2011: Part two

My last blog about 2011 was a macro look at the UK economy and I was trying to give generic advice for start ups. I thought it might make sense for me to blog about more specific stuff.

Firstly, I think many angels will remain outside of the fresh investment space. Most businesses follow a cash raising pattern which broadly goes along these lines

Phase 1: Equity financing (may include several rounds)

Phase 2: As the business starts generating some revenue (or it is highly visible) Debt financing can be introduced to help expand the business

Phase 3: Revenue financing. This is the phase where all of the needs of the business are met through cash generated through revenue and hopefully profits are being made and dividends distributed.

This model is of course highly simplistic and many businesses may go from phase 1 to 3 or start at 2. However, certain trends (mentioned in the last blog) make debt financing virtually impossible for small companies and because of the contraction of the economy, phase 3 becomes harder to achieve (in the sense that revenues being higher than the cash requirements of the business).

This means that increasingly angels are being asked to fund businesses for longer and in more rounds than may have been anticipated. Many angels I know are not in the market for ‘fresh’ deals; they realise that they will be required to support existing deals they are in.

I made a mistake of over-committing in 2010 and had to pull out of a deal (the management team were great about it) because I did underestimate the stuff I am now writing about! In 2010, I only wrote four investment cheques and three were to support existing investments. I do not see myself making any new angel investments in 2011, only investments to support my existing portfolio.

This may not be what start ups want to hear and there are angels with far deeper pockets than mine that are actively looking for new deals as they believe now is a great time to launch a start up (I do agree but simply don’t have the money to back this belief).

I would seriously caution start ups from trying to raise money from forums where you to have to pay to pitch. I lack statistical evidence, but very strong anecdotal evidence suggests they don’t work. You need to work harder and pitch directly to angels with a proven history of writing cheques in your space.

11
Jan 2011
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POSTED IN Business Practice Fundraising General Commentary Investments
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  • David G H Phillips

    Funding governments is sucking a lot of cash out of the system. Portugal and possibly Spain at 7% or more is very attractive for funds and they will want to access more cash this year. This is money for the public sector and does not create wealth. Very depressing for those of us who would rather see enterprise growth and investment.

    Even more so for start-ups. We do need to have robust economies although I would rather start at the beginning of the cycle than at its end.

    Perhaps we just have to be more creative.

    One approach we are taking is to have a ready 8 minute start-up pitch (http://goo.gl/eZRlJ). It does mean we can respond much faster than using many of the more traditional routes (and we can also use social media to spread the word).