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Effective Angel Investment: Art or Science?

Published on May 2, 2018

On Thursday 24th April, Rod Beer (Community Director at the UKBAA) led a 2-hour workshop to help attendees become ‘effective investors’ – specifically for existing and budding angel investors. Rod provided a useful overview of the UKBAA, the UK Business Angels Association to the uninitiated, and described it as the trade body for early stage investing. The UKBAA connect investors with each other, help them to find deal-flow, and connect them with earlier and later stage funders.

Over the session Rod drew on some recent UKBAA research to share some surprising insights:

  • 65% of investing takes place in the Golden Triangle (London, Oxford and Cambridge).
  • 69% of investors invest in their home region and 59% of investors invest outside their home region.
  • 69% of investments are meeting or exceeding investor’s expectations.
  • 86% of angels invest alongside other investment (InnovateUK, R&D tax credits for example)
  • £1.8Bn is invested annually by angel investors in the UK via SEIS and EIS (and only £300-400m by VCs/institutional investors)

In a world of too many events, I thought it would be useful to share a few highlights from the presentation for those who couldn’t be there in person:

What is an angel investor? An individual who provides money, time and expertise to help a business that they invest in to thrive.

The earlier in the lifecycle of a business that you invest, the greater the risk. The majority of angel investment opportunities are what Rod calls ‘early stage’ companies i.e. those who have a proven product and have in some way validated their product through commercial traction, they’re usually seeking £100k- £1m. Angels also invest at ‘early or growth stage’ i.e. their business is trading though often not yet profitable and is looking for investment to scale in the order of £1m-£5m.  If their product or service is more tested their valuation will be higher and they should expect to gain investment more readily.

What makes a good angel investor?

Someone who effectively supports their investments –

  • Reinvest when they need more money (if they deserve it). If you don’t reinvest (i.e. follow through) have a good reason. Remember to keep cash aside to increase shareholding and back star performers.
  • Introductions – bring your friends in to invest too and to help your investments to find potential customers too.
  • Advice – share your experience and be a soundboard. Don’t be a first-time investor investing in a first-time entrepreneur – don’t hound and pester them to give you returns – give them space to grow.
  • Encourage founders to use your investment to leverage other finance – InnovateUK grants, co-investment, R&D tax credits. Equity is the hard money to secure so once it’s there, consider whether there are regional investment funds to support.
  • Look beyond the ‘investor meeting’ – talk to the founder’s previous employers, explore their online presence – understand the founders and their business ambitions.

What should I look for in an investment?

  • ‘Always back the jockey, not the horse’ – 60-70% of your investment decision should be based on the quality of the team – a passionate, driven CEO, a technically capable CTO and people who are aware of their gaps.
  • Consider whether it’s truly a scalable You don’t want to find yourself having funded a lifestyle business unwittingly (unless that’s your priority).
  • Look for a proper unique selling point (USP) – there’s always competition but do they have something significantly faster, better, smaller etc. Be a ‘mystery shopper’ and get under the skin of the market, proposition and competition.
  • A realistic funding journey – the company you invest in needs to have grown enough by the next time they need more money, to attract more investment and excite investors. This might mean that they demonstrate a 10% month on month growth rate, or they are doubling in size every year.
  • Viable, sensible, exit strategy – founders should be driving from creation to exit – they should understand why they will exit and what a good exit looks like for their business.

How should I manage my portfolio of investment?

  • Expect your investment to be committed for 7-10 years. You should be looking for 10x return over 7/8 year investment period. Don’t burn out in 12 months – and make all your investments and then wait for the return. Don’t take too much equity: next stage investors won’t invest if there’s not enough equity there for the founder which will jeopardise the business’ future growth.
  • Take a portfolio approach – always the priority. It’s a high-risk industry. Invest no more than 10-15% of your capital deployment. Invest in a minimum of 10 – 15 businesses, they need to carry losses and create returns. Don’t’ just invest in 3 companies and hope it works out. Lead on some/a handful, follow on the others, build a network of investors that you trust. Don’t try to invest in things you don’t have specialist expertise in. There’s a high failure rate, some suggest 5/3/2 or 7/2/1 where 7 fail, 2 provide a small return (1-3x) and 1 will smash it out of the park! Matt Lerner from 500 startups explains that they’ve invested in 700 startups and they see the ratio 70/20/9/1 (1 is crazy unicorn).
  • Find a ‘lead angel’ to follow if you’re not ready to lead a round. This is someone that you trust and respect, who really understands the industry. Be passive on some of your investments: why take all the risk yourself, put some money behind others.
  • Be part of a group – share due diligence (5 or 6 people) based on each person’s expertise. If you all like it, there’s a better chance it’s a good deal. This will help you to see more deal-flow (you should only invest in 1-2% of the companies you see), ensures the founder can access more expertise and helps with future investment rounds as there’s more potential sources of investment. E.g. Angels 5k, Surrey Investors Club
  • Take some time to understand loss relief and tax relief schemes.
  • Work on the assumption that it’ll typically take 6-9 months from meeting to completing the deal.

A few more top tips:

  • Where do the best deals come from? Referrals, investors, entrepreneurs, incubators.
  • How can I learn more about the art (or science) of angel investing? Watch out for the e-learning modules coming soon from UKBAA to compliment this session.

The UKBAA and Engine Shed are working together to deliver a new regional Angel Hub. For those active and budding angel investors who are members of the UKBAA, membership of the Angel Hub will provide free access to the Engine Shed Business Lounge, a range of events and training and support via the Quarterly Investment Briefing network.

If you are an investor and you would like to join the Bristol Angel Hub, please find more information and apply here: http://www.engine-shed.co.uk/projects/scale-up/angelhub/

If you are an investor and you would like to receive invitations to future Quarterly Investment Briefings, and to see the Quarterly Investment in Brief newsletter hit your inbox, please sign up here: http://bit.ly/ESQIBFORM. Future event schedule: Thursday 28th June, Thursday 27th September and Thursday 6th December all 16:00 – 18:30

If you are a scaleup founder I’m afraid this isn’t the event for you. However, if you would like me to share your investment proposition with this group, please send over a one-page summary of your proposition at least 48 hours in advance of the QIB events.

If you would like a copy of the original pdf (with more legible font), please email me – details below.

This blog series tells the story of the Scale-up Enabler, Briony Phillips. Briony joined the Engine Shed team on a 1 year contract in June 2017 funded by Business West, Engine Shed, The University of Bristol and the West of England Growth Hub. This group have a shared ambition – first, to identify scale-up businesses in the West of England region and to better understand their challenges and second, to design, facilitate and support initiatives that will make it easier for businesses to scale-up more effectively – in the long term.

Links and information are correct as of May 2018.

Briony – Scale-up Enabler
briony.phillips@engine-shed.co.uk
@BrionyPhi1