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.

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.

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…….

My political career ended today at around 10am. My career in politics lasted around two weeks and it was great fun and I met some completely new people whom I was deeply impressed by.

Regular readers of my Blog will know that although I was never a big fan of Gordon Brown, I have been less than impressed by the actions of the new coalition government. They are shrinking the size of the state for ideological reasons; and I do not philosophically have a problem with that. But they are doing so at exactly the wrong time. I believe the UK will enter another recession because of the actions of the government.

When people say that this is the best thing for the UK in the long run, I remember what Keynes said “In the Long run we are all dead”. Someone losing their job is a massive tragedy for them and their family; they will not be comforted by the idea that their lost job is in the best interests of the UK economy.

So rather than complain about what is happening I decided to contact one of the contenders for the leadership of the Opposition Labour Party; Ed Balls. Two weeks I got involved in his campaign. It has been a strange experience but an inspiring one. My advice to everyone would be to get involved in a political campaign (whichever colour or views you subscribe to). You will meet some great determined and talented people and you should get inspired.

I met Ed Balls last night for the first time although I have been working on his campaign for two weeks. I really enjoyed meeting him and in a classic case of being in the right place at the right time, I was asked if I would introduce him and chair a major speech he was delivering today in the City of London. It was strangely nerve wracking!

Get me in front of hundreds of people to talk about business strategy or investing as a business angel and I will not have a problem. I realise I know enough to not embarrass myself; but talking to a room full of journalists and TV crews (live coverage on BBC news!) about something I know little about and you can imagine my fear. So at the end of talk, I decided any involvement I have in politics will be strictly behind the scenes! Hence my political career is over!

I do have to say though that I really enjoyed the talk that Ed gave and I felt inspired. He has bravely broken away from the consensus that we need drastic cuts to public expenditure. www.labourlist.org/the-growth-deniers—ed-balls-full-speech I also found him to be very keen to listen and learn what I thought were the key ways to support start ups and entrepreneurs. I wish him well and I will continue to support him.

As for advice from this blog; stick to what you know and are good at!

The economic environment we are in is a big determinant on entrepreneurial activity. I am a believer that start ups which start in a recession can often do better than companies starting up in a boom. I do think though that the UK economy is going to be heading into another recession/ slump very soon.

It is important that entrepreneurs recognise the circumstances that they will be trading in. Starting in a recession is very different from trading into a recession.

My views on why we will go into another recession are just mine – and better placed people than me, will no doubt disagree. Firstly, the recovery the UK is going through at the moment is very fragile and although inflation is higher than the target range, it is predicted to fall sharply.

Public expenditure is coming down sharply in the UK. Some cuts (£6bn) have already been announced and another set of cuts will be announced on the 22nd of June. This will of course negatively affect total demand in the economy. Taxes are also set to rise, and if VAT goes up as widely predicted to 20%, it will have the effect of adding 1% to the inflation rate.

Sterling being very low at the moment against the US$ and Euro also adds to pressure on inflation (by increasing the price of imports). The ‘problem’ with this type of inflationary pressure (as well as with VAT increases) is that they are shocks to the inflation rate and don’t represent excessive demand. Nonetheless, the Bank of England which is charged with maintaining a low inflation rate may need to raise interest rates.

I hope they do not raise rates as I think demand is going to be considerably lower in the economy without a rise in rates. An increase in the interest rate would precipitate a recession.

The point of this blog is that if you are looking at starting up – now is a time to be a bit more cautious than normal. You may be better off starting in a year or two. Equally, if you are trading already – just be careful, we are most certainly in for a bumpy ride

I love being busy. I find I get a lot more done when I don’t have time to stop and think about what needs to be done (which means my effectiveness is not perhaps what it should be – but that’s another blog). I find that when I am not busy – procrastination sets in.

There are many great jokes about procrastination. “I always find its best to procrastinate when you have something to do” would be my favourite – or the T-Shirt which said “ Top 10 reasons to procrastinate. 1….”

I have always needed to come up with clever ways to avoid doing nothing. The impression people always have of entrepreneurs is that they are always busy and they manage their time really well; my experience (now working with just over 100 start ups!) is that most entrepreneurs are really bad with their time management and do indeed procrastinate,

The really bad habit for me was working from home. I could not do it. I would find it too tempting to watch the Jeremy Kyle (a poor version of the Jerry Springer show). It really is an awful program – and he is the personification of a parasite, but I had to watch it. And then there are those wonderful crime programs on the Hallmark Channel like Monk, Law & Order (both Criminal Intent and SVU: Special Victims Unit). I could so easily spend all day watching TV – and not feel bad! Here I go again procrastinating…

Anyway, at the start of this year I got myself an office and started working with someone. This has seen an amazing increase in my productivity – I have to be in the office by 9am – the hard thing for me is starting work. Once I start, I really enjoy the work and can easily stay till about 7:30 in the evening. I also find that working in an office means that when I am home, I can switch off (although iPhones don’t help!)

Other things that seem to work for me are making lists of what I need to do. It is not that I have a problem remembering what to do, I just really enjoy ticking off things from a list once I have done them. (If I could have my way, I would even list things like brushing teeth, having lunch etc – just so that I get more easy ticks). And hence I still need old fashioned paper and pen. Point is whatever works for you is good.

Finally, my new business partner in Canada (great to have you on board April) told me about this concept she sometimes uses called The Life Manager. If you employed a Life Manager and you were reviewing how well they were doing managing your life/ your week/ your day, what marks would you give them?

Well – you are that Life manager and if you are not giving yourself top marks – why would you continue to employ them? This concept is mainly used with weight management – but I do feel that it can so easily be extended to your professional life. Like I say – whatever works for you is good. Now- can someone tell me how to get myself motivated to go to the gym?

I am spending about one week a month working in Canada. Whilst there, I work with many start ups and I have started angel investing in Canada. There are no notable differences between the issues and the challenges that start ups face no matter where they are located. Sadly, I have though noticed I am giving very different advice in the UK to start ups wanting to obtain support or contracts from government.

In the UK my advice for a start up is to stay well away from Government (any agency of government). In Canada, I would advocate the company to get involved with a government agency as soon as possible. Why the difference?

For cultural reasons, Canadian government staff tend to be of a much higher calibre than the people I have come across with government agencies in London.

The sheer hard work required to win government work in the UK even for relatively small value contracts means that I really think it is a flawed strategy for a start up to try and seek government contracts.

In the UK, I recently looked at pitching for some work which I felt I would be well placed to do but once I looked at the requirements involved in pitching, I decided it simply was not worth the effort to go for it. The risk/reward ratio was skewed against me.

For a start, I would have to partner with another organisation that had at least a £3m turnover. The paperwork required would mean that at least two members of the team would be fully occupied for at least two weeks. And as a business that has not won this type of work before, I felt that the effort was not worth it. Compare this to my Canadian experience.

I came up with an idea to help Canadian companies and after writing a four page proposal for a local government agency, it was accepted and I have started working on this project.

The people I have worked with in Canada seem more commercially aware – they ‘get it’. So, I do find it ironic that in the current climate when the British Government is trying so hard to try and support small businesses and start ups, that they do not start closer to home! They should temporarily lower the high barriers that prevent companies from getting government work. And they should actively discriminate against the same old companies that seem to win most of the big pieces of government work.

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.

“The problem is the world is too pessimistic, and I cant see it getting any better”

Optimism is the lifeblood of entrepreneurialism. It is where our ideas and our energy come from. It is the source of great endeavours from Landing on the moon (40 years ago) to the building of the Channel Tunnel. Optimism is what leads angel investors to invest in start ups knowing that in all likelihood they will, on any one deal, lose all of their money.

When I was in Halifax, I was reminded of a great story that I was told about optimism – and I hope you do not mind me retelling the story.

A businessman owned a great shoe making business. He had two sons and sent them out to an island to examine the possibility of selling shoes to the local population.

After one week of being there, both sons were able to submit their reports. One reported back that there were no opportunities out there “as the population simply does not wear shoes” The other son reported back “the opportunities are enormous as the locals do not wear shoes. There is no other competitor here and we have the whole market to ourselves”.

This is a great story and when ever you go to any foreign market you will always spot great opportunities but you also have to be cautious and ask yourself why the opportunity is not satisfied at the moment.

I remember a famous English based jewelry retailer going into the Dutch market. A bright graduate they had sent out there reported back that the opportunities were enormous. The company set up shop and then in the run up to Christmas, put lots of stock in the Dutch retailer. In January, the company was shocked to discover it had such high levels of stock in its Dutch subsidiary. The reason was simple; the Dutch do not have a tradition of buying jewelry at Christmas! Yet, no one had bothered to check this vital assumption.

Another real example is that of The Sock Shop. The founders had built up a great and fast expanding business in the UK by placing Sock shops in concessions along the London Underground and other busy locations but with cheap rents. The business model worked because they had such low overheads and customers knew they would get good quality and varied socks from this shop. In the move that killed the company, they decided to expand into the USA. They decided that New York was the ideal location (it was) and they decided to rent lots of concessions in the Metro system.

This was in the late 1980s and the company made a fatal flaw in its property policy. No one traded in the Metro system other than drug dealers and no one wanted to be in those shops! The company had to employ security guards in the stores and had to have strict opening hours; the business failed.

The lesson here is that whilst I was in Canada, I spotted many great opportunities and I think it is a great place for any aspiring entrepreneur to be right now (I really do). But you simply must ask yourself the question, “ why has no one else satisfied the need that you have spotted?”

When it comes to foreign markets this becomes more apparent but I am still amazed at how few companies do basic testing in their home market.

Optimism is great – but temper it with some evidence!