One of the interesting things about having lived in both the UK and India (I was there from the ages of 9-11) was you do get to appreciate different cultures and you see how things are different. From the trivial example of restaurants where if you want to have a meat dish you would ask for the Non-Veg option! In the UK, meat eaters are still the norm.

The thing that seems very different in outlook in the West is the need to have an investigation into something or an enquiry and of course a scapegoat. In India, and I suspect other Eastern countries as well, fate is seen as playing a role in many things.

These thoughts were prompted this morning by learning that BP have ‘changed’ the role for their CEO Tony Hayward – he is being served up as the scapegoat. Everyone knows this, but yet it is seen as the right thing to do.

My concern with this and with all the enquiries we in the West seem to be obsessed about is that we take false comfort from their findings. There are some landmark enquires which can alter the face of organizations. Lord Scarman’s report in 1981 looking at the riots that took place in Brixton (South London) changed the way policing was carried out in the UK in a very extensive manner and has I think professionalized the police much more.

But then there are lots of enquiries where people are simply seeking vindication for their views. And I think many businesses fall into this trap of hiring consultants at great expense to tell them what they already know.

Watching Dragons Den last night made me realize as well that too many entrepreneurs ‘outsource’ the learning of their business to outsiders who write great business plans. This is why I will NEVER invest in a business where the management team do not own the business plan. I am highly skeptical of great looking business plans that are written purely for the purposes of raising money.

Of course that is a very important reason – but it would be even better if you learned about your business at the same time. And of course be careful to avoid hearing and seeing and what you want to hear and see.

As for me, I blame the scapegoat.

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I was recently coaching a business in Canada and advising the CEO about building up a team. He was on a recruitment drive aimed at building up a team of all stars. My strong advice to him was to not pursue that policy but to rather focus on building a team with one or two functional stars and then have a team around that.

My thinking went along the lines that too many stars across too many disciplines bring their egos with them. They also will feel that because they are ‘stars’ that the company should focus on the expertise that they bring to the table. How do you then resolve problems between the sales superstar and the marketing superstar or the finance superstar? Recruiting people is hard, but retaining talent is even harder!

On the basis of this thinking, I believed that Spain would not do well in the World Cup. They were a team with too many stars. How could they park their egos and work well as a unit? Especially as World Cups bring together players who may not be used to working with each other. When they started the campaign with a loss to Switzerland my views seemed to be confirmed. And the failure of England with its ‘Golden Generation’ and the success of Germany with relative unknowns again seemed to vindicate my views.

Last night however, the Spanish proved me utterly wrong!

But there are some strong lessons that Entrepreneurs can learn from the experience of the Spanish team which does not entirely repudiate my belief about the danger of recruiting stars.

Firstly, most of the players came from one team; Barcelona. They were therefore used to working as a team and as a unit with pre-defined roles and responsibilities. Secondly, the captain of the team was the Goalkeeper; by definition he had to trust the team to motivate themselves to perform on the pitch. He needed to provide little leadership. Finally, the defeat to minnows in the first game and the elimination of both France and Italy at the first stage may have proved a great lesson to the team. They were not invincible and they had to park their egos at home.

The team on this occasion proved to be much bigger than any individual. The key lesson for someone looking to build a team is to ensure that they understand the essence of teamwork; the importance of inter-dependence and shared goals. And they must be capable of putting their own interest aside and work for the greater good. And of course, the hardest lesson to learn is that if you are a ‘superstar’ CEO, you are unlikely to get the best out of your team.

Very few great managers were great footballers (the current Barcelona manager is a notable exception). Ironically, I suspect it is easier to motivate and manage people when you have genuine respect for their talent because you realize you cannot do certain things yourself. Superstar CEO’s tend to think they can do everything better themselves; very de-motivating!

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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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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 am spending about one week a month working in Canada. Whilst there, I work with many start ups and I have started angel investing in Canada. There are no notable differences between the issues and the challenges that start ups face no matter where they are located. Sadly, I have though noticed I am giving very different advice in the UK to start ups wanting to obtain support or contracts from government.

In the UK my advice for a start up is to stay well away from Government (any agency of government). In Canada, I would advocate the company to get involved with a government agency as soon as possible. Why the difference?

For cultural reasons, Canadian government staff tend to be of a much higher calibre than the people I have come across with government agencies in London.

The sheer hard work required to win government work in the UK even for relatively small value contracts means that I really think it is a flawed strategy for a start up to try and seek government contracts.

In the UK, I recently looked at pitching for some work which I felt I would be well placed to do but once I looked at the requirements involved in pitching, I decided it simply was not worth the effort to go for it. The risk/reward ratio was skewed against me.

For a start, I would have to partner with another organisation that had at least a £3m turnover. The paperwork required would mean that at least two members of the team would be fully occupied for at least two weeks. And as a business that has not won this type of work before, I felt that the effort was not worth it. Compare this to my Canadian experience.

I came up with an idea to help Canadian companies and after writing a four page proposal for a local government agency, it was accepted and I have started working on this project.

The people I have worked with in Canada seem more commercially aware – they ‘get it’. So, I do find it ironic that in the current climate when the British Government is trying so hard to try and support small businesses and start ups, that they do not start closer to home! They should temporarily lower the high barriers that prevent companies from getting government work. And they should actively discriminate against the same old companies that seem to win most of the big pieces of government work.

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I have now made 24 investments. 20 of these could be described as a pure Angel investment, where I simply wrote a cheque to the company and that was the end of my involvement. The returns show that my investments in these companies have been very poor. (As in I have lost a lot of money). The most successful investment I have made to date is Flight & Partners. This is a business I co-founded and own a 25% stake in. What is the one key difference between all of these investments; People.

What I have learned from Flight & Partners is that the reason for the company’s success is the quality and experience of people. A key thing though is the relevance of the experience. I have been involved in many enterprises that have not been successful but I would like to believe I am good. The reason why I think Flight & Partners worked (and is working) is it allowed talent to focus on what they are specifically good at.

The key to Fund Management is the ability to raise Funds and the ability to manage them. My contribution to the Fund Management was limited to bringing the key parties together. It was the ability of each of the other three partners in their particular fields that made the business happen.

In many other businesses, you see talent being recruited and deployed and yet the results are often disappointing. With hindsight, using my own personal experience it is because talent is being used in a field which is not the area of expertise or relevance. I do believe very strongly that you can train business managers to become better general business managers. But at the start up phase (first year at least) you need people with strong credibility in their chosen field.

With coaching, training etc you can become a much better business person. That is you can be trained into making better decisions. It does not mean that you will always get it right; it just means you give yourself a better chance to get the decision right. It is like going to University. Very few graduates ever use their subject knowledge in their career but the degree has hopefully taught them how to organise their thoughts better and make a judgment on a sound and logical basis.

There is a lot more to say on this subject and I will of course come back to this. What I have learned though that simply backing a business idea – no matter how good it is, does not work. It is always about the people. So questions to ask yourself when launching a business include;

1. Do I have highly relevant skills in the chosen field of business?
2. Do I have a team who have shined in this particular field?
3. Have I demonstrated an ability to be a general manager rather than a functional manager? (as in being a project manager rather than just an IT/ Sales/ Finance specialist)
4. Do the team bring together all the skills and experience needed to manage the challenges of a start up situation?
5. If not, is there a pool of Non-Executive but motivated talent available?

Best of luck.

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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 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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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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