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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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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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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Like finding a suitable name for a new band that you are going to launch, much time is wasted in defining luck and the importance it plays in business success. I like the definition that luck is where opportunity meets preparation.

A successful friend of mine told me that he believes that most of us (but not all) get the same amount of luck in life. It is just that some people are able to take advantage of it and some people pass up on the opportunity.

When I purchased my very first property to rent out, I remember someone close to me at the time telling me not to do it because “if it was that easy, everyone would be doing it”. It is true that you should avoid acting with the herd, but equally, it is not a good reason to not do something.

If you pardon this ego-trip, I would like to share the history of my Canada experience with you and highlight the role that ‘accident’ has played in my latest venture which I am very excited about.

My good friend and business partner, Fergus got off a plane from Portugal and told me that he thought I should write a blog. This was over a year ago – and with a lot of help from him, I started writing a blog.

This blog got ‘picked’ up by some Canadians working at the National Angel Capital Organisation and a guy called Bryan Watson – started commenting on my blog and being very encouraging about the whole thing. Before his comments, the whole thing felt very lonely! I was as a result of this invited to speak at their Annual Conference in Halifax Nova Scotia, 11 months ago.

Whilst there, I met some very interesting people including someone who worked for a great University based there called St. Mary’s University. When I next visited Halifax in February this year, I spoke at the University to some business students. I also met a person there who invited me to have lunch with her and some of her business partners.

At that lunch on the last day of my trip some interesting discussions emerged and it seemed possible that there could be the makings of an interesting business venture between us.

Earlier this year, I was also at a European Angel Conference in Madrid and I met many of the Canadians I had first met in Halifax last October again, including the President of the Organisation.

I then went to Halifax for five weeks in May this year to start this business venture. It was obvious after just two days for reasons that I won’t go into (for fear of being sued!) this venture was not going to work. I then contacted my old friends from the conference and they invited me to a few dinners and networking events. By ‘accident’ at one of these dinners, I happened to be sat next to two company executives who were both looking at the UK market for their business. I was able to help them (and since then I have invested in one of them).

Because of this evening, I was also introduced to some local government officials who were able to put me in touch with other companies that I could help and as a result of this, I was able to get a lot of paid work to help local companies – and am now going back to Canada at least one week in four.

In the interim, I have been able to use this experience of Canadian and UK angels to launch a new venture with the head of the Canadian Angels called www.newmarketspartners.com

This venture will bring 25 of the most promising Angel funded Canadian businesses into the UK on September the 30th. These companies are looking for UK based angels with market expertise and contacts in their chosen fields to help them expand into the UK.

There is another trip taking place on November the 25th in Toronto where UK companies looking to expand into North America will be invited to present to North American based Angels with strong market expertise.

The partners in this venture believe that angels add most value when their money is combined with expertise and market know-how.

If you are an angel – please email me and I will be able to send you an invite to the event. If you are a company looking to expand into North America, please get in touch via the website.

Back to the point of the blog! When I talk to entrepreneurs, what strikes me is how fluid their plans were and what an important role accident played in shaping the way their business looks today.

The lesson here is to go with the flow – but always be looking for new ways in which you can help others.

I do hope you found this blog useful – who knows what this may lead to for me or for you!

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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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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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