Regular readers of this blog may know that the UK Business Angel Institute was launched last month in association with stalwarts of the early-stage scene, the UK Business Angels Association (UKBAA) and Angel News to create standards and professionalism in UK business angel investing.
Last week, Catriona and I were fortunate enough to be invited to contribute to the Institute’s first angel training course. Held last week in a sweltering London, the event brought together a mixture of first time angel investors and budding entrepreneurs wanting to get an investor’s viewpoint. It was a great discussion around the table and I thought it might be useful to touch on a few of the topics in a post.
Angel Basics: Earning Your Wings
Jenny Tooth of UKBAA opened the session with some interesting statistics:
- More than 18,000 angels in the UK invest nearly £1 billion each year in early stage companies.
- With 58 % of investments likely to fail, spread your risk across a portfolio of investments.
- The AngelCo Fund, a £100 million fund set up by the government in 2011 which is only available to syndicates, has helped to drive an increasing trend for angels to form syndicates to invest. Of course, the AngelCo Fund has now extended its reach to Scotland.
As Modwenna Rees-Mogg of Angel News pointed out, when you consider investing for the first time, it’s important to think tactically about your approach. Do you want to be seen as an active investor (perhaps the “lead” angel in a syndicate) or in a more passive capacity? What kind of time/experience you can bring post-investment?
Very Taxing Considerations
Running through the basics of EIS/Seed EIS (SEIS) tax relief for young companies, Geraint Jones of Reeves accountants warned about circumstances where a company could lose its EIS/SEIS qualification - for example, if a loan to the company means the business has more assets than the permitted limit. Losing its EIS/SEIS qualification will mean that a business will be far less attractive. Experienced financial advisors are critical here to keep everyone on the right path in this very complicated area of tax.
Spotting the Right Deal
There was further great advice from Jenny about what to look for as a prospective investor.
- The entrepreneurial team: passion and commitment are crucial but so is a willingness to have an exit as a goal and to not overly attached to their project.
- Entrepreneurs must show willingness to take advice.
- Businesses that are eligible for EIS/SEIS are far more attractive.
- Look for a business plan that shows exactly how a project can make money through a disruptive idea.
- Ask lots of questions: Jenny showed statistics proving that the time spent by an investor on due diligence can affect the outcome of an investment.
The Seasoned Angel
Grant Calton, business angel and former talent manager (Men at Work - who knew?), has made 16 angel investments in 20 years and gave us an insight into some of his experiences. For Grant, the motivation for the extra work involved in investing is to use the business experience you’ve accrued through your life, make your money work for you and, importantly, to avoid the golf course! Interestingly, Grant admitted that his decision-making is often made on gut instinct. He likes a business plan with no jargon, and one that has a plan B and C! Indeed the best laid plans don’t always work out, but he quoted Churchill: “success is walking from failure to failure with no loss of enthusiasm”.
Learning To Be A Business Angel: The Legals
Catriona then gave the benefit of her experience of negotiating angel investments from both the investor’s and entrepreneur’s side of the table.
I’ll not go into great detail here given the fact that we often speak about issues that business angels and entrepreneurs need to understand on the Startup Blog but Catriona gave the budding angels and entrepreneurs a whistle-stop tour of Term Sheets (setting out key commercial points of a deal), Articles of Association (focusing on share transfer, good/bad leaver and drag along/tag along provisions), and the Investment Agreement itself (particularly the warranties and disclosure process).
With the valuation of a company far from an exact science in the early stages, a business and prospective angel often come up with different figures when it comes to the percentage of the company that angel expects for his money, but a share option scheme for the founders provides a compromise on this point.
Finally, Catriona reminded those present that the deal is never done until the money is in the bank - sometimes it can be less painful to walk away in the long term.
What Next For A Budding Business Angel?
This first training session was undoubtedly a success, with plenty of questions and an obvious need for potential investors to have information and advice given in a clear and practical way. The legal considerations of investing delivered by Catriona in particular were well received for shining a light on the nuts and bolts of how a deal actually takes place, together with tips on areas to focus on to avoid problems later on. Those present also appreciated the example of seeing a “successful” pitch delivered by Maureen Scott, CEO of Ether Books, a publishing company promising great things.
Thanks go to both Modwenna and Jenny for inviting us down to London to participate. As ever, their passion and enthusiasm for early stage investing was obvious to all in attendance. If you’re thinking about dipping your toe into the waters of early-stage investing, I thoroughly recommend that you sign up for one of the UK Business Angel Institute courses.