Business Angel Blog

As any regular follower of my blog will know, I love Economics, and feel that an understanding of the subject can help business owners make better decisions. The Macro environment is very important in considering even what appear to be small business decisions.

However, a tweet (you can follow me on @permjotvalia) I read suggested that the very difficult pricing model of airlines could be solved by more competition. I disagreed with that and would hope to use this blog to demonstrate how in many cases, more competition can leave consumers worse off.

If anything, airlines are one of the best examples of learning from economic principles. They are great at explaining the issue of marginal revenue. (Even if ALL costs are not covered, it is always worth doing something providing marginal cost + $1 is earned). So even if a flight is making a loss, it is worth flying providing the costs of actually flying (petrol, food etc) are covered. That is because the fixed costs are going to be huge; that is wages (fixed), landing fees (fixed) and aircraft costs (fixed).

Travel is also one of the few markets that allows producers to practice perfect price discrimination. They are able to price each seat differently depending on how much the traveller needs that ticket. So if you buy a ticket for tomorrow that will be more expensive than in a months time. Just before Christmas will be more expensive than January. And my pet hate, if you do not stay over on a Saturday night, the return flight can be very expensive (as they can use this to discriminate between business travellers and leisure travellers).

But the airline industry is also very odd in that it is very heavy regulated. You would have to get rid of some these regulations to ensure that there could be more competition. One of the reasons Ryanair prefers pilots to hold Irish licences rather than UK ones is that they can fly an extra couple of hours a week because of that. How would we as consumers feel if the UK upped the limit from around 32 hours a week to say 60? It may lead to lower prices but is that what we would want.

And what about the fixed landing slots regime. In a truly competitive market each and every slot could be up for negotiation. If it got to the stage where all the fixed costs were made flexible, flights could literally decide 24 hours before they were due to take off if it was worth making the flight or not. Although its opaque pricing structure is very annoying, it is also the best guarantee we have that these flights will indeed take place.
So, more competition and flexibility is not always the answer.

Another great example is Premier League Football. Until recently, Sky had a monopoly on live matches. Because of EU intervention, other operators have had to have matches offered to them. This sounds great, but the consumer is a lot worse off as they now have to subscribe to multiple pay for view TV operators.

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!

I made a rule last year to stop investing new money into new ventures. Before 2011, I had invested in 25 companies since 2004. And overall, like most Angels, I am deeply into negative territory (so please don’t ask me for investment advice – my track record is pretty bad). So I will now only invest money earned through an exit into new investments, and only have 10 investments still ‘active’. So I have to wait till I get an exit from these before I can invest any more.

However, I managed to get a good exit last week (which I tweeted about @permjotvalia) and as such I was delighted to be back investing again.

I have invested the proceeds from that exit (promised as it still has not gone through 100% yet) into two companies and I wanted to share the information on those companies and why I had invested in those companies.

Before I say any more about those companies, I should issue a very appropriate wealth warning. You should not read the information below as an invitation to invest. Angel investing is risky and you are likely to lose your entire investment. Before you engage in any angel investing you should ensure that you understand the risks and have sought professional advice and that you are indeed an eligible investor (either a High Net Worth Individual, a sophisticated investor or a recognised counterparty)

The first business that I will be investing in is a company called Hoops Innovation website is www.shotloc.com This is a company based in Halifax, Nova Scotia and I think they are doing something which is awesome and fun. Being able to shoot hoops accurately is a key skill in Basketball. This skill requires you to hold the ball in the right manner and follow through in the right method. Shotloc is a great and scientifically proven training aid that will improve your shooting accuracy.
That’s just the product, but what has impressed me most about the company is their ability to have achieved so much in such a short time. They have achieved listings with major retailers and will be available at www.amazon.com in a very short time (days). The great thing about being on Amazon is that they sell a huge number of basketballs and every time they sell a ball, they can ask the buyer if they would like to buy one of our training aides as well. You can never tell – but I really think this is a winner.

The second business is called http://myows.com and I am excited about this as this is a business based in Cape Town (have you got the impression that I totally fell in love with this place yet?)

This is a business that uses the internet to empower creators of original works (hence Myows – My Original WorkS) to ensure they are copyright protected at a tiny fraction of the cost to the standard ways of protecting copyright. Soon to be announced enhancements will ensure that the internet is scoured to see if any.

I have been fortunate enough to have travelled a lot in the last month and I have been able to think about the real differences between the different entrepreneurial scenes in different places.

In the last three weeks, I have carried out some training in Winnipeg, Halifax and of course stunning Cape Town.

The first thing that struck me as odd was the demographics of the groups I was dealing with. My time in Cape Town was the first time I had spent in Africa and although I interacted with around 100 or so people in the ten days I was there, I only came across three black people. The strange this was that one of them was from Kenya and one of them was from Dallas!

When I recanted this to my friends in Canada and in the UK, they immediately jumped to the conclusion that this was racism. They were right, but not in the way that they thought. The government of South Africa through its black empowerment policies has instigated race related economic policies which guarantees low participation rates for the white population in employment and therefore forces them to pursue a path in entrepreneurship.

As it happens, I think this will be a very interesting business and social experiment – and it will be good to see the results in a few years. What does happen to the business prospects of a country when much of its talent is forced into entrepreneurship?

Can you imagine if in the UK or in places like Nova Scotia, talented people were prevented from taking jobs in government or large businesses and had to start their own business? Interesting.

Halifax is my second home (The Prince George Hotel at least!). And it really is an awesome place. You do notice that there are almost too many initiatives and organizations in the ‘entrepreneur’ space. As an entrepreneur you have to be very careful about whose advice you take and you should always really judge the people that are trying to judge you.

Much of my credibility came from being a mentor at Seedcamp in London – and the feedback that came from that. But as a trained salesperson, I know that I am only as good as my last business deal, or coaching interaction or talk.

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!

Angel investing is like marriage; it is the celebration of hope over statistical reality. So the world is celebrating the marriage of Prince William to Kate Middleton tomorrow and on a personal note of course it is something worth celebrating. But I have to admit that I am a complete party pooper and as a proud Republican I find the national celebration of a royal wedding depressing.

Many people do not care about it and perhaps I am worrying about the wrong thing. I just find the idea that we in the Commonwealth are still subjects rather than citizens depressing. We are supposed to show respect to members of this family purely on the basis of birth right rather than on merit.

My background is as a Sikh. A central principle of Sikhism is the utter rejection of the very cruel and barbaric caste system. The idea that your life ambitions and aspirations should be determined by accident of birth is a shocking and alien concept. People across the world are at this moment in time giving up their lives so that they can be governed by people that they elect rather than by the children of dictators.

I love the opportunities that this country has given me. I came from a very modest working class background and have not had that hold me back in any way whatsoever. However, there is the backdrop of the Royal Family which lets me know that I could never aspire to be the head of state of the country that I was born in.

Lets compare that to the USA. And it interesting to look at the USA where Donald Trump is leading the charge into questioning Obama’s Americanism (by the way I do think Trump is the perfect candidate for President as he has more experience than most of being able to declare a business bankrupt and then start out again – where the only losers are the banks and shareholders). The truth is that a black kid from the UK could not become the head of state for this country. It is also still true that a Catholic can’t become part of the succession.

It is still problematic for a Catholic to be prime minister of the UK (Tony Blair converted once he had left office). As someone who loves the entrepreneur space, I think it is wholly incompatible to believe in social mobility and the role of the crown. The principle behind the royal family is exactly the same as the principle behind the caste system.

And I concede that the problem we have in this country is that the queen has done a magnificent job as head of state.(Her first prime minister was born in 1874 (Winston Churchill) and her latest was born in 1964). So this is not an anti-queen diatribe but it really is about the principle behind it all.

So do celebrate the wedding, but please do bear in mind you are celebrating birth right over merit.

There is nothing better than helping a client through the provision of a service that you just know is going to really help them. It is a case of all the interests being aligned. I remember watching a movie “In Good Company” (to be fair not a brilliant movie, but a great sales scene).

In the movie Denis Quaid is the senior sales person teaching a young up-start how to sell. They get a really good sale and Denis seems very pleased because he customer has got a good deal. “You really believe in this, don’t you?” asks the young up-start. “Of course, why else would you do it?” replies a slightly startled Denis.

There is a real truth in this and yet we all come across businesses and sales people where you sense the objective is just to make money rather than seeing making money as a by-product of providing a really useful service that adds value.

The business I have recently started up and am now focusing much of my attention on is www.springleads.com and I do not mean for this blog to come across as an advert for this business, but I want to use it to explain exactly what I mean by alignment.

My background is in sales and my career break came through my cold-calling efforts at PricewaterhouseCoopers. I was very good at it and went around the country training others across the firm on cold calling. It is something that I enjoy enormously and have a passion for.

With all of the mentoring I have done recently, I know that the big issue many start ups face is having to make many cold calls just to find the few customers that would be interested in talking to them. The most effective sales person in a start up tends to be the CEO, and yet the most precious resource they have is their time. Cold-calling for them is not a good use of their time.

www.springleads.com provides that service for them and for any other company that needs a large number of calls being made. So how did we set about differentiating between other call centres? Again through understanding the pain that start ups have, we were able to realise that having a set up fee and a minimum order number of hours acted as a barrier to many cash-strapped start ups. As such we set up a cost structure where there would be no set up fee and a flat £15 per hour.

Of course this is a plug for the business, but I hope it illustrates that when you are starting a business, it is important that you have (or you rapidly acquire) knowledge about the problem you claim to be solving. The other lesson is that you have to make money from the activity whilst still providing an enhanced service. So your cost structure has to demonstrate not just the needs you have – but also the needs of your client.

Ensure your personality and experience are aligned with your business and that most critically your business structure is aligned with the needs of your customers.

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!

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.