Business Angel Blog

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.

There has been much discussion about what angels look for when investing and how to pitch. I hope my last couple of blogs have been useful in giving some guidance. It has also been some time since I talked about companies I had invested in.

Most of the cases I mention on my blog are businesses that I invested in and where they have failed. I think it might be useful to actually list the companies that I have invested in that are still active. For various reasons, (including some very good legal ones) I am not going to mention all of the companies! I should also add that nothing below should be read as me giving financial advice. Asking me what you should invest in is rather like asking Oprah how to maintain the same weight over a long period of time.

1. www.mydeco.com This is a company that is in a great vertical (furniture retailing) and has a management dream team with a great long term vision of where they want to be.

2. www.medicalfutures.com Medical devices can be really big money earners and can truly bring some huge benefits to many thousands of lives. The issue is one of how do you validate ideas when you have such little knowledge. This business seeks to create a pipeline of validated medical technology. Validated by the giants in the space. So it solves a real problem and it creates value for the shareholders. Best of all for me, it manages to carry out its core activities as a charity function. It raises a lot of money for a different charity. And yet this charity rationale is at the core of being a very smart business decision.

3. www.wooshii.com This is the first company that I have ever chaired and really got involved with. I like the problem it solves; how do companies find creatives to make compelling video/animation content for them without paying ridiculous agency prices? And how can freelance creatives from around the world get in contact with companies needing them? So it solves a problem and is in a rapidly growing market. On top of that, there is a management team that I really trust (having worked with Fergus – the CEO for over six years)

4. www.tribesports.com Again this company has a dream management team, is in a very exciting market with huge potential. I have known the CEO for several years now – so that really helps was well when looking to invest. What is particularly great about the management team is that you can sense they are constantly learning. They recognise patterns and look at examples in other industries of what has worked and why and vice versa.

I will mention another three companies in a future blog, but four other companies I cannot mention because they are now publicly traded (any mention of them in a positive way may be construed as an advertisement to buy shares in the companies) And another two companies should not be mentioned as they are in negotiations and any mention may be distracting.

A few weeks back I visited Poland for the first time and went to a place called Sczeczin. I was there to talk to a new Angel Forum that has been set up there and the strange thing was that this talk came about because of my Canadian connection. (So, I was an Indian Brit, representing Canada, in Poland).

I was reminded that my Canadian adventure started with a talk at an angel conference two years ago. So who knows what this may be the start of?

There were many interesting things and it was good to hear from local Polish Business Angels. They were talking about exactly the same issues that angels talk about everywhere I have been. They were worried about due diligence, documentation, valuation etc . So, whilst my last couple of blogs may have highlighted the differences between angels in terms of what they look for, it is also good to know that on the broad issues, we agree.

I also met an American from Honolulu who is now living in this very small but charming part of the world. It is refreshing to see how many people around the world end up in strange places just because they visited a place once and fell in love with it.

I am still utterly fascinated by how former communist countries have made the transition from command to free economies. Anyone under 30 in Poland will probably not realise the enormity of the change their country has been through. It was great to see how Poland has for the most part avoided interpreting economic freedom as gangster capitalism as other Eastern European countries have.

Much of the focus of the debate was about how Universities can commercialise their innovations and it remains a very interesting topic. ISIS (University of Oxford commercialisation arm) presented and it was brilliant to hear how a leader in a field does it. However, there are dangers from trying to implement a model that works for one of the (if not the) leading University in the World with over 800 years of history.

My advice to entrepreneurs and angels would be to travel a bit every year. But I don’t mean travel as in holiday. I really do mean that you should go and try and speak to people involved in your industry across borders (perhaps there is an internet based matching opportunity here?)

And to Poland I say Czan quia!

Change threatens people. Change can mean competition and can mean a necessity to change your skill set. I have long admired the North American model of lifelong learning, whereby people continually go to school to learn new skills in keeping with the needs of the economy and seeking new opportunities.

However, many people, especially those in powerful positions will hate change as by definition they will work out they have more to lose from change than gain. Entrepreneurs are agents of change and can run into real problems when they are seeking to bring about disruptive change. Some parts of the music industry have really struggled for example to cope with the changes that new digital technology has heaped upon them.

Private enterprise thrives when people are rewarded for going the extra mile. Tourist trap eateries exist for very rational reasons. Why would you as a cafe owner in a high tourist area pay extra attention to the quality of food served and customer service when you are unlikely to have any repeat business?

I never thought about it before but those cafe owners share much with civil servants and employees in bureaucratic organisations. There is simply no incentive to go the extra mile. You will only go the extra mile if your personal values and pride demand it of you.

Areas can become plagued by a Status quo culture. In areas where there is a very high dependency on government funding and support, why would you want to disrupt that? It is simply not rational to seek change that could end up harming your own interest. Yes, we can point to the greater good, but we trust governments and development agencies to look after the greater good. Our own interests will remain blinkered by narrow self-interest.

The point for entrepreneurs and start ups is to look at who or what does your solution threaten? How will you change the status quo? If you are going to upset some powerful groups, think through how you can minimise the impact of their threat. Is it by going viral? Is it by moving areas (some areas are much more business friendly than others) Or should you (or do you need to) co-opt your ‘rivals’ into your solution.

I do like the strapline for the new Social Network movie; “You don’t make 500 million friends without making a few enemies”. Or as my Uncle says, you can’t make an omelette without cracking a few eggs.

Another reason why entrepreneurship can be so lonely!

In a chilling speech last week, the German Chancellor, Angela Merkel said that Multiculturalism has utterly failed. Across Europe, Xenophobic politics seems to be on the rise and you can see echoes in terms of the economic situation we are in and the need to blame someone, with the dark days of Europe in the 1930s.

What I find ironic is that a country like Germany would say that they have attempted multiculturalism. The UK, Canada, US, Singapore and India amongst others are vibrant and successful multicultural societies. Multiculturalism means that being from an ethnic minority and belonging to another country are not mutually exclusive. In France you are French and that is it (although they have a whole heap of their own problems with integration). But in Germany, the idea of German citizenship and identity is deeply linked to a notion of ‘bloodline’. And although the law changed somewhat in 2000, it is still very hard to become German.

There is no wonder therefore that their version of multiculturalism has failed. And yet rather than look at what they can do to make people feel more German, the solutions they are coming up with are around making it even harder for immigrants to settle in Germany.

What does this have to with being a Business Angel or advice to Entrepreneurs?

I passionately believe that business and people thrive when borders are open for trade, capital and people. Societies which have managed to resolve (and many are still resolving) ethnic differences are stronger and more dynamic than closed societies. In the early 1990s a fear had gripped the US (which was rapidly being overtaken by Japan as the leading economy) that perhaps it was the fact that the Japanese culture is so homogenous that gave the Japanese an economic advantage. In a landmark speech, displaying true leadership, President Clinton rubbished these claims. He argued that America gets it strengths from its multiethnic and diverse fabric. Whilst those differences have to be negotiated and worked out (1992 saw Race Riots in California), the US was a more dynamic and vibrant place because of it. I believe he was right.

Investment opportunities and wealth are enhanced through the free movement of capital and people. However, if countries want these dynamic entrepreneurial people to stay and enrich the country, they also have an obligation to make people feel welcome. Yet rationality is never the ruler in these matters.

Angels are increasingly making cross border investments and many entrepreneurs I know and admire do not recognise borders. Many people still see international trade as a zero sum game. It is not and entrepreneurs and angels need to keep selling the merits of free movement. To badly misquote “I may hate the competition you bring, but I will defend to my death your right to compete”

I recently wrote a post about what investors look for. It was so generic that you may have got little value from it. The point was that each and every investor will look for something slightly different. However, I hope you enjoy this blog looking at what almost all Investors do not want to hear in a pitch or question and answer session. Scarily, I promise you all of the comments/ sentiments are from real examples I have heard….

1. It seemed right (when asked why the company was valued at £3m pre-money)

2. All seems like a bit too much bother (when told what the company needed to do to get investment – after doing a great pitch where investors wanted to invest)

3. This is a sexy business

4. Let me answer a different question

5. That would be fair (when a CEO was told that “You haven’t given us much confidence to invest in the business have you?”)

6. We will IPO

7. We will be bought by Google

8. One of the management team is related to (any high profile name will do)

9. I am a serial entrepreneur (point is if you are – you would not be pitching to strangers)

10. Anyone else not understand the business model?

I hope you found this more useful than my last blog.

One of the Angels I work with will not invest in businesses run by an entrepreneur who is a single child (I guess he is going to struggle to find people to investable people in China!). But his reasoning was that single children tend to be spoilt and he likes to back people who have learned to share resources.

Last week I was in Calgary and one of the businesses that I have just got involved with went there to pitch to the Angel group there. The pitching process involves a 10 minute pitch to two sets of investors in two different cities; Calgary and Edmonton. These two groups could not be more different. Calgary was about the numbers, the team and the business. Edmonton was about the technical side of things. I am confident that the company will raise a lot of money, but that most of it will come from Calgary (if not all of it).

The other interesting thing to note is that the investors in Calgary really liked the presentation and commented on how good it was (very pleasing as I helped develop it!). The investors in Edmonton commented on how they did not like the fact that the presentation was so good. They believe that a good presentation hides flaws in the business.

The reason I mention the above is that it makes it very difficult to answer the question, what do angel investors look for?

I am giving a talk next week in Poland about Angel Investing. After the talk, I would be happy to post the presentation on this Blog. The presentation is about what I look for in a proposal. Most Angels will say that they are looking to back three things

1. Management
2. Good Business Model
3. Proven Idea/ concept

That sounds easy enough. But it is too generic. It is rather like saying I like the colour grey (There are hundreds of shades of grey – and some I will hate and some I will really like).

Each and every angel will judge the above factors very differently. So I guess when you are pitching to Angels, find out what they have invested in before and get a feel of why they invested in those companies (talking to Angel groups, it is amazing how few companies ask them “What kind of deals does your network do?” or “What does your network look for?”) And then you need to change each and every presentation slightly to address the different emphasis that different investors may have.

It might be easier for me to do a blog on What Not to say!

I would like to think I am pretty good at understanding business and have strengths in helping businesses to grow. And yet it took lunch with a complete stranger (a friend of a colleague) over a month ago to transform my main business. And she did this by asking a very basic question.

This week marks my second anniversary of going to Halifax. I am now working in Halifax helping companies from that region come to the UK. That project went well and I know have another project to do the same thing with Calgary (next week!)

I was explaining this to my colleagues friend and she asked a great question; “why Canada?”

This very obvious question was a breakthrough. We realised there was no business logic whatsoever to focusing just on Canada. That same afternoon, we called other countries and have now got inroads into several other countries to do something we enjoy, we are good at and are able to do so whilst making money.

The business has been repositioned and hopefully within a few months, we will need to recruit another person to join the team. And this is all because someone asked the question “Why Canada?”

Yesterday I met one of the founders of a company I have invested in www.tribesports.com He asked me what I wanted in the sense of where I wanted to be in a few years time. Incredible as it seems, I had not thought of that for a long time. I guess it is one of those things you think about when you are in a job dreaming of escaping. I have not thought about it for a while as I guess I have been pretty happy for the last couple of years.

So having thought about it, (I rang him back this morning 24 hrs after our meeting to tell him my answer) I guess I would like to be doing this in a few years

1. Have a successful Help with Sales business that allows me to do lots of international travel and lecturing (I do enjoy coaching and speaking about business)
2. Be getting access to good angel investment deals and doing just four deals a year – but really getting behind them and supporting them (not as a board member)
3. Writing a successful blog (with many more readers)

It has often been said that writing down your objectives means you are more likely to achieve them. If you keep following this blog – you will be able to see if this is true!

So what obvious question should you ask yourself?

Most entrepreneurs when they pitch think that all they are asking for is money. Sometimes when they are recruiting people to join the team, they may only be thinking about acquiring talent. Sometimes what companies really need is Monergy. That is Money and Energy (directed and talented energy).

One of my bugbears (I have so many) is that entrepreneurs are often not clear about what they are after. The reason why this is important is that angels are often wrongly accused of putting in ‘dumb money’. That is they write a cheque and that is the end of their involvement.

My counter-argument is that on many occasions, angels ‘helping’ are seen as interfering angels. And when I invest as an angel, I am backing the management team. If the company wants my help (and sadly for my ego, very few companies do ask for my help) they assume that this help would be available for free. Of course I want companies I have invested in to do well, but there is a cost to time. The best way to overcome this is to agree a different valuation for monergy and for just money.

For example, I have invested in three companies in Halifax recently, one of them www.curingresin.com needed no help from me at all. It was an easy straightforward investment (money only). Another company www.shotloc.com needed a combination of money and energy (Monergy), so we agreed a combination of a straightforward investment (along with other investors) and some options in the business (so that if the company benefits from my input, I am able to share some of the uplift in value).

Finally, one company needed much more time and effort than money, so in that instance it was a straightforward options package. When the company does get to the stage where they do need straightforward investment, I may decide to invest (with no bearing on my existing options package).

I guess the point here is that entrepreneurs should be clear about what their ask is. As an aside, I was talking to a very close friend of mine from the other side of the pond. The ‘criticism’ he faces from people he works with is he would be so much more effective if he would just focus on a few things. The common denominator these critics have is that the projects they wish him to focus on is always their own – and further more they do not want to pay him for that focus!

Be clear about your ask, if it is Monergy, that’s good but allow that to reflected in the valuation.

I often ask start ups how they get funded and some reply that they are bootstrapping. Despite having an MBA, I hate jargon and I hate people trying to be clever. Bootstrapping is a new word (in terms of the current meaning) but the idea that you start a business with your own money is as old as business itself.

The danger with entrepreneurs stating that they are bootstrapping (and all the accompanying courses that go with it) is that it gives the impression that bootstrapping is a planned strategy. I am sorry but I think that is wrong.

To have a strategy that says we have no money is not right. Some of the businesses that I am involved with have a plan of not raising any external investment. The decision was based on looking at the costs we needed to start the business and gain traction and then comparing that to the resources we already had. We called it self-financing not bootstrapping.

The other problem with bootstrapping is it can sometimes force you into making the wrong decisions for the wrong reasons. There comes a point where a business has to have money to expand. I have lots of examples where businesses are being held back because of cash. The honest companies admit that they need cash to allow them to get the growth path they need going. Others will somehow pretend that their strategy is to bootstrap.

Bootstrapping (I really hate the term) gets businesses thinking about the wrong thing straight away. Are you interested in surviving or going for growth? The two things are not always mutually exclusive – but they often are.

I understand the need to preserve resources until you achieve proof of concept; that is a different thing altogether. I will often not want to back a company until at least one person has bought the solution or I am convinced by its merits. But the companies that I have backed pre-revenue such as www.mydeco.com were never in the bootstrapping mould. It was obvious they were going for it, and going for it big.

I guess my motto would be, if you are going to fail, fail big. Do not go out with a whimper. I am afraid that Bootstrapping leads to that whimper…….