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.

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.

The article says the rate could rise from 18% to a top rate of 40% or even 50% for those with shares and second homes, although they may retain relief for entrepreneurs. The likelehood is that capital gains tax will push more people into angel investing to avoid any future hike in tax which would be a boost to early-stage businesses.

Angelic Agreement? But will it stay heavenly?

More than half of business angel investments fail, but why? How much of this can be put down to the innate vulnerability of start-up businesses?

Surely having an enthusiastic angel investor on board, eager to provide a timely injection of funding to ensure success should mean failure rates i.e. those leaving the business angel out of pocket come exit time should statistically be on the better side of half.

Yet this clearly isn’t the case. In an ideal world entrepreneurs and the angel investors are made for each other, a real match made in heaven as the title to this blog suggests. Put simply most start-ups require money and if it seems like a good idea, most angel investors on the lookout for new opportunities  are eager to supply it – and make a decent return in five years or perhaps less. Perfect, the entrepreneur gets his money, establishes a viable business and the angel investor rides off into the sunset profit in hand ready to fund the next venture.

But life isn’t that simple. Good relationships are crucial to the stability and success of a business. Relationships need not necessarily be cordial at all times, debate and alternative viewpoints are healthy and can be productive , but like all relationships in life, certain elements must be in place to ensure relationships don’t unravel and become destructive.

While some angel investors will be looking more at business structures and the ideas and innovations those businesses are bringing to their market, it would be wrong to ignore the importance of the individuals who run businesses – the management team and the person(s) leading them.

The most successful investors should put fairly large sums into two or three businesses they know something about and whose management is trustworthy, at least this is what the most astute investors like Keynes and more recently Warren Buffet would tell you.

Finding out if the managers of the business you invest in are trustworthy isn’t easy. First you must establish a relationship. We often speak of relationships as having the right chemistry and it is crucial for the angel investor to feel that chemistry when he meets the entrepreneur he’s willing to invest in for the next four, five or maybe more years.

This is no easy task. Not all angel investors are entrepreneurs and many entrepreneurs don’t have the right instincts or ideas to make their business a success even with the help of investment as the statistics show. There can often be gaps in age and experience between business angel and entrepreneur. Take for example an ambitious 18-year-old fresh out of college, full of ideas and exuberance, the business angel who invests in the business may have a wealth of experience to offer, but will he/she be able to pass that knowhow, as well as money, on to ensure a successful future? There may well be gaps in age and understanding as well as experience.

If both angel investor and entrepreneur lack experience of starting up and developing a business, the relationship might turn into a voyage of discovery for both which may then flounder on rough seas. No matter how much money is invested, at least one party should know how to make the best use of it and both investor and entrepreneur must be able to work together and have their interests in alignment to achieve success and a positive return on investment.

Increasingly these days, angel investors are opting to join business angel networks and groups to spread risk rather than be faced with the possibility of choosing the wrong business to invest in. While this approach may have its advantages it will naturally create a distance between them and the entrepreneur. The cash may well pour into the business, but can the entrepreneur be trusted? This is a major question to consider, and also is the entrepreneur self-disciplined to spend the money wisely?

Investing too much money too soon can be toxic for a start-up particularly when an entrepreneur may lack focus or is prone to taking risks with your money.This brings us back to relationships, put simply, the business angel’s role is to invest not only money but also add value. For the relationship to work, therefore, the entrepreneur must be flexible, be willing to be mentored, work as part of a team and frugal with the money at his/her disposal.

Keeping these tips in mind should ensure that at least (market forces permitting) it will be the business that fails rather than the business relationship.

Business angels often find it easier to work in teams.

We have already established that angel investing is a risky business but one with potentially high rewards. So is it better to go it alone? Or seek the company of others?

It is more often the case these days that angel investing is best pursued as a  team activity. While they still exist, the lone business angel poring over opportunities to ride to the rescue of the startup seeking that vital injection of start-up capital is becoming an endangered species, more an exception than the rule, but why is this so? Why do business angels increasingly work as part of a team?

While the high risk nature of angel investing is one significant factor there are also others to consider. It is true that angel investing is not an entirely altruistic activity (despite what many angel investors might tell you). While it may be satisfying to help nurture a fledgling business to growth and profitabilty, the main aim is to make money and lots of it when it comes to exit time.

With the odds stacked against a successful outcome, by working with other investors you can spread the risk and avoid sinking your hard earned cash into one single business which may, as statistics often show, fail and leave you with a loss.

But there are always those who prefer to go it alone and try their luck, after all if you believe the business you invest in has every chance of success and it’s in an area you’re familiar with, then why not?  You are able to help shape the direction of the business and for those with an entrepreneurial background this can be a way to re-live the excitement of starting up and hopefully watching a business grow thanks to your experienced input and investment.

Going it alone as a business angel means more direct involvement and greater access to the business you invest in. Working with a team of investors or a network often means a portfolio approach where a number of businesses and investors will be working together but in a less hands-on way. Therefore, on the one hand you are able to spread risk as part of a network, but the downside is you will also be sharing any profits and spending less time on individual businesses.

The main advantage of not having a business angel network in the middle is that you won’t need to pay the usual 5% of the sum invested as a fee and granting options to the network which would eat into any future success. Networks also have the incentive to increase the sum raised – so that they earn a larger percentage.

But despite the attractions of going it alone which also includes not having to work with other investors or share profits if the business is successful, weighing the pros and cons between being part of a team and going it alone,  it becomes easy to see why the chances of successful outcomes are greater when working alongside other business angels as a member of a group or network.

And there are plenty of business angel groups out there in the UK. For the less experienced business angels, these can be excellent starting points where experience and knowledge can be shared. There are a number of established angel networks in the UK, often regional, which meet regularly to discuss strategy and share experience and they can also provide opportunities to network with other investors with varying levels of experience.

You will often hear that the great advantage of being part of a business angel network is the chance to tap into deal flows. However, you can still find them, depending on the size and effectiveness of your network or you can even gain access through online business networking sites like Linkedin, but the effort of due diligence and supporting the business is high – especially if you are alone,  therefore, although you may find the deal, it is still better to get a team involved.

Networks can provide a ready supply of angel investment opportunities numbering in the hundreds or even thousands. The process is organised and unsuitable businesses are filtered out at an early stage with the help of video presentations, saving the time and effort usually required to find the best deals out there.

The responsibility for due diligence still lies with the investors themselves but this is one area worth spending a lot of time on. You also benefit from the variety of expertise and experience offered by your fellow investors. Due diligence can be complicated, so by dividing work among its members a network can offer a more complete understanding of a business when knowledge can be pooled.

Being part of a network can only lead to better investment decisions overall and those businesses seeking investment can also benefit from having access to broader knowledge. Angel investing is not for the faint hearted but there is relative safety in numbers!

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.

Beating the Business Angel Investment Odds?

We are living in risk-averse times and “Cash combined with courage in a crisis is priceless” according to Warren Buffet.

But when does courage cross the line into gambling territory? Or to put it another way what if you had say, £50,000 to invest, and someone said you have a 20% chance of a return on it, would those odds appeal?

With a failure rate in the region of 80% if you look deeper into the stats, the odds are pretty well stacked against any kind of successful outcome. But there are ways to lessen those odds and increase your chances of success by following the advice of experienced business angels.

The latest instalment of the BBAA angel investor evenings held in Manchester provided an opportunity

to listen to the advice of seasoned business angels who have been there, made the mistakes and learned from them.

56% of exits failed to make a return according to the Robert E Wiltbank’s 2009 report on angel investment, a figure based on a sample of UK Angel investors – more than 50% of whom had yet to reach for the exit! Hardly a USP, and an unacceptable risk for those seeking a decent return on their investment.

The panel of seasoned business angels briefly removed their halos to provide insight into why indeed would anyone want to be business angel let alone in a crisis!

Robert Heise an angel investor with over 40 years of  business and technical experience to call upon described being a business angel as an “onerous task” but one that can be worthwhile with the right approach.

His pointed out that to get the most out of your experience as a business angel, you need to be altruistic to some extent. Investing in an early stage enterprise is also a two-way process which is unlikely to bring a successful outcome without a large degree of cooperation between the management team and the investor. When things get tough, which they inevitably will, be sure that you know the management team well enough to weather the storm.

A business angel should also be prepared to act as both teacher and mentor to the company they invest in, by bringing expertise in areas such as sales or the technical side of the business to the table. There is little point in simply writing a cheque and stepping back (a point I will return to later). Active involvement leads more often than not to better outcomes and more profitable exits.

Aside from increasing the chances of success, active involvement, from the point of view of the investors themselves, can also be more rewarding; providing a sense of achievement as well as an opportunity to have some degree of control over the direction of the business. .

Unlike other asset classes, investing in an early stage venture brings with it an opportunity to shape, create and drive forward ideas which brings a greater sense of satisfaction for your average business angel.

While it may provide a rewarding venture for some investors, the panel put forward some good reasons not to become an angel:

•    Angel investing will not bring a regular source of income.

•    An early stage business will generally take years to begin showing real profits with the average exit feasible in just under four years.

So what about those who are thinking of becoming a business angel, have money but no time to devote to the business they invest in?

The experienced angel investor practices ‘business be awareness’ which means you should have at least some active involvement in the business you invest in; this may only be a place on the board even if you simply choose to observe.

This will at least ensure your cash is being put to good use and tip the odds in your favour. It is no coincidence that, statistically, businesses where a business angel has taken an active role are more likely to achieve a profitable exit. If you only have money to offer without time or expertise then angel investing probably isn’t for you.

For those who still believe angel investing is for them, it can be an extremely rewarding and profitable experience as long as you’re prepared to exercise patience choose your management carefully and, importantly, get involved!  That way you can beat the odds against a profitable exit.