Business Angel Blog

Every election we are promised an interesting one. The 2010 UK general election is truly exciting for a number of reasons. Firstly, this is the first election for a very long time where all of the party leaders are facing their first general election as leaders. Secondly, after half of the campaign has gone, it is still anyone’s guess as to who will win. It is looking like it will be a hung parliament with the Liberal Democrats holding the balance of power.

Not surprisingly, I am a natural conservative. I believe in an entrepreneurial Britain where what you do is more important than where you came from or what school you went to. I believe in low taxes, free markets and little government activity in the economy (I only believe this in the UK – where the agents of government activity are third rate – although this sweeping generalisation excludes the very impressive people we have at the Treasury and Whitehall. In Canada by contrast, most of the staff I have worked with in Government agencies are really impressive.)

Despite the above, I am disappointed in the conservative party and cannot bring myself to vote for them. I still believe in a cabinet approach to government. I am no fan of Gordon Brown, but when I look at Alistair Darling, Ed Balls, Yvette Cooper, Lord Mandelson, Liam Byrne and Shaun Woodward, I see a team of proven talent that I am convinced are better placed to face the challenges we have coming our way.

The Conservative cabinet is very weak with only Ken Clarke a real heavyweight. These times call for a talented team. As an angel investor I would never back a weak team – not even if they had a great leader. If you think about it, elections are times when we are all asked to become Business Angels. The average person will ‘spend’ £80,000 over a five year period in taxes. We are being asked who we trust best to spend it.

Of course there is a philosophical dimension; I would not back the best management team in the world if they were selling something I disagreed with. I remain convinced that the best way to build a more dynamic and entrepreneurial society is to also build a fairer society.

I wish to accumulate much wealth in my lifetime but I also accept that being able to pass on your wealth gives your children a huge advantage in life that makes society less fair and less dynamic. Everyone feels angry about inheritance tax, but I remain convinced that it is a fair tax. Children of wealthy parents have so many other advantages handed to them (education, connections, confidence etc) that give them a head start that a high inheritance tax seems fair. (I have just managed to lose most of my blog readers!) Survey after survey shows that if you ask people what they think of ‘death tax’ they give you a very strong opposition to them. But ask them if they would rather have a high inheritance tax or high income tax – and you know what they will say.

Yet the conservative party flagship piece of tax policy remains to lift the threshold of inheritance tax to £1m. Then I look at what the Labour administration has achieved – and I am most proud that we have now joined the modern world by having a minimum wage. It was disgraceful that so many conservative politicians opposed this. I do not wish to live in a society that allows UK citizens to work for £1 an hour (as many were in the catering trade).

They also gave the Bank of England independence to set interest rates. This has been a hugely successful move which has given businesses the most important thing they need; stability. Interest rates and inflation have both been very low over the last 12 years or so.

I also have to be honest that I would probably not back a management team made up of people from very privileged backgrounds; I don’t think they would ‘get me or their customers’. As such, I can be accused of discriminating against Cameron and Osborne because of their background. I am sorry but this would be true. There seems to be a lack of authenticity when I see Cameron ‘mixing with the hood’ and talking about the problems of ‘broken Britain’.

As I have said before, I am no fan of Gordon Brown, and I may end up voting for the Liberal Democrats. An ideal scenario for me would be a Liberal Democrat – Labour joint administration, with Gordon Brown replaced as Prime Minister (there I have lost the labour supporters as well.)

I was at a very nice lunch last week hosted by my lawyers (and who said there was no such thing as a free lunch?). The lunch was simply wonderful and during the conversation I naturally explained what I was doing in Canada, and that I now spend at least one week a month there. This then led one of the people at the lunch to say I was a great example of an entrepreneur.

Of course I was flattered, but in all honesty I do not consider myself an entrepreneur. I would describe myself as someone who just stumbles from one thing to another and hopes that one of the things I stumble across works. As a very successful angel investor described his investment approach “spray and pray”.

The problem with the above is that it does not fit into the description that most people have of entrepreneurs or successful investors. I have often sensed the disappointment in business students when I am doing my talk at St Mary’s University when I explain that the route to where I am now was littered with accidents and very lucky coincidences. What a lot of us want to hear is that there was a plan and some positive thinking affirmations.

I personally have a real thing about people calling themselves an entrepreneur. I think it is for someone else to call you that. Most people I know who call themselves entrepreneurs are rather like waiters in Hollywood who call themselves actors. It means nothing to me.

If you had an enterprise which had launched or was running – you would talk about that. Calling yourself an entrepreneur implies you do not have one thing to talk about.

Judging upon whom I am talking to, I will describe myself either as a Salesman (my preferred description), Fund Manager, Angel investor, Blogger (is that a valid job?), Business consultant or trainer. The point is that I would never call myself an entrepreneur as it ends up meaning nothing other than tell the person I am describing myself to – that I have nothing substantive to point to. And trust me – I never want to invest in someone who describes themselves “as a bit of an entrepreneur”.

I was at another lunch recently where I asked someone what they did. The answer was “I run several businesses”. She did not know who I was at that point, but she had lost my interest straight away. I am involved in several businesses but I only run one – Help with Sales. I am sure some of you will disagree but I find it very difficult to imagine someone actually running more than one business.

Why do people do it? Just remember that great saying “money talks, bullshit walks – but wealth whispers”.

Entrepreneurs have an uncanny ability to keep going and be visionary. Most of the nation collectively has this ability at the turn of the year. But now that we are just one month into the year, most of the will power has been sapped. McDonalds is busy again, cigarette sales are back to normal and thankfully gyms are empty again (or so my friends tell me!) This is what separates entrepreneurs from everyone else – ‘bouncability’

I always find it depressing that the ‘worst day’ of the year is the third Monday of January. The thing I find depressing is that it is so close to the beginning of the year. I love January – even though the weather has this year sorely tested that love.

The thing I admire most about entrepreneurs is that never ending enthusiasm they have for projects and they are living embodiment of that quote “success is how high you can jump from your last failure”.

So how do you keep going?

1. Never stop believing in yourself. Really tough at times. Over the last few years, I have had a real roller coaster of a journey with business. My self-belief took a knock – but never a dive.
2. Remember that the line between success and failure is very thin. Sometimes luck and timing does play a part in your success. My biggest success to date is Flight & Partners. Yet this business came about because of huge dollops of luck. To deny this is arrogance. But yes, lots of things happened to ensure that when the opportunity arose I was able to take advantage. But in that sense we make ourselves willing recipients of luck!
3. Keep yourself fresh. I find going to the gym a real struggle and mostly I fail! But it is a proven way to keep your emotions in a good place. Other ways include reading new books, cooking something new, going out to watch a movie. Anything will do.
4. Work with great people. The best thing I learned from the F&P experience was that when you work with truly great people who are experts in their field – you get the leverage effect. Your time is the most precious resource – so spend it wisely
5. Make sure you meet your friends on a regular basis. I always feel recharged about life after a good chat with friends.
6. Most of all, be honest with yourself and make sure you remain enthused about your business. I do think that sometimes we feel compelled to carry on supporting something, long after we have lost its allure. If you are at this point, find someone else to run it.
7. But the best tip I would urge you to follow is to set yourself monthly resolutions. Hope springs eternal! Just like New Year resolutions lets you set aside the failures of last year – and start again, why not just do it on a monthly basis.

I was one of those lucky students who loved my chosen subject at University; Economics. (Whilst on this subject my advice to anyone going to University is to always choose a subject you love rather than one which you think will enhance your career prospects – unless the subject is Media Studies – we all enjoy watching TV. I am not worried about Media students writing in to complain as they only do texting!)

One of the subjects which I really enjoyed covering was Marxist Economics. If you have not studied Marxism, I would really recommend it. I disagree with the conclusions, but the analysis tools are seriously first rate. One of the main thoughts in Marxism was about the accumulation of wealth. To generate wealth, labour has to be exploited.

This argument which is now about 150 years old is still compellingly relevant. Other ways of explaining this have come to pass and are more widely accepted because they seem less ‘offensive’ or stark. However, the truth remains exactly that.

Whatever field you are in, your pay or level of remuneration will ultimately depend on two things. The value you can add to your employer and your bargaining power. If an organisation decides to pay someone £1m a year, it will because they believe that the employee will add considerably more value than that and their bargaining power will get them to that level of pay.

The development of the trade union movement can be explained as thus. The bargaining power of individuals was a lot less than that of a group and they were engaged in ensuring that more of the value ‘created’ would go to their members rather than to the employer.

The interesting thing to note from Marxist Economics was that they believe that it was in the interests of capitalism to maintain high levels of unemployment. The rationale for this being that the bargaining power of individuals is not that strong when there is mass unemployment. Statistically this does hold true.

What is the relevance of this to the Entrepreneur?

Firstly, many entrepreneurs fall into the trap of paying too much money for ‘talent’. They feel that because of the insecurity of working for a start up, they have to offer a higher salary. Secondly, they also think that as a small business they are in a weaker bargaining position.

A further point is that salaries should only be offered at a level which means that the employee is adding value to at least three times the level of their salary. In sales, it is common to expect a sales person to generate sales at a level which is at least ten times their salary.

If a sales person generates £1m of sales, that would probably equate to around £300,000 of gross profit – and therefore a salary of £100,000 would still hold this equation.

However, many start ups feel compelled to offer very attractive sales packages. And here another bit of economics comes in handy. You have to remember your marginal cost. Revenue is not the same as profit. There are many deals I know of where the better a sales person does, the greater a loss the company will suffer.

I was working for a start up in 2000. I was a good sales person and was one of the companies top earners. However, the company fired me (a story for another time) and the real reason was that they wanted to replace the first set of sales people with another set who were on very different packages.

Anyway – back to the main point of the blog. Always remember that wealth creation is based on being able to sell at a greater price than you pay – and that is also true of labour.

Many of you will not know who Brian Clough is. He was one of the best football managers ever and achieved something which I sadly think will not be achieved again – (unless someone like Wenger can do it with Arsenal). That is to achieve greatness without spending a King’s ransom. One of his quotes was that he would only tell someone they were great – if they were. It was cruel in his opinion to tell someone that they could excel as a player when they did not have it in them to be great.

It comes down to honesty and clarity. People like to know where they stand and what is expected of them. It is amazing that we accept this as a rule when it comes to the way we manage and communicate with employees, but not when it comes to business relationships.

Last week a good friend of mine told me of a story that is all too familiar to me.

They were running a great business with real promise and I for one fully expected the business to do very well. They got into negotiations with a Business Angel and the Angel was very enthusiastic about investing. He spent a lot of time with the business and even went on a lot of customer visits. He made it clear before Christmas that he wanted to invest in the business. The entrepreneur was also very clear that failure to get investment by January would have a serious impact on the business. The angel reassured the business that investment would be forthcoming.

You know how the story will go. Earlier this week the investor pulled the rug on the investment. The business is now in a serious position and will probably have to either close down or go into extended hibernation.

There is a school of thought that believes that all is fair in love and war and business. I have never believed this. The ‘strategy’ (if it can be called this) is to say yes to a deal and then wait till the last minute to change your mind. The idea is that at that time, the business will be so desperate that they will do a much better deal (for the funder).

I am old fashioned and I still believe that your word is your bond. Do not say yes unless that is your intention. I have said yes and then said no. But this is because of something I have learned through the due diligence process or basically being told a lie. Simply changing your mind is not an option.

So my advice to anyone looking for finance is to always do your due diligence on the investor. I will write the next blog about questions you should ask potential investors.

But till then remember “trust is good, but contracts are better”. Very sad but true.

I was watching some old TV footage of ‘alternative’ comedy in the late 1980s. The comedy was seen as alternative at the time (although it is mainstream now). The comedy was based on simple observation and finding the stuff that is funny and unusual about our everday routines. It was groundbreaking as it wasn’t telling jokes or finding a victim – the victim in this humour was us – we were being encouraged to laugh at ourselves rather than at a minority.

I know some very funny people and their ability is not based upon their ability to tell jokes but rather to just observe and make witty comments in any given situation. I could not help but think that the Entrepreneur has a similar ability.

They look at everyday situations and see opportunity. They see that things could be done better and that there is value to be provided in making things better. All of us are ideapreneurs – but some of us have an additional ability to take things beyond an observation and do something about what we observe.

Again, like comedians, it is about recognising the skills you have. Many comedians have a team of script writers providing the jokes and they practice the ability to deliver a performance. The script writers create the content – but perhaps lack the ability to perform (or more importantly, perhaps don’t want to) on a stage.

I always thought that Angus Deaton (former presenter of Have I got news for you) was hilarious and then I saw him in other programs and realised he was fantastic at reading scripts (a skill not to dismissed). In a similar vein, I was disappointed to learn that Elvis did not write any of his ‘songs’. Neither did most of the Motown legends. Does this diminish the power of some of their music? (It was actually The Beatles that were one of the first music acts to write and perform their own material). Scarily, you could argue therefore that Simon Cowell is taking music back to where it was pre-Beatles!

Back to the main point, we need to recognise that not everyone is a John Lennon and that the best businesses are all about a team effort and approach. I tend to have a good business idea at least once a week, but there is very little if any value in that. An idea is not a business. As one entrepreneur said to me – “until you have a customer, all you are is an idea”. But making the idea ‘happen’ is for another blog and is a course in its own right. (Cheeky plug here – I do run a three day course called “From Mind to Market” – if you are interested, please contact me for more information).

If you are looking for ideas – just be an observational comedian for a week or two. You will be surprised at the wealth of opportunities that are just waiting for you to make them happen.

There are two main reasons why I never pursued a career in finance (or the City as we in England describe it). One; the city would not have had me. Two; a career in finance appeared to be dull as heaven. (I have been told that heaven is only for people – so the idea of spending eternity as a vegetarian – sounds a bit dull)

Business to me has not been about making money; money is simply the measure of your success in a business venture. It is rather like saying to an athlete – why work so hard for a gold medal – I can buy you one off the shelf. It is about trying to persuade consumers to purchase your product because you have convinced them that your product/ service will be good for them.

People in the city tend to be obsessed about making money for the sake of making money. Don’t get me wrong; they are vital to the interests of the UK economy. The city generates some 25% of the tax revenues for the UK. This idea of introducing salary caps is too be resisted even if people and companies can not be persuaded to reign in their excesses. And the conservative party should be thoroughly ashamed for not defending the rights of people over the age of 18 and companies to enter into private arrangements over what they should be paid for a service that is vital to the national interest.

But the main thing I wanted to say was that people in the City tend to take themselves way too seriously. It must be all that training around money – and yet when they do relax and party – they tend to do so in the most obnoxious and loud way possible. It must be the Medical student syndrome. Those of us who went to University with medics will know what I mean. Because they had to study a fair bit, they had fewer opportunities to party – and they seemed to make up for it when they did party. Scary to think, that I now rely on those people to help me when I am at my most vulnerable.

As an entrepreneur your greatest asset will be your personality. Make sure therefore it is a good asset. One of the things that will help you is the ability to be able to laugh at yourself and not take yourself too seriously. I cannot stress that enough. Friends who have known me for a long time (or at least before I began my career as a business angel) are more important to me now than they ever have been in the past. They know the real me – not the person who writes business angel blog (although I try to be as honest as possible). And as soon as I do my pompous routine – they put me back in my place.

I always remember one day borrowing a car from the taxi business I had invested in. I went to pick up my then six year old son in the taxi. He was thrilled that his Dad was a taxi driver. He loved telling his friends at school about that. He is now nine and finds the idea of me being an international investor and entrepreneur really dull!

As many regular readers of my blog will know, I am now increasingly based in Canada (at least one week a month). I love the place that I have settled in completely by accident (Halifax, Nova Scotia). I have done many speaking engagements there and recently wrote a guest column for a local newspaper.

After my feature in the newspaper, the hits on my blog went up substantially and I was contacted by many people and offered a few good deals. It seemed to prove to me the old adage about the value of PR and profile. This blog was inspired though by me reading the weekend papers – more about that later!

A good friend of mine who I have worked with for almost ten years is very private. He easily qualifies for a place on the Rich list – and yet never appears there. He confessed to me when I asked him, that he pays his accountant a lot of money to make sure he never appears on any rich list. I also learned that someone else I knew (calling them a friend would be an exaggeration) was paying their PR agency to ensure that they always appeared on the annual rich list.

Two very different approaches and yet they both made sense. The first person did not need the PR. He worked in a ‘closed’ industry. The people he did business with, knew about him and what his company and values were all about. Other than a massive ego massage, there would have been nothing for him to gain from appearing in a rich list – or indeed any other form of PR.

The other person wanted to be taken seriously and ‘break into’ the top tier of deals. They were in the business of selling products to retailers. They had calculated that if the people they were selling to, thought they were ultra-wealthy, they would be more likely to get a meeting and want to befriend them (by saying yes to doing a deal). There is a cold logic that runs through this. However, the real reason is ego. And there is nothing wrong with that motive at all. I should know – On many occasions, I have done things driven purely by ego.

I have talked to many people about the Dragons Den experience. You get the feeling that when the cameras are off, many of the dragons would rather not be bothered with these new deals they have done; it is a massive ego trip for them. The Dragon whom I most respected was Doug Richards who was there at the beginning – but then left because he did not have the time to fulfill the filming commitment (it takes an entire month to do just one series).

The problem I do have with exercises in ego is that it is unfair on the person seeking to do a deal with you or funding as they may believe your reasons for doing something with them are real. This brings me back to the inspiration behind this blog.

As I mentioned, I saw a couple of people I know well featured in the weekend papers. They were having very good coverage and I am sure they will have been very pleased with the write ups they got.

Any entrepreneur reading these interviews may be tempted to spend a lot of time and energy to contact these people as a result of what they have read. The reality is that from what I know of these people; they would not be able or willing to support new start ups.

So my advice to entrepreneurs seeking funding is to be wary of people who have very high profiles. Most angels conduct their affairs in private and want businesses to put the effort into finding them (it really is not that hard). There are of course exceptions to this. One of the most active angels in the UK (and also the largest single angel investor) has a high profile – but not because of his angel investments but because of the deals he is involved in.

I hope this is useful advice from a publicity seeking blogger!

A manager I once knew would always use the same technique to motivate his team irrespective of the way they performed. He had come to this conclusion after many years of management.

When his production staff had a disastrous run – he would use harsh words to try and get them ‘fired’ up again. He would then see an improvement in performance in the person. However, when people in his team were doing well, he would use the same harsh technique to try and keep performance going at a high level. Not that performance did stay high – it didn’t. But he had noticed that when he used to praise team members, performance would drop. He had come to the conclusion that performance seemed to drop less when he used the same consistent critical method.

Like my blog on causation v correlation, what this production manager had done was forgotten about the concept of regression to the mean. It is a common problem. It explains stock market returns on an annual basis, why some people think homeopathy works (it doesn’t!) and why sports people who are labeled as ‘stars’ tend to have a poor subsequent season.

Anything that can be measured will have an average. The average will be that for a reason and over the long term – performance will vary around that average, unless there is an exceptional and permanent change (new technology etc).

So there is a strong likelihood that if you have one or two exceptional years or months of performance, that future performance will revert to the mean. Of course this does not mean that permanent improvements are not possible, but there have to be some underlying reasons for this. It is not possible to consistently outperform an average.

Why is this important as a concept for entrepreneurs and for business angels?

Many entrepreneurs when writing their business plans extrapolate from data that suits them over a relatively short period of time. They may assume that a new trend marks a permanent change in the landscape. It may – but I would want to know how the business would cope with a regression to the mean. That is a basically a way of saying – a return to the average. Can their breakeven points, and profitability points still be hit when the fast growth inevitably returns to an average?

Business angels will want to know the answer to that question.

There are times in life when you are asked a question and you have the perfect answer. The problem is the perfect answer appears five minutes too late! This blog is great as it allows me to either say what I wanted to say but could not think of it at the time – or to say what I wanted to but found myself lacking courage!

My answer to this question in a presentation was;

Angels
• Own Money
• Entrepreneurs
• Very early stage
• Networks
• 10x return
• Expertise/ Board
• Normally straight Equity

VC’s
• Other Peoples Money
• Professional Managers
• Next stage
• May be competitive
• Return expectations vary
• Corporate Governance Board
• Different instruments

However what I really wanted to say was ‘Testosterone!’

Anyway who has raised money from Angels and from a VC/ Fund will know exactly what I mean – and I would welcome your comments.

Ironic though that I lacked the word I wanted to say!