Your country needs you: more British angel investors urgently required

May 27, 2011

Rich guy in his castle hoarding all his money!

I’ve been working on raising a seed round for my startup, Teamly, and it’s become really clear to me from my experiences and from speaking  to other entrepreneurs that the UK really lacks a culture of seed investing and this is starving potentially great companies from creating jobs and wealth. There’s no shortage of schemes to encourage and accelerate entrepreneurship, but what’s being done to get more people to get involved in angel investing here?

There’s dozens of campaigns, competitions, online resources and organisations all geared towards encouraging and supporting entrepreneurship. A handful of the more notable ones: StartupBritain, BusinessZoneBusiness Link / Business Gateway, Global Entrepreneurship Week, If We Can You Can, Entrepreneurs Forum, Smarta, Prince’s Trust / PSYBTSmallBusiness.co.uk, The National Enterprise AcademyStartups.co.uk, Shell Livewire, Entrepreneurs Business Academy, School for Startups and [LondonEntrepreneurial Exchange

But what exists to encourage angel investing? Should we be encouraging people to set up businesses when there is a lack of capital to help nurture and develop these new businesses?

Perhaps you’re an individual of high net worth and you’ve heard about the excellent Enterprise Investment Scheme (EIS) tax breaks, if you went on to the HMRC website you wouldn’t exactly feel inspired. Even if you manage to find the official British Business Angels Association you will find just a one page introduction to angel investing. Come on guys, you can do better!

I have an example of the type of person we should be encouraging to angel invest: he is the founder of a very successful online retailer who recently exited for multi-millions to a publicly listed company. After 15 years of hard work this entrepreneur has bought a million pound house in the countryside and is sitting on the rest of his money while he relaxes. This is someone who has valuable domain expertise, and could really play a part in funding and advising the next generation but has opted out from that. This wouldn’t happen in silicon valley, where money is far more likely to be recycled, and a new generation of entrepreneurs and businesses are created with help from the advice and money of those who have gone before. I know there are countless other examples of successful entrepreneurs that somehow get into angel investing. It’s definitely a virtuous circle, if you received angel funding you’re more likely to subsequently become an angel.

It’s not just that we need more capital in the system to seed companies, but we need better quality angels as well. One unintended consequence of the EIS scheme is that it perhaps encourages those who aren’t really cut out to be an angel to look at it as an alternative to a deposit account. Dragons’ Den is perhaps a double-edged sword, while it definitely raises the profile of angel investing and entrepreneurship I cringe at the thought of the imitators across the country trying to be all hard nosed and dragon-like. (I met one such individual… shudder… not a fun meeting).

The existing angels we do have are also spoiled for choice because they are getting the opportunity to invest for equity on deals which ought to be funded by bank debt. This is down to our non-functioning banks who won’t lend even to established businesses with proven track-records. If you are an angel, with limited resources (money) and limited capacity (time) for doing deals, which would you rather go for? The seed stage startup doing something new and innovative which could be huge, but so far hasn’t delivered any revenue, or the long established company in a traditional sector you understand which just needs some additional capital to generate more revenue and profits?

What about VCs, are they seed funding startups? According to BVCA figures quoted in Management Today, funding for startups declined from £125m in 2009 to just £46m in 2010. This is another area where our friends in silicon valley do much better as there are far more VCs doing seed deals, and some that specialise in only these type of deals. The underinvestment in seed stages though makes it less likely the VCs will find those juicy later stage deals, because less companies will get to that stage without an influx of early capital. Without an infusion of capital early on many great companies are dying before they’ve even had a chance.

What needs to happen:

1. We need to raise the profile of angel investing and share best practice.

2. We need to encourage more “smart” angel investors to enter the system.

3. We need to encourage newer investors and other sources of “dumb” money to invest alongside “smart” money so that the money goes further and can help more startups. 

4. We need to ensure the banks lend to the businesses that are bankable so that angel’s risk capital can be freed up for the deals it ought to be funding.

5. We need to encourage more VCs like Passion Capital to be set up and invest at earlier stages.

But who can make any of this happen? Fortunately this Government is listening and responding to matters involving the economy and job creation. Last night at an event organised by SkillsMatters I put some of these suggestions to Eric van der Kleij, the head of Number Ten’s new Tech City Investment Organisation and I was delighted with his positive response: He genuinely loved the idea to encourage more angel investing and said it’s going to the “top of the list”, and seemingly reading my mind said “there must be a TV show in this!”

Do you have an idea for how we can encourage this new wave of seed investing in promising UK startups?

Please contribute in the comments!

Here’s 3 ideas of mine to get the ball rolling:

1. Reach out to high net-worth individuals you know and ask them to consider angel investing.

2. Encourage smart, experienced angels to register on AngelList.

3. Start an angel syndicate (Eric called out for someone to create the Tech City Angels – great idea!).


How to measure product/market fit and the implication for external finance

October 31, 2009

The Startup Pyramid

Earlier this week I attended one of many excellent talks organised by the Informatics Ventures and Edinburgh University Entrepreneurship Club. This week’s talk was by Sean Ellis of 12in6. Sean has worked in marketing roles at web companies LogMeIn, Xobni and Dropbox; amongst others. He is known for his metrics driven approach to customer development and in this talk he shared with us how you evaluate whether or not you’re at that critical moment in a startup’s life: product/market fit. I want to share with you the implication this moment has on raising and spending capital. I have seen that too many startups are obsessed with raising finance, but don’t appreciate the negative cost of this if taken at the wrong stage.

Although it was made famous by Marc Andreesen, I believe it was Andy Rachleff, co-founder of Benchmark Capital who coined the phrase product/market fit.

Product/market fit is being able to satisfy a good market with a good product.

But how do you determine you are there? According to Sean the key question to ask users is “how would you feel it you could no longer use our product?” If you achieve product/market fit you are looking for greater than 40% of respondents answering “very disappointed” to this question.  If less than that you need to keep working on your product until you have something people really need. Sean’s made available a free survey tool and all the necessary questions pre-populated at Survey.io; if you have a product right now and you’re not sure where you are then start with this.

If you have P/M Fit you probably know it already; the sales are already piling up, the phones are ringing and there is press interest in your product. If you don’t know you are there yet then you’re probably not there yet. Assuming you’re not there and still struggling then a way to measure it will help you get there (and stop you from kidding yourself that things are going well).

Assuming you hit the jackpot and achieve over the 40% benchmark what comes next? Life after product/market fit is very different. It becomes all about the race to scale up; if you have found a successful formula speed is critical and you must go for growth and make the most of your advantage. Before product/market fit you focused on conserving cash, but now you need to change your mindset, you want to spend, spend, spend; assuming you can demonstrate the return. This is where Sean’s metrics driven approach to marketing pays off: relentlessly measure and optimise for ever greater conversion rates. Simply put, spend more on the areas that deliver the biggest ROI.

Spending money is only possible if you have it to spend, so you don’t want to get to this stage and discover you have a fantastic product, loved by the market but due to a lack of cash you cannot scale up and take advantage of your fortunate position. It is at the crucial point of P/M Fit where external capital comes in very handy, and it’s also the point VCs get interested as you have removed a lot of the risk and guesswork by proving you’ve got a valuable product. Luckily as you can demonstrate you have P/M Fit it’s also cheaper for you to fund raise at this time.

Much of success in business is about timing and external capital acts as a magnifier; it magnifies all the good and bad things in your business. I would caution that if you are not at P/M Fit you probably are not ready for that injection of steroids.

Matt Mullenweg, founder of WordPress explains it by likening VC finance to rocket fuel, put it in your car and it will do one of two things: it makes you go very fast or it makes explode. The magnification effect of VC finance acts on all aspects of your business good and bad. Once you have P/M Fit that is the right time to be going fast, before then you want to extend the time it takes till you fail, not speed it up.

The point of all this is… raising money is not what matters, focus instead on building a good product and getting early traction with sales.


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