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.   

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?

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.

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

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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.

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

Business angels usually don't have money to burn

You’re wealthy and you’re ready to invest large sums of money to make a decent return – so where do you invest your cash in 2010? Should you invest in a start-up business? Is angel investing right for you?

Property’s still looking a bit shaky, the stock market looks like it will continue to take a beating every time there’s a whiff of bad news coming from Europe or the US. Then there’s gold which until recent years has offered little to get excited about when it comes to a good return on investment.

So how about having a go at business angel investing?  Start-up businesses are apparently desperate for capital. Risk-averse banks are setting the bar too high on their lending criteria according to Vince Cable.

At this point I’ll stop…

A common misconception about business angels is that they are wealthy, the kind of wealthy that means they’ve got money to burn. They’re ready to invest large sums of cash in a promising idea, and if it doesn’t float, well it doesn’t matter nothing ventured, nothing gained. Perhaps TV shows like Dragons Den help create this image of the business angel, but in the real world it isn’t quite like that.

Business angels are unlikely to be sitting around surrounded by wads of cash whilst deciding whether or not to invest in a business. While it is important that you are prepared to invest a decent amount in a fledgling business this can be as little as £10,000, and, typically investments are often around the 25,000 mark. You really shouldn’t risk it if you cannot afford to take the very real risk that you might lose all of this money

So anyone can become an angel investor as long as they can afford to invest the sums mentioned above and take a hit if it doesn’t work out. But while anyone can become a business angel, angel investing is not for everyone.

The journey for a start-up business is far more volatile than a nice maturing property investment. It is true rewards can be much higher of course, and the journey exciting – assuming you back the right horse. But there is no guarantee and the odds will be stacked against making a return on your investment.

So as long as you have the stomach for failure, where even the most seasoned business angels can get it wrong sometimes, becoming a business angel may well be for you.

You can either go it alone or join a network. If you choose to go it alone, contacts in the business and experience in the type of the business you choose to invest in are invaluable. That way you will have a better grasp of the potential value and the amount of money it is sensible to invest. If your business knowledge is not up to scratch you could easily be misled by an excitable entrepreneur who believes that his or her idea is a sure bet that simply cannot fail.

The most successful business angels are the one’s prepared to be hands-on; Thomas Edison once said “Opportunity is missed by most people because it is dressed in overalls and looks like work”. So if you are prepared to get to work and help with your experience in the business you invest in then your investment is more likely to succeed.

Still fancy having a go?

Before you begin it is vital that you do your due-diligence. Start with obtaining legal advice to assess for assessing documentation and drawing up agreements. Get this wrong and things could get messy. If you are unsure, consider joining a network of business angels who can offer you some valuable advice before you begin as well as sharing any losses if a business fails to take off. But going it alone means you get to keep a greater share of the profit if the business is successful come exit time.

Remember keep in mind that as with any form of investment, it is important to be patient and wait for the right opportunity, it can take a long time to find an investment opportunity you are comfortable with. Be prepared to make a commitment of around three years by which time you can hopefully (there are no guarantees) exit with a nice profit.

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.

Big cuts are on the horizon for regional business development

Chancellor George Osborne’s announcement that the Business Department will bear the brunt of £6 billion cuts, could well signal difficult times to come for those businesses seeking regional development aid…

But help could be at hand if business angel numbers expand. As Labour’s ‘big government’ philosophy is unravelled by new kids on the block George Osborne and David Laws, this could affect new business enterprises who rely on development agencies and associated bodies to get them on the first rung of the ladder.

The aim of RDAs is to help create businesses through the fostering of entrepreneurship and growth in their respective regions. However,  according to a report by the Tapayers’ Alliance  success has been limited and, if figures between 1992 and 1996 are anything to go by,  over the course of 14 years the rate of business creation has fallen overall.

This is hardly surprising. Most businesses in the start-up phase will require support which includes money and advice. The former is often in short supply and only given out according to strict criteria and whether the sector is fashionable. Money is one thing, there will be other sources of funding available to the entrepreneur, but with businesses in for example emerging creative industries, access to expert advice  and money may well be in short supply in some areas.

It is understandable then that with this kind of limited success and with £6 billion of spending cuts to find, that the business development department is high on the list of the government’s targets for cuts ─ £836 million worth to be exact.

With cutbacks to a public sector service that was already struggling to deliver, The input of people like business angels will become vital in the years to come as those who are starting up businesses exhaust the goodwill of friends and family and search for support elsewhere. With cutbacks in development funding, and business lending from the UK’s banks still in short supply, business angels will be increasingly called upon to play the role of advisors as well as investors, which many do already.

The growth in the number of organised regional business angel networks in the UK in recent years goes some way towards plugging the gap in advice and funding while help from elsewhere is in short supply. However, with many appealing for more members there is clearly a shortfall in the number of business angels.

Without the valuable support angel investors can provide in terms of expertise those starting up businesses or those looking to take them to the next level may find themselves starved of advice and cash in some cases and forced to explore innovative ways to grow their business. Alternatively they could well be left to feel their way in the dark or, worse still, a promising idea may not be developed into a profitable business.

Enterprise and business is among the key drivers of growth in the UK economy. While government departments have lacked the required agility to support new ideas in rapidly developing sectors in recent years, such drastic cuts in funding could still see those businesses who would have benefited from some kind of government support left high and dry. It is clear that the new UK government’s strategy is to strike some kind of balance which won’t upset all of the people, but a possible imbalance in support for new business will need to be addressed.

Most entrepreneurs will have the instinct to succeed in what they do regardless of changes in government policy, but it would be unrealistic to expect business angels to suddenly ride to the rescue if the axe falls on government help. Firstly, there is an even greater burden of risk to carry, particularly in the current economic climate and there will be less chance of an early profitable exit than in recent years. A big consideration when most angel investors will be looking for a profit inside 3 years.

The number of business angels in the UK is tiny in comparison to the USA where we have just heard that new business creation hit a 14-year peak in 2009 according to The Kauffman Index of Entrepreneurial Activity. This was despite the worst recession in living memory and goes a long way towards revealing US appetite for enterprise.

We may well see a growth in the number of business angels in the UK who are passionate about supporting business creation. We might also see opposition to the decision to put the business development department on the chopping block, but as statistics in the US have proved, even in the worst of times there are more than enough people ready to take a risk.

Valuing a start-up business is no easy task

Seven years ago in August 2003 an unknown company released some software which would allow people to make free voice and video calls over the Internet. A year before the company had received seed capital from a group of private investors to allow the company to develop its idea. That company was Skype.

Skype was later bought by ebay for €2.1 billion and is now an indispensible means of essentially free international communication. Those early investors made a return of around 350 times their initial investment which was no doubt heavenly for those involved at the time.

Most start-ups can only dream of achieving rapid growth of this scale and generating profits of this magnitude for their business angel backers. The reality is that most start-ups will fall at either the first or second hurdle and the angel investors who backed them will be on the receiving end of an 80% failure rate when you look deeper into the stats.

But was it simply luck that allowed those early investors in Skype to hit the jackpot? Or was it as much about the ability to know when the price and the opportunity was the right one at the right time?

The biggest problem for angel investors as they ponder whether or not to invest their cash into a start-up business is assessing its value. Investing at this stage is undoubtedly a gamble as we have explored previously on ibusinessangel.com, but with the odds stacked against a successful outcome and the cash involved, the risk needs to be a calculated one.

So how do you assess the value of a start-up when even established businesses are difficult to value?

This really is the million dollar question and unfortunately impossible to answer for even the most seasoned investor. This is because valuing even an established business is more art than science. As an angel investor you will often be expected to assess the value of essentially nothing other than an ‘idea’. Experience as a business angel or learning from the experience of fellow angel investors is really the only way to gain some idea of how much a start-up business might be worth.

According to the experts there is a simple rule of thumb. If the start-up is just an idea, it is worth maybe £10,000; if it has a credible management team in place it could well be worth £100,000 and if it has sold its product to a real company for real money then it might be worth £500,000. There is of course a question mark against all three, is the ‘idea’ a good one?

For anyone who has watched the BBC’s Dragon’s Den good ideas certainly appear hard to come by. The show has its fair share of deluded entrepreneurs valuing their businesses to highly or often presenting laughable ideas to the panel with a completely straight face. Those individuals make good television but are they representative of the kinds of entrepreneurs out there seeking the backing of angels?

More than 90% of the ideas that find there way into the Den appear to lack the Reggae Reggae Sauce to succeed!

The high failure rate on TV could well be a result of the heavy emphasis on ideas and individuals. Rather than experienced teams of managers the people presenting their ideas often lack the basic fundamental business knowledge to make a credible case for investment. Their businesses are, more often than not, valued to highly and they are often seeking guidance and direction in addition to investment.

With this in mind it is worth considering whether the person with the great idea but with no business sense is worth the risk. Whilst the idea is important and in rare cases can lead to a significant return on investment, as suggested above, a business is worth more when it has a credible management team in place who know the route to market and have a track record of delivering success in their market place. Add this to a product that is already selling and you have a more realistic chance of long-term success.

While the lone wolf entrepreneur with a good idea may offer a bargain, if you prefer to play safe, it may well be worth considering investing a bit more cash in a good proven management team. You can never really know when the price is right , but you can look at the people you are investing in and hope their  expertise will give you a better chance of a heavenly exit three years down the line.

Start-ups will compete for a cash prize in Barcelona

The entrepreneur comes first as a competition to find the next top start-up begins

With the auditions for this year’s X Factor now underway, the search is also on to find a start-up business with enough potential to scoop a generous cash prize. Start-up and entrepreneur portal f3fundit have organised the event to give those entering their business the opportunity to turn €120 into a €25,000 prize.

Applicants are expected to apply by May 21 and following a selection process, the top-ten companies will gather in Barcelona, Spain, on June 16th and 17th.

In a variation to the popular ‘speed dating’ method of matching business angels with promising entrepreneurs, the entrants will work closely with a team of 25 experts who will both mentor them and decide which one will be crowned the next top start-up and walk away with the no-strings attached cash prize.

Jacek Grebski a founder member of the team of three at f3fundit came up with the idea after finding traditional events for start-ups frustrating for both the investor and the entrepreneur. As an entrepreneur himself Jacek experienced the frustrations felt by the entrepreneur after attending funding competitions himself in the past.

He regards such competitions as a turn-off for both the investor and the entrepreneur. Describing his experiences, he said; “after participating in a number of these types of competitions ourselves we saw a few underlying problems – these were, that most of these pitch events were akin to a meat grinder, ten companies, one hour.

Or you would attend a bootcamp styled event for start-ups and sit there listening to what seemed like a near endless series of unvaried speakers, worst of all was, you would leave without really taking anything away that pertained to your business.

We believe that both of these aforementioned models are inefficient. If you have five minutes to pitch to a group of investors, you are clearly nervous, more so if you’re not accustomed to it. Additionally, I see this all the time, an engineer will pitch what is undeniably a good idea, but will spend the entire time talking about the process, or a scientist will describe the chemical compound of a new drug. This not only wastes the entrepreneur’s time – but also the investor’s.

With next top start-up we’re focusing on getting great ideas through the door, and ensuring that by the time they leave they’ll be ready to get on that podium, with a fully sound business model, and impress the socks off the investors.

At the same time, those mentors who participate may have a vested interest in these companies as well, and from the point of view of a business angel, what better way to get a sense of a company than to spend a few hours with the start-up’s founders and directors and see how they work, how they problem solve, and additionally to gauge if there is a personality mix in there as well.

The competition is aimed at new companies in the so-called “valley of death” – the time post-incorporation when a company is burning cash – who are seeking financing of up to €300k. Ideal entrants should be innovative, scalable, internationally focused and concentrated on attractive market segments.

They can come from any sector and should have the ambition to work with venture capital investors. “We are on the start-up’s side”, added Jacek, “When we designed this competition, we looked at it from the position of a new company that has a big future but right now is short on cash and resources. How can we make a competition work for them? So all we require of the entrants is a very reasonable €120 and their participation. We do not take an equity stake and we will make sure that every company receives feedback.”

Entrants initially pass through a multi-metric evaluation process. This is then reviewed by the event selection committee who will make the final decision on the top ten. The chosen will then gather in Barcelona where they will spend two days behind closed doors having their business models intensely examined by a host of experienced mentors along with select investors. Every aspect of their performance over the two days will be taken into consideration when determining who will be the next top start-up.

f3fundit is an online community that enables entrepreneurs to exchange ideas and information and links them to potential sources of funding. The event is organised with the support of Barcelona Chamber of Commerce and ESADE Creapolis, a business incubator and innovation park, as well as in collaboration with successful entrepreneurs, investors, and international business networks such as Maroon Analytics, an international advisory firm offering strategy, finance and incubation services