... that is the question which was posed in different ways by two of the speakers at the excellent conference run by Young Company Finance last week.
John Huston, the founder of Ohio Tech Angels and past president of the American Angel Capital Association gave us a fascinating insight into the dynamics and performance of his syndicate. I was particularly struck by the following observations:-
- The average wage in Ohio is $35,000. However, the average salary paid to employees of companies supported by his Angel group is $70,000 – exactly double! John’s comment was that we don’t just need more jobs, we need more tax paying jobs. I am sure that, if this analysis was done in the UK, we would see a similar pattern emerging which fully justifies the increased investment which the Government is making in EIS relief;
- The vast majority of exits are below $30 Million with a much smaller number above $100 Million but virtually none in the band in between. In his view this is largely explained by the fact that the smaller exits mainly relate to Angel backed companies whereas the larger ones relate to VC backed companies;
- Ohio Tech Angels work closely with their management teams to achieve outcomes for investors by which they mean an exit within five years. They try to align the interests of their management teams with those of their investors from the outset;
- They are very focused in the process to bring this about and have achieved an overall IRR of about 25% on their exits (good and bad).
Simon Acland, who was the founder of Questor Investments and ran their funds very successfully for many years prior to their exit, and is also the author of Angels, Dragons & Vultures gave us a VC perspective from which I took the following:-
- Interestingly, the overall IRR of his funds was also in the mid-twenties. Both speakers were able to show very commendable rates of return over a long period. This demonstrates that our early stage investment, if it is done well, can produce real long-term returns and it is an asset class which is worth supporting. This is a message worth reinforcing to stock market investors with the FTSE Index once more in chaos. It is still nearly 20% its peak in December 1999 and showing no sign of real long-term growth;
- Simon identified sixteen cases where his funds had some influence on a change of Chief Executive. Fifteen of these cases had then gone on to successful exits with only one failure;
- He then identified five other cases where there had been no change of Chief Executive resulting in four failures and only one successful exit!;
- It was clear from John Huston’s presentation that, in Ohio at least, American Angels find it difficult to work alongside VC investors. The vast majority of companies are content with relatively modest investment to enable the founders to exit with a comfortable sum rather than a huge fortune. John expressed the view that this is more beneficial to the local economy as a whole as it creates more “cashed-out” entrepreneurs who are willing “to put something back” into the local economy;
- It is difficult for VC investors to see the returns they are looking for in a sub $30 Million exit. They are therefore focused on achieving a smaller number of larger exits;
- It is often said that investors back individuals. While that is undoubtedly true, those individuals must understand that, if the company fails to perform, they must be willing to step aside so that the Board in conjunction with the investors, can make changes to the management team as required for the benefit of all shareholders.
What should the directors of companies seeking investment take from all of this? It should certainly not put them off seeking investment as their businesses will go nowhere without appropriate investment. However, it does mean that they should select their investment partner with care. It is about much more than the first round of funding. The right investor will have the ability to lead follow on rounds and will bring much more to the table in terms of contacts and experience. Management teams must also think very carefully about the compulsory transfer and good leaver/bad leaver provisions so that any management transition which may be required is dealt with in an appropriate way and that those who may be founders but may not be there at the finish are still appropriately rewarded for their efforts.
Much food for thought!