Dragons' Den VC Duncan Bannatyne

Anyone who watched this week’s brutal episode of Dragons’ Den may have been surprised to find Theo Paphitis talking about sticking pins in his eyes and Duncan Bannatyne behaving a bit like a spoiled toddler who’d just been handed a carrot instead of a lolly – should business angels adopt the modus operandi of the VCs in Dragons’ Den?

I watched with interest the pitch from entrepreneur Guy Jeremiah who arrived at the Den hoping to secure £100,000 of investment in return for 10% of his plastic bottle business.

The pitch seemed convincing enough to begin with. “Buy into my folding plastic bottles and save all the waste from this other great pile of plastic bottles I’ve brought in”. With investment in eco products now all the rage Mr Jeremiah thought he was onto a surefire winner. Afterall he was offering the dragons the chance to gain a slice of the £multi-billion bottled water industry and save the planet.

What ensued was a study in cringe-worthy TV as the fatal flaws in the entrepreneur’s business plan were ruthlessly exposed by each of the dragons in quick succession. The folding bottles were only going to add to pollution and waste, Duncan Bannatyne felt that they would bulge his pockets spoiling the lines of his suit. Theo Paphitis reacted by saying “aw wanna stick pins in my eyes.”

A visibly enraged Bannatyne added that he re-uses the bottles he buys several times. Not only that he has plenty of room in his “shports bag” where he keeps his “trainarsh” before adding something about public fountains being the best and most environmentally friendly place in the world to get your water. This was only the prelude to him crunching up the bottle and lobbing it in the direction of the crestfallen entrepreneur. Cue camera zooming in on mangled bottle in the far corner of the room and back to Mr Jeremiah who looked as crushed and mangled as his eco bottle RRP £4.99. He probably left the Den feeling like he had the green credentials of a senior BP executive.

But I couldn’t help but wonder while watching whether it is right that when an entrepreneur appears in front of you with a business idea, he should be given a good ear bashing and have his gear thrown at him? We’ve come to expect this kind of behaviour on TV Shows like X-Factor and Celebrity Come Dancing, but it is now filtering into business programmes on BBC 2. The stand before the all knowing judging panel format.

Ok Dragons’ Den is an extreme case, they need to keep viewers interested and what could possibly make better TV than seeing “sophisticated”, sullen faced investors who might kick off any minute for seemingly insignificant reasons and throw wads of cash at people or launch products into the four corners of the room?

Behaviour like this certainly puts the entrepreneur under pressure and if business angels began acting this way – perhaps some already do – then there will need to be a rebranding exercise. But it might be useful to have a less extreme sense of this fear factor in place during negotiations. When the entrepreneur’s pitch is done and the questions begin, it might be useful for the business angel to take a less friendly approach, put the entrepreneur under pressure and extract anything that might be misleading in a pitch.

This year the TV Dragons reflect a more conservative attitude that is pervading the VC investment sector and filtering down into the angel sector at the moment. We know that VCs are investing less in seed stage businesses than they were, so they are even less likely to fall for the sales patter in an unconvincing pitch.

In this climate entrepreneurs will need to try harder to convince potential investors of their credentials and demonstrate the bottom line – that their business idea can and does make money. Business angels will also need to play their part and encourage entrepreneurs to develop or improve on their ideas, some of which may turn out to be a genuine attempt to solve an everyday problem in a new way.

Caution isn’t a bad thing, it helps us avoid costly errors, but it can also lead to missed opportunities. Perhaps those plastic bottles so ruthlessly cast aside by Mr Bannatyne will go on to make millions more than the £700 they’ve made so far. Perhaps we might see Duncan lose it altogether in a future episode.  It will be interesting to find out.   

The global financial crisis and the resulting recession made a deep impact on seed funding

New venture funding is the lowest it’s been for a decade according to Nesta’s July report; Venture Capital Now and After the Dotcom Crash and that’s not all…

The BBAA’s glittering annual awards dinner and conference took place last Wednesday providing an  opportunity for business angels to meet up and share their experiences over the past 12 months. I wonder how many of those attending had read Nesta’s report on VC funding. Ok so we haven’t really witnessed the end of seed stage funding, but there has certainly been a huge decline.

The findings of this latest report which follows Nesta’s business angel report last year will likely have provided a sobering topic of conversation. What is interesting about this latest report is that it takes us back to the Dot Com crash of 2000 and compares it with 2009. It makes three alarming conclusions :

•    Fundraising in 2009 is the lowest in the past decade.
•    The situation now would be far worse without public funding.
•    It is taking longer for investors to see returns on their investment.

You could say this is all about VC investments and not really indicative of the likely performance of investments made by business angels. You might also think that it is understandable given the scale of the financial crisis and a deep global recession that there would be a temporary loss of appetite for risk – considering the millions rather than thousands VCs tend to invest.

But this report suggests something more than a temporary blip. It highlights a longer term decline in the performance of VC investments made in the past decade. It is worth remembering that 2009 was the start of recovery when most countries were beginning to move out of recession. Yet fundraising was also lower than it was in the last recession.

What is also alarming is that it was investment in seed and start-ups which suffered most between 2007-2009 dropping by 58 per cent. And this is an area that would be of concern angel investors who use their own money to help those early stage businesses.

Looking at these figures there appears to have been a marked loss of confidence amongst VCs and a dramatically reduced appetite for the risks involved in early-stage investing. So will business angels be filling in those funding gaps? Possibly, but rather than dive in and exploit all those growth businesses the VCs are missing out on it might be worth finding out why VCs have seemingly abandoned seed stage businesses.

Correct me if I’m wrong but I’m guessing the biggest reason lies in the time taken to exit. I recently read with interest a blog which talked about angels finally getting in on the act with all those seed stage businesses, however it won’t be a simple as a VCs out, business angels in scenario.

Owners of those businesses shouldn’t get their hopes up. The reason VCs are pulling out of investing in seed stage businesses is down to the time it takes to exit. Typically the patient investor would want to see a nice return on their cash and an exit in three or four years.

What this report tells us is that exit is more than likely going to come in seven years or more. Seven years is far too long. While not all exits will take this long, clearly there will need to be a considerable commitment. The landscape appears to have changed dramatically in the 10 years since 2000 when it took on average three years less to exit a company in the UK.

More worrying still is that the report says there is greater uncertainty now about the time taken to exit and there are likely to be more funding rounds now before flotation than ever before.  So more money is being pumped in than ever before and it takes longer to get your money back out again, if you make any at all and that is far from guaranteed according to last year’s report. This doesn’t sound attractive. The impact on those promising growth companies that should be helping to boost economies should also be considered.

On this evidence things can only get better and at that glittering awards ceremony in Manchester there was much to celebrate, but this latest report from Nesta certainly provides some food for thought.

However the Index also reveals that the total number of venture capital investments in both North America and Europe has declined, which provides further evidence that confidence has yet to fully return to the sector following  the recession. In North America there has been a decline in both total number and total amount of tech investment in Q2 2010.

In Europe after an encouraging start to 2010, the amount of venture capital in Europe has continued to grow into the second quarter of the year, with the total amount invested in European companies rising from US$632m in quarter one 2010 to $740m in quarter two. However the total number of investments has continued to decline, falling from 178 in quarter one to 144 in quarter two. In terms of the total number of North American investments, these fell from 496 in Q1 2010 to 333 in the second quarter.

The Cleantech sector has shown good growth, with solar demonstrating a resurgence, as well as there being a large number of follow on rounds. The relative inactivity of Europe’s VCs seems to have offered opportunity for US based funds to make some interesting investments into some of the region’s top-rated start-ups including a $10m round for Huddle.net led by Matrix Partners, and a $7m round into Criteo led by Bessemer Venture Partners.

Commenting on the findings Philip Boyd, Partner at Calibre One London, said, “As the venture capital industry recovers, we’re seeing a new optimism emerge led initially in the US and now filtering through to the European market as well. VCs are still being cautious with their investments but optimism is growing. As a business we are seeing an increase in US companies expanding into Europe, and European businesses looking to strengthen their domestic management teams and expand internationally. ”

The deal is intended to boost  links between high growth companies, investors and research organisations in Oxfordshire. The Harwell Science and Innovation Campus is being developed into one of the world’s leading locations for scientific, academic and business collaboration through a joint venture between global property group Goodman, the United Kingdom Atomic Energy Authority and the Science & Technology Facilities Council (one of the UK’s seven research councils). The campus is home to over 100 science and technology companies as well as the Diamond Light Source, the UK’s national synchrotron science facility.

The sponsorship deal will see the Harwell Science and Innovation Campus provide support for the OION Network, which helps technology companies secure funding from £200,000 to £2 million, and its sister network, Oxford Early Investments (OEI), whose remit is early stage companies requiring proof of concept funding from £25,000 to £250,000.

Belfast-based SOPHIA Search Limited a technology company focused on enterprise search and unstructured content management has secured funding of £800k ($1.2M), the largest ever angel investment made in Northern Ireland. The funding will be used to assist the company with expansion into the USA. The company has appointed a safe pair of hands in Dr. Chris Horn who is regarded as one of the most successful technology entrepreneurs in Ireland and formerly of IONA Technologies PLC as chairman.

SOPHIA has developed advanced search technology which helps businesses to internally search for quality information much more quickly and accurately. There are many applications for the technology with significant global markets. Initial products have been released that assist in researching information, cross-referencing and reducing the duplication of data. Funding recieved by the company included a significant contribution from a newly formed Belfast based Angel syndicate – ‘Volcano’. SOPHIA Search’s clients include IBM and Accelrys.

My-Wardrobe is British company that sells “accessible” fashion labels such as Ralph Lauren and Mulberry via its website. The company hopes that the money can be used to help push its expansion into Europe. the clothing retail sector has come under pressure in the past two years but this particular group of investors clearly believe that the clothing business has the potential to make them a good return judging by the size of their investment.

Eileen has held senior leadership roles at Yahoo!, Skype, PalmSource, Openwave, Sun Microsystems, Apple and Verizon Wireless. She is currently involved in establishing White Bear Yard in London for technology innovation and startups, Eileen is also an advisor to Ambient Sound Investments.

What made you decide to become a business angel?
After Skype I teamed up to work with the founding engineers again, who had set up a small early stage venture fund, Ambient Sound Investments (www.asi.ee), and through the course of evaluating potential investments for them I realised there were certain projects or teams that I wanted to personally support – even if ASI elected not to.  It’s a habit or tendency I’ve been trying to break ever since…!

What do you look for in a business you decide to invest in?
The most important facets of a business I would invest in are its founding team – and the people behind it, starting it and/or also supporting it.  I think life is too short – and there are too many interesting projects out there – to spend one’s time with people who don’t somehow enhance your working/general life and day to day interactions.

How important has your expertise in technology been in helping you choose the right businesses?
I believe that it’s been helpful, but you never do know what you don’t know, so I may actually not have as much expertise as I’d like to think!  I feel that it helps the most in being able to relate to technology founders and in assessing the challenges and decision points in building and growing an early-stage technology business.  By the same token, I try to only evaluate businesses in which I have some basic level of understanding, so for example I would stay away from robotics or artificial intelligence, genomes or an area in which I had no understanding.

Should anyone who hopes to invest in this area have the right technical knowledge to help them make the right decision?
I believe it helps, but with early-stage investment decisions, one’s gut and intuition is often what makes the final call.  So whatever data points will help to influence that are always helpful.  Perhaps sometimes the people (and existing support around those people/team) are enough.

What do you think will be the next big thing in Internet technology?
If I knew that I’d be strictly focused on that – and not investing in or working on anything else!  That said, I don’t know what I feel will bring the biggest change from a “technology point of view”, but I think a lot of opportunities lie in how the technology will be applied, consumed or impact on existing commercial models and products/services.

Is now a good time to start a business in the UK?
I think it’s always a good time to start a business, but particularly now as there is a talent pool established and some tastes of success to whet entrepreneurs, employees and investors’ appetites.

According to the British Business Angels Association only 5% of business angels in the UK are women, why do you think the numbers are so low?
I couldn’t really say and have wondered the same thing myself, but at the same time I feel it’s important to take this statistic into context with the larger business world.  So for example, as I understand it, only 3% of FTSE 100 companies are run by women.  If that’s the case, perhaps the fact that 5% of business angels are female is a positive sign.  Women’s participation/involvement in business (either as employees/team members, executive leaders, directors, advisors or investors) in general needs to be considered – and once that grows, so will the proportion of business angels I’m sure.

What advice would you give to other women looking to get involved in angel investing?
Please go ahead and get started, and feel free to contact me if you want any encouragement or suggestions on where or how!

http://www.linkedin.com/in/eileenburbidge, Twitter handle @eileentso

White Bear Yard website: http://whitebearyard.com

Joelle Frijters CEO of Improve Digital

Online advertising revenue specialist, Improve Digital, has announced that it has been accepted to join Astia a global network that has served high growth start-ups led by women since 1999.

Astia’s Global Advisor Network, which includes more than 100 former and current CEOs and 125 investors, will provide Improve Digital with increased access to funding and commercial expertise to sustain and accelerate its business growth.

Not-for profit organisation Astia is a global network of over 750 experts whose goal is to ensure the success of women-led high-growth start-ups, primarily in the high tech, clean tech and life science sectors.

Improve Digital was founded in 2008 by Joelle Frijters and Janneke Niessen and was created to meet the needs of online publishers looking for additional ways to generate revenue from their advertising inventory, whilst protecting their brand image, audience and premium income stream. The company has its  headquarters in Amsterdam, but has  has since opened in London, Hamburg and Paris.

Since 2003, more than 60 percent of the companies who have presented at the Astia Investor Forums have achieved funding or an exit within one year. In the same period 19 companies have exited, two of them as IPOs.

NVIDIA has announced announced that its third annual Emerging Companies Summit (ECS 2010) will showcase the world’s most inventive start-up companies who use graphics processing units (GPUs).

The summit — a key part of NVIDIA’s GPU Technology Conference (GTC) — is a unique forum for startups to showcase innovative applications and technologies that leverage GPU to solve visual and high-performance computing challenges.

ECS 2010 will be held Sept. 21-23 in San Jose, California. It follows two previous ECS shows which successfully brought together entrepreneurs with those who fund their ventures. In 2009, ECS featured presentations by 60 emerging companies from 15 different countries.

In addition to start-up presentations, ECS 2010 will feature a series of panel discussions. There will also be a “fireside chat” with Jen-Hsun Huang, NVIDIA’s president and CEO, to be moderated by Quentin Hardy, national editor at Forbes magazine.

A new feature of ECS 2010, “CEO on Stage,” includes the heads of a select group of start-ups. CEOs will each introduce their companies and interact with a panel of industry analysts, investors and technology leaders. These companies will be selected by an advisory committee. The deadline for applications is Aug. 1, and Interested companies can submit their proposals at the GTC 2010 Submissions site. www.nvidia.com/gtc.

CGT rise will put the squeeze on business angels

It’s the day after one of the most eagerly anticipated, or should that be dreaded? Budgets of recent times. Budgets are becoming like buses, normally you wait ages for one and suddenly two come along in just a few months.

There was little in the last one to encourage business angels or entrepreneurs in the UK, but in this latest emergency Budget the Chancellor has gone out of his way to show that Britain may be weighed down by a mammoth budget deficit to reduce, but it is still open for business. Or is it?

Business groups on the whole have welcomed some of the measures introduced to help entrepreneurs and owners of SMEs. The 1 per cent cut to companies’ tax the new £5 million threshold for entrepreneurs’ relief on CGT have been applauded as have measures to reduce National Insurance liabilities.

This all sounds too good to be true, is Mr Osborne really giving a leg up to entrepreneurs so that they can get Britain back on the road to recovery and avoid the possibility of a double dip recession in the UK?

Perhaps, but as with all Budgets, it depends how you look at it. Sure all the headline grabbing measures will show that enterprise is being encouraged. It is also worth noting that entrepreneurs can now claim Capital Gains Tax relief on up to £5m worth of business sales in a lifetime – this is up from £2m in March.

To help fast growing SMEs starved of growth funding the government plans to introduce a new Enterprise Capital Growth Fund to provide a £37.5 million boost of equity finance to SMEs. The Enterprise Finance Guarantee is also being increased by £200 million to support additional lending of up to £700 million to for small businesses until the end of March 2011.

All this funding is great if you are a growing business and able to gain access to it, but as we have seen in the past 12-months start-ups are struggling to secure funding from banks. But the banks have been holding onto their purse strings, which means start-ups have had to turn to business angels for help. The problem is that again there is little in the budget to encourage business angels.

The sharp rise in Capital Gains Tax from 18% to 28% is likely to discourage rather than encourage investment in the UK. Despite the headline ‘good news’ the entrepreneurs relief doesn’t cover all of those involved in the investment chain. Those business angels who are affected by this hike in CGT are likely to decide that the risks outweigh the rewards when it comes to investing at seed stage. This would cut off the vital supply of capital needed by those start-up businesses who can’t secure funding elsewhere, stifling innovation in the process.

Britain had the lower CGT rate (18%) than most other countries, until last night just behind Brazil (15%) and the US (15%). According to a table compiled by Ernst and Young, Britain has now dropped from 7th to 15th with a higher CGT rate than China’s 22%.

Britain’s slide down the scale of competitiveness with these other countries is a concern, and could make it more attractive to invest abroad where the rates are more attractive.

It could have been worse. The worse case scenario of a rise to 40% and without the measures introduced in the Budget to help entrepreneurs would have dealt a heavy blow to hopes of recovery. Everyone in the UK knows that payback time has come, but time will tell if business angels will still be willing to take a risk on early stage growth businesses. The incentives should have been spread more evenly between entrepreneurs and those other links in the investment chain.