Angels 101 is this for you
David Nicholson
07-Jan-07
Now that we live in a world fixated by reality television, the real world has to try to catch up. Where once angel investors were little-heralded, barely-understood figures in the business community, carrying out their work with angelic discretion, these days public understanding of the role is based on the crude and sadistic pantomime of Dragons’ Den.
For all its faults, Dragons’ Den has certainly increased the public appetite for private equity investment, alongside media coverage of real private equity companies’ spectacular returns and rising levels of individual wealth, to the point where many thousands of people in the UK have sufficient spare capital to invest in speculative ventures.
Where there is appetite, there is a market opportunity. So into the void comes Equity Entrepreneur, a company founded and managed by Chris Clegg, himself a private equity entrepreneur. He runs several workshops a year for prospective angels, professionals who advise them and fund seekers. I joined them for a day of workshops, presentations and discussions at Henley Management Centre, on 8th November.
The background to the workshop, as Clegg explains in his preamble, is that too few people understand what it takes to be an angel. "You need to have enough money to lose, skill and understanding, and experience," he begins. "The trouble is, the learning curve can be very expensive."
He goes on to sketch out a scenario: “Darling, I’ve just made £5 million and I’d like to invest £2 million of it in other people’s businesses.” His wife agrees, so he invests £250,000 and loses it. Then he invests another £250,000 and loses that as well. “You can imagine the next conversation,” says Clegg.
So while Clegg advises that successful angels need to make 12 investments on average, many get burnt so quickly that they never do it again. “We want to fast track the learning process,” says Clegg. For the traditional angel investor, who has come to the subject late in life, having spent his career building and selling businesses and now wants to enliven his retirement years with some judicious investments, the phrase ‘fast track’ might jar. Surely one of the points of being an angel is that you can afford to take a longer view, you are not hurried and anxious.
In these days of aggressive private equity turnarounds and everquicker exits, angels it seems are no longer afforded the luxury of time. Two of the participants at the workshop in Henley were in their early 30s, had made some money on the property market and were considering how to invest it. “We’re not sure this is for us,” said one of them, “but it’s been very interesting to see how it works. We can probably use what we’ve learned here in other kinds of investment.”
This is certainly true. There are dozens of pieces of good advice for investors of all stripes with the workshop sessions led by three highly experienced and successful angels. “You need to trust your own judgement, and – maybe more importantly – other people’s judgement”, “Some people keep investing to prevent losing face”, and then a whole series of tips for spotting a good prospect: “Have they got a methodology for getting to the customer and getting money off them?”, “If the leader of the company doesn’t understand money, maybe he shouldn’t be the leader, or maybe he doesn’t get my money,” and so on.
For the uninitiated prospective angel or fund seeker, the day passes in a whirl of such apercu, progressing at a brisk trot from risk management to personal risk to investment risk, deal risk and more. There’s no doubt left in anyone’s mind that this is a risky business. If you’re looking for solid returns, look elsewhere.
Indeed Chris Clegg has now signed a marketing agreement with FTSE and Dow Jones indices to make small cap company performance data available to angel investors so that they can benchmark the performance of their investments.
So what is the upside, apart from the chances of hitting pay dirt if you get it right? “It can be great fun,” advises Clegg. “There is an element of mentoring, of putting something back.” This chimes with the traditional image of angels, as kindly Godfather figures gently encouraging an enthusiastic but naïve young entrepreneur. We discussed how an angel can fill a missing role in a company – for example bringing financial expertise to a company with plenty of product and marketing skills but little understanding of accounting.
The workshop elements of the day begin mildly enough, with a discussion of the merits and demerits of a particular business plan. Everyone broadly agrees on the main issues: this company lacks marketing expertise, its products could go out of date and its financial projections are unrealistic. But as the day goes on the complexity of the calculations increases, until almost everyone is left chewing their pencil in despair, at a loss over how to work out the risk/reward ratio for a motorbike company that has apparently not sold a single bike.
Nevertheless, the consensus it that this was a useful exercise. We may not know the answer, but at least now we know that we don’t know, as Donald Rumsfeld might put it. We were encouraged to rely most heavily on a ‘back of the envelope’ style of valuation, using other methods simply as a back up.
Finally, four real live entrepreneurs who had been with us all day made their pitch to the rest of us, just like in Dragons’ Den. We were kind but firm, not afraid to lay a gentle boot into their carefully worked out plans. It was fun! (though not necessarily for them). We decided that the guy who had devised a way to get the best price for a part-exchange car was the pick of the bunch. Straight forward, direct, addressing the concerns of investors and describing in detail how this business was going to make money, he casually mentioned that someone had put in £200,000 the other day. It was a shrewd move: if someone else thinks this is worth ponying up for, then I’d be a fool to miss out, we thought.
In the real world, of course, these decisions are fraught with danger and difficulty. But just for a second we were there, behind our desks, with the wads of cash sitting in front of us, living out the Dragons’ Den fantasy. For more information on the workshops run by Equity Entrepreneur contact Chris Clegg at: info@equityentrepreneur.co.uk Tel: 07860 700305
