The corrolory of this, of course, is that starting up a successful business has to become more science and less art.

This view was admirably expressed by Nic Brisbourne in his recent blog ‘its is getting easier to startup’.

He lists Steve Blank and Eric Ries as key contributors to this as well as quotes from Marc Andreesen’s interview in the WSJ where he said

“I think entrepreneurs are getting better and better,” he said, “better educated, better trained, better informed, better networked”

So, is the same happening to the Business Angel sector?

Yes!

In the Business Angel sector, angels who like to be involved in startups are engaging with accelerator programmes or setting up and running one themselves.

This has a few advantages

• the business angels get to know the teams over 10 or so weeks – to see if they can resolve problems and challenges and keep moving forward
• the idea gets formed by real market experience (hopefully) and therefore becomes established or de-risked. Of course, if this doesn’t happen, then the idea – no matter how good – doesn’t get backed
• the business angel build relationships with the management teams so that the entrepreneurs themselves understand what the angel brings

This method of engaging de-risks the investment for both parties – the entrepreneurs swapping equity for cash – and the business angel swapping cash for equity.

And, an investment process which is de-risked is easier to understand and therefore has a greater chance of going through.

Hence, the more intelligent business angel strategy is actually very simple – get to know your investment and the entrepreneur team, it is the best way to de-risk and deliver a paper ‘lite’ due diligence process.

So follow your exec team for a bit – before you hand over your money. A startup accelerator programme is a great way to do this….

Legislation is moving in the USA and the UK to make business angels of us all – and that is, to allow crowd funding.

We want to help the USA and UK governments decide about crowd funding – so please take our short survey below.

Your answers will remain confidential and we will only contact you if you have requested it.

Business Angels investing in startup UK companies are gearing up for tax breaks of between 50 and 78% for investments which are made after 6th April 2012.

The UK government has made it a priority to get funds into small fledgling businesses and will offer a 50% rebate – even if the individual making the investment isn’t paying 50% income tax.

What is more, if you make a capital gain in the tax year 2012 / 13 and invest that money in a startup, then you’ll also get the 28% capital gains relief – a massive 78% relief in total.

You can read the detail of the UK government scheme here (Seed Enterprise Investment Scheme or SEIS)…

There are a few restrictions – but they are relatively minor – ie

• smaller companies, those with 25 or fewer employees
• companies with assets of up to £200,000,
• carrying on or preparing to carry on a new business;
• directors who invest in their companies;
• annual amount of investment limited to £100,000 per investor, with unused annual
• amounts able to be carried back to the previous year
• investment limit of £150,000 for the company on a cumulative basis, not an annual limit

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Want access to Business Angel deals? If you are a high net worth or sophisticated investor, then you may attend our investor evening on the 22nd February.  Please contact us for details…

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The UK government’s new Angel CoFund is willing to provide equity or quasi-equity investment of between £100K and £1M into eligible SMEs alongside business angel syndicates.

The Angel CoFund will not invest directly into companies – so is, in effect, money that matches a syndicate.

Hence, business angels should look to their local syndicates to see if they are raising additional funds through the Angel CoFund and entrepreneurs should look to their local syndicates.

The Angel CoFund will invest alongside other Business Angels (or their syndicates) and assumes that the same investment assessment as the syndicate.

The Angel CoFund will invest up to 49% – so, practically doubling the money available to a syndicate.

This will allow the syndicate to spread its investments more broadly and hence, act as a reduction in risk. It also provides the syndicate with more money should the syndicate wish to stay active in a second or third round of investment.

Investee companies must also fall within the European Commission SME definition (headcount not exceeding 250, turnover not exceeding € 50M and balance sheet assets not exceeding € 43M).

Syndicates expected to participate include

• Oxford Innovation Network (OION),
• Braveheart Investment Group,
• Hotspur Capital Partners,
• Octopus Investments and
• Venrex Investment Management.

A new year is a good time to take stock and look around to see where the best investment opportunities will come from in the year ahead.

There are now some well established trends – mobile, data and cloud solutions – are all creating new investment opportunities for angel investors.

However, the opportunity to enter the social media space is (or has) closing according to Nic Brisbourne in his equity kicker blog.

Instead, Brisbourne is highlighting the enterprise software sector as the area of greatest opportunity.

What Brisbourne is saying here is that the scale required to deliver rapid software developments has shrunk and therefore, small players can deliver just as quickly as larger players.

In addition, smaller teams – here I’m talking about less than 100 people, possibly many fewer – can probably make a bigger impact than huge teams – which was the preserve of the large software development companies.

We might wonder on the cause of this change, but it is only reflecting that most entrepreneurs have know for a long time – that is, open source and cloud based software beats the heck out of proprietorial sofware with its lock ins etc….

It also means that more income will be earned from intergrating and installing software, rather than originating it. So, more cash for consultancy, less for software sales – unless, the software is sold as a SaaS on a subscription basis.

Here Brisbourne points out that rapid development also allows systems to be delivered and earning revenue earlier – which again, opens the market up to smaller and more nimble players.

Essentially, the cloud is removing the benefit of scale – and that no matter how many users or how large your sales or distribution team, everyone is equal. As soon as the software updates are uploaded on the cloud, every customer has the latest!

Hence, the time for small software companies – using agile development techniques and cloud deliver – 2012 should provde to be a great year.

Charting the value of VC investments vs number of companies passing through the original and best business accelerator – Y Combinators – provides a graphic illustration of decline vs growth.

However, don’t forget that the Y Combinator alumni are also receiving early stage funding and seek to raise more money later. You could also argue that the informal Business Angel industry is not truly measured in this data either.

Hence, an even more intriging view would be to show the volume of companies recieving VC and Business Angel funding vs Y Combinator graduates.

I’d expect that this measure would show the two are climbing more evenly.

Hence, whilst the VC industry has less money, it is also making more investments (volume rather than value). So, the value of the average investment has fallen.

This may be for two reasons.

Firstly, the value of early stage digital or tech investments has fallen sharply. Steve Blank says $0.5m is now enough to start a US company, whereas, before $10m was needed.

Secondly, the ecosystem for investing in early stage companies and make more repeated investments is improving.

In other words, whilst the over all sum of VC money has declined – and that is a worry – this is also forcing structural changes to the venture capital industry – which is a good thing.

Is there a decline in the value of Business Angel funding? Anecdotal evidence would suggest that yes, there has been. However, as business angels link up more closing to business accelerators, then we can also expect the investment decisions to be more often although of a smaller amount.

Nevertheless, this is a clear sign of the business angel sector maturing and growing up. 

Welcome to this months round up of business angel news and ideas. We’ve got three pieces each of which has significant consequences…

We start this month’s business angel newsround we’ve got a fascinating report on angel investing strategies from China’s Lei Jun. He says…

“he invests only in markets and people that he’s familiar with. This might seem obvious — why would you invest in a person or business you don’t understand? — but Lei takes it to the next level, saying that once he’s chosen to invest in someone, he might follow them through multiple failed projects, so long as his faith in the person remains intact. “

Any entrepreneur who still thinks investors only care about the product or idea should take note.

Also, a highly significant event didn’t happen. As reported by Nic Brisbourne, Hulu’s sale fell through.

Why? Brisbourne says because far greater value lies in the content not the audience! That means startups hoping to build an advertising revenue model are likely to fail. It is original content (or brands) that count.

Does that kill half of all internet related business angel plans? I think so…

Our third favourite piece for the month says that freelancers make the best startup business partners.

Quoting from Luke Johnson, successful entrepreneur, venture capitalist and FT columnist, the article says that

“What often kills an early-stage business is excessive personal drawing of money by the owner, draining the company of vital working capital.

“If you moonlight [or we might add, freelance] the downsides are reduced. Even if it means 100-hour weeks, it’s likely that your employer’s salary will be the least demanding investment capital you’ll ever receive.”

Indeed. So, if you are asked to invest in a startup, find out if they founders already have an income from a job, part-time work or freelancing. If they do, then your angel investment will have greater flexibility around time-scales and be far less at risk of the founder needing to take money out or leave for a better income.

Launching the first phase of a startup business – or for a business angel, preparing to invest in one – requires an assessment of three things – product, market and team.

Equally, it is well understood that the first stage of product development is a prototype, a beta version, or more recently, a minimum viable product.

But, does the same apply to the market and the team too?

Well, yes, it does…

So what would a minimum viable market look like?

Steve Blank is the person who came up with the concept of ‘customer development’. This was because he used tech developer concepts of agile development to argue that the product needs to be developed rapid and quickly and that equally customers need to be developed too – quickly and rapidly.

In effect, Steve Blank argues that customers are developed through a series of contacts or product developments or iterations.

So, what would count as a minimum viable market (customer) or minimum viable team?

Let’s start with the minimum viable market. Steve Blank says that this is not a focus group. In other words, it is not about collecting desires or wants from potential customers. Instead, it is about selling a product.

The best description I’ve heard is; one product sold, one happy customer, one referral.

… and the happy customer can’t be your mum (or dad). Instead, it has to be a real / non-family / customer without vested interests who pays and is willing to provide a referral (ie a lead to another potential customer).

The referal bit is critical, as it confirms that the customer is still happy after they’ve bought the product. Hence, slick marketing and a poor product won’t deliver a happy customer after the event.

Minimum viable team

So, moving to our third test – minimum viable team – what might that look like?

Again, business angels and early stage venture capitalists understand that the team will not be complete in the early stages of a startup business.

So, what is the minimum viable team? Most business accelerators have settled on the view that the team must consist of at least two partners. So, solo entrepreneurs don’t count. This is based on empirical experience of seeing teams succeed far more often than solo entrepreneurs.

To this, we would add that the two partners must bring different startup abilities. For instance, a tech developer who brings in another tech developer partner does not count as a minimum viable team. Instead, there must be both the ability to invent and create along with the ability to sell and market fit.

Other abilities – such as the ability to work with investors, might be missing, but this would be the absolute minimum.

Minimum viable product

Lastly, a minimum viable product is described as an operating prototype. However, be warned, this can not be a low quality product. So, if a fashion item, it must be made with the material that you intend the final product to be created in, not a cheap imitation.

The consequence of the ‘minimum viable’ concept is that we have temporarily suspended profitability. This is not being tested at this stage. Instead, we want to know whether our product will sell and impress customers and that the team can deliver this basic element.

The question of profitability follows next – as it is tied up with scale and falling production costs, but this is typically the stage where a high potential business will require (or seek) funding. And it is a great stage at which an angel investor – with a small size investment – can have a significant impact.

Summary

So, to sum up, a viable business angel investment must consist of a minimum viable product, team and market.

The purpose at that stage of the investment is to prove the scalability of the product(s) and the potential profit margins.

For a more info, check out the 4 tips at Arena’s blog on Minimum viable product

Business angels and business angel networks are changing … and it is for the benefit of both the angel investors and the entrepreneurs!

Further evidence this week is that business angels that truely enjoy mentoring their companies are getting involved in business accelerators at NW England’s super business angel David Atherton has committed his time to Manchester’s new business accelerator – run by Idea Alive .

At the same time, this month saw Ian Merricks of White Horse Capital commit his time and business to launching and education, funding and development programme – the accelerator academy. Again, the list of mentors for this programme reads like a who’s who of London based business angels with Michael Blakey and Maria Dramalioti-Taylor leading the business angel roster.

Regardless of the business angel, Atherton in Manchester or Blakey and Dramalioti-Taylor in London, they all share a history of starting, leading and mentoring companies.

These business angels are not bankers or financiers by trade – they have built companies and want to help others (with their money) do the same again, and again, and again.

Hence, the mentoring business angels – that is, those that enjoy being involved in their startups, are focusing on the accelerators for two key reasons.

Firstly, they recognise that starting up businesses is a skill that can be developed through practical education (ie doing it – in a supportive and reflective environment) and second, the success rates rise exponentially when investors and angels take this more enlightened route.

Of course, success breds success, so expect more business angels to make more money by working with their local or regional programmes, whilst the traditional business angel networks shrink and focus on less knowledge and more asset based investments such as clean tech or, in the UK, wind farms.

Business Angel news round up

We’ve got another piece on why company boards don’t work and what to do about it (read the our previous piece on company and startup boards here).

I kind of get the feeling that this just isn’t going to go away – about like executive pay.

Likewise, the question of signing NDAs has created a great deal of heat. If you missed the NDA article, you can check it out here.

A new crowdfunding platform has launched – this one is called Civilised Money- although I’m not sure I want to know what uncivilised money is? I guess this is pointing to the fact that when there are lots and lots of investors it is very hard for anyone investor to control the board or direction of the enterprise? If so, bad news for business angels and venture capitalist.

Any business angel or entrepreneur looking to build a startup team might want to consider an ex-freelancer – here are some good reasons and follow this advice on choosing a business partner.

Ever wanted to know what anti-dilution means – check out Nic Brisbourne’s excellent blog.