Archaeologists have just discovered a small fleet of 18 m boats just off the coast from Rome, Italy.

The boats date from 5th top 7th century BC and were full of cargo – wine, olive oil, garum (a favourite Italian fish sauce).  The trade – probably between Spain and the nascent Roman empire, is an indication of business risk and investment 2,500 years ago.

In addition, the number of boats found, suggests that a fleet sailed in convey and that in turn, this suggests that the trade route was a regular one, with well known ports and middle men ready to buy and sell the goods at both ends of the trip.

So, were these the ancient business angels?

Perhaps not.

The trading activity, although ancient, was mainly an entrepreneurial activity, ie. individual merchants risking their own life, limb and cash to sail their own boats and purchase their own goods (often sleeping on them at night). There might have been a family or series of friends who supported the venture, but this could not really be called business angel investing as it remained an informal structure.

Instead, the first business angels began to appear once a trading company was formed. This trading institute was set up apart from the national government to purchase and provision boats for long voyages. Nearly always, it would obtain a royal charter – an exclusive right or monopoly – to trade certain products.

A trip to the spice islands, around cape of Africa, might take 18 months, including a number of trading legs along the way, and deliver a profit of 500%.

The sailors – many of whom did not return, along with lost boats – took a share in the profits or were allowed to trade their own goods on the ship, in return for their risk and effort. They were rarely, please note, paid salaries.

The returns, in some cases, were fabulous, which encouraged further investment and better institutions.

These informal coalitions gave birth to the major corporations – the Dutch East Indies Company and the English East Indies Company in 1604 and 1602 respectively.

The major difference between these two institution was the role of capital. In the case of the English, the capital was initially lent to fund a single voyage after which everything was sold (including boats and sailors released) and profits taken.

The Dutch, on the other hand, had a remarkable commitment to leave their money in the company to allow profits to be reinvested in future voyages and conquests with investors receiving a steady dividend.

The Dutch company therefore, took on features that we would recognise in a global publicly listed company today. Where as the English company, in its first instance, was a narrowly defined business angel investment – with a time horizon of between 18 and 24 months.

Both trading companies went on to become major corporations in their own way and sporned many competitors, however, they are both early examples of individuals financing a company in a formalised fashion, and so, is the best example of where business angel or VC funding began.

And, given the recent report from Nesta about 7 years to realise a return on investment for successful angel investments, funding a highly risky 18 month voyage doesn’t seem so risky after all (that is, so long as you didn’t have to crew a boat).

It is also worth noting that each company obtained its charter or monopoly prior to the voyage begining and no doubt planning the voyage would have been a one to two year activity.

In today’s world, the monopoly or patent or intellectual property (IP) is just as important. But how many entrepreneurs know that business angels want to see the IP before they commitment to invest?

Looking for a business angel network in the UK? Well, look no further, that the

If you are providing services to business angels, please feel free to click here to add your free business angel lisiting too if you have a suitable service. Each entry will be reviewed and added if appropriate.

There is a tendency among entrepreneurs to chase money wherever they find it. The pressure to find the financial resources so necessary to build a business can be over-mastering. Most of the time the partnerships which form between founders and angel investors are productive but, in a few cases, I have seen it turn very destructive. Companies that should have realized success have been held back by investor partnerships that have severely limited their potential or, in some cases, doomed them to failure.

Look Beyond the Checkbook

It may be hard to be discriminating when you are in the heat of the ‘money hunt’ but the sins of omission you commit while chasing investors can return ten-fold to destroy any chance of success. The problem can become acute because of the incredible range of circumstances, experience and interests that angel investors bring to the table. Their having money to invest is not enough. You need to understand their basic motivations and what is driving them to act as an angel investor. You also need to understand that all investment money is not the same. Some money will help you succeed while other investments will be a poisoned pill that will reduce your chances of building the business you envision. Here are some ‘sacred cows’ that you need to slaughter:

• Angel investors are in it for a return on their investment: Well, how can you argue with that? You would assume that the primary driver is always a return on investment. But, as you will read further on, that is not always the case. I know angel investors who are simply bored and looking for something to do and others who are frustrated CEO-wannabees. For some investors, it is all about a return but for others the return is secondary. You need to sort these two groups out. Do not listen just to what they say; it is what they do that is important.
• They have money so they must be smart: This is another fallacy. Some of the dumbest and most self-destructive people I have ever met are wealthy. I have found only a weak correlation between wealth and intelligence and a slimmer one between wealth and wisdom. Many a destructive hubris has been built on a fat bank account. Investors have an important role in start-ups but pretense, omnipotence or omniscience can warp an investor’s understanding of that role. Smart investors play their part in a highly professional and constructive manner. Seek them out; they are most likely the winners you want to associate with.
• They have been successful in business so they will know how we can be: Past success is not always a good indicator of wisdom going forward. In fact, great success can be counter-productive when they decide to work with start-up companies. I know one investor who continually regales his CEOs with stories of how he ran his company. Of course, the company was running over one hundred million annually when these stories took place. The CEOs, wanting to emulate his success, take steps that are entirely premature. The result is wasted resources and a dysfunctional corporate culture. Past business success is not a good indicator of professional performance as an investor. Remember, you are seeking an investor, not a shadow CEO.
• They will become my close personal friends and advisers: Not a good idea; the correct focus of investors should produce a tension in the relationship with management. If you want a friend, buy a dog.

The Bad and the Very Ugly

The problem with writing about angel investors is that they come in an amazing variety. I have met lots of them and there is always something different about each. The ease of entry into the field may have something to do with it. The only real entry requirement is wealth beyond current needs. That’s all it takes to become an angel investor. There are no educational requirements, courses to take or certifications to merit. Only a bank account and a decision to ‘invest’ are required to hang out a shingle and open up for business. Watch out for the following:

• The Shadow CEO: I have met investors who purposefully pick weak or inexperienced CEOs to work with. Their real agenda is to run your company from the back seat. These investors are very intrusive and will push you to make decisions and commit resources that will put your company at risk. They are mostly successful entrepreneurs who have built and sold a business. In the process, they have lost touch with the necessary energy levels and passion that is essential to building a start-up into a going business. Mostly they remember the later stages of their company and the extended staff they had. Then they turn the CEO into a kind of executive assistant and attempt to run the company by proxy. Most of the companies in the portfolio of this type of investor remain very small. They generally have very complex Excel spreadsheet projections and poor records in meeting them. Stay away from the Shadow CEO; they are very dangerous investors.
• The Crazy, Rich Uncle: This is probably the most dangerous type of angel investor because they are so easy on the management team. They are mostly retired and living comfortably. Their mission in life is to ‘give back to the younger generation’. A clear indication of this type is the total lack of performance metrics and a weak statement of expectations. They can be very seductive to entrepreneurs but there is a dark side. Without stiff set of performance metrics, the company can develop a culture of permissiveness. That will feel good until the money runs out. A key indicator of this type is the feeling that the amounts of money involved are, at least initially, not sufficient to cause them concern. The expenditure patterns are not carefully monitored and discussions do not turn serious until the money is spent and the wolves are at the door. As an entrepreneur, you need to seek out investors who will be hard on you; insisting on strict performance metrics and precise definitions of roles. Take the easy way out and you will be in for a ride to nowhere with a crazy, rich uncle. Sure you will enjoy the ride but, in the end, you will be let off the bus in the middle of nowhere with a tarnished reputation for failure.
• The Gaggle: Remember the old saying about a camel being a horse designed by a committee? These gaggles are fond of that kind of engagement. The investments that they make are very often selected in a very casual way and supervised fairly loosely. The problem comes as the group itself is very loosely organized. Different participants might have significantly different understandings of what it mean to be an investor and what that status entitles them to. This can range from complete indifference to total immersion in the management of the company. This situation can result in lots of pulling and pushing of the management team without an overarching strategic vision. Investments should be made based on clear and concise understandings codified in a detailed investment agreement.
• The Bottom Feeders: You will meet some investors who are really only interested in your intellectual property. They ‘drag the bottom’ of the entrepreneurial community looking for weak teams with good ideas. Mostly they insist that their funding be used to develop the technology rather than developing revenues. Once the money runs out, they regretfully inform management that they are closing the company down and taking the intellectual property as compensation for their investment.
• The Lead Broker: I have seen these lead brokers promote themselves into central roles in companies without putting much of any of their own money on the line. The net result is that the bulk of the investor group gets involved without much direct knowledge of the business or the management team. In one case, such a broker put together an investment in excess of one million dollars without making any investment of his own. He still managed a seat on the board and a dominate role in the management of the company. Be particularly careful of the broker who can invest but does not. This situation can turn nasty if expectations are not met. Finger pointing and recriminations can come to dominate the relationships among the investors. This could seriously damage chances of follow-on investments by the group.

The Good

Good angel investors always take a highly professional approach to the process and their portfolio companies. They generally focus in industries that they are familiar with. It is a good idea to avoid angel investors whose portfolio companies do not fit a close pattern. The best angel investors will often forgo the option of claiming a board seat and, instead, insist that an independent board member with professional experience be appointed. Beware of investors who seem to see investment in your company as an opportunity to enhance their reputation by sitting on yet another board. Here are some positive things to look for:

• Success Breeds Success: There are angel investors who have the knack to help their portfolio companies thrive; while others seem to doom them to failure or stagnation. I know of one angel who specializes in little deals and has a well developed ability to keep them that way. Other investors seem to have the opposite skill. Their companies grow and prosper. It is a good idea to do some diligence on the track record of the investor. Go with the successful ones even if the deal terms are less generous.
• The Investment Agreement: There ought to be a detailed investment agreement agreed to before any funds are transferred. This agreement should be very specific when it comes to the roles and responsibilities of each party. The best agreements provide for an earn-in by management based on performance. It also sets the ground rules for further investment. Good angel investors will require this as a matter of course. The worst ones will simply require a term sheet and then write a check. Remember that the absence of planning is the road to failure. Think of the investment agreement as a strategic plan for the relationship.
• Strategic Agreement on Roles and Responsibilities: Good angel investors will insist that the roles and responsibilities for each party be very well understood from the very beginning. These roles will be codified in the investment agreement and specify the actions that each party will be able to take under a range of possible outcomes. Although such an agreement can complicate initial negotiations, it will help greatly when performance does not meet expectations and realignment become necessary.
• Use of Proceeds: I have seen investors write rather large checks without insisting that there be an agreed upon use of proceeds. You can imagine what happened then. Entrepreneurs initially like the freedom to simply take the money and spend it as they see fit. But, more often than not, this leads to waste and spending on things that do not connect directly to the success of the company. One company, upon receiving funds in this way, spent a lot of the money on new laptops and cell phones with expensive service plans. They replaced very serviceable units. Another CEO kept paying his salary, even through results fell far below projections, and failed to pay suppliers. The result was a law suit that is almost certain to shut down the company. It is good business practice for the angel investors to insist on a detailed use of proceeds and for control over the spending of their money.
• Insistence on Performance Metrics: As a CEO you should be insisting on performance metrics for every member of your team. That is just good management. Your investors should take the same approach. It may seem initially easier to deal with angel investors who are very lax about this, but it is far from best practices. I am not just talking about Excel spreadsheet metrics. They have to be much more detailed than that. Good performance metrics detail the responsibilities of each member of the management team and the way their performance will be measured. Everybody from the CEO to the receptionist should have a job description with metrics attached. And the metrics should be sufficiently detailed to drive evaluations based on performance. Performance should be the driver in determining both compensation and earned-in interest in the company. Performance metrics are a sign of a professional and productive organization. Start-ups with that culture have a much higher chance of success.
• Focus on Governance Issues and Oversight: “Who’s minding the store?” If the answer to that question is “nobody but us entrepreneurs”, consider that a red flag. In the short-term, it may feel good to be free from oversight but, in the long-term, you are guaranteed to make more mistakes and waste more opportunities. The board of directors has a very important role to fill in any corporate structure and it is not just making sure that the investors get to a liquidity event as soon as possible. Good governance means overseeing the strategic planning process, dealing with issues of succession, audit and compensation, and providing for the protections and expansion of shareholder value. This fiduciary relationship with the shareholders is an important part of the corporate structure. Without it, management is under no effective supervision and the investment looks more like a roll of the dice than an investment.

Keep This In Mind

An angel investment creates a relationship that will help determine how successful you are going to be. Your skill in crafting that relationship is a test of how dedicated you are to the success of your company and team. If you take the easy way out, your chances of success will drop significantly. If you opt for the limp relationship with an inattentive investor, your prospects will suffer. Angel investors, the good ones, bring much more than money to the table. The good ones have helped their companies succeed and will help you do the same.

© Dr. Earl R. Smith II

~~~~~~~~~~

Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

Various firms have been developing psychometric tests to identify the personality traits of a successful entrepreneur and it turns out, that there is no agreement on whether any of these work.  So what can research tell us?

In fact, funding of research into entrepreneurial issues in the academic world is beginning to dry up – as Durham University have closed their department for entrepreneurial research, partly in response to the failed hope of being able to teach entrepreneurial skills to carefully selected students.

So, if business angels can’t find a common personality trait, what should an investor look for when interviewing cash hungry entrepreneurs?

Well, there appear to be two ideas that can be supported in the accademic research.

Firstly, becoming a highly successful entrepreneur is a process. It takes time and you can make a pretty good judgement – after interviewing – where someone is on their business path. A colleague of mine suggested that a really experienced entrepreneur is someone who has built a business and lost it, built a second and exited with a healthy gain and now is on their third business.

Okay, you can discuss alternative formula – but you get the idea.

Secondly, how the entrepreneur is able to respond to what is going on around him or her is a critical factor that determines if they are likely to succeed. Or perhaps, to put it another way, how do they deal with uncertainty and difficult situations?

This reminds me of the famous story of the criminal who said ‘I had no choice, I became a criminal because my father was a drunk’ and his brother said ‘I had no choice either, I had to succeed’ . The successful brother became CEO of a global business.

So, in summary, you can forget personality and therefore personality testing. Look instead for where the entrepreneur is on the path and then asking searching questions about how they dealt with uncertainty.

So, the good news is that there is evidence of there being a way to systematically identify likely successful entrepreneurs – and also the quality of the team – and your fellow investors – that surround the entrepreneur.

Good luck.

What does your brand stand for?

So, how do you do it….?

Before you do anything else – do your businesses’ websites have a Copyright symbol and a date at the end of every page?

If not, go and request it is done right now!

Copyright is the best and only free way to defend ideas – but it does require the business owner to claim it.

Simply by adding Copyright to a written piece of work, or drawing, or report you can establish rights over the material. If you wish to go further, you can print the work and ask a lawyer to sign it – again, this logs your claim, with a specific date and the signature adds authority to the claim.

Copyright is free and applies worldwide. So, do it now.

Okay, so how do you defend an idea that goes beyond just copyright?

Essentially there are two routes, both of which cost money to set up and maintain

1. Trademark – which is used for brand names, straplines and brand designs; and
2. Patent – which is used for scientific formulea and other similar items

In the UK and Europe it is not possible to patent a business process for instance, although the application of these rules in the USA can be different.

Also, both trademarks and patents are granted for

• a geographical area (eg UK, Europe, Internationally, US etc…)
• a fixed period (typically 10 years)

in addition, trademarks are granted for

• a class of business (there are 45 classes, and your trademark can be registered for one or more of these classes)

So which do you choose? Well, if you have a scientific formula or discovery, then patents – otherwise, all else will be trademark.

Now, here is the interesting thing – you can have a business idea which can be copied (and will be if it is successful) but if your business also generates a strong brand – then the brand can not be copied.

For instance, a high quality sports shirt without any branding might cost £5 (or US$7.50) but put the Adidas brand on the shirt, and the same high quality shirt might cost £25 (or US$37.50).

Can the shirt structure and shape/ form be copied, mostly yes! Can the Adidas brand name – or the 3 stripe logo or use of similar logo designs be copied, no, not at all!

Now, there will inevitably be disputes here – but the point is this. Most businesses are unable to protect their IP other than through trademarks.

Therefore, a business which does not have copyrights nor patents at the heart of its business will therefore need to depend on and defend its brand name and brand design.

Equally, the point for business angel investors is that this requires a fledgling business to think carefully about how it creates and builds its brand name, brand image, brand design and how it uses that brand.

For instance, careful application of a consistent brand will be a key part of proving that this particular use of design belongs to you. Equally, sloppy application of the brand – not adhering to standard colours, shapes or sizes, will make your brand vulnerable to attack.

Hence, for most investments, the real value of the business is the brand - and the premium price that you are able to charge for your product (say a sports shirt) by using that brand consistently.

Lastly, the more widely your brand is used within any class of business, then the more established it becomes and the easier it is to defend.

Therefore, some activities – such as a regular newsletters or magazines (digital and/ or print) will massive increase the number of people that see your brand, and this will play a key part in establishing your unique right to use that brand.

So, to summarise, get your copyright rights for free now. If you can patent, do so – otherwise focus on your brand.

And your brand design and name should be

• clear and distinct
• applied consistently in all the different contexts (print, digital, business cards, letter heads, company vans, product design and packaging etc…)
• used as often as possible

If you follow these rules, then you will not only create a defendable brand, but also a valuable one and your investment will benefit from the effort and expense.

Useful websites

• UK Patent and Trademark Office http://www.ipo.gov.uk
• European Trademark Office http://oami.europa.eu and European Patent Office http://www.epo.org/
• US Trademark and Patent Office http://www.uspto.gov/

=============== Advert=======================
Establishing rights to a brand depends on how many people see
it – so how do you increase your brand visibility without it
costing a fortune? Simple, publish your own magazine under
your business brand name. This is what Media Modo can
do for your investment…
=============== Advert=======================

Warren Buffett on a visit to Kansas University Business School

Have you ever asked yourself what would Warren Buffett do if he were a Business Angel?
 
Well, it might be a bit hard to ask Mr Buffett along to attend our investments seminars, so instead we have attempted to summarise the rules Warren Buffett applies to his investments to see if we can apply that to business angel investing?

Yes, we can. With a few adaptations.

From Buffett’s many rules and ideas our take on his work is that it can be summarised very briefly as follows

• lose no money (nor shareholder value)
• buy franchise business (with pricing power)
• align incentives (between management and shareholders)

 

Lose no Money

means
Buy at fair price (neither too much nor too little). Too much and you’ll never make a return, too little and the sellers (who will probably remain in or retain an interest in the business) will resent your presence and are likely to undermine the financial outcome for everyone. What is a fair price? It has to be based on the likely throw-off of cash (net of capital reinvestment required to maintain the business, its assets and its brand) over the next 20 years. It is difficult to assess early stage business values, but that is no reason not to try and Buffett’s method is as good as any and provides a clear starting place.

There are two tricks when assessing future cashflow returns

1. Firstly, most start-up business plans predict steady growth over years one to three and then exponential profit growth. This just means that future costs are unknown, not that the business is likely to experience 80 or 90% profit margins. Nearly all businesses, especially if they wish to maintain growth, will revert to profit margins at or below 30% of revenue. Many mature businesses will have much lower profit margins but are much more stable and reliable. Therefore, use the industry standard profit margin for future returns and never above 30%.
2. Secondly, most businesses forget that they need to re-invest a given amount of cash into the business simply to maintain its value. A good example is brand advertising, which does not have a direct cash generative benefit, but without it the long term ability of the business to grow revenue will be harmed.

Lose no Money

also means
Don’t speculate - but place your money on sure bets at good prices. However, this is not the environment of the business angel investor – who is in early investment sector. The truth is that the early stage investment market is not a sector that Buffett works in. However, the principle can still be applied – albeit that you accept that you are in a speculative environment. iBusiness Angel has written before on how to reduce the chances of losing your money- and it is important to keep these ideas at the front of your mind before making any investment. So Business Angels need to consider reducing the risk of a loss whilst Buffett can focus on ‘Lose no Money’.

Lose no Money

also means
Invest in businesses that you understand. That means that if your knowledge is based on retail businesses, don’t invest in a tech start up, unless it has specific application to the sector that you know about. Buffett famously didn’t invest in Microsoft nor the tech boom. He made his money by sticking to what he knew well so that he could judge a good opportunity clearly and avoid the bad investment options.

Franchise business means
The business must be able to maintain its price position. Hence, it must be creating and delivering a product or service that is unique and protected by intellectual property rights or geography. Without this protection, whatever the business offers is vulnerable to´’cheap immitators’ or ‘me too’ competitors which might not put the firm out of business but will prevent the business maintaining its margin and therefore damaging shareholder value (see point 1 above).

Aligned incentives means
The incentives of the shareholders must be the same as the investors. This is often the case at the beginning of the start up, but if the management start paying themselves large salaries, then their incentive will no longer be to sell the shares but to hang onto the job. The control of future remuneration by shareholders – independent of the management – is critical for any start-up in its middle years. This control needs to be set up right (ie to ensure that shareholders can keep the incentives balanced or have an option to sellout) and it needs to be set up before the business angel invests.

Early Stage investors who can adapt Buffetts rules and principles and apply them to Business Angel Investing stand a far greater chance of success.

This approach does, of course, require a more systematic approach to investing – some might call it ‘professional’ – but the evidence is that this steady handed and cool headed approach is the most successful. And, for the epitome of a cool headed investor, we need look no further than Warren Buffett.

Ps. We’d strongly recommend you keep a copy of Mr Buffett’s thoughts and essays.

There are many books on Buffett, but there is nothing like going directly to the source yourself. The best of the bunch has to be The Essays of Warren Buffett: Lessons for Investors and Managers.

With many companies – particularly early-stage ones – the Board of Directors is seen as little more than a legal necessity. But it can be so much more including an important force for growth and a gyroscope that keeps things on course and sure-footed.

~~~~~~~~~~~~~~~~~~~~

I work with a lot of CEOs who are trying to move their companies out of the mid to high single digit run rates. The journey from five to twenty million in annual revenue is one of the most difficult in the evolution of any company. CEOs need to reinvent themselves at least two or three times during the process.

The senior team at five million will be radically overhauled and resourced by the time the company hits twenty million. The cottage culture will have given way to an increasingly professionalizing one. The competition that the company faces in their business development efforts will be better resourced, smarter and more efficiently managed.

By the time a company reaches the high teens in annual revenue, the whole question of governance becomes a significant issue

. Management will be spending a lot more time managing the business. The original team, with their overblown titles, will have been replaced with new faces that actually have the skill sets necessary to carry them.

In the best of all worlds the recruiter who had the title VP of HR is now replaced with an individual who understands, and can effectively deal with, the HR issues that can bring a company down. The controller who had the title VP of Finance or CFO has been replaced with a person who can manage banking relationships, oversee an increasingly complex financial reporting system, keep track of a complicated options and equity ownership situation and effectively manage relationships with investors and potential investors. There may be a more experienced COO and possibly even a Chief Administrative Officer (CAO) on the team.

One of the most significant changes in corporate resourcing occurs with the board of directors. Partially as a result of Sarbanes-Oxley and partially as a result of the demonstrated risks of inadequate board supervision, there are many more good boards and more good directors on boards than there used to be. The change began with public companies to be sure but has begun to spread to private ones. Even emerging companies are organizing and recruiting board members to serve on audit and compensation committees. The more enlightened institutional investors are increasingly insisting on having experienced board members in lieu of their own representatives.

A CEO who is facing the need to overhaul an existing board in order to support and control faster growth faces a set of challenges that can be daunting even in the best light. Here are just a few guidelines for board membership and management that may help:

1. A Working Board: Make sure that you organize a small working board. Large boards tend to be passive audiences for presentations by management. You need to have a manageable group of committed people who will sit around a table and actually engage in collaborative discussions about issues, trends, plans, challenges, etc. For most companies below the twenty million in annual revenue, five or six is more than enough and a dozen is way too many.

2. Avoid Celebrities (or people who are convinced they are): I once gave a lecture to a class that was focused on entrepreneurial issues. They had been divided into teams and charged with developing a business concept and working through the planning stage. My lecture was on advisory boards and how to build them as business development engines. One of the projects had a higher-education twist and the team had thought to recruit college presidents. I pointed out that these people don’t work for a living anymore. They are fundraising celebrities. Another CEO had put together a board of successful entrepreneurs who had cashed out of their businesses and were ‘hobbyists’ board members. She was frustrated because none of them wanted to do any heavy lifting. Celebrities like to think that their name is important enough to make a difference. This is mostly untrue. Workers tend to focus on making meaningful contributions to present problems. Pick the workers every time and your board will work for you.

3. Independent Directors: Your board should have a majority of independent or outside directors. The best possible board will have only one insider – the CEO. In fact, it is rarely a good idea to have the CEO also be chairman of the board. The two roles are inherently in conflict. The function of any board of directors is to protect and extend shareholder value. They do that by effective oversight of management. Independent directors can meet that fiduciary responsibility much more effectively. The brutal fact is that a group of inside directors who see each other on a regular basis and have been regularly drinking the corporate bath water is a waste of time and money. It is also an indication that management has an aversion to adult supervision.

4. No Service Providers Please: Keep your lawyers, accountants, investment bankers, commercial banks, business partners and, if possible, your investors off of the board. For most of these categories, you’ve already paid for their best thinking. All of them will have agendas that will, sooner or later, conflict with their obligations as directors. By the way, I do make one exception to this rule – intellectual property. If the company is involved in the development and deployment of new intellectual property, I consider it prudent to have the counsel that covers those issues on the board.

5. Avoid Promoting Corporate Espionage: Don’t allow your board to become a link to your competition. Be very careful who you allow into that inner sanctum. The board should be privy to the innermost trade secrets of the company. In order to do their jobs effectively, board members will have to understand the strategic and tactical plans that the company is operating under. They will also need to be familiar with innovations that are about to be launched against competition. Board members who have conflicts of agenda or loyalty should be avoided.

6. Facilitate Contact Between Board Members and Management: Make sure that you encourage your directors to interact with and have access to key members of your senior team. For a board to do its work effectively members need to have well based assessments of senior team members and their thinking on critical issues. Most board meetings will involve presentations by selected members of your team. Give directors the opportunity to evaluate those people before they are asked to evaluate their ideas. A benefit from this policy is that over time senior management will get to know individual members of the board. Often important mentoring relationships will develop – major advantages result as the experience of your board members works in service to your team.

7. Set and Enforce Metrics: Board members are properly accountable to the shareholders – and to the shareholders alone. It is very important that there be a clear set of metrics for continued board membership. New board members should understand what is going to be required of them, be clear that their fiduciary relationship is to the shareholders rather than the management and be aware of the various reasons for which they may be removed prior to completion of their term. Accountability yields results.

8. Thievery is Seldom a Good Policy in the Long Run: Don’t steal the time of those who would help you. Companies that do not compensate board members for their contributions end up with ‘charity boards’. Even at the early stages, you need to recognize the willingness of very substantial people to help your company grow. At first, equity accumulation in the form of options may be all that you have – and that is what you need to use. But, as the business grows, you should stand up a policy that includes a retainer, honorarium for meeting attendance and a formal way to recognize extended service. You also need to be sensitive to the risks that board service brings. In the early days you may not be able to afford D&O insurance but you should put a policy in place as soon as possible.

9. Disclosure is Vital: Complete and open disclosure to your board members is critical not only to the future of your company but to the financial well being of the directors. Board members tend to react negatively to lies by omission – and these lies always come out – so don’t do it. As a matter of policy, err on the side of more disclosure. Full disclosure is one of the best ways to build trust between your team and board.

10. Oversight is the Name of the Game: An effective board is all about management oversight. If you build a corporate culture that sees them as outsiders and ‘enemies of the state’, you will lose the battle to reap benefits from the board and, over time, will lose key members of that board. I recently watched a substantial portion of a board dissolve because senior management had formed a cabal which cut out most of the board members. As a result, and within an amazingly short period, some very important resources left the board. It may seem easier, and even rational, to avoid the close scrutiny of an effective board but, in the long run, avoidance is simply a bad option. Subject your team and yourself to board oversight and the chances of succeeding with your company will go up sharply.

A couple of comments about the process of overhauling existing boards might also be in order. First, most early stage companies take a rather informal approach to constituting their first board. In many states, there are requirements for a minimum number of members and those are generally selected from the team and their immediate family. The process of overhauling or professionalizing a board can cause serious stress when it becomes necessary to remove charter members. As daunting as this process may seem, it is important that it takes place. All board membership should be seen as temporary and the decisions about who will be on or who will leave the board should be solely in the hands of the shareholders. As a company grows it needs a more and more effective and well resourced board of directors. You ignore these needs at not only your own peril but at the peril of other team members, the future of your company and the interests of your shareholders.

Finally, the restructuring of an existing board is best done with an outsider’s eye overseeing the process. This may be either a consultant who specializes in board design and population or a sitting outside board member. In any case, management should have only a contributing role in the restructure. The alternative is equivalent to letting the foxes design the hen house.

© Dr. Earl R. Smith II

~~~~~~~~~~

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic adviser to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration

Crazy Risk Taking Business Angels?

Business Angels come in different shapes and sizes. But are they really like? Crazy? Successful? Generous or in it for the money?

That is a question that not only entrepreneurs ask themselves, but also the Business Angels too.

Why?

Most investments that gain Angel investment will have not one single investors but a small team or committee or even a board. And one Business Angel is going to want to know who they are investing alongside. If the Business Angels don’t have mutual respect among them, then the investment is at risk.

This is why Angel investors will often form a small team and, collectively, invest in a number of projects. 

Sometimes the investor team will include a Venture Capitalist and a passionate / dedicated individual in the role of the Business Angel / board or non-exec director. Sometimes the investors might be a group of Business Angels who may have different expectations

However, the image of Business Angels as someone who gives not just his (or her) money (with conditions) and his time, network and experience (more or less for free)… is often not correct.

There are a number of different types of Business Angel – and I propose these these profiles as personal observation – so do feel free to contribute your own.

Quiet Angels – these Business Angels have never invested before – possibly they were an FD in a highly successful company and saw a big payout on sale – and so tend to be looking for that next entrepreneur that will re-create riches like last time. These are perhaps the most nervous of investors as they are not entrepreneurs themselves and are not used to being on the front line.

Sold Up Entrepreneurs- many entrepreneurs who have sold a business just love being around new ideas and are naturally restless. These are probably your ideal investor but they may get bored quickly and want a quick return. Richard Branson might be an example? Hugely charismatic but a bit of a problem if he decides he doesn’t like the direction of the business. May be looking to sell their stake before the founders would wish.

Professional Directors - some investors are professional non-exec directors and have seen a number of business sales plus been on the purchasing side too. These guys have probably seen a few founders ousted by the board. Their knowledge is invaluable and probably they would bring a calming influence. They probably have the greatest ability to play the long game – think Warren Buffett.

Trader Angels - some entrepreneurs made their money less by building a business than by buying low and selling high. They may add great energy to your sales team and have the best networks in your area but they wouldn’t hesitate to sell and do so on their terms.

Institutional Investors - these guys hail from the VC industry and will expect things to be played by the book. Probably they have the least to offer in terms of business expertise and many smart VCs have learned to team up with expertise in the form of Business Angels as this increases their success rate. You might call them the professional money men.

Some investors will, of course, be a mix of all these profiles or even, make take on different roles at different times. Feel free to contribute your profiles of Business Angels – click Comments at the top of this post.

Is the Iceberg Melting?

I am not suggesting for a moment that all Green businesses are bad investments, but I am suggesting that whenever a bubble appears or to there is much enthusiasm for an idea, that a number of the businesses ideas sold to unquestioning investors will turn out to serve the middle men far more than the money men.

As the investors, the business angels, we need to be on our guard.

There appear to be two dangers with the current alternative or green energy fad.

The first is the classic investment risk taught by Benjamin Graham and discussed in his book The Intelligent Investor. Graham, the mentor of Warren Buffett, took apart the reasons for investing in the 1950s boom industry – the airlines.

His analysis has been proven to be right as Buffett now claims that in 50 years, airline investors taken as a whole still have not had a return on their money.

However, Graham did spot that a large number of companies supplying the new industry did make a lot of money for investors. Airports, retailers and caterers have done well.

Graham’s conclusion was that it is far better to supply a growth business sector than to be a part of a great swam of investment as inevitably too much money will be invested too easily squeezing the profit margins of good ideas.

The second risk is that climate change will turn out to be a Malthusian idea that solves itself as population growth, mutually assured destruction and other apocalytic senarios usually do.

This is illustrated by the increasingly sceptical scientific community which is beginning to raise its head against the slavish commitment to all forms of greenery.

I and my fellow investors are not scientists, but it is worth noting their scientific concerns as it could up-end a few business models and a lot of start up ideas.

Firstly, there is a generally held view by the (admittedly few) academics that I know that if a scientist wishes to receive funding for research he is well advised to research ‘the affects of climate change’ and that research into ‘climate change – the myth’ isn’t currently being funded. By making the assumption that climate change is real, researching get money, if not then not.

Therefore, the scientific literature being published is already biased by the incentives of the research grant process and therefore, can needs to be viewed as biased in favour of climate change. The latest report from the IEA (International Energy Agency which made the front page of the Financial Times) might be a good example as it take it as proven that global temperatures are rising).

Next, dissent is beginning to break out in normally green magazines such as the UK’s Big Issue (sold on the streets by UK homeless) as well as larger circulation magazines such as The Economist.

In fact, a recent letter to the Economist by Horst-Joachim Luedecke, retired professor of physics, Heidelberg set out three reasons to be scepitcal of green alarmists.

1. There has been no discernible increase in storms, hurricanes, floods or droughts according to the Intergovernmental Panel on Climate change.
2. Rises in sea levels of 1-2mm per year have been occurring for many centuries and therefore this is not evidence that sea levels are rising as a result of any climate change factors.
3. Mean global temperatures have actually declined since 2001 and the research scientist, Professor Mojib Latif of University of Kiel, predicts further declines over the coming decades.

Let’s not enter the green / not green arguments here.

Let’s simply take this as a warning and a reminder that green start-up business are at greater risk of hype and hyperbole, rather like dot coms in 1999, and therefore each idea needs to be scrutanised much more closely.

Or indeed, that if you are not an expert on this sector, simply do not allow yourself to be drawn into it on the promise of easy winnings.

If you want to read some more science based sceptiscm on climate change then head over to http://cfact.eu/