Business Angel Blog

Writing this blog has been really exciting and challenging. I have faltered on occasions in trying to keep up with a daily blog and I have settled on making sure there is at least something fresh twice a week. More than that is great and recent events have helped me write lots but I do hope that the New Year is actually less eventful.

There is a famous Chinese curse which most people think is a wish; “may you live in interesting times”. If anyone doubted that this was a curse, I think the events of 2008 have paid rest to those doubts. 2008 has seen Lehman Brothers, Woolworths, MFI, and Zoom airlines to name just a few companies go bankrupt and I do not think anyone could have predicted this (other than Woolworths) a year ago.

Of course it is sad and the cost to those thousands of dedicated staff who have given their working lives to these businesses is immeasurable. Schumpeter, a famous economist wrote about the ability of the market to engage in “creative destruction”. His argument was that capitalism has a built in ability to destroy lame companies and from the ashes arises new opportunities and new renewed strength.

There is a Darwinian sense to this. It is not about survival of the fittest, but survival of those that are most readily able to adapt to changes in the environment. On many occasions I have stated that it is this ability to adapt to change that is the key to business success. That is why most companies need to change management at different phases of growth. Each phase can call for different skill sets and experience.

Anyway, back to 2008. I hope it has been an exciting year for you. The highlight for me was launching this blog and launching and co-founding a fund management business. I received a cheque for £79 this week from Google and it was the first bit of money I have obtained from the Blog. So a big thanks to all you readers – and for clicking on those Google ads!

From my limited experience the biggest joy of running an enterprise is when you get the first cheque. It is a sign of validation of your project. When someone values your efforts enough to pay you for them – it is a great feeling!

May I once again, thank you for your support over 2008 and wish you the very best of luck for 2009. I have a feeling the next year is going to be a great year for new opportunities. Only the brave will be starting up – and the money is still out there!

In the midst of the financial meltdown, we were able to raise £11m – for the right team and business the money will always be out there.

One of the factors for rapidly rising inflation in the earlier part of the year was the rise in the price of oil. As a large component of fertilizers is oil, this also then fed through into increases in the price of food. It is amazing to recall how much circumstances have changed in the last six months. We were really worried about stagflation rather than deflation as we face now. Given the importance of the price of oil, where next?

Oil peaked at $147 a barrel in July. It is now around the $45 a barrel range. This is a drop of two thirds. This will ensure substantially lower inflation over the next few months. There is no doubt that the ‘correction’ in the price of oil has been vey sharp, if indeed you could describe it as a correction.

Many would argue, including Tim Guinness (an energy fund manager, who is a bit of an expert in these matters) that at $147 the price of oil had risen too far and too fast. He thought it would correct itself to trade at the $70 to $80 range and then move upwards gradually. In the long term, I remain convinced that the price of oil has to rise substantially. Oil is running out and demand is increasing.

In the short term though, I would expect the price of oil to remain below $50. Politics plays a big role in this. These thoughts are based on my own analysis – and no doubt experts who are more knowledgeable than me will have better informed views.

As one of the major oil producers, Saudi Arabia has a major influence on the volume of oil produced and hence the price. It is of course easy to assume that the Saudi interests are best served by having as high an oil price as possible. That I think misses the wider point. The marginal cost of a barrel of Saudi oil is around $17. For Canada at the other extreme, it is around $62 a barrel.

The Saudi budget balances when the price of oil is around the $30 range. Saudi Arabia is overwhelming Sunni and they have long been worried by the Iranian Shiite regime. The Iranian sphere of influence has gradually been spreading. The Saudis are worried about the influence Iran is having in Iraq and the success of their proxy Hizbollah in the Lebanon. The Iranian populist (bad use of the phrase – I would have preferred the word demonic) president is popular with the poorer classes in Iran.

The Iranian budget needs the price of oil to be around $70 for all of the planned social spending to be carried out. It is now more important to them to have a high oil price to combat the effects on sanctions brought on by their pursuit of nuclear weapons.

Elections are coming up in Iran early next year and there is every chance that the reformers could win under the former President Khameni who is being nudged out of retirement. A low oil price would hinder the chances of President Ahmedinijad of being re-elected. It is my view that the Saudis would be pleased to see a regime change in Iran. A low (ish) oil price may help them achieve that objective.

I would expect the price of oil to stay low until after the Iranian elections and then rise if Khameni (he has not yet declared himself as a candidate) or another reformer was to win the Presidency.

I also fear that if Nethanyu wins the election in Israel and the current regime is re-elected in Iran, Israel will order pre-emptive strikes against Iranian nuclear sites (as they did against Iraq in the 1980s).

As investors or entrepreneurs, you need to prepare for these scenarios and realize how these events may have an impact on your business.

Let us hope that the second scenario does not come to pass.

The most challenging aspect of being in a start up position is that the management team will be under constant pressure to think both strategically and tactically. In my experience, few people are good at both.

A good way to think about the difference is in terms of the time horizon the thinking has an impact on. Strategic thinking is very much about what the future direction of the business is and how it is best suited to make the most of an ever changing environment.

As a member of a board, the expertise that you should bring to play is to be informing the company of how you expect the environment that the business is operating in to change over the next few months and years and how it can gear up to either exploit the changes or to defend itself.

This is where the boards of many major banks were found wanting. Although hindsight is a great tool to have, I find it amazing to think that no one at the board of these banks asked the question “what if we can no longer get hold of funds from wholesale markets?” or “What if people default on the loan payments?” or even more obviously “what if the assets we are lending against (such as houses) drop in value?”. Surely, the answer could not have been “Don’t worry – we are too big to go down and the government will rescue us!”

I do feel let down by some of the non-executive directors of the companies that I have invested in. They have been great at taking the money but not too good at asking difficult questions. Sometimes, I do think that people confuse putting someone under pressure with asking difficult questions.

This is perhaps best defined by tactical thinking. In this thinking, it is more about operational delivery and ensuring that the strategy you have laid out to meet the challenges ahead are executed well. But it should be up to management at an operational level to deliver this. Of course a board should ask when KPI are not being met. But their role needs to be wider than this.

Tactical thinking is a skill that is hard to define and to spot. You only see evidence of it once it has been delivered. On the other hand, you can see strategic thinking being displayed in case studies and through academia.

Sales people tend to be good at thinking tactically, but appalling at thinking through the strategic consequences of their actions. By definition, a sales person will be fixated on the achievement of short term goals to deliver x in revenue or y in volume.

Giving a large discount to a customer may help deliver the operational need you have today but may scupper your plans to position yourself as a premium brand.

That is the challenge of managing a business and the conflicts between managing in the short term and managing for the long term.

Great companies tend to employ a blend of good strategic thinkers and good tactical doers. The worst thing is when tactical people move into strategic positions or you have someone who is strategic performing a role which requires tactical ability!

Which one are you better at?

Two of the companies I sit on the board of are going through problems at the moment. However, the response of the boards to the crisis gives me hope that one of the companies will survive and one will fail. I will keep you posted as it will make an interesting real time case study especially in these trying times!

On one of the companies, company A, the board is made up of all the shareholders who have invested (four of us) and the founder. There are no independent Non-Executive Directors on the board. The other company, company B, has two non-execs and three of the management team along with two investor representatives.

The problems both companies face are dire. The issues they face are not linked to the credit crunch – although it does not help that access to funds has dried up. In both companies the problems are operational and strategic.

I had a board meeting with Company A in November. The problems became very clear. We had negative net worth and the board believed we could be close to trading whilst insolvent. The board has had enormous issues with the founder and we all believe he has mismanaged the company. I would go as far as to say we would rather not work with him.

However, given the situation we are in, the board did not devote a single moment to ascribing blame. We made sure we were all aware of how bad things were. At that moment assigning blame seemed like rearranging the decks on the Titanic.

We told the founder to

1. Get rid of all staff – all of them
2. Move to a much smaller premise
3. Sell the very expensive computer equipment he had just bought
4. Agree to a 50% pay cut
5. Remove himself from having any control of the finances

To his enormous credit he accepted this and all of the actions were carried out. The board then negotiated with some of the creditors a repayment plan which again was accepted. (I would always advocate negotiating early with creditors if you are having problems and stick to the agreements you reach with them)

The great thing about the meeting was we worked together and we worked as a team. Duties were assigned to each member of the board with a tight deadline (three days). The great things to report so far is that although all the sales activity is being carried out by just the founder and one other person working on a self-employed basis, we are achieving more sales than when we employed six people!

Early days – but I am optimistic.

Company B’s board, on the other hand is made up of what I would call are ‘professionals’. Despite the problems facing the company, the board were much more interested in covering their own positions and spent most of the time at the board meeting trying to blame other people. Don’t get me wrong, I think post-mortems are useful – but the word gives it a way – it is post death! Whilst the patient is alive, it is too early to carry out a post-mortem.

The board agreed lots of action plans for the CEO, but have not taken any actions upon themselves. I will be taking my own course of action as well to look after my shareholding and the other shareholders I am responsible for, but I think the chances are that the business will not survive.

No doubt lots of you have some stories about this area, and I would really like to learn about your experiences. It is an area of real interest to me. Please do contact me with your stories and of course I will keep you updated on company A and B.

I was at an event last week organized by a company I invested in about three years ago. The business is called Medical Futures and exists to encourage and promote innovation in health care. It is a fabulous business and one that I am very proud to associate myself with.

The event that I went to was the Medical Futures Innovation Award. The business runs this as a not for profit event and as a result of that it is able to generate a great deal of goodwill. The process involves putting together a panel of the great and the good in specific medical fields to validate and probe business ideas put forward by entrants in the competition.

If you can imagine it, is a dragons den made up of people who actually do know what they are talking about and who want to support rather than knock the entrants in the competition. Because the event is not for profit, the panel is willing to give up their very precious time for free. As a result of this input from them, the winners are very good and are able to go on to successful funding rounds.

The company makes it money by persuading some of these businesses to work with us to get funds raised and to allow us to invest in them. Whilst many people like to invest in the healthcare sector because of the potential of great returns, it is a notoriously difficult sector to get right. It really does require a lot of due diligence and specialized knowledge which most angel investors simply do not have.

This is an example of a business which has a clear vision about the future and has worked out how to create a compelling pipeline of companies to invest in. It has also worked out a long term plan. It is very happy to run these events on a not for profit basis (a lot of money was raised for charity that night) because it is thinking of long term gain and not short term.

Sadly, not enough businesses do that. I am constantly amazed at the huge amounts of goodwill that exists out there. My own career has numerous examples of people giving me a lucky break or helping me with something which had no gain for them. One of these people is Chris Gorman (who also happens to be a shareholder in Medical Futures).

I remember asking Chris on one occasion why he was so generous with his time and money supporting me. He answered back “Because I see you as a good long term bet!”

Apart from the enormous encouragement I got from this vote of confidence, it highlights again the virtue of taking a long term and hopefully ethical view in your dealings with people and businesses. Time will tell whether or not I do turn out to be a good investment for Chris, but certainly, I feel obliged to do my utmost to repay his faith.

Let me end by asking you a question; how are you planning for the long term?

Frank Peters is a business angel I met while at the NAO summit in Halifax, Canada. He similarly runs a really excellent, (and I must say a good deal more media rich than mine) blog.

He recently did an podcast interview with me. It covers many subjects and themes covered here but thought you may find it interesting

Thanks Frank

Listen Here  – http://www.thefrankpetersshow.com/podcasts/myWimpy.html

I have the great pleasure of working with New East Manchester on a regeneration project to encourage businesses in that deprived region to grow and create jobs. I will typically spend one morning talking to businesses about growth strategies and planning. Contestants will then be encouraged to submit business plans to the panel after some coaching and advice. The best five plans are then invited to spend a further ½ an hour with me for some coaching (luckily for me, they have so far all taken the opportunity). A winner is then selected who will get a £10,000 prize and a runner up will get £5,000.

The process is run twice a year and the latest winner of the process is Barking Barbers. I was delighted to see them win and I congratulate the Entrepreneur behind this great operation.

One of the things I enjoy most about this competition is that it gives me access to all kinds of entrepreneurs operating at lots of different levels. I would never have come across Barking Barbers in any way other than this competition.

The business is very simple. It provides holistic grooming for dogs. This includes Reiki healing. The first question I asked was how many clients this business has and was staggered when the answer was almost 400. The business is doing very well and needs cash to expand.

I was also amazed to learn that there are very few certified holistic pet healers and it does cost a small fortune to become registered for this. The business would expand by not just growing organically, but by also allowing students of the art to serve apprenticeships with them (for which the students will have to pay the business)

This small story just proves the point about the vitality of the business scene. Opportunities exist everywhere. All you need is the ability to make it happen. And from my limited experience, I would argue that what you really need is the desire to make it happen and the humility to learn how to make it happen.

And it helps of course if you are barking mad! (if you have better jokes please send them to pvalia@businessangelblog.com )

Part 2!

In my last business angel blog, I wrote about the danger of deflation and how it links in with interest rates. The pressing issue for governments and for businesses at the moment is to get the economy spending again.

The struggle businesses are facing is very real. Many of the companies I have invested in are in a dire position and I fear that sadly some of them will not survive. What we need is a dose of inflation to get people to get buying again.

One of the effects of bringing down interest rates is that your currency will tend to weaken at the same time as well. An interest rate attached to a currency tells you as an investor what rate of return you will get for holding deposits in that currency. Assuming that you view the risks attached to certain group of countries as the same (big assumption) you will no doubt invest in the currency that gives you the best return.

As interest rates drop in the UK for example, it means that international investors may decide to sell their holdings of the pound and hold the dollar instead or the Euro where they may get a better rate of interest. As with most things, the value of a floating currency (most developed economies have floating currencies – China is a strange anomaly in that the currency there is ‘pegged’ which I always think is a euphemism for fixed!) will rise or fall depending on demand and supply.

The pound has dropped significantly in value over the last few months. Just before I went to the US it was around the $2 mark – now it is around $1.44. One of the reasons for the fall is that interest rates in the UK were expected to fall rapidly – the market tends to be efficient in predicting which way things will go. And indeed the return an international investor will get from holding sterling has dropped from 5% in October to 2% now – a very large drop.

A falling currency makes imports more expensive and exports cheaper. Foreign holidays will be less attractive although with a bit of luck the UK will attract a lot more tourists especially from Europe and the USA. Welcome!

This could give the country a much needed export boost. Sadly, the markets we would be exporting to (Europe is our biggest trading block) are experiencing sharp slowdowns of their own. The fall in currency may allow us to keep export volumes constant which given the conditions would be a great result.

The other ‘hidden cost’ of a falling currency is that it increases inflation. Over the last five or six years, the UK has benefited from very low inflation for a variety of reasons. One of them was the strong currency which made imports a lot cheaper. Given the threat of deflation at the moment, imported inflation may turn out to be a good thing!

What does all of this mean for the business community?

1. Because of low interest rates (I expect them to bottom out at 0.75% by the end of 2009) many capital projects will become viable. If you have a capital project that will generate revenues two to three years out – it is a great time to get going (if you can get the funding)
2. Because of the low value of the pound, export markets could be more promising than they have been of late. Look to export to markets which are still experiencing growth (India and Brazil look good)
3. Manage your working capital more tightly. If that means factoring – do it. Low interest rates are a great opportunity. You should not be in business if you cannot generate a return of at least 10% (or five times the current base rate!). You might be better off agreeing to pay more to your suppliers – but with extended credit terms.
4. Manager your stock. It can be the biggest cash-killer for a business. A business I am involved in sells goods at trade shows. Last week I was able to get stock on a sale or return basis. Deals are there to be done.
5. Try to get a pot of government money! They are spending big at the moment and try and get a piece of that if you can

As always, I hope this helps

Part 1!

As some readers of Business Angel Blog might gather, I enjoyed reading Economics at University (too many years ago to recount) and that passion for the subject has never left me. We are living in fantastic times. Having a background in Economics helps make some sense of the current turmoil and in this blog and the next, I would like to talk about the forces that will shape the landscape for the next two to three years in an Economic sense.

In the US and the UK, consumption is the driving force in the economy accounting for over 60% of economic activity. In China by contrast, it is very much investment and export led. As economies have contracted (negative growth), governments and central banks have tried to reduce the cost of money, otherwise known as interest rates to encourage people not to save but to spend.

This may seem odd, but Keynes wrote about the paradox of thrift in the 1930s. Saving is of course a good virtue. But the problem is that if everyone saves, it is bad for the economy as activity will grind to a halt as no one is buying and who will want to borrow all of the money saved up if no activity is going on?

Hence interest rates are coming down to encourage people to spend (or at least spend the savings from lower mortgage repayments) and to not save. If interest rates come down to near zero, I could see negative interest rates being applied to savings. In reality this means that banks might charge you for using their facilities to hold cash. That would be an incentive to spend!

The problem is the spectre of deflation. In an earlier blog, I wrote in defence of inflation, and it seems prophetic that what the bank is now looking for is a bit of inflation! If people perceive that prices are falling rapidly, why would you buy? I think this will be one of the worst Christmas shopping seasons ever. Consumers are expecting massive price drops in January so it does not make sense to buy now. If the expectation of falling prices takes hold though, it is rather like the paradox of thrift, and whilst it may be good for an individual to defer purchasing something, if everyone does it is a bad thing as it ends up feeding itself.

If you believe that prices are going to be cheaper the next month, if you can, you will delay your purchase. This is the problem facing the housing market at the moment. Although interest rates are down to 1951 levels at just 2%, even if you could get a mortgage today, would you buy a house thinking that prices could fall 10%? (I would – but that is a different matter as I think the difference between rent and interest payments is now so wide, that even allowing for a 8% drop in property prices, you would be better off buying than renting).

So we need a bout of inflation to get the whole thing kick-started again. If prices are rising, people will engage in activity again. The problem for Japan for most of the 1990s was deflation. We need to learn from that very painful experience.

In the next blog, I will continue with an explanation of the link between inflation, interest rates and a currency. With the pound being at low levels, such an explanation I hope would be welcomed.

Most of the world has recently moved from taxing income and wealth to taxing consumption and expenditure. Last week, the UK government temporarily (for the next 18 months) decided to bring the rate down from 17.5% to 15%. Many critics have attacked the move as not being bold enough and wanted direct tax cuts (on income) instead. I feel this criticism misses the point and in this business angel blog I want to defend the action taken by the UK treasury.

VAT (Value added tax) is a tax which countries within the European have to apply on a range of products. The standard band is between15% to 25%. Your standard VAT rate cannot go below or higher than those limits.

So, the most the UK government could do is reduce the VAT rate down to 15%. This point has been sorely missed from many of the commentators criticizing the move.

A point I have made in my previous blogs is that what we really need to see is consumers spending again. During a recession or any period of economic uncertainty, the savings ratio tends to rise. In the UK and the US, the ratio has recently been as low as 2% to 3% (By contrast in Germany it has been around the 10% mark). If consumers were given direct tax cuts, the likelihood is that they will use this extra cash to pay off debt. Again, as I mentioned in a previous blog, whilst that may be good for an individual (managing my debt down is certainly my priority for next year!), for the economy it is a bad thing.

Therefore the only thing the government can do is cut the main tax on expenditure which will result immediately and directly in lower prices. That is what they have done.

The flip side to this is though that of course it brings down inflation. That is an undesirable side effect. To play devils advocate for a bit, what if rather than reducing VAT the government announced that it was going to increase it to 20% from the 1st of March 2009?

I would have thought that this would not only help balance the government books, which look simply awful (Government debt will be 57% of GDP – up from around 40%) and it might actually induce people to spend a lot ahead of the VAT increase. Assuming people are rational, if you know that prices will be going up in a couple of months, you will no doubt try to save money by bringing forward your planned purchases. This is the exact opposite to where I fear we are heading which is the built in expectation of lower prices.

As I have argued over many blogs in the past, what we really need in the UK is a good dose of inflation!