damage by not being ready 24/7.

I want to back businesses where the owner has sufficient enthusiasm (can we stop using the word passion? – which means either the suffering of Christ or a strong sexual desire) for his or her business.

Regular readers will know that I am in Amano on a Saturday morning – perhaps you could say hello and pitch your business? But that just wouldn’t be cricket would it?

Related posts

• What I look for in an elevator pitch? Part 1 (0)
• It’s a Pitch - Win £5000 for your business (1)
• Where do I start in raising money? (1)
• When to appoint an FD (5)
• What should you earn? (2)

I had the pleasure last week of going to Prague for a pan-European investment show. Angel investors from lots of European countries turned up to listen to 20 companies looking for angel investment. The companies were all based in central Europe and as Angel investing is still relatively knew there - it made sense to look across Europe.

In all honesty the businesses which presented were poor and I personally did not get excited about any of them as investable propositions. However the idea is great and what was really good fun for me was meeting lots of other angels and sharing war stories (lots of business angel blogs to come from there!)

From the feedback I get from readers of this blog, it seems that most of the readers are Entrepreneurs. What I have always tried to do with business angel blog is pass on some advice for people wanting to have a go at a start up. It was great to hear from other business angels that essentially I am on the right lines.

As a group, we really do not like what Dragon’s Den is doing in its portrayal of Business Angels. I have to be honest and say I have not met any angel that behaves like the dragons when they invest (but it would make really boring TV). If you work with a group of professional angels - they really will try to ensure that the deal makes sense for everyone.

As an angel explained to me, “if you screw the deal too hard, you may win the battle, but you will lose the war”. As a business angel, you always have to strike a delicate balance between getting a good deal but also a deal that leaves the entrepreneur motivated.

In Europe, Cross border angel investments are set to grow - and if you are a start up looking to do activity across Europe, it makes a lot of sense to seek that type of investment arrangement. Contact your local or national Angel network for information about EASY - or look it up on the BBAA website www.bbaa.org.uk

I am excited about going to North America and seeing if I can start some cross border investing. It also makes a great deal of sense for the angel. It helps diversify your risk but the appeal is wider than that.

Angel investing is an emotion led activity - as a business activity it does not make sense (you are much more likely to lose your money than make any!) So therefore most of us do it because we enjoy it. I love Italy and if I was to invest in Italian Companies, I would have more of a business reason to go there. However, there is no way that I would want to invest in foreign companies unless I knew other locally based angels or networks that were supporting the activity.

Related posts

• Canada: It rocks! (3)
• Which structure? (2)
• The falling markets (0)
• Legal Documents (3)
• Inflation and Investing (2)