In the Vice Presidential debate between Joe Biden and Sarah Palin (and yes like most men over 30 I do fancy her – and yes I do feel very bad that I do – she is someone who does not believe that Dinosaurs roamed the earth) Senator Biden was talking about the last eight years and Governor Palin said “this is all about the past”. The response was one of the best lines I had heard in the campaign (and yet was not reported). His response was “The past is a prelude to now”

Business opportunities do not exist in a vacuum. They exist through change and making the most of the uncertainty that change can bring. As someone who likes to look at the bigger picture as an investor it is important that I try to make sense of the world around me and the uncertainty that exists. By trying to understand the background, hopefully I will be able to predict the scenarios that may exist in the future and plan accordingly.

In the early 1980s, Shell was one of the first corporations to engage at a strategic level with scenario planning. One of the plans was to see the impact of oil at $10 a barrel. At the time, this seemed to be far fetched. Nonetheless, the scenario was flushed out and plans were drawn up. When the price of oil did drop to $10, Shell was well placed to exploit this changed scenario. They were able to steal a huge march on their rivals. They had planned for this change of events and did not panic when these events came to pass.

As such I think passionately that if you want to be a seasoned angel investor or a serial entrepreneur, you need to understand more than your own narrow field (although you do need deep expertise in that area). I have both an interest in the wider world and a professional desire to better analyse and comment on the world around me. One of the highlights for me in 2008 was being asked to speak at a conference in Canada. To position myself to speak at more events, I do need to be able to articulate my own views of how I see the world.

Although the views may be my own, they will be hopefully formed by reading lots of different sources and basing the views on logic.

I am away in Egypt this week and hope you will indulge me by allowing me in future blogs to share my analysis of the world. Although I may be convinced I am right, if enough readers to tell me they are not interested – of course I will have to change my views!

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Man we were cool in the 80's !

I am off to Egypt for a week and I have promised myself no email or even phone access for that week. It remains to be seen how long I am able to survive. I have not been without the use of a phone for more than 24 hours in over ten years!

It is a funny thing, but I remember getting my first mobile phone (through my employer Duracell batteries). It was very strange technology and I couldn’t get over how cool I must have looked – talking into a phone whilst driving on the motorway with my jacket on a hanger and popping into Little Chef for tea (I didn’t know what a latte was at this stage. Yes my perception of what I thought was cool then is very different to what I think is cool now! At this point I should apologise to those thousands of salespeople who live this life – yes it is still cool (especially white socks with dark trousers).

Again, I remember when emails started. Again it felt very strange to use this new technology. I was at Fujifilm and I remember how the sales team had a secretary who used to do the typing for us. The process was as follows

1. We used to first write something up on paper and then submit it to her
2. She would type it in draft and then let us have it back to check.
3. There would always be error so we would then make the corrections and then submit it back
4. We would then get a letter printed out on proper paper which we would sign and send

This was a little over ten years ago. It is amazing to think that a business which was producing cutting edge digital technology (1Mega Pixel cameras!) were not using laptops.

Again I remember when we did get a laptop, we only used it for sales presentations – and the sales team had to share one between four people!

My point is that the way we do things can rapidly become obsolete. And it is very difficult to know what technology will work. I remember getting my first text message (Thank you Mark Bryant) and thinking how stupid that was. I remember saying “that will never take off!”

If you are working on a new technology, my advice would be to learn from 3M Post it Notes. This is a classic case study of how a failure (glue which was too weak to stick) became a massive new market which did not exist before. The key thing that happened here was that what led to the success of the product was the company giving out lots and lots of these products as free samples. People were free to invent the way they wanted to use this product – and I think the result is that now you would be hard pressed to find any office which does not have Post it notes.

If you have come up with new a new product or solution, my advice would be to ensure that you have allowed enough budget to just give out a lot of your new solution. And let people to play with it. The most amazing thing about new technology is that we all different reasons for using it. The classic case is the iPod and the iPhone. The way the iPod was sold to me is very different from the way I perceive the benefits. I travel a lot and I like the idea that I can take my entire music library with me wherever I am.

When I run my sales training courses, one of the key things I try to teach is for sales people to appreciate the difference between knowing what you are selling and what your buyer is buying. This is very important when selling a new solution. If you let the buyer ‘get it’, you are more likely to get a sale!

Happy playing with technology

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I was asked the following question recently and I hope my answer satisfies the reader. If any of you do have specific questions for me, please do not hesitate to contact me.

You put in £10,000, company is then valued at £100,000, so your stake is worth 10%.

After several rounds of financing, company is now valued at £1,000,000.

Do you:

a) still have 10% of the company, your stake now worth £100,000?

Or

b) now have 1% of the company, the value of your original investment?

This is a good question and I can say that it took me ages to get my head round this. As an entrepreneur and an investor it is important you understand this.

Let’s take two examples – starting off with you owning 10% of the business above. It is easier to think of this in terms of the number of shares in issue. There are 100,000 shares in issue at £1 a share. So the investor owns 10,000 shares.

In example one, the business is doing well but needs to raise more money. The business now is making a profit of £50,000 a year and gets valued at £1m (pre-money valuation). The company raises £100,000 by issuing a further 10% of new shares. To raise this extra money, the company issues 10,000 new shares at £10 a share. The post valuation is £1.1m. The investor’s shares are worth £100,000 before and after the fund raise but in terms of % ownership

1. Before s/he had 10,000 shares out of 100,000 (ie 10%)
2. After s/he has 10,000 shares out of 110,000 (ie 9.09%) which is 10% less than the shares held before.

In example two, the business is not doing well and needs to raise a further £100,000 at a pre-money valuation of £50,000 (the company is not doing very well and in today’s climate, asset prices have collapsed – so this is realistic). This means that the shares pre-money are priced at £0.50 each. To raise £100,000 therefore, the business needs to issue 200,000 shares at £0.50. Before and after the event the investor’s shares are worth £5,000. But in terms of % ownership

1. Before s/he had 10,000 shares out of 100,000 (ie 10%)
2. After s/he has 10,000 shares out of 300,000 – (ie 3.33%)

I hope this helps as an explanation. Most businesses will have around three or four rounds of finance. As I may have mentioned in a previous blog, it is important not to get carried away with the ownership % as an investor, but what your shares are actually worth.

The other point to bear in mind is that when you are raising money, you are issuing new shares or selling shares that have been authorized but not issued; you are not selling existing shares that belong to someone. In that instance, the money raised, belongs to the person that has sold the shares not the company.

Feedback as always welcome

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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This has been a very bad time to be a racist. First, Lewis Hamilton spoils that bastion of white wealth called Formula One by winning it (and becoming the youngest ever world champion) and then Barak Hussein Obama becomes elected the most powerful man on the globe.

I have always been staunchly pro America. I hate the lazy anti American attitude that Europeans seem to have at times. The reality is that Europe could not even sort out the murderous ethnic cleansing going on in our backyard in Bosnia until Bill Clinton decided enough was enough after a bomb went off in a market in Sarajevo killing scores of civilians and ordered US planes to bomb Serbian positions.

Like most of the world, I am highly critical of George Bush’s misuse of US military strength. But if you look at the evidence, he has done more for the cause of Africa than the Clinton administration did. (Bono from U2 said this!). He was also the President that gave two black people of immense talent Secretary of State roles. (Colin Powell and Condoleeza Rice) But I guess it is easier to join the crowd and condemn him than to look at things objectively. Under the new President, I am sure that US military strength will be used alongside the renewed moral strength that the US has. Other than India, which other democracy in the world is led by a person from a minority community? (OK you might argue that President Sarkozy as the son of a Hungarian immigrant qualifies). The victory of Obama is massive. ‘Civilized’ Europe will have to devise a response to this. We can no longer beat the US up because of what happened in the South in the 1960s.

The question being asked here in the UK (and Europe) is where will our future black political leaders come from? I think one of the reasons why it is very hard for anyone outside of the mainstream to advance is that in the UK there is only one route for political advancement which is as a Member of Parliament. You then owe your allegiance totally to your party and the senior politicians who you hope will promote you to a prominent position. This has nothing to do with racism. Having lived here all my life, I can say that in my professional life, I have not experienced racism. It is again too easy and too lazy to just blame things on racism.

In the US, you can become high profile enough to run for President by becoming a Mayor (Guiliani), a Governor, (Clinton & George Bush), a Congressman or a Senator (Obama). There is also the ability to occupy a senior government role without being an elected official (Colin Powell). In the UK, to be in the cabinet, you have to be in Parliament (either as a Lord or as a MP).

For me, this explains why politicians on the whole in the UK are bland and their failure to inspire. They have to be part of the ‘system’. Entrepreneurship is far more attractive. Politics loss is Businesses gain – lets be having you!

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One of the challenges facing investors and entrepreneurs alike is the whole issue of what constitutes ethical behaviour. Some business courses attempt to teach morality and ethics but I am skeptical about the ability to teach ‘good behaviour’.

Many people (the vast majority I would say) believe that ethics and morality derives from ones religious belief. I reject this view entirely and am very suspicious of people for whom morality is something that can be referenced against a book.

As an entrepreneur, you will face multiple judgment calls and occasionally you will be required to make calls which will have an ethical dimension. You will have multiple stakeholders to consider. Primarily, these will be trading partners, employees, customers and investors. Your actions need to look after all of them.

In my humble opinion, each person has their own code of ethics that they need to subscribe to. My code is governed by a very simple overarching motive; ego. I admit that it is very important that to me what people who do business with me think of me. I would not want to behave in a way that would lead anyone to cast aspersions on my business morality.

My favourite adage is “treat others as you would wish to be treated”. As an entrepreneur, if you can treat your angels with that level of respect you will never go wrong. To illustrate, let me give you a real life example.

I invested in a business recently, which went bust. A new company purchased the business from the receiver and was aided in this process by the founding entrepreneur (who was the person I invested in). There is nothing wrong with this – it happens all the time. As part of the deal, the entrepreneur was given shares in the new company. What do you think the entrepreneur should have done with this stake?

In this case, he did nothing. In another identical scenario, the entrepreneur divided up the stake he obtained to give the investors who had lost their money some chance of getting some money back. Again, I will leave it to you to decide, what the right thing was and what the wrong thing to do was in the scenarios above. What I can say is that if the entrepreneur in the second scenario wanted me to back him in another venture, he would have my support with no qualifications. He has demonstrated that he will look after the investors who have backed him.

Of course, the example works the other way around as well. If you act as an angel in an ethical manner, the entrepreneur would recommend you as an ideal investor!

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

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

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

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

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

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

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

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

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

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

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

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It got me thinking about the issue of absence from work and in particular entrepreneurs being off ill. Firstly, I should state that I did manage to go to all my business engagements and nothing was cancelled. I was suffering and when I got home, I did not have the energy to write a blog.

I invested in a business a couple of years ago and after about ten months the entrepreneur decided to take two weeks off on paternity leave. I have to say that along with the other investors; I was a bit upset about this. Being an entrepreneur carries with it special responsibilities that in the first few years you should not seek to ‘escape from’.

I have written previously about the need to take a break – and I hope that I am not contradicting myself by now appearing to be attacking leave which you are entitled to. And if the former Prime Minister, Tony Blair, can take paternity leave, why can’t entrepreneurs?

For me, the answer is about scale. As a small start up with a management team of just two, the entrepreneur taking paternity leave for two weeks, in the anecdote above, did have a significant and negative effect on the business. If you want to take leave (and there is nothing wrong with that desire) you have to put in place a structure that can cope without you.

This is not always possible in the first few years if you are the main driving force and putting in very long hours. Having said this, I would be nervous about investing in a business that was so dependent on just one person.

The lesson for entrepreneurs is – if you want to be flexible with your time and want to be able to take paternity leave (and this is not a judgment call for me to make), then you should either only seek investment from family and friends or you should raise enough money (and therefore have a strong enough business) to hire a good management team to look after things when you are not there. Investors should also learn from my mistake and only invest in businesses which are not utterly dependent on just one person.

Happy breaks!

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For example, I have no idea who the readers are and what kind of articles you like reading. I am hoping that I can take your feedback to make the blog more relevant to your needs.

I am also looking to get sponsorship for the blog and knowing a little bit about the readership can hopefully make the blog more attractive to potential sponsors. Your help in giving me this feedback would be really appreciated

As always, your comments are welcome

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