In my last blog, I mentioned that I have started investing in new businesses again. I also mentioned though that my criterion has changed. I hope this blog is useful as if you do fit the new model – please get in touch.

My starting point should be that I am seriously worried about Google. I have read so many business plans which end with Google buying the business. On my estimate they are going to spend at least £400m buying businesses that I might be investing in. If they are going to spend this much just on businesses that I see – what will happen to them if they end up buying all the businesses that no doubt other Angels see?

Seriously, I have seen many businesses that really are going to be the next ‘Google’ that as soon as I read this in a plan, I dismiss it. It would be funny (and painful) if one of the ones I turned down really does become the new Google!

I have decided to balance my portfolio of angel investments a bit. I have many companies that could become very big in a few years and are capable of delivering at least 5x return on my original investment. But they are unable to generate any cash or dividends in the interim. I have recently become very attracted to cash generative businesses.

They will never be massive enterprises, but they will deliver good returns because they should from month three, start returning cash to the owners. It sounds crazy but I don’t have any of these in my portfolio. Two deals I have done recently are precisely in businesses like these. I found them through my own personal network and was prepared to invest in them in place of a bank. I also find that the amount of investment required is not substantial in these situations.

So cash generation is one priority. The second is my involvement. I have always been a passive investor. I have to conclude that this has not been a good move. My mentor, Sir Rodney Walker has always said that he has only lost money in investments where he has not been involved. I have always believed that I am too young to be a Non-Executive Director (under 40 – only just!). And I guess I have lacked confidence to do this – strange but true!

But through some painful experiences (such as the loss of Amano) I have realised I could have done a much better job than the Non-Exec’s on the board at the time. I have also had my own successes of founding companies that have become worth more than £1m. Finally, it seems strange to be a business coach and a writer of this blog – and yet not be involved in companies I have put money into! As such I am now only investing in businesses where I am involved in a major way. But this also means that I have to select businesses where I can add real value. If someone came to me with an engineering, catering or medical business, I could not be involved as I don’t have the expertise to add real value.

And allied to this there is time. To be involved properly with a business means it takes up a lot of your time. As such I can probably only be involved in about five businesses at a time. I am formally involved with four companies at the moment – so now only have the capacity for one more.

My final recent criterion is that I have to know the entrepreneur – or they have to be vouched for by someone I know. This may seem very harsh, but I have found that some people who don’t know me have found it easy to just give up on a business where I have invested my money and not feel any remorse about it (Leadz on line is an example of this). I know that personal bonds are very important. The people I am working with now – would do anything to ensure that my interests are always being looked after. The only exception to this is where the founder is putting in a substantial amount of his or her own money into a business.

I would still like to do one ‘google’ investment a year where none of the above apply. But for the meantime, I am sticking to my new guidelines. If you have a plan which ticks the above boxes, I would like to hear from you.

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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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In my last blog (which was a bit depressing I know) I highlighted that the due diligence process is a two way thing. Just as an angel will carry out due diligence on you – you will need to carry out diligence on them.

Here are some of the questions you should ask them with an explanation of things to look out for;

1. Where are you meeting them? I have to say that I have been very disappointed by so called Angel events in the UK. In Canada at the First Angel Network, they really probe and make sure you can only come to an event if you have both the means and the appetite to invest. Lots of people want to join the network to sell their own services. FAN is great at excluding them. If you are lucky enough to pitch at a FAN event you WILL raise serious money. I went to a London event last week. Out of the 120 people at the event, I suspect only 12 to 15 people were investors.

2. When did they last invest in something? (if it was more than 12 months ago – forget it) you have to be careful that you are not the ones they are losing their virginity to. I took ages over doing my first angel investment. And when I did do it, I put in half the money I first wanted put in. (That is very common as well)

3. What have they invested in? (if they give you sectors or generic descriptions – probe more. Most of the investors I know love telling people what they have invested in. I, for one get a real buzz telling people about the businesses I have invested in. Funnily enough, one of the Canadian Angels I was working with got ‘caught out’ through this probing)

4. Do they invest or do they ‘earn’ sweat equity? There is nothing wrong with sweat equity (I can do a blog on this if required) but be clear that this is what you after. I prefer combination deals whereby someone puts in hard cash as well as the opportunity to earn more. Human nature being what it is we have a greater motivation to not lose something rather than win something. Therefore I will be twice as motivated not to lose £25,000 than I will be to make £25,000. (Strange but true)

5. Can they give you references? If it looks like you will be doing due diligence together and spending time – find out what they are like as an investor. Ask the companies they have provided details for.

6. How much do they normally invest? I was raising money for a business once in the region of just under £1m. One potential investor I met asked some great questions and wanted to meet the entire management team (not unreasonable). I then learned that he wanted to invest £10,000. Nothing wrong with that amount – but if every investor putting in that level wanted a meeting lasting two hours that is 600 hours of management time (assuming one out of every three investors you meet ends up investing). That is 15 weeks of management doing nothing but raising money!

7. Do they invest with ‘strings attached’? There are loads of tricks whereby investors can get more from their investment. Again nothing wrong with this – but you have to be clear from the outset. For example, do they insist on being a Director? Again, not a problem, but what is the cost. I have written a blog about one ‘investor’ I knew who had done a great PR job on himself, convinced many companies that he would be a great NED and invested £10,000 in many companies, but got a payment of £24,000 from each company (with 50% needed upfront) Fantastic business model – but I have to say it lacks erm Honesty! (he also did a very poor job) Again be careful of investors looking for a job – unless you need their skills.

I hope this is useful. It was good to write this blog as it is very much about going back to basics and the reason why I started out writing this blog. Sadly, the world of finance always attracts more than its fair share of talentless morons..

Make sure you find angels to back you who get the wealth creation and risk ‘thing’.

Best of luck.

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Many of you will not know who Brian Clough is. He was one of the best football managers ever and achieved something which I sadly think will not be achieved again – (unless someone like Wenger can do it with Arsenal). That is to achieve greatness without spending a King’s ransom. One of his quotes was that he would only tell someone they were great – if they were. It was cruel in his opinion to tell someone that they could excel as a player when they did not have it in them to be great.

It comes down to honesty and clarity. People like to know where they stand and what is expected of them. It is amazing that we accept this as a rule when it comes to the way we manage and communicate with employees, but not when it comes to business relationships.

Last week a good friend of mine told me of a story that is all too familiar to me.

They were running a great business with real promise and I for one fully expected the business to do very well. They got into negotiations with a Business Angel and the Angel was very enthusiastic about investing. He spent a lot of time with the business and even went on a lot of customer visits. He made it clear before Christmas that he wanted to invest in the business. The entrepreneur was also very clear that failure to get investment by January would have a serious impact on the business. The angel reassured the business that investment would be forthcoming.

You know how the story will go. Earlier this week the investor pulled the rug on the investment. The business is now in a serious position and will probably have to either close down or go into extended hibernation.

There is a school of thought that believes that all is fair in love and war and business. I have never believed this. The ‘strategy’ (if it can be called this) is to say yes to a deal and then wait till the last minute to change your mind. The idea is that at that time, the business will be so desperate that they will do a much better deal (for the funder).

I am old fashioned and I still believe that your word is your bond. Do not say yes unless that is your intention. I have said yes and then said no. But this is because of something I have learned through the due diligence process or basically being told a lie. Simply changing your mind is not an option.

So my advice to anyone looking for finance is to always do your due diligence on the investor. I will write the next blog about questions you should ask potential investors.

But till then remember “trust is good, but contracts are better”. Very sad but true.

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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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As many regular readers of my blog will know, I am now increasingly based in Canada (at least one week a month). I love the place that I have settled in completely by accident (Halifax, Nova Scotia). I have done many speaking engagements there and recently wrote a guest column for a local newspaper.

After my feature in the newspaper, the hits on my blog went up substantially and I was contacted by many people and offered a few good deals. It seemed to prove to me the old adage about the value of PR and profile. This blog was inspired though by me reading the weekend papers – more about that later!

A good friend of mine who I have worked with for almost ten years is very private. He easily qualifies for a place on the Rich list – and yet never appears there. He confessed to me when I asked him, that he pays his accountant a lot of money to make sure he never appears on any rich list. I also learned that someone else I knew (calling them a friend would be an exaggeration) was paying their PR agency to ensure that they always appeared on the annual rich list.

Two very different approaches and yet they both made sense. The first person did not need the PR. He worked in a ‘closed’ industry. The people he did business with, knew about him and what his company and values were all about. Other than a massive ego massage, there would have been nothing for him to gain from appearing in a rich list – or indeed any other form of PR.

The other person wanted to be taken seriously and ‘break into’ the top tier of deals. They were in the business of selling products to retailers. They had calculated that if the people they were selling to, thought they were ultra-wealthy, they would be more likely to get a meeting and want to befriend them (by saying yes to doing a deal). There is a cold logic that runs through this. However, the real reason is ego. And there is nothing wrong with that motive at all. I should know – On many occasions, I have done things driven purely by ego.

I have talked to many people about the Dragons Den experience. You get the feeling that when the cameras are off, many of the dragons would rather not be bothered with these new deals they have done; it is a massive ego trip for them. The Dragon whom I most respected was Doug Richards who was there at the beginning – but then left because he did not have the time to fulfill the filming commitment (it takes an entire month to do just one series).

The problem I do have with exercises in ego is that it is unfair on the person seeking to do a deal with you or funding as they may believe your reasons for doing something with them are real. This brings me back to the inspiration behind this blog.

As I mentioned, I saw a couple of people I know well featured in the weekend papers. They were having very good coverage and I am sure they will have been very pleased with the write ups they got.

Any entrepreneur reading these interviews may be tempted to spend a lot of time and energy to contact these people as a result of what they have read. The reality is that from what I know of these people; they would not be able or willing to support new start ups.

So my advice to entrepreneurs seeking funding is to be wary of people who have very high profiles. Most angels conduct their affairs in private and want businesses to put the effort into finding them (it really is not that hard). There are of course exceptions to this. One of the most active angels in the UK (and also the largest single angel investor) has a high profile – but not because of his angel investments but because of the deals he is involved in.

I hope this is useful advice from a publicity seeking blogger!

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The area I am most often asked to give a talk about is what Investors look for in a Business Plan. I can only comment on what I look for as an angel with limited experience.

The first thing I look for is evidence of a good management team. This does not mean a team compromising of some stars (I find it is very hard to create a great team from one or two ‘stars’). I also think that businesses need to be wary of recruiting one or two really big names to sit on their board as Non-Exec’s.

I can understand the attraction, but the skills a start up need are rarely found in someone who has experience of managing publicly listed companies. And if you do have NED’s with great CV’s – I would expect to see some considerable investment from them.

An investor I work with from time to time has a great approach. He does not care about past achievements, he asks the same question of every NED – how much have they invested?

With all points I make on this blog, it is about taking the sensible approach and not taking the point to the extreme.

I am also looking to understand what the business does in a very easy way. A great example of this was in a business I invested in recently (last one I invested in) created a short video to explain what they do (as it was something I knew nothing about!). The point was that I got it after watching the video – and it was fun. Another great recent example is when someone sent me the presentation they would make to a customer. That means I get more than what the business does – I also get

1. Who they see as their customer? (And I understand the size of the market)

2. What the problem is for their customer? (And I understand the value of the problem they solve)

3. What the current solutions are and how they are inferior? ( And I understand their competitive landscape and barriers to entry)

4. What the charge is? (And I understand profitability etc)

So it really is a great way to get an investor excited.

And… Just a personal thing, although I was pleased to see it was backed up by someone I consider an expert in the field at a recent talk in Halifax. Please save your time and money and write your own business plan.

Nothing will lose you more credibility with me (and other investors) if you don’t come across as the author of your own plan. By all means, use consultants to do research and validate some of your propositions – and to add expert industry commentary. But do not engage consultants to write a business plan.

If you cant write – and I have worked with a lot of people who can’t, make sure someone on your management team can – and they come with you to any presentations you may make to potential investors.

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There are times in life when you are asked a question and you have the perfect answer. The problem is the perfect answer appears five minutes too late! This blog is great as it allows me to either say what I wanted to say but could not think of it at the time – or to say what I wanted to but found myself lacking courage!

My answer to this question in a presentation was;

Angels
• Own Money
• Entrepreneurs
• Very early stage
• Networks
• 10x return
• Expertise/ Board
• Normally straight Equity

VC’s
• Other Peoples Money
• Professional Managers
• Next stage
• May be competitive
• Return expectations vary
• Corporate Governance Board
• Different instruments

However what I really wanted to say was ‘Testosterone!’

Anyway who has raised money from Angels and from a VC/ Fund will know exactly what I mean – and I would welcome your comments.

Ironic though that I lacked the word I wanted to say!

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Although this is very difficult for me, I did want to say congratulations to Manchester United fans for what they achieved against my team on Saturday. Pleased as I was that Arsenal did not lose to Manchester United – what they have achieved is simply breathtaking.

To win the title three years in a row, to win the Champions League last year (and be in the final again this year) is some amazing achievement. Sir Alex has won 11 premier titles in the last twenty years or so. No British manager has ever come close to being anywhere near that number. Over a history spanning nearly 100 years as a top club, Liverpool have won the title 18 times and Manchester United have now equaled that record.

Critics argue that Sir Alex has had a lot of money to achieve the success he has. I think this is a lazy statement. Blackburn Rovers spent tens of millions and could not avoid being relegated just three or four years after winning the premiership. Chelsea has spent a staggering £238m on players in the last five years and have only won two titles. Having spent only about ½ of that money, Sir Alex has delivered three titles and a European Cup during this period.

Having lost all blog readers who are not interested in Football, I hope you will bear with me in terms of the point I want to make. Sir Alex deserves credit for having created at least four different teams (only Ryan Giggs has won all the titles under Sir Alex)). Most people simply do not have the desire and the hunger to keep pushing themselves and going forward.

One criticism I often hear from people when talking about wealthy people or successful people (the two things are most certainly not the same) is “how much is enough?” I think the point is misunderstood. I have written about this many times in the past, as in my experience most successful (and by definition happy) people never work on things for the money. The very small cheque I got from Google for my first advertising on the blog– and the first cheque I got from Flight & Partners made me very happy. But it really wasn’t the money. It was the fact that I had worked with other people to create something which generated value (in the form of money).

If you are driven by a desire to just make money, I have some bad news for you; you are highly unlikely to succeed. If you are driven by a desire to create something and solve a problem or something else – you probably will. Sir Alex is driven by a deeper desire than to simply collect another Trophy. He wants to beat his peers – and earn their respect. And as hard as it is for me to do as an Arsenal fan, Sir Alex you have totally earned my respect. Congratulations.

Ps. Arsene Wenger – I love you, but please, please make sure I do not write this blog ever again!

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Many a new business idea or business project has failed because someone, somewhere has failed to notice the difference between causation and correlation. I hope that by the time you have finished this blog you will not be one of those!

Business people and especially marketers are always looking at general trends and then extrapolate from that data, new ideas to satisfy growing demand in a new area. Here is a good example of the dangers;

There is a very strong relationship between the sale of ice creams and bee stings. You can almost plot the value of ice cream sales if you know what the level of bee stings will be. It has been well documented recently that there has been a dramatic decline in the bee population (some estimates suggest they are down 80%). Should an ice cream manufacturer therefore cut back on the level of production this year?

Most of you will realize that this is a silly suggestion. Some of you will see that this is merely a coincidence and some of you will see that there is a very strong relationship between the two because of a third factor; summer. Obviously people will be out more in the summer and consume more ice cream as well as get stung by bees!

Sadly, I know too many people who assume correlation (where two factors move together) is the same as causation. I see too many business plans where the fundamentals are wrong because of the assumption. Take for example the recent growth in home cooking. A lot of this growth has been driven by consumers tightening their belt. And yet I have seen at least three business plans recently setting out to ‘exploit this interest in home-cooking’. Yes, there is a big increase in the sales of items like flour and yeast. But this does not mean that people are looking to learn how to cook bread. It may be true – but it is wrong to automatically assume this is true.

A company I looked at recently is called DIY Kyoto. It is a great business which makes fantastically well designed products which measure the amount of energy you are using (or rather wasting) in your home. It is a very green product but I expect the company to do well in the recession as it is a great way to cut costs. I expect a lot of companies will get confused in the next few years as they will see many ‘green’ products increase in sales. They will assume that consumers are very interested in saving the environment. However, I expect the products will be primarily ones that actually save consumers money.

If you are going to exploit a trend and are basing a business plan on that trend, please make sure you are clear about causation or correlation. Otherwise you may find a correlation between the rejections you get and the causation you believe in!

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