The majority of startup enterprises begin with an idea conceived by two or more people working in partnerships or a group. The chances are, the founders of the business will know each other well, they may even be friends or family members collaborating on a great business idea, the problem is even the best of relationships can be tested to the limit by the inevitable day-to-day pressures that come with running a business.

Do you have a Tevez in your startup team?

As anyone who saw a certain Champions League game this week will know, teams can be affected badly by  disharmony in the ranks. If one member of the team suddenly refuses to play ball, this can have a dramatic affect on morale. Even the most promising teams could feature a Carlos Tevez type character harbouring underlying issues so it’s vitally important that everything is done to prevent problems in those early stages when a business is launched so no one feels aggrieved when changes happen.

The honeymoon period…

A startup is typically launched with a great deal of enthusiasm amongst its founding partners, the ideas are flowing and there is often the euphoria that accompanies that first big order, or securing that first big client which tells you that this business idea really does have legs. This is the exciting honeymoon phase of course, the foundations are being laid for future success and there really can’t be anything that would get in the way of reaching that first million. Or could there?

This honeymoon period is unlikely to last long as the influx of orders and signing up of new clients paves the way to late nights, seven-day weeks and the dreaded accounts. As a lack of cashflow can quickly kill a business in its early stages, a large proportion of time will be spent on maintaining it.

This can be a particularly challenging phase for startup founders and one fraught with danger.

There may be trouble ahead…

If we rewind to that early honeymoon phase this is the point where agreements are made and firm foundations for trust between the partners must be established.  If those foundations are weak, there may well be trouble ahead  because like any relationship, business relationships must be based on trust.

Startup founders who do their homework will establish this through written agreements but unfortunately this can be overlooked by inexperienced founders, often to the detriment of a business. Written agreements between the founders should include elements of what’s expected of each other and just as importantly how any cash the business generates is divided. Taking care of this early on will form the basis of that trust when the relationship is inevitably put to the test.

A fledgling business is often subject to growing pains, that might include changes of direction or evolving ideas that will test any partnership to the limits. To stand any chance of maintaining a successful business partnership both partners should be working from the same page when it comes to their aims and ambitions for the startup.

Sometimes these ambitions may be to grow the business or make adjustments to the service, either way compromises will need to be made and opinions heard. This is why team harmony is so important, without it a business will often buckle under the strain of conflicting aims and objectives.

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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Many are successful, some very successful.

However, does that mean that they will always pick a good investment? No…

A shocking fact buried deep in the Nesta report about business angel investors (Siding with the angels, 2009) declared that the number of successful exits reduced when business angels became active investors.

Yes, that’s right, the conclusion is that angel investors and entrepreneurs do better when the business angels remain the investors who look after and care for their investment – as a non-exec director or with an observer role. They do less well when they become an executive with day to day responsibilities.

How can this be true?

Surely, you might think, a talented team with a talented Business Angel investor who is involved day to day, is more likely to succeed than a team in which the investor takes a back seat?

Indeed. It is possible of course, that the investments in which the Business Angel typically gets involved are weaker – and that is why he feels the need to jump in.

But, regardless, the business failure is largely due to the T-problem – that is the Team.

You see, it isn’t enough to have talented individuals (as anyone who witnesses England at the football World Cup will know), you must have a team that fits together.

And, the temptation of the Business Angel to ‘get involved’ in the team should be avoided. The statistics tell us that he would be better to find a better investment or send back the entrepreneurs to build a stronger team themselves.

So how do you assess the team?

Which begs the question, how do you build a better team? In fact, how do you assess the team you’ve already got to know whether or not it is a strong team?

This is a very tough question. If it was a matter of potential market share – we could look to a specialist who can assess market potential, or establish IP or Patent rights. If it were a matter of money, we would go to a corporate finance expert and ask their opinion. But team? Who do we ask and where do we go?

My gut feeling

Beyond a few ‘after the event’ actions – such as credit checks and references, most investors rely on their gut feeling. Beyond, ‘met the guy(s), like them’, what more do we do?

Well, over the years, very experienced and successful VCs have built up an instinct, a gut feeling.

However, if you are not a very experienced VC (perhaps just a business angel of a few years experience or a successful entrepreneur rather than a 30 year experienced expert in early stage business) then what do you do? Well, you could rely on other people’s experience, but apart from that?

That’s why the new Executive Team Tool (eTeamTool) offers an interesting and sensible alternative to guessing about the management team. (The eTeamTool has is a MediaModo LLP product, who also own www.iBusinessAngel.com).

This tool uses 6 attributes to test each executive team manager and then allows the user to plot each executives results on the same map to show overlap, duplication or the degree to which the team is complementary.

And, the interesting thing is that it doesn’t depend on the skills, but rather it assesses the key attributes that VCs look for. This means that your executive team shouldn’t be built based on skill bases – such as an IT person, a marketer or finance person. For early stage and fast growth companies, these skills can be bought in.

Instead, the composition of the team should ensure that all the key attributes are present – that is, an ability to focus and understand the core market plus the willingness to be open to ideas, advice and react to market behaviour. Lastly, the team needs to be led by someone with charisma and the ability to set a vision and persuade others to work to that vision – even though they might be be paid better by other companies.

The critical thing here, is to put skills to one side and ask yourself the question, can this team bring in what ever skills are (or may become) necessary to make the business a success?

Remember also, that the current hot product won’t always be. Instead, the business needs to develop a constant stream of invention and new product development. Can this team do it?

In otherwords, we are asking, does the executive team have the necessary leadership to see the business to profit and success?

This is the most important question for angel investors and entrepreneurs too. This is the big T or team problem that successful angel investors need to resolve for each and every investment.

Unless you’re lucky enough to have free premises courtesy of your business angel, then it’s often a case of
spending long hours trawling around potential properties looking for the right location and space to occupy.

The main office space locations in the UK for renting are office space in London, Manchester, Birmingham, Leeds and Glasgow.

However if you are looking for a really cost effective office space and are not fussed about or would prefer not to be in one of the big cities then there are some great options throughout the UK.

The internet search

Thankfully the internet makes the chore of searching for space much easier – you can now look for vacant office space to rent using a comparison website such as www.OfficeGenie.co.uk. This works in much the same way as you’d look for a broadband deal or mobile phone package.

Regardless of whether you are a new or existing business, there are significant benefits in checking that you are in the most cost effective location. Using a quick online comparison service, it’s now easier to find more competitively priced office space for rent in your current or an alternative location.

Desk space rental

Starting at the bottom, with businesses that are run by individuals, then the recent growth in ‘desk space rental’ options has been huge. This works in wonderfully simple fashion in that an existing businesses will advertise its spare desk space on the free comparison website and potential renters can locate it using a simple search.

The obvious benefit for people who work for themselves is that it means they can enjoy a proper office environment, and often in a city centre or prime business park location. There is no fuss and bother as the building still belongs
to someone else. You’ll get a desk, basic utilities and generally things like broadband internet too. Better still, it instantly gives your business a respectable looking address and postcode.

Greater needs

Moving up the scale and you’re soon into shared offices, services offices and whole offices for rent. Again, the comparison route is the way to find office space that is ideally suited to your needs as you can search for this using a location, the amount of people or desks you need to accomdate, along with costs.

A shared office can be ideal for smaller businesses as it offers no long-term commitment and contracts are often rolling, that is – they operate on a month by month basis and not a 2 to 3 year fixed term. You can often move in straightaway too, and the administration is very simple too. One monthly bill is often the way
forward.

Serviced offices, on the other hand, differ from a conventional rented office in that you deal with a management company that takes care of all of the day to day running and provides all of the services. This can often include things like broadband, IT support, heating, lighting and ventilation, plus there are generally post and receptionists on offer too.

Again, this is a quick and convenient way of getting office space, it often highly flexible meaning you can add or subtract desks as you need them, while flexible rolling contracts and no commercial lease negotiations reduce the admin headaches.

Traditional option?

Of course, you may just want to rent a regular office in the traditional manner, but thanks to the internet, you can review your options within the space of just a few mouse clicks. You’ll not only save on shoe leather and hassle but it could be hugely cost effective for your business too.

This article was written on behalf of www.officegenie.co.uk, the UK’s first proper online marketplace for desk space and shared office space.

Crowdfunding - Will all the pieces fit together?

Crowdfunding, a model that raises funding for start-ups by harnessing the power of the Internet investor crowd has grown from similar models that already exist in the US, but Crowdcube is the first website of its kind to be launched with UK businesses in mind – will it provide all the answers for entrepreneurs who need investment?

“There is something very attractive about the concept and we at Angels Den applaud anything that makes funding more available to the masses”, said Angels Den founder,  Bill Morrow, when I asked him about crowdfunding, the Internet innovation which threatens to shake up the world of start-up financing.

However there are rumblings in some quarters that crowd sourcing for business investment may not provide the answer in all cases. There are already some business angels and entrepreneurs who have expressed doubts about having large numbers of investors involved in a single business idea.

“Making the BIG assumption that making a financial promotion to a large number of “unsophisticated” and inexperienced investors can be said to be legal [and I remain unconvinced about this, just wait for the first widow or orphan to complain that they did not understand what they were getting into] means I do wonder if having a multiplicity of investors serves the entrepreneur in the medium term.”

There are concerns that the crowdfunding concept may have its limitations for both business angels and entrepreneurs particularly where they need to be in agreement on the investor investee arrangement from the outset to make sure things run smoothly. “We have 6 investors and they often pull us in a different direction to that which we feel is right. That is their right, but in common with most start-ups this is confusing and time consuming.” explained Bill, “Having 1,000 investors, each with their own agenda is going to be a nightmare, no matter how it is dressed up.

One of the benefits of having a business angel invest, is not just about their money … they bring their experience and little black books of contacts. They want to share these and I wonder if much sense of ownership can really be had, by investing £10. Will this be enough to motivate the investor to share their experience? And even if it does, coordinating 1,000 “good ideas” will take a lot of energy.

He added “I also wonder if an entrepreneur feels comfortable telling the world about his business. There are a lot of unscrupulous people out there. Our deals can only be seen by those who have complied with FSA guidelines, even then, confidentiality is THE number ONE question entrepreneurs ask us about.”

Despite highlighting these concerns, Bill welcomes the opportunity Crowdcube could provide entrepreneurs starved of growth capital. “We wish the concept well. Given the death of the banks and the lack of Friends and Family monies it is extraordinarily difficult to find growth funding these days …. We have over 4,300 certified angels and we find it hard, even though we are amazingly selective about those we take on. Currently we reject 13 companies for every one we take on and we find that even then we still only fund about 40% of those.

Against this, should the first deal actually get funded, the social media PR that this generates will be substantial and attract professional angels to take a deeper look at it …. Maybe 1,000 people all cannot be wrong?

It may be a long road to Chile, but the country is offering a warm $40,000 welcome to adventorous entrepreneurs with a global focus.

The entire landscape of early stage funding is in a state of flux – new innovations in funding models are emerging to threaten the traditional status quo and the world has become a smaller place for those adventurous entrepreneurs willing to take a risk internationally.

An event held in London last week attracted a capacity audience of entrepreneurs keen to find out more about expanding their businesses internationally. The Going Global workshop looked at how the traditional barriers to setting up an international business have crumbled to the point where the micro-multinational can open a business on Monday and be trading worldwide by Wednesday.

But what really got me thinking was a message in my inbox a few days ago announcing that start-ups can now apply for $40,000 of seed capital.

Nothing unusual in that, but this offer was being made on Linkedin to entreprenurs interested in setting up a business in Chile. This offer could well suit those entrepreneurs with an adventurous spirit willing to spend at least 6 months in the country.

This wouldn’t be a bad thing, Chile has one of the best performing economies in Latin America and plenty of spectacular tourist attractions to explore when you’re not too busy! But let’s not get too excited by this latest gold rush for entrepreneurs.

The government in Chile has high ambitions to put the country on the global map by attracting entrepreneurs who can compete not only in Chile but also on a global stage. There is also the added bonus of being able to do business in English as well as Spanish which would have been a significant barrier to English speaking entrepreneurs in the past.

This new age of global co-operation has of course been opened up by the Internet and tools allowing businesses to communicate with their customers and build networks with each other wherever they are in the world.

But while the barriers of the past are crumbling, globalisation still presents challenges for business angels and start-up entrepreneurs to overcome. Attitudes particularly in the UK and Europe will need to change to take advantage of new opportunities abroad.

As we know 28% of angel investments in the UK are made within just 50km of home, so it would take a giant leap of faith for those angel investors to consider a business operating abroad. The reluctance of business angels to invest beyond national boundaries is firmly entrenched in Europe and it will take time for these attitudes to change.  However, the emergence of crowdfunding will inevitably speed this process up by forcing traditional angel networks to look at global expansion.

One of the front runners in the globalisation of angel networks is Angels Den which currently has networks in Hong Kong and Singapore with ambitions to expand its operations further.

Despite the promise of offered by countries like Chile, challenges still exist for entrepreneurs too. These are unlikely to be the kind of challenges experienced by the Spanish conquistadores of the past, but even so, if you are an entrepreneur who wants to relocate abroad you will still need to get on a plane and get familiar with the local culture and make quality connections. This will inevitably be harder than it would be on home soil, so a new venture in Latin America will need to be carefully considered.

There will still be language barriers despite 80% of online trade being conducted in just nine languages. So as a business owner you will need to accommodate other languages to maximise your chances of success. By the same token if you are a business angel or a business angel network looking to invest in businesses abroad, experience of other languages and cultures will become an increasingly important consideration as globalisation gathers pace.

Business angels who are 'guardian angels' have a better chance of success.

This should be an exciting time, you’ve waded through all those investment proposals and found a business that feels right, one that you believe has the potential to give you a profitable exit in 3 years.

So what next? Will you be a ‘guardian angel’ or a hands- off angel investor?

Experienced business angels will have learned the pitfalls and the risks of getting involved with fledgling business investment, but novice business angels will often need to learn the hard way as that fledgling business grows and develops.

Entrepreneurs who set up these businesses are a varied bunch exhibiting many different characteristics, but what all those who are successful have in common is a passion for what they do and a strong work ethic. Presumably, having chosen a business to invest in, this will have been identified from the start.

But things can and do change with time. They say you don’t know a person until you live with them and the same applies when you do business with someone, particularly when the commitment is three years or more when it comes to angel investing.

So going back to the introductory point, it is much better to be a hands-on ‘guardian’ business angel so that you have some influence on business growth rather than simply handing over the cash and leaving it to the management team. The existence of a good management team will have been one of the most important considerations from the start. You will already have formed an opinion as to how good they are if you have done your homework prior to investing.

But there are no guarantees, businesses do go through growing pains. Anyone who has started a business will know about the hard work, the sleepless nights, the multi-tasking and keeping costs down to a minimum. If it is a small team then stress levels will be at their highest at this stage and focus can sometimes be lost, particularly if the team or entrepreneur is distracted by other business interests. Again this is something that would need to be considered before investing.

With the odds stacked up against success it is vital that the team keeps its eye on the ball in these early stages. This is where the encouragement and guidance of a business angel who has been there and done it will come in especially handy.

A business needs to be carefully nurtured from the start to survive its early growing pains. Does the business have accounting software? If it doesn’t then the book keeping process will eat into time better spent in other areas such as development. While in its early stages this can be manageable but the business will need room to grow as you never know when a grow spurt will occur.

After the first year or so the set up phase will be largely complete and the business will begin to mature and as it matures it will hopefully have identified a need and be carving niche for itself. But here too there are dangers for business angel investors to be aware of.

Imitation is part of human nature, from birth we begin to imitate those around us and the same can be said about businesses. In those early stages certain approaches will be copied and refined as the business puts its own stamp on what a competitor has successfully been doing for some time. The problem with imitation is it stifles innovation.

Some companies will get so hung up with what their competitor is doing, they will take the eye off what they themselves are doing to make their product(s) more appealing to their consumer. In a crowded market place getting this right is no mean task.

Hopefully the business angel will have identified early the USPs of the business he or she chooses to invest in and identified a clear path to business growth. This is where knowledge of a particular market sector comes in very handy because it will be crucial to provide guidance to a fledgling business at this stage.

It is no coincidence that business angels who take an active role in the development of a business are statistically more likely to achieve a successful exit. The same can also be said of those business angels who offer valuable knowledge in the sector they choose to invest in.

If you are about to invest in a company or if you are an entrepreneur seeking funding, fill in our unique survey to help you decide whether or not a business is ready for investment.

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…

Meanwhile the extension of tax cuts introduced when Bush was President will provide a further boost in 2011. To add to the feel-good factor this year legislation is being floated in Washington that would effectively reduce capital gains taxes on angel investments as long as they are held for five years or longer. There is a possibility that this legislation could be passed early this year as part of a range of measures to support innovation and entrepreneurship.