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!).


Angel investing in Silicon Valley

November 4, 2009

silicon valley mapAs part of Edinburgh University’s continuing Silicon Valley Speaker Series, supported and organised by Informatics Ventures and the Entrepreneur Club, Jim Papp gave a talk tonight entitled “Angel Investing in Silicon Valley today”. This followed on nicely from last week’s talk by Sean Ellis on how to gauge whether you have product/market fit. Assuming you do then you need to get some angel money to get things moving!

Jim Papp is the CEO of Podaddies, an angel funded online video advertising company, and he is an active angel investor in high tech companies. He is a member of the Band of Angels where he has served on the deal screening committee and has made about a half dozen investments in start-ups in the past several years with a focus on software and internet services, medical devices, and wireless technologies.

Jim started by giving a brief history of Silicon Valley, mentioning that although HP was founded in 1937 in a garage in Palo Alto it wasn’t until 1956 the first “silicon” business started in the valley. In 1968 Intel was founded, and in 1976, the same year I was born, so too was Apple in Steve Jobs’ garage in Los Altos.

The first angel group, the Band of Angels, was formed in 1994. Since then Angel groups have flourished world-wide, including Scotland. Of all the angel groups operating in the USA, 82% of them report making investments into software companies and 48% into telecoms companies. However, they do invest in a range of different industries but the failure rate is consistent, it doesn’t vary from industry-to-industry. More detailed facts and statistics available here.

ROI

  • 52% of angel deals return nothing, or less than the initial amount invested
  • 32% return between 1 and 5 times the original amount invested
  • 15% Return greater than 5 times the amount invested

It’s for that reason that angels and VCs look for outsize returns, usually a minimum of 10 times amount invested; simply put, there are a lot of duds that need to be paid for.

The record year for investments by VCs was, unsurprisingly 2000, when an enormous $100Bn was invested. In a telling sign of that overheated period the average amount invested per deal increased significantly. In most years before or after 2000 the average amount invested has been between $20 or $30Bn. Sadly, 2009 has been significantly lower than this amount and shows there is still some way to go before confidence and level of investment returns to normality.

I asked Jim to explain why Silicon Valley still has an advantage for technology startups and he replied by quoting the famous crook who, when asked, “Why do you rob banks?”, sensibly responded, “Because that’s where the money is”. Out of all the VC money invested in the US, 38% is invested into Silicon Valley. As angels and VCs the world over tend to stick to their local area for investing, mainly out of practicality, startups continue to arrive. The odds are stacked against you though. Out of perhaps 70 pitches a month submitted to the Band of Angels, only 3 will get in front of the entire angel group, and only one of these will get funded.

The talk concluded with a summary of what investors look for in their investees:

  • Something that solves a big or complex problem
  • Something unique; a competitive advantage
  • Large and growing market for your product or service
  • Great team
  • Capital efficient and scalable
  • Exit strategy


Find out about the upcoming events in the Silicon Valley Speaker Series, including Alexis Ohanian, founder, Reddit. (I saw Alexis speaking a few weeks ago at MIT and I can definitely recommend attending to hear him!)


First hand: the wisdom of Warren Buffett

October 27, 2009

Photo Credit: *Jimmy

The BBC aired an informative and entertaining profile tonight of Warren Buffett, “The World’s Greatest Money Maker: Evan Davis meets Warren Buffett“, hopefully spreading his name to more Brits; the average person here has no idea who he is, despite him being wealthier than the GDP of half the World’s countries and usually coming top of the World’s rich list! When I met Evan Davis he mentioned that he had just 5 minutes with Buffett, but that’s not stopped him presenting a thorough profile and insight by combining research and interviews with others close to Buffett, including with Bill Gates.

Evan describes Buffett by saying:

“He really is different to the other super-rich… uniquely clever, funny and generous”.

This is the man that’s lived in the same house for the last 50 years, (currently worth around $700,000), on a regular street in Omaha in America’s mid-west and drives a beat up old car with the licence plate “THRIFTY”. I’ve been to the Berkshire Hathaway annual shareholder meeting for the past two years, met both Warren Buffett and Bill Gates in the process and learnt a lot from the wisdom of Warren Buffett by reading his shareholder letters and attending the day-long Q&A at the gigantic stadium where the AGM is held.

Questions from the audience of around 30,000 attending what has become known as “Woodstock for capitalists” cover a wide range of topics including business, religion, the environment and tips for a successful life. Buffett is always interesting and frequently entertaining. The fellow attendees are all delighted to be there and I have met some wonderfully friendly Nebraskans who are all delighted at the influx of visitors in this weekend, the highlight of the Omaha calendar. If you are at all interested in business or investing I do recommend going at least once to this unique event. (See “how to attend” at the bottom of this article).

Buffett’s approach to investing in businesses is first and foremost about investing in things he understands, “stay within your circle of competence” and these guidelines:

  • Businesses with a durable competitive advantage through a strong brand (protective moat)
  • Management integrity, passion for the business and talent (doing business with people he likes, trusts and admires)
  • Paying a sensible price for the business

At this year’s meeting he brought up that he doesn’t have either a calculator or a computer on his desk, quite simply, “if the calculation needs so much accuracy that you need to use a computer, then don’t invest”; it should be obvious whether a company is worth investing in or not. He further explained, the key to successful investing is strong emotional stability, not skill or high IQ; in fact it’s dangerous to be too smart! An IQ of 120 is just fine; anything above that and you’re too clever for your own good.

For more lessons on life, business and investing a great free starting point is the website of Berkshire Hathaway where you can download all the annual shareholder letters.

My favourite Buffett quotes:

“Price is what you pay, value is what you get.”

“Time is the friend of the wonderful company, the enemy of the mediocre.”

“It’s better to hang out with people better than you. Pick the associates whose behaviour is better than yours and you’ll drift in that direction.”

“It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

“There seems to be some perverse human characteristic that likes to make easy things difficult.”

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

“Only when the tide goes out do you discover who’s been swimming naked.”

“If you let yourself be undisciplined on the small things, you will probably be undisciplined on the large things as well.”

“The smarter side to take in a bidding war is often the losing side.”

“No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”

“When proper temperament joins with proper intellectual framework, then you get rational behaviour.”

“Success is having people love you that you want to have love you.”

Charlie Munger is equally as erudite, but somewhat taciturn:

“Acquire worldly wisdom and adjust your behaviour accordingly. If your new behaviour gives you a little temporary unpopularity with your peer group…. then to hell with them.”

“I sometimes tell my friends, I’m doing the best I can. But I’ve never grown old before, I’m doing it for the first time and I’m not sure I’ll do it right.”

How to attend the Berkshire Hathaway annual shareholder meeting:

Anyone can attend by one of two routes that I know of:

1. Becoming a shareholder in Berkshire Hathaway
2. If you are in business for yourself attend the Entrepreneurs’ Organization event which is held to coincide with the shareholder meeting. This year it included a behind the scenes tour at one of Berkshire’s businesses, the Nebraska Furniture Mart and a talk by Bob Prosen.


Richard Farleigh – the chess playing dragon

September 20, 2009

Earlier this week I saw Richard Farleigh, one of the previous stars of Dragons’ Den, speaking at Clydebank College and giving a brief run down of his life,  approach to investments and some of his successes and failures. His talk was memorable for his simple insights, not just because of the rather incongruous sight of a tanned Australian in this run down part of the West of Scotland!

Farleigh had a troubled childhood, taken into foster care at a young age – he was from a huge family and from a very tough sheepshearing background. Luckily Richard is really, really smart – and became a chess champion as a teenager. His first insight – unlike in chess, where you can play all the right moves and never lose, in business, you can still lose even if you do everything right. There is an element of randomness. That’s why it can be dangerous to listen to every successful and prominent entrepreneur – what worked for Richard Branson isn’t going to work for everyone else. And as another former Dragon, Doug Richard pointed out to me, survivor bias makes sure you don’t get to hear from those who tread the same path but failed.

So, as someone with over 70 investments how does Farleigh assess the winners from the losers?

First he looks for the essence of the business and tries to boil it down to the simplest concept, or equation. By saying that is what he is looking for suggests to me that a lot of businesses who approach him for financial backing are not able to communicate that to him. How many times have you seen people on Dragons’ Den who simply cannot explain what their product or service even is, never mind explain what the business model is and the likely return on investment?

Farleigh’s second investing rule is that a quality management team is more important than the product. The best product will fail with weak management, and a strong management can make almost anything work. After cutting his teeth in angel investing and building up his experience Farleigh changed from backing products to backing people.

The attributes he’s looking for in people: drive, passion, nous and commitment.

Finally, back to the metaphor with board games, he accepts that due to that degree of randomness he simply doesn’t get it right all the time.

If you want to know more about Richard Farleigh’s approach, his book, Taming the Lion has 100 investing secrets. More info at www.farleigh.com


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