Google in trouble?

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 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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Will this recession be W shaped?

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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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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As I mentioned in a recent blog, I ran a three day course in Halifax recently from St Mary’s University called From Mind to Market. Given the last blog was all about looking for an idea – it seems to be appropriate to talk about what to do next.

Thank you for the emails requesting more information about the course, given the interest, I thought it made sense for me to write a blog. I would appreciate your feedback on this blog as I am seriously thinking about writing a book called “From Mind to market” – if your feedback is positive, I will start writing it, if it is not so good, perhaps the book can wait! Furthermore, I am running the course again at the end of March and am thinking of filming it. If you are interested, please do let me know if you would like a DVD or web access to the course.

The course was split into five courses over three days;

1. Is the Market Ready?
2. Writing and Financing a Business Plan
3. Sales
4. Planning for High Growth
5. Planning for the very long term

I trust the sequence of the courses makes sense. The first stage is to ensure your idea is validated. There are many ways of doing this and electronic media makes it possible to dry run an idea at a very cheap cost. Twitter/ Facebook and especially Linked-In, make it very easy for you to test out the appetite of your idea at a fraction of the cost associated with proving old ideas. I am very sceptical about market research – be careful that the results do not tell you what you effectively were paying someone to come back and tell you. We have all seen episodes of Dragons Den where we all know the idea is stupid. However, someone else has convinced, the would be entrepreneur that they have a good idea!

Once you have established that there is a market for your product/ solution, you will probably need some sort of financing. There are lots of sources to consider. Depending on the nature of your business, different sources may be more or less attractive. Remember that as a general rule, debt is cheaper than equity. Debt though is hard to get and especially in the current business climate. Make sure you clearly understand what the different providers of finance are looking for.

Sales is the lifeline of any business and once you have raised the money the best thing you can do is make sure you get selling and get selling quickly. If everything is not quite ready, let the customers be the ones to tell you what further hoops you have to jump through to get their business; let them co-author your final offering. Too many times I see companies develop solutions which are perfect for them but not the customer! You don’t get a second chance to make a first impression – so really put a lot of work into your sales process and execution.

High Growth sounds great, but it brings with it a whole heap of issues that you need to plan for. Critical to this is your ability to manage cashflow. As a high growth coach and as a manager of a turnaround fund, I see many businesses run into predictable problems – that could easily be avoided by managing cash.

Finally, once you are at a stage where you are confident that you have a good business in shape, you need to ensure that the business is equipped to deal with long term issues. For example, global warming means that weather extremes are more likely to occur with greater frequency. Does your business have a plan to cope with at this? (I was recently surprised to learn that some cheques I had paid into a HSBC branch were delayed by a week for clearing because the snow had meant that the cheques were not picked up by the delivery van on time! I am amazed to see even now how many retail businesses in the UK, don’t have plans to clear the entrance to their store when there is snow!

I hope this snapshot – and it is just that is useful. The course went for a full three days – so of course is much, much more. You can help me conduct my own cheap market research and let me know if yes you are interested in either

1. Attending such a course if it was run near you
2. Buying access to a video of the course
3. Buying a book

It is good to practice what you preach!

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I was watching some old TV footage of ‘alternative’ comedy in the late 1980s. The comedy was seen as alternative at the time (although it is mainstream now). The comedy was based on simple observation and finding the stuff that is funny and unusual about our everday routines. It was groundbreaking as it wasn’t telling jokes or finding a victim – the victim in this humour was us – we were being encouraged to laugh at ourselves rather than at a minority.

I know some very funny people and their ability is not based upon their ability to tell jokes but rather to just observe and make witty comments in any given situation. I could not help but think that the Entrepreneur has a similar ability.

They look at everyday situations and see opportunity. They see that things could be done better and that there is value to be provided in making things better. All of us are ideapreneurs – but some of us have an additional ability to take things beyond an observation and do something about what we observe.

Again, like comedians, it is about recognising the skills you have. Many comedians have a team of script writers providing the jokes and they practice the ability to deliver a performance. The script writers create the content – but perhaps lack the ability to perform (or more importantly, perhaps don’t want to) on a stage.

I always thought that Angus Deaton (former presenter of Have I got news for you) was hilarious and then I saw him in other programs and realised he was fantastic at reading scripts (a skill not to dismissed). In a similar vein, I was disappointed to learn that Elvis did not write any of his ‘songs’. Neither did most of the Motown legends. Does this diminish the power of some of their music? (It was actually The Beatles that were one of the first music acts to write and perform their own material). Scarily, you could argue therefore that Simon Cowell is taking music back to where it was pre-Beatles!

Back to the main point, we need to recognise that not everyone is a John Lennon and that the best businesses are all about a team effort and approach. I tend to have a good business idea at least once a week, but there is very little if any value in that. An idea is not a business. As one entrepreneur said to me – “until you have a customer, all you are is an idea”. But making the idea ‘happen’ is for another blog and is a course in its own right. (Cheeky plug here – I do run a three day course called “From Mind to Market” – if you are interested, please contact me for more information).

If you are looking for ideas – just be an observational comedian for a week or two. You will be surprised at the wealth of opportunities that are just waiting for you to make them happen.

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Sssshhh

I was asked by a neighbour to help him with his business idea (I have since learnt to never tell neighbours what I do for a living!). So we go out for a coffee and I ask him about his business. His reply is “it is something to do with design”. I obviously needed something more than this – but he refused to tell me as he was worried I would steal his idea. I could understand his fear – but then he should not have asked me for help. As it happens, it turned out to be a very quick coffee.

Last week, I was having a conversation with someone about their business and they were worried (rightly) that once they launch their business, they will generate competition and other companies will try and do what they are doing.

Sometimes, people can get carried away with this fear of competition and the need to keep things secret. You need to look at your business and recognize that most of your business value is not in the formulas, IT system or even brand design. Most of the value will be in the relationships and partnerships you form within your business ‘eco-system’. This part of a business becomes very difficult if not impossible to replace.

Many people argue that because of the internet, the value of these relationships diminishes. I would disagree. Most e-commerce sites still rely on partnership arrangements and it becomes very difficult for new entrants to replicate this.

In this specific example, we were able to realize that by tying up contracts and agreements with just twelve very specific companies, this new company would have most of the market tied up and make it very difficult for a new entrant.

So in this new decade and indeed in this new supposedly depersonalized world, I believe it is firms who employ people with the best interpersonal skills and emotional intelligence that will build great businesses that will be able to withstand the competition from new entrants. Networking and relationship building will take on a greater importance.

So to conclude, when you are thinking about protecting your business – focus on the areas that are truly difficult to copy such as great service.

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OK – so I have had more relaunches than the caring face of the Conservative party, but in my defence, the blog has had to take a back seat whilst I focus on some struggling business issues.

So after a three month absence it is good to be writing a blog again and hopefully I can get back to writing at least a couple of blogs a week. By the way, I have to confess to being slightly miffed by the complete absence of any emails begging for the return of the blog. There is a Chinese curse which most people think is a greeting; “may you live in interesting times”.

These last three months have been very mixed. The lowest point of the year for me was in October when I lost my very good friend and founder of Amano Cafe, Jonathan Cooper. He was simply wonderful and I miss him terribly.

I have also spent a good three weeks in Halifax, Nova Scotia and have invested in my first Canadian business – www.adventus.com And I have relaunched my own website www.helpwithsales.com comments and feedback would be most welcome.

Earlier this month, a competition I was involved in announced its winner – well done to Wigs up North. If you are interested in learning more about them and all of the other finalists (and it was great fun to work with them) here is the video link http://www.wigsupnorth.co.uk/

Other ventures that have taken off since I last wrote a blog include www.wooshii.com – if you are starting out in business or need to drive a lot of traffic and ‘buzz’ around your website, you could not do better than this site (trust me – a business to watch in 2010) and finally if you get a chance have a look at www.learn2playpiano.co.uk – this was a business started because I personally loved the product so much that I wanted to sell it in the UK.

So this has turned out to be more of an advert rather than a blog!

I will write a blog soon – with some meaningful stuff.

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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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