Similar, in the UK, the government is conducting a high level review of finance for SMEs lead by ex 3i director Chris Rowlands. This review is expected to make suggestions on crowd funding at the next UK budget in March 2012.

Do you think crowd funding should be legal? If so, take our survey – should crowd funding be legalised?

More info here…

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.

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.

Some secrets on Super-angel investing. Click here to read.

Fabrice Grinda discusses his strategy – a few percentgage points in a large number of deals, with very little time spent on picking winners.

He also recommends that there is no formal reporting structure, but, when needed will respond to the entrepreneur.

Fabrice, with his partner, Jose, invest between $10 – $250k, but are always a small part of the overall investment. So far, they have made 23 investments in 2011.

A great micky take of jargon congested investment proposals. Click to watch it here.

The video raises a key point – do investors really want this jargon? Actually, according to some, they do. They just want it to be true!

Well, okay. What they are saying is that you do have to hit the hot buttons for VCs and business angels – so, speaking their language counts. Just make sure that what you say can be backed with facts and examples.

What should be in a startup business plan? Click to read.

Nic Brisbourne is runnig a series of 50 Questions for Enterpreneurs looking to raise finance.

This one is particularly useful, not least, because so much startup time is often spent on a plan that no one reads (or perhaps they do?). Hence, working out both the purpose and level of detail required is essential.

For instance, if a business spent as much time developing its market, it might find that the business plan would write itself!

Due Diligence is often seen as not possible or relevant for an early-stage investment. Yet most business angels lose money on the majority of their investments

So, can due diligence help?

Many business angels comment that “they are taking a punt”, comforted that they are only risking a small proportion of their own capital, and encouraged by the tax credits they will receive, so do they have to do due diligence?

Equally, many business angels have also enjoyed significant success and trust their own gut feel as the barometer of an investment. Yet Nesta tells us (in their 2009 report on business angels) that “even a small amount of due diligence significantly reduces failure”.

Okay, it is true that Angel Investors are often investing money they can afford to lose – but will still experience any combination of anger, disappointment and remorse when that loss is incurred. Is that worth it? 

And there are plenty of examples of Angel Investors following their “gut feel” without exploring and rationalising the causes of these feelings – something that can be an illuminating process for both the angel and the potential investee business.

Whilst Angel Investment will always be a high risk activity, there are due diligence steps that can be taken to significantly increase the chances of success.

How to increase chance of success for early-stage investments

Due Diligence can (and should) be performed on an early-stage investment, focussing on the following areas:

1. The Market Opportunity:
   Market size, product position and pricing
   What is the value to the customer?

 

2. The Management Team:
   What are their competencies?
   What are their strengths?
   What are their personal expectations?
   Where are the gaps – and how easily can these be filled?

 

3. What is the structure for delivering the Business Plan?
   Are the best sales channels being used?
   What are the key risks in the supply chain?

 

4. What are the expectations of investors?
   How may value be realised for investors?

 

Working through these four questions provides structure, balance and focus to the investment process.

It also provides a much greater likelihood that the expectations of the Management Team and the investors are realistic – and aligned.  This means that the relationship between the investors and the executive team are much more likely to be friendly and to work in a cooperative and successful manner.

In my experience, the above process works best if it is seen as a collaborative, rather than confrontational, exercise.

So, bite the bullet, do the due diligence. you know it makes sense.

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Chilcomb helps investors and early-stage businesses through this due diligence process. Chilcomb’s Investor Checklist provides a robust structure to increase the chances of a successful investment.  To find out more, go to our website (www.chilcomb.com) or contact Matthew Dreaper.
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Why does this matter?

Firstly, the new Startup Genome report (from which the research below was gathered) makes the ability to learn the key ingredient of a startup that is likely to succeed.

That is, a startup will evolve through discrete stages of development and that learning is the fundamental unit of progress from one stage to another.

Therefore, the faster the startup learns – the faster it will evolve into a functioning and profitable business (ie success!), and, without learning, it will stay stuck in the discovery phase.

Secondly, the Startup Genome report says that companies that track metrics (ie. can learn from their market and customers) achieve a growth rate that is 7x greater than those that don’t track (and we assume, don’t learn from the market).

Third, and finally, the company must act on the feedback, otherwise it is at risk of growing quickly only to find that its products are not wanted.

The four stages of startup growth

The four stages that the report outlines are (and the typical duration of the stage);

Discovery: 7 months; validating whether the founders are solving a meaningful problem and whether anybody would hypothetically be interested in their solution

Validation: 11 months; converting the customer interest into an exchange of either money or attention (or both)

Efficiency: 17 months; refining the business model and the efficiency of customer acquisition.

Scale: 25 month; time to hit the accelerator and drive growth very quickly.
The time to pass through each stage will typically increase if the founder is a ‘sole’ founder and if the business is attempting to integrate markets or challenge exisiting ones. The time reduces for a google type automation or a business like Twitter which aims to change the way that people do things.

The startups do all need mentors, as the report found that those companies without mentors nearly always failed to raise funding.

The report also found that during the initial discovery phase, money raised is typically in the range of 10 to 50k, the second stage will raise 100k to 1.5m (depending on type of business) and then, at stage 3, where efficiency kicks in, no fund raising is required, until stage 4 when the business achieves a massive boost by going for growth and raising 1.5m to 7m (depending on the type of business).

However, at all stages, the key challenge is customer acquisition which rises from being the number one priorty in 35 to 40% of the first three stages to 70% in the final (scale stage).

Significantly, barely anyone considered product to be the greatest challenge at any of the four stages.

Therefore, Business Angels and Enterpreneurs, do you have a balanced team and can it learn? Solve this, in each of the different stages, and you will raise funds and build a successful business.

Lastly, at our next business angel and VC meetings shall we stop talking about products and talk about the customer and the team only?

Isn’t it time?

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Can your startup team learn? We can tell you…
http://www.eTeamTool.com
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The Congress of European Business Angels Network (EBAN) is scheduled to be held in Warsaw, marking the first time the event has been held in Poland. The Congress is considered the largest and the most prestigious meeting of business angels in Europe and will include representatives of business angels networks, angel investors, angel investment experts and entrepreneurs, mostly from Europe, but also from the US and Asia.

The main topics up for discussion will be syndicates and joint investing by groups of angels, alternative management models, the impact of initial-stage investments upon the economy the near future of angel investing.

The elusive golden key to funding.

For start-up entrepreneurs, is each source any better than the other when it comes to handing you the golden key?

Even though only 3% of businesses actually consider equity funding from business angels in the UK, three  different models of funding have emerged to try and bridge the gap between start-up entrepreneurs and business angels.

So what are they and what do they offer?

Most of us are familiar with is the panel of “Dragons” in the BBC’s Dragon’s Den. Dealing with an angel investor network, fund or the latest innovation, Crowd funding, isn’t really like that, it is a much more civilized affair and tempers will rarely if ever get frayed as they do on TV.  So dealing with networks, regional funds and ‘Internet crowds’ is a nice cosy experience where business angels of various levels of wealth will hand you some cash to get your business going with the minimum of fuss.

Now everyone knows what a business angel is, they’re the saviour of the UK economy as the banks remain tight with their funding. Business angel groups are out there waiting in the wings to dish out cash to get the UK’s businesses up and running. Nice thought, however the reality is somewhat less rosy.

If you think that getting funding for your business from business angels will be easier than getting it from the banks then look away now…

The trouble is these angel funds and networks are statistically more ruthless than the Dragons! If the success rate of the angel networks and funds was replicated on TV, Evan Davis would be in danger of repeating himself even more than he has to do already.

On TV the process is of course more magnified making it far more dramatic, but in the real world getting financing for your start-up can involve months of networking and preparation and even then you are far from guaranteed. Of those who consider equity funding only 3% of them will actually get it.

Regional funds and red tape

This likelihood of success in gaining business angel financing is statistically poor. The North West Fund, which is an umbrella for six individual specialist funds is the largest regional fund of its type in the UK expects to see only between 5 and 10% of businesses who apply getting the financing they need.

This is not surprising when you consider the amount of hurdles you will need to jump to firstly get your business plan considered and then meet the criteria which includes complications if your business is already getting funding from an EU source. But at least the North West Fund doesn’t charge any up-front fees.

Speed funding can be a hit and miss affair

Angels Den is a source of speed-funding charge a modest up-front fee of around £800 to get your business plan in shape and in-front of some business angels.

This approach centres on ‘speed funding’ which can be a hit and miss affair. However, the result of a large number of pitches at any given event means that depending on the event the average percentage of those entrepreneurs gaining finance this way is 43% by my calculations, which is a fantastic result compared to tradition business angel funding which might have a success rate closer to 3%.

What you also get, via Angels Den, is support through advice clinics and an opportunity to meet the investors face to face. This is something you are unlikely to get with the latest crowd sourced funding innovation launched this week….

Getting in with the Internet crowd

The Crowdcube model is about harnessing the power of the Internet crowd. But as anyone who works regularly online knows, this ‘crowd’ can be a fickle one. They will be made up of individuals who like the idea of investing but who don’t have the wealth angels investors do.

It will be very interesting to see how this concept plays out, will businesses be left on site for months on end why the owners go into online marketing overdrive to squeeze the finance they need from the crowd? And will those businesses who do get it find the vital support they would get from an angel network or fund?

So whether it’s fund, crowd or network it really depends on your motivation for seeking financing. Like everything else involved in early stage business, there are no easy answers.

Useful links

North West Fund
Angels DenCrowdcube

Okay, you’ve hunted down the best business proposals, you’ve sorted through the angel networks and found a good supply of deals… now, your network wants you to make an investment, the entrepreneurs appear credible – and hungry … do you press the button and write the cheque?

Or… do you continue with your due diligence?

Making a Business Angel investment is extremely hard and stressful.

You are required to make a decision about the product/ service – based not just on what it is, but what it MIGHT be…

… you need to review the financials, the money in, the money out, the cashflow and the likelihood of an exit with sufficient profit…

… then you need to review the entrepreneur, his or her management team (and their ability to build to talented team around them) and of course, your fellow investors – the Business Angels who may (or may not) be committed to deliver and share experience and help.

Of course, you’ll have advisors involved too, but everyone in the process will have a vested (and understandable) interest in the process. So how do you decide – what the heck – let’s invest?

Is there a neutral and useful review that is quick and easy – that you can undertake? We believe there is…

Sometimes, we get so close to a potential investment that it is very hard to step back and get an independent perspective.

Of course, no investment proposal will be perfect and as a business angel you may well expect to add experience and knowledge that will help the product / service become profitable and successful. However, sometimes the pitch just isn’t quite strong enough.

Other times, you’ll have a niggling doubt.

So how do you resolve whether your doubts are just natural caution but unfounded – or whether your gut feeling is a sign of a bigger problem or unresolved issue?

To help you through the process of deciding about your angel investments, we have devised a questionnaire – free to take – which will guide you through a series of standard questions.

At an advanced stage of the angel investment decision making process, you should be able to answer these questions – or quickly get the solutions.

If not, then either you need more information or the investment proposal is too immature and needs more work.

The questionnaire will help you decide – with an entirely neutral perspective – after all, this is a standard template, whether or not your questions can be resolved or not.

So, before you make your angel investment, take the survey…