Business Angel Blog

As an investor and a business student, I think it is important to want to meet people with fresh and interesting solutions to problems. Access is always difficult though (as I recently learned through LinkedIn when I tried to connect with some people from Hollywood whom I did not have any connection with – if any of you can help, please do!)

Often the most interesting and promising entrepreneurs are not those who are one or two degrees of separation away, but genuine outsiders: from different sectors, countries and backgrounds. For this reason, while many excellent people still come to me via introductions, I always try to read messages via my blog, twitter and those (often awkward) “please add me to your network LinkedIn” requests.

Here’s the rub. Once you turn on the digital openness tap, you get swamped. There is no such thing as a trickle. You let one person in, you let everyone in – from those who’ve thought long and hard about contacting you, who’ve done their research, who’ve targeted their pitch, to those who just chance it, giving little thought to their approaches, thinking what have they got to lose. You know the type: “I’m thinking of starting something… I’d like to ask a few questions… can we have coffee?”

I barely have time to review all the messages I receive. I certainly don’t have time for all the coffee requests.

But if you’re really serious, I do want to hear what you have to say, and more often than not, I would love to meet you.

That’s why I’ve started using new platform OneLeap, which tests your seriousness by asking you to ‘put your money where your mouth is’ to send me a message. This is not pay to pitch. When I reply to your message (and you get a guaranteed reply in 10 days or 100% of your money back) the fee benefits my chosen charity, Kids Company. For me the value of the fee is a quick way to tell if you’re serious – it screens the timewasters pretty quickly. And the charity support is a great bonus.
The other day, I received my first OneLeap message – a targeted and interesting pitch. I ended up meeting the person who got in touch and watch this space!
One of the benefits of OneLeap is that I can cap the maximum messages per month I receive. So I know I’ll never be swamped, and you know, if you contact me through OneLeap, that you’ll be one of a few serious people, not one of a big pile (some serious, most not). I also know messages will be no longer than 400 words. And that is an art in itself, and it means I never have to endure again the “my business isn’t like everyone else’s and cannot be condensed to an elevator pitch or less than 1000 words”.

You’ll find other angels on the platform – as well as decision-makers in business – valuable access if you’re a small business trying to reach out to potential clients. As I discussed in my last blog, the economic climate offers a good opportunity here for entrepreneurs.
You can also sign up yourself, to help prioritise your messages (we’re all busy after all) and help a good cause while you’re at it. To use OneLeap as a more effective filter over existing services, I’ll also sometimes reply with a tweet like this:

@[name] Please tell me via @oneleap why you’d like my attention http://oneleap.to/permjot. Messages help @KidsCo_Tweets

I’ve also put automatic reply below on my email.

To show you’re serious, reach me through OneLeap at http://oneleap.to/permjot

The exciting thing about being involved in the fields that I am working in is the fact that you are always learning. I have said that before of course, but it is so true. There is an endless discussion amongst people who discuss the differences between managers, entrepreneurs and leaders. I, for one, have written about the differences I see between coaches, mentors and consultants as I think there is a real and important distinction between them.

I recently had a meeting with Andy Goldberg, someone I have been lucky enough to call a friend for several years. The guy is seriously a genius and as well as being a full time surgeon he is also the driving force between www.medicalfutures.com

This morning we were talking to someone who I hope will soon be joining the fold. One of the questions Andy asked was around the difference between a manager and an entrepreneur. It is a great question and there were three very different answers. What do you think is the difference?

Well, the first answer was a very typical young MBA answer. It was all about attitude towards risk, ambition and vision. It was a very good motivational answer but it was just wrong.

Then my answer was around a Manager being someone who executes a plan whereas a great entrepreneur can create the plan and the vision. Which may sound great but is actually just empty waffle which doesnt really help.

Andy’s answer was that an entrepreneur gets resources needed to get a job done whilst a manager gets great results from a given amount of resources. I loved the simplicity of this answer and also found it useful in terms of understanding what people enjoy doing. A lot of us like the idea of being called an entrepreneur, whereas we may be better suited to being a manager. The big breakthrough in my career came when I realized I wasn’t a particularly good CEO but I was very good at other bits – and if I focused on them – I could make more money and be much happier than trying to be a CEO (because that is where I thought all the glory was).

This definition also fits in neatly with what I think a CEO should do. Get the money and people needed to get something done whereas a great COO will be able to get the thing done – better and with probably less resources than most ‘entrepreneurs’ would.

Through this exercise, I also recognized that I love being a manager – and my enterprises are all about bringing managerial skills to play. That is getting things done for less resources and better than someone else.

So what are you?

There is a lot of management speak about learning to overcoming your fear. Most of the fears we have are based entirely on very good reasons. For instance, I am very scared of Great White Sharks; that is a healthy fear. So last month, in South Africa, I went diving in the Ocean with some Great White Sharks and it was an awesome experience (one of the best moments in my life!) but it did not help me overcome my rational fear in the sense that I would never want to be in the Ocean with those beautiful animals without the aid of the cage that I was in at all time.

And we get on to talk about Entrepreneurship. One of my many pet hates is the way we are encouraged to become a nation of ‘risk-takers’. Entrepreneurship is not about risk taking, it is in fact the complete opposite. And risk taking is not in itself a good trait. I would argue it was the risk taking culture that existed in the investment banks that got our economies into the terrible mess we are in. Borrowing money is always a risk, and we in the West were collectively encouraged to take this risk; so the idea that risk taking is an inherently good thing to do is simply wrong.

The best business start ups I have been involved in are all about mitigating exisiting risks rather than being an exercise in taking risks. It is interesting to note that many of the biggest companies that exist today (Apple, Microsoft, Oracle etc) all started off as Consultancy projects where the basic product was developed at someone else’s expense and then scaled up and rolled out.

Business is not about taking risks and I will never invest in someone who shows off about the fact that they are a risk taker. That is also why I have had a problem with the over use of the word entrepreneur.

This is why a track record is so important for investors. It is recognising that the ‘entrepreneur’ has learned that running a business is not about taking risks but about managing risks.

My background is in sales and my first business (which I am still running) focuses on sales training. What is interesting though is that the best business lessons I have learned have probably been as compliance officer of Flight and Partners, the fund management business that I co-founded over four years ago.

It is all about recognising the inherent risks involved in business and systematically reducing those risks. It is the same as any extreme sport or back to cage diving with Great Whites. People engaged in those sports don’t advertise the risk, but rather focus on how the inherent risks are mitigated. Risk means there is a strong chance of different outcomes.

Let me tell you, I am not going into the Ocean with Great White sharks with someone who advertises the fact that they love taking risks. I can tell you, investment decisions are made on the same basis.

So once again, I find myself apologising for not having posted a blog for so long – although this is the longest period I have gone without and sadly, I received no complaints at all about no blogs!

I always enjoy the festive break as it is a great time to reflect and take stock of what you have done and what has yet to be achieved. It is also one of the few times of the year where you can take a break without worrying about the calls going unanswered.

The other interesting thing about personal ‘stock takes is that it is one of few activities that really reveal gender differences; men tend to overestimate what they have achieved and women tend to underestimate what they have achieved.

Everyone has been saying how they expect 2012 to be a difficult year. For once, I would say there is merit in the consensus view. The Euro drama has not played itself out and I just think the European leaders have not acknowledged the full scale of the situation or how powerless they are.

I am a very proud and staunch European but the Eurozone simply does not make economic senses. Along with a single currency you have to have single points of control. There are (and have always been) two Europes; a Northern Europe and a Southern Europe. What does make sense is to have two ‘Euros’ one for the North and one for the South.

There is no hope for Southern Italy (which I love) and Greece to compete with the super efficient Germany and Scandinavian economies. Normally, free floating currencies will compensate for these inherent differences, but they haven’t. Germany is benefiting from a massively undervalued currency (for them) really helping them to boost their exports (last month they overtook China as the largest net exporter!) and Greece and Ireland are seriously being hampered by a very expensive currency (for them) not allowing them to find the right level for their exports to be competitive.

The current economic management of Europe is a fantastic manifestation of Nietchzse’s maxim “principle is the enemy of the reason”. The leaders are so wedded to the idea of making the Euro work that they are prepared to let reason fly out of the window.

And for once, we in Europe all need to wake up to the idea that whilst the Germans are being asked to dole out more to support the Eurozone, they are by far the largest beneficiary’s of the Eurozone as well. There is something fair about them being asked to pay more towards the cost of keeping Europe solvent.

The hope for me is the USA. The economy seems to be moving again and I expect Unemployment to dip below 8% by November, ensuring Obama’s re-election. I do think Obama will win – and win convincingly. The main reasons being that the economy will improve, Romney will fail to ‘super-charge’ the Republican base (a strategy that Karl Rove deployed to terrifying effect in 2004) and I do not think in this year, Americans are willing to vote for a Private Equity guy (just see the anti-Romney video that his ‘colleagues’ in the Republican party have produced).

The UK will also benefit from the Olympics and I do not think we should underestimate the effect that will have on the UK economy. Along with the millions of visitors, it will bring lots of advertising dollars as brands will be desperate to communicate with that very attractive demographic.

And of course, inflation is showing signs of easing in the UK but I do expect things to be very tight here as companies continue to hoard cash and few investment projects get the go-ahead.

So…….

If you are an entrepreneur what does this all mean?

1) Now is a good or as a bad time as any other to start up
2) If you are seeking to work on Government financed projects – forget it
3) If you are looking to export – that would be a good strategy, go for markets are are in good health such as Northern Europe.
4) Export quality. It is going to become harder and harder to export on the basis of price alone.
5) Shop around in terms of the ideal location for you to be based as an entrepreneur. I did a lot of travel last year and I was amazed at the support available to attract and retain start ups. (I will be writing a blog about this soon) but be very flexible in your thinking.
6) There will be some great restructuring, management buy out opportunities. Get together the key skills needed to run an enterprise and you will be surprised at the opportunities available to you as companies continue to focus on their core activities.
7) Don’t give up.
If it’s really not working – learn when to give up.

And as always I wish you the best of luck for the New Year.

One of the curious observations I had, when I was at Duracell as a salesperson was that every time our competitor, Energizer advertised on television, our sales went up significantly.

In the last couple of weeks, many of the companies I have come across could do well to remember this. You should always have a clear message which is also intelligent rather than generates lots of noise. This is particular true of many internet based businesses.

The key to a successful campaign is to get your distribution right. Companies like Unilever, Mars, Coke, Kellogg’s etc, can get good return on advertising investment because they have excellent distribution. If an advert makes you want to purchase one of their products the chances are if you live in a city, you are less than 300 meters from a store stocking the product.

Whenever Energizer advertised, they reminded people that they needed to buy batteries, or that they should stock up. However, as Duracell had won the battle for distribution, when the consumer went to the store, they would find only Duracell available.

I suffered the opposite problem when I worked for Fujifilm, we were playing second fiddle to Kodak and as an ‘impulse’ category, it did not make sense for convenience stores to stock both brands.

So, when a start up tells me of the very clever PR plan or marketing strategy that they have in place for their start up – I get very nervous, as I tend to ask questions about the distribution – which will ultimately determine the effectiveness of the marketing plan.

I always like asking people the difference between sales and marketing, and you are guaranteed to hear a lot of MBAesque answers. The best one I have ever heard (again from Duracell) is.

“A sales person’s job is to make sure the product is on the shelves, the marketing person’s job is to make sure it does not stay there”.

Are you getting your sales and marketing efforts the right way around?

This has been a strange week for me. BBC Breakfast has been running a series on Happiness and what leads to it. The conclusions seem to be that people are happier through showing acts of kindness and spending time with each other rather than through accumulating money or assets.

This week I took part in Seedcamp for the second time. It was exhausting and does involve giving up a lot of your time – and none of the mentors get paid for this. I also have to say I am feeling very happy right now (despite having the usual problems that all of us have to fight on a daily basis).

It was only when I saw the conclusion on BBC this morning did I make the connection between the way I felt and the fact that I had given something back to the entrepreneurial eco-system.

There are too many ‘grubby’ things out there where lots of people of little or no talent try to make money off the back of incredibly hard working and risk taking entrepreneurs and it really makes me angry when I hear some of the stories around this. Entrepreneurs are the new rock stars of the moment and there are so many organizations that claim to exist to support them. Unless you are in the business of investing or mentoring, you are not helping. It really is as simple as that. And if you are in the business of investing, be clear, honest and transparent about your cost structure.

Seedcamp has created a great eco-system where lots of mentors give up their time for free. The companies pay nothing to be there and benefit from the advice given. I was able to mentor a few companies, and I was really pleased with the feedback (not about me, but about the Seedcamp process).

There is nothing more disheartening than to give your advice to people who don’t want it (even though they ask for it!). This is what I as a mentor thought was brilliant about Seedcamp companies – they all wanted advice and really took it on board. This compares with two companies that asked for advice and did not turn up for pre-booked meetings that I met through a different forum (still not had an apology from one of them!)

Back to my main point, I would encourage anyone with experience in the digital space to try and get involved in Seedcamp as a mentor. It is a great experience, you will meet great people and companies who will value your input. And as the BBC proved this week, giving your time to this will make you happy – I promise you.

My last post led to me getting a phone call from one of the best Angels I know on the London scene at the moment making some very important points.

I promised that I would write a blog about the points that came out of the conversation.

1. The importance of tax considerations. One of the big drawbacks with using loan instruments (such as convertible notes) is that it does not attract EIS relief. EIS is a very big deal for investors and given the likelihood of failure, for a very good reason. And of course with tax increases, the potential upside EIS very attractive.

2. From a security point of view, convertible loan notes only make sense if the underlying business you are investing in has assets. For example, investing in a company in the digital space will mean that upon a liquidation event, you will probably not receive any proceeds from a disposal even though you have a ‘loan’.

3. A conversion formula only makes sense if the conversion ‘event’ is in the short term (within 18 months). The example given was the following

An angel investors puts £100,000 into a pure start up in the digital space. The investment is made at a 30% discount to the next liquidity event convertible loan note formula. At this stage, there is nothing but a business plan. No revenues to speak of etc. The business quickly grows and does not require any more funding.

The business is then sold after five years for £5m. The investor then receives the £100,000 note back along with 30% extra. There is no conversion to take place as the shares are all being bought. A 30% return on a very high risk investment when there was nothing to back seems very low. It will grate even more when the founder walks away with £4.9m! You would agree that this does not seem like a fair split of the risks and reward.

My colleague also uses an interesting cap and collar mechanism. This mechanism ensures that both the company and the investor are protected on the downside and the upside.

Agreeing a valuation figure is always problematic in a start up situation and much time and energy can be wasted on that. One interesting instrument I came across recently was a convertible loan note with a future valuation formula agreed.

Commonly, convertible loan notes work like this;

An investor makes a loan to a company and earns an agreed % of interest each year. The loan will then either be redeemable after an agreed time frame or be converted into equity at that time at an agreed price. The instrument is very flexible and you can have many different variables (what is done with the interest, the number of years etc).

This still leaves the problem of valuation to be agreed though. One of the loan notes I came across in Canada deals with this problem fairly neatly. The valuation is at an agreed discount (30%) on the next fund raising round. The benefit of this solution is that it allows valuation to be left till a future date when there should be some metric based valuation dependent on performance.

Another instrument I came across was a redeemable preference share. This acts like a convertible note but allows for massive upside in the case of a sale of the business. The example I came across was that an investment of $1m was made and this would equate to 20% of the business, but would be treated as a loan. If (when) the business was sold, the $1m would be repaid and 20% of the net sale proceeds would go to the equity holders as well. (So if the business sold for $10m, the Note holders ($1m) would get $2.8m ($1m + $1.8m (20% of $9m))). So although the business has doubled in value, the noteholders would get 2.8x the money invested.

I think these instruments will increasingly be used in the next two or three years as angel investors look to protect themselves against high valuations and to ensure that they get a good upside for the higher level of risk they are being asked to undertake (in terms of other competing financial assets).

Be interested in hearing from start ups about their thoughts on these instruments.

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.

For many people 2010 was a very tough year. Whilst the economy grew in the UK, it is still considerably smaller than it was a number of years ago. I personally think 2011 will be a very tough year for the UK economy.

Many people think that the Government austerity program has taken place; it hasn’t. 2011 is the year when the cutbacks will start to take place. The idea that the private sector will soak up workers made redundant from the public sector looks very naive especially in certain areas of the UK where a large private sector doesn’t really exist (the North East, the Isle of Wight). This will represent a big drop in demand.

Apart from the job losses, the cancellation of contracts has had and will continue to have a significant effect on the private sector. Banks are also not lending. In meetings with them, I am constantly told that the banks are open for business and they are looking for good companies to support; but they are not. This restriction will continue to hamper the ability for companies to grow and manage cashflows through expansion.

Inflation is already well above target and it looks likely to race ahead as energy prices hit two year highs (not helped by the freaky weather being experienced at the moment across Europe and the US). This pressure on inflation means it is highly likely that interest rates will have to rise. With base rates at just 0.5%, even a 0.25% increase will represent a significant proportional increase after borrowers have become used to ultra low rates. This again will represent a dampening of demand.

And of course tax rates are set to increase. Both on consumption (VAT will be going from 17.5% to 20% – which ironically will also put pressure on inflation and hence interest rates) and income taxes will be rising as well. The VAT rise takes effect this week, whilst the income tax rises will not take place until April.

The hope for the UK economy lies through exports. That though will rely on two things. Firstly the weakness of sterling will help (and sterling should remain weak) and secondly the strength of our export markets. The US remains sluggish but the German economy is showing signs of rude health.

So, my advice to entrepreneurs is to really think of how their solution can save businesses money (and ideally within a 12 month accounting period). I would also suggest that if you need to raise money, it will be through equity financing rather than debt financing. And you need to be very realistic about your valuations. I still think UK start ups are over priced compared to what I see in Canada. Finally, if you can export your service/solution/ product, you may be in with a very good chance of success.