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

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CGT rise will put the squeeze on business angels

It’s the day after one of the most eagerly anticipated, or should that be dreaded? Budgets of recent times. Budgets are becoming like buses, normally you wait ages for one and suddenly two come along in just a few months.

There was little in the last one to encourage business angels or entrepreneurs in the UK, but in this latest emergency Budget the Chancellor has gone out of his way to show that Britain may be weighed down by a mammoth budget deficit to reduce, but it is still open for business. Or is it?

Business groups on the whole have welcomed some of the measures introduced to help entrepreneurs and owners of SMEs. The 1 per cent cut to companies’ tax the new £5 million threshold for entrepreneurs’ relief on CGT have been applauded as have measures to reduce National Insurance liabilities.

This all sounds too good to be true, is Mr Osborne really giving a leg up to entrepreneurs so that they can get Britain back on the road to recovery and avoid the possibility of a double dip recession in the UK?

Perhaps, but as with all Budgets, it depends how you look at it. Sure all the headline grabbing measures will show that enterprise is being encouraged. It is also worth noting that entrepreneurs can now claim Capital Gains Tax relief on up to £5m worth of business sales in a lifetime – this is up from £2m in March.

To help fast growing SMEs starved of growth funding the government plans to introduce a new Enterprise Capital Growth Fund to provide a £37.5 million boost of equity finance to SMEs. The Enterprise Finance Guarantee is also being increased by £200 million to support additional lending of up to £700 million to for small businesses until the end of March 2011.

All this funding is great if you are a growing business and able to gain access to it, but as we have seen in the past 12-months start-ups are struggling to secure funding from banks. But the banks have been holding onto their purse strings, which means start-ups have had to turn to business angels for help. The problem is that again there is little in the budget to encourage business angels.

The sharp rise in Capital Gains Tax from 18% to 28% is likely to discourage rather than encourage investment in the UK. Despite the headline ‘good news’ the entrepreneurs relief doesn’t cover all of those involved in the investment chain. Those business angels who are affected by this hike in CGT are likely to decide that the risks outweigh the rewards when it comes to investing at seed stage. This would cut off the vital supply of capital needed by those start-up businesses who can’t secure funding elsewhere, stifling innovation in the process.

Britain had the lower CGT rate (18%) than most other countries, until last night just behind Brazil (15%) and the US (15%). According to a table compiled by Ernst and Young, Britain has now dropped from 7th to 15th with a higher CGT rate than China’s 22%.

Britain’s slide down the scale of competitiveness with these other countries is a concern, and could make it more attractive to invest abroad where the rates are more attractive.

It could have been worse. The worse case scenario of a rise to 40% and without the measures introduced in the Budget to help entrepreneurs would have dealt a heavy blow to hopes of recovery. Everyone in the UK knows that payback time has come, but time will tell if business angels will still be willing to take a risk on early stage growth businesses. The incentives should have been spread more evenly between entrepreneurs and those other links in the investment chain.

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.

With lending to businesses still being squeezed by the banks, business angels can often provide the best route to vital start-up capital.

The dates are:

Norwich: 23 March 5.30pm – 8pm @ St Giles Hotel, Walnut Street, Norwich
Ipswich: 25 March 5pm – 8pm @ Ramada Encore, Ipswich
Chelmsford: 20 April 5pm – 8pm @ Pontlands Park, Chelmsford
Cambridge: 29 April 5pm – 8pm @ Murray Edwards College, Cambridge

Start-ups just aren’t feeling the love from banks right now

It may have been Valentines Day yesterday, but with banks’ reluctance to lend to businesses, they could push more start-ups into the arms of angel investors.

With UK banks still showing a reluctance to lend to businesses, companies could well be forced to look towards alternative sources to fund their ventures. The recession may be over, but with UK GDP figures just crawling over the line into positive territory, how are the banks doing? Those vital foundations of a functioning economy and an equally vital source of lending for start-up enterprises.

Banks may well have received an eye watering £850 billion of taxpayers’ money to keep them afloat but a glance through last week’s House of Commons Committee report, ‘Maintaining financial stability across the United Kingdom’s banking system’ the crisis of confidence that has haunted banks since 2007 appears to have a sting in the tail for businesses in the UK seeking funding.

Despite recent declarations that they are ‘open for business’ banks are still struggling to help those innovative start-up companies the country needs to help UK plc climb out of recession are still being starved of investment. Lending to business, as the report suggests, is ‘falling short of legally-binding commitments entered into by two of the banks that received the most support: the Royal Bank of Scotland (RBS) and Lloyds Banking Group’

The reasons for the banks’ inability to meet their lending commitments are unclear but when it comes to small or medium sized business, lending in a downturn is perceived as even more risky than usual. This creates a paradox where businesses are starved of the vital capital they need to grow which in turn can lead to the failure of those businesses vital to a flourishing economy.

This can only be bad news in the long term for banks looking to bolster their balance sheets. So where can businesses turn to for help? The obvious answer is angel investors.

What has become an age of austerity for the banks could be a golden age for angel investors, those wealthy individuals willing to take a calculated gamble on start-up companies. But it isn’t just start-up capital angel investors will need to provide if banks continue to refuse or give unfavourable terms to businesses hoping to borrow.

According to an article in this week’s Scotsman, angel investors in Scotland are increasingly acting as bankers to fledgling companies, providing £1 million in overdrafts or loans in the past twelve months. Angel investors are also being asked to act as debt providers in the absence of loan and overdraft facilities offered to businesses by banks.

It isn’t just in Scotland that banks are perceived as the villains for taking taxpayers’ money and showing reluctance to lend to businesses. Ask any business owner or entrepreneur in the UK and you are likely to hear that trust in banks is at a low-point.

This could well be good news for business angels, if not for entrepreneurs struggling to launch their businesses. As we have established angel investors are becoming more picky with the businesses they invest in, therefore for all but the most promising businesses, there will be no easy alternative and the door will remain firmly shut when it comes to accessing vital capital.

But what this means for business angels, who unlike banks require an equity stake in the businesses in return for investment, is they can now afford to be even more choosy when faced with more choice. Due to the perception that banks are the villains when it comes to lending, those businesses with the most potential will be more likely to take the angel investment route rather than approach the banks.

And for those entrepreneurs who do make it through the deal funnel, they can gain access to valuable advice and coaching from those who have been there before, rather than just cash from the bank.

There is a caveat. How many of these extra businesses seeking capital from business angels will be viable? According to the banks, one reason they haven’t been able to reach their lending target is the higher proportion of those companies needing credit not having viable business models.

This leads us to two conclusions. Business angels will need to be more wary when it comes to assessing the viability of companies. Banks meanwhile will need to be careful that their reluctance to lend now creates an irreversible trend of the best businesses turning to business angels for their start-up capital now and in the future.

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.