Business Angel Blog

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.

It seems most people like meeting people in business for the sake of meeting. One of the curious things I noticed about the most effective sales people was that their ability was all to do with their tenacity in following up and ensuring that action points agreed were carried out. Other sales people with ‘personality’ and ‘charisma’ were great at the initial bit but not on actually getting things done. This has interesting parallels with entrepreneurs.

I meet with many people on a regular basis who say that they are not very good at networking. I found that strange as many of these people have great social skills – and then I realised that what they were really saying is that they find it hard to build relationships and manage relationships.

To me there is nothing more frustrating than having a good meeting with someone and feeling there is going to be something there – and then there is no follow up or actions promised.

You need to always remember that it is a small world (I have stopped getting freaked out by the incidents that remind me of that) and that every time you interact with someone there is likelihood that you will probably come across them again in a different context – or that your name may come up in a conversation with them and they will offer an opinion. Question is what opinion do you want them to offer?
And yet it is all so easy. We too easily manage people on a transactional basis rather than on a long term relationship building basis. I come across many people who I do feel are just wanting to ‘use me’. There is nothing wrong with meeting people with an objective in mind; but you should try and make the person feel good about helping you.

I have to be honest and say that I struggle to see why people struggle with this. Why not simply treat people as you would like to be treated yourself? And that creates a virtuous circle where favours kept getting passed on.

As an aside, I was talking with a journalist a couple of weeks ago and he was bemoaning the nickel and dime culture here in the UK compared to the US. He felt that Angels/ Advisors in the UK were too focused on their own rewards to really help entrepreneurs. I surprised him when I said that it works both ways. In Canada (and Cape Town) there is much more of a reciprocal relationship between advisers and companies. If I do a good job with a company there, I am often given an options package, asked to join the board and nine out of ten times at least paid something. In my experience, in the UK, despite helping lots of companies, no one has offered anything in return. Only one company has ever sent me something unprompted. I guess this is a cultural difference rather than a statement about the spirit of people.
And yet this still comes down to relationship management. It should never feel like a one sided relationship.

And if you are thinking of how to say thank you – its my Birthday on Thursday!

Many managers I know get a real kick out of managing people – they measure how successful they are by the number of people they manage. I think I am good with people but I really hate managing people. The problem is that as you start to grow as a business, you may find that you are increasingly involved in HR issues rather than growing your business.

Managing people can be very rewarding and certainly it was one of the best aspects of my last role at Ernst & Young – where I was directly responsible for managing six people. But I was lucky; the people in the team were high performers and wanted to get on with it.

The reality is that although you may really believe you are founding the next Google; your new employees may not share your passion. And recruiting the first few people is actually easy. Certain types get attracted to start ups and love being called co-founders. I realised last year how motivated I was by this when a company recruited me and said I would be a co-founder.

Your problems really start when you look for employees for non-core roles (yes, I know that every employee is important and that everyone is part of a winning team etc – but back in the real world). You will not be able to recruit the best talent for roles such as credit control (which I actually think is one of the most important roles in a fast growing business). And you will not be able to compete with the big corporate in terms of salaries that you can offer or the terms of employment (gym membership, subsidised canteen, pension arrangements etc) and the employee share pool will soon dwindle if you start offering everyone access to the share pool.

So, what is my advice to start ups in terms of recruiting and retaining staff?

Firstly, find a really good HR person/ part time director/ outsource partner. This is vital to ensure that you take care of the paperwork and create the impression that you are serious and professional about the way you treat your team.

Secondly, take a long time over hiring decisions – at whatever grade. Hire slow, fire fast is a good motto.

Thirdly, treat the interview as a genuine two way sale process. You want to impress the interviewee as much as they will hopefully want to impress you.
Offer an accredited training program with a local University or College. There are many government programs which offer subsidised training. Why not offer employees skills based learning where they get a qualification? Employees rate this very highly as a benefit – and it could be a very effective way of you keeping them with you during the course (the longer the better!)

Fourthly, if you are the key entrepreneur, really do try and stay away from the managing people piece. It is hard work and can take up lots of time.

Anyone who has been following my twitter feeds @permjotvalia will know that I am in gorgeous Cape Town at the moment and loving it.

Recently, (since last year), I have got involved in helping local governments with some advice on encouraging angel investment and helping start ups. That work has took me to some great places including St. John’s, Newfoundland, Szczecin in Poland and now to Cape Town.

I have seriously been blown away by the beauty of Cape Town. Absolutely stunning and you can see why the natural landscape encourages creativity and dreaming about possibilities. But there are two things that are really striking about the people I have met so far.
Firstly, there is a real focus on working together and helping each other to make the digital sector become world class. This works through all the organisations I have met so far either private, not for profit and government organisations.

It reminds me of the reason that I fell in love (and remain in love) with www.seedcamp.com. This was the first time I saw lots of people get together and put their expertise into something that was for the greater good in business rather than to try and get a deal for themselves.

Cape Town has that same spirit in abundance. I even got to meet all the VC’s from the area sat together in the same meeting; unbelievable!
The two things I really think help entrepreneurs to be successful is being able to understand percentages and having coachability.

The other thing that I have picked up (and I really was not expecting this) is the total humility of people here in the Cape. They are totally open to new ideas and advice and despite meeting some people who are already more successful than I will ever be – they are keen to listen to me.

When I was a student in the late 1980s, I dreamed of visiting a free South Africa. That dream has come true. And I would encourage digital entrepreneurs to visit Cape Town (if you let me know if you are coming here – I will happily introduce you to some great people to meet). And it is a great place for a holiday, especially as they have their summers when we (Europe and Canada) have our winter!

I have so far seen dolphins (swimming with the boat I was on), baboons and penguins all in the wild – and breathtaking scenery. And if you were to come and have at least one ‘business meeting’, your holiday expenses could become partially tax deductible!

Anyone who has been in business will learn that they will come across people who are either very greedy or completely lack integrity. The problem is that many of us have been taught that “all is fair in love, war and business”. This then creates an impression that “greed is good”. I would like to challenge this.

Wanting to make money is a noble desire. Wealth creation creates opportunities for society and improves the well being for an entire society. It is the only thing that can permanently lift people out of poverty and cycles of low expectations. But dumb people (and you know who you are!) confuse business acumen with something which is Greed.

Business acumen is about how you can generate value for your customers or shareholders, and capture some of that value for yourself and your backers. Greed is very much about what you alone can take out of a situation. A good acid test on whether you are acting with greed or with business is how you feel about describing your actions.

If you are embarrassed or want to blame someone else for what you did, it is greed. If you are able to stand up and tell people how you created value- it is more likely to be good business acumen on display.

I have always tried to behave with integrity in business, but that has not always been the case. When I was very young (pre-University) I did a couple of things which were acts of greed. As such, we should always make allowances for people who are young and in a hurry. But there must come a time in your life when you should know better.

I have had experiences with greedy people (more so recently than in the past bizarrely) but the great thing about greedy people is that they reveal their hand very early. Tell tale signs to look for are

1) If you are not clear about the motivations of your business partners – that is a big red flag. I tend to tell people within minutes what I want out of a situation.

2) They invoke religion as a character reference. One of my best friends and business colleagues is a very devout Christian, but he never uses that as a reason why I should trust him.(a real tell tale sign of a crook. They will say – as a devout (whatever religion I will not do this or that)

3) Strangely, they never want things to be crystal clear in terms of who does what for what. They may stick to broad things like 50-50!

4) They don’t like people they are doing business with.

5) They agree with everything being said (even when they are totally contradictory)

You have been warned!

Anyone who has been subjected to sit through one of my lectures, will know that I love Economics. I am so grateful to Mr. Shellard at my college for encouraging me to pursue this subject.

Economic concepts are so highly relevant to understanding business models and profits and I think more entrepreneurs need to understand concepts such as marginal cost and marginal revenue. But I think an important piece in this equation often gets missed which I hope to illustrate in this blog; the cost of acquiring and keeping a customer.

Marginal cost is simply the cost of producing the last unit. Some businesses have zero or very little marginal cost. So a cinema for example will have a zero marginal cost (the cost of allowing one more person to ‘consume’ a film). Equally, the transport industry has zero or virtually zero marginal costs. How much extra would it cost to sit one more person on an otherwise full flight from London to New York? Perhaps $50?

Economic theory states that providing you can cover the marginal cost (and do not confuse marginal cost with average cost) you are always better off making that trade. Profit is maximised where Marginal Cost is equal to Marginal Revenue. This is very much the pricing model that airlines and hotels adopt.

But, you can still be making big losses as a business even if you are covering marginal costs (because you may not be covering average costs). Again an airline may have a very expensive average cost of a flight – and the breakeven may be to get the flight 70% full. But given that most of the costs are going to be incurred anyway, providing they can get marginal costs covered, it is always a better decision to accept that additional ‘contribution’ to the average cost.

Digital businesses often assume that they have zero marginal costs. This is true to a certain extent. But what is often missed by a lot of businesses I deal with is the cost of selling to a customer and then keeping that customer.

It is easy to think of your cost of production – and thats it. But what about the time, effort and SEO cost that goes into acquiring that customer?
And many people will want customer service – that can be thought of as a marginal cost (if x% of people will phone and take up y% of time, you can add that to the cost). Often businesses fail to make a profit because they confuse this element as a fixed rather than a variable cost. The business plan assumes that this overhead is fixed and not related to sales volume. This is not true.

One of the companies I spent some time with recently, wanted to employ some account managers and I had to show them that there simply was not enough margin in their pricing for them to afford to do this (even though it would grow revenue).

Entrepreneurs have to remember the old adage from Economics “Sales is vanity, profit is sanity, but only cash is reality”.
Have you worked out the true cost of each sale?

I was recently coaching a great digital business based out of Halifax and we were looking at the issue of menu costs. The business theory is very simple; minimize choices on offer. By doing this, you reduce the inventory cost and the business becomes simpler.

He had tried this with his business and found that the revenues went down. I then remembered lessons I had learned from my experience at Amano (still miss you terribly Johnny RIP).

Consumers in our sandwich shop would always choose one of three sandwiches – and 80% of the time, they would have just one sandwich. But if you only offered the consumer the three sandwiches they want, they will really not like the lack of choice and go somewhere else.

This is very odd but it is a real phenomena. How would we feel about going to supermarket that didn’t allow us to ‘browse’? I know I don’t want to buy biscuits, but I want to see them there either to satisfy my sadomasochistic instincts or to congratulate myself on not buying them!

Most people feel the same way. Hence, you must avoid the temptation of only giving consumers what they want to buy? What they want to see and what they want to buy is not the same thing.

I also learned last week (during a fantastic pitching event in Winnipeg, Manitoba) that most consumers use the same formula to choose a bottle of wine at a restaurant. They will choose the second least expensive in any given category. Amazing and yet – they want choice. One of the whole points of a wine list is to be able to browse and choose thereby looking cultured.

This is not the same as ‘confusion marketing’ which mobile phone companies shamelessly use. This is where you deliberately confuse the consumer with too many choices and confusing ones, so that they choose one which is not the best for them.

Websites suffer from the same problem and Alan Sugar (whom I have to say really impressed me with his Biography) has always used menu pricing to help consumers feel they have choice in what they want to buy.

So the lesson; theory is great and just because you are doing something very clever in the digital world; basic rules of psychology still have to be understood and applied.

There is a widely held view that by understanding what is happening in a great artists life at the time of the piece of work you are enjoying, you gain extra depth and see more colours in the work. This I think is true. More people know about the personal hell that Van Gogh went through (in terms of cutting off his own ear) than recognise his work.

I have always felt this way about pop music and music videos; that is my culture and just because it is not very old does not make it less cultured. I remember listening to the Hothouse flowers song “Dont go”. It is an OK song, but when I learned this song was written for a friend who was dying of a terminal disease who wanted to give up, it took on a very powerful meaning for me.
It is very much the same thing in business. There is nothing wrong with being in business to make lots of money. But in my limited experience I have found that just isn’t enough as the commitment or ‘passion’ that is required to see you through the really tough and lonely times will not come from wanting to make just money.

I regularly meet people who are running business and want coaching from me when they get stuck in a rut. 8 out of 10 times they are actually looking for someone to take the business off them (or outsource the entire business). The real reason, which they dare not say is that they have either run out of steam or they did not realise how much hard work is required.

Business is great fun but it is a really hard slog. Great businesses take ages to come into fruition and cashflows never turn out to be accurate. It is something else that will drive you forward and that is passion. That is why I am nervous about people who are motivated solely by money; it really is not enough.

And getting back to the artist link, this is why funders often want to know more about the founding team and where there passion for the business and the idea came from. They are often testing the commitment the entrepreneur has to the success of the idea.

Trust me when I say there are much easier ways of making money than through entrepreneurship; but that misses the point. It is not about making money!

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.