Corporate Finance - Pennies from heaven.

They live in the shadows, they don’t like publicity and they’ve got lots of money. Britain’s business angels are quietly assessing the state of their investment portfolios as dot.com mania subsides. Most are still smiling. They already know investment opportunities that sound too good to be true usually are. There could be as many as 40,000 business angels in Britain – high net-worth individuals prepared to invest in start-up or early-stage companies. And the good news for entrepreneurs and their professional advisers is that there is more cash than suitable investment opportunities. Professor Colin Mason, of Southampton University, who is the country’s leading academic expert on angels, says: ‘I am increasingly convinced there is plenty of money out there. Most business angels say they can’t find enough suitable opportunities to invest in.’ The problem is the angels are not always easy to find. ‘It is an invisible marketplace,’ says Mason. In theory, the National Business Angels Network and the 48 other, mostly regional, networks should be able to play a key role in matching entrepreneur with angel. In practice, most angels have very fixed ideas about the kinds of business they want to invest in, so making a match can be about as difficult as finding a marriage partner at a football game. Accountants ought to have a key role to play in this. They are often the first port of call for clients frustrated in their search for the finance to get a cherished business idea off the ground. They’re also a repository of useful knowledge about wealthy clients with spare cash to invest in the right idea. Mason’s most recent research found a third of angels regard accountants as a useful source of leads about investment opportunities (see box above, right). But although accountants scored better than banks or stockbrokers, they were not as highly rated by the angels as sources of investment leads as friends or business associates. Michael Snyder, chairman of the National Business Angels Network and a partner in accountants Kingston Smith, says: ‘I see accountants as very valuable associates of the network – they can introduce people who want to invest and locate investment opportunities from among the companies they work for.’ The problem, according to Snyder, is that some accountants are worried a client introduced to a wealthy investor may ultimately disappear to another firm of accountants – perhaps the investor’s. He says this is mistaken. The entrepreneurs’ accountancy practice can maintain its relationship with its client while accessing the money an angel wants to invest, sometimes through his or her own professional advisers. But a larger reason why accountants don’t play a bigger role in linking entrepreneurs to angels is that they are not always aware of the extent of the opportunities available. Too many are acting as ‘accounts factories’ churning out annual results without looking at the broader business context their clients have to deal with. And they don’t really understand how business angels plug that critical ‘funding gap’, ranging from around #50,000 up to #1m, which is more than banks are generally willing to finance by overdraft but less than venture capitalists will fund. The key to making a successful link with a business angel is understanding what makes them tick. Mason found that seven out of 10 business angels have net worth, excluding their principle residence, of more than #500,000. A similar proportion have founded at least one business of their own and many are what Mason calls ‘serial entrepreneurs’. Although angels generally place five to 10% of their portfolio in unlisted companies, amounts they have available to invest range from #10,000 to more than #1m. An average, Mason says, is around #100,000. But the statistics tell only part of the story. You need to talk to angels to understand what makes them really tick. Norman Price is a former managing director of a British Steel company, Triplex Lloyd, who describes himself as a ‘businessman by habit’. He decided to become an angel about five years ago. He was attracted by the idea of investing in small businesses partly because of the expertise he could bring. This is a key point. Many angels are looking to put in more than money. Some have sold their own businesses, tried to retire, become bored and look on becoming an angel as a way of being involved with interesting businesses without having responsibility for the day-to-day grind. ‘Often small businesses come from a marketing, technical or production background. You can sometimes help them take an overview,’ Price says. ‘There are certain things I’m looking for when I decide whether to invest in a company. ‘One is a unique proposition. It may be some intellectual property, marketing or branding. But it needs to be a differentiated business. ‘Secondly, I’m looking for something with a growing market – or which has some new purchasing activities which means you have got opportunities. The third point is distribution – which is often weak in new businesses.’ One of Price’s most successful investments is Bede Scientific, a Durham-based company which is becoming a world leader in materials characterisation using x-ray technology. Price originally put in some of his money as part of a #850,000 financing when the company was seeking a capital injection for growth. Now the company has a turnover of more than #3m and is growing profitably with 80% of sales in overseas markets. Sarah Anderson decided to become a business angel after she established her own company Mayday Group, an employment agency for catering staff, and it was running efficiently. ‘When I started my own company, I went on a small business course with the London Enterprise Agency. When I was thinking of getting involved with another start-up, I got in touch with their business angels introduction service, Lenta Ventures.’ Her first investment was a children’s nursery called Teddies Nurseries – she was pregnant at the time. It started in Fulham and successfully expanded to other parts of London and elsewhere. Anderson has sold her investment in Teddies but put money into Poplars, a 152-place day nursery in Swindon. Like other angels, Anderson does it for more than the money. ‘I don’t think I do it purely for financial returns. I do it because it interests me.’ Jason Purcell had a background in the City, as an investment analyst at UBS before becoming an angel. ‘My experience as an analyst working in emerging markets and interviewing dynamic entrepreneurs first got me interested,’ he says. Purcell says personal chemistry is critically important if an angel-entrepreneur link is to work well. ‘I think you need to be able to trust that person. You need somebody who has got vision and who is trying to do something new.’ He, too, believes bringing management talent to the table is as important as the money. ‘The great problem I’ve found with the companies I’ve been involved with is that the entrepreneurs are so involved in the day-to-day management, they never have the chance to step back from the business and decide where they’re going on a one or two year timescale.’ What turns him off? ‘If people don’t recognise there is competition out there and go out actively to seek it, that is something I would be a bit concerned about.’ Purcell has invested in Simulacra, a hi-tech business that specialises in content management systems for the internet. He joined as chairman and finance director, not just to invest, but to provide management expertise. ‘My role was to put the company on a proper financial footing and get the infrastructure in place. When a company is growing very rapidly, it needs a robust infrastructure,’ he says. While there are thousands of angels looking for deals, research suggests they are reluctant to sign on the dotted line unless the terms are absolutely right. Mason found more than half of the angels he interviewed in his research had failed to reach agreement on at least one or two occasions. And Snyder points out: ‘Business angels are people who have made some money and understand the way of the world. They are not going to be conned by some transitory hype.’ They may be angels – but they are not saints. www.nban.com National Business Angels Network www.capitalmatch.co.uk Matching service for seed firms www.business-and-skills-direct.co.uk Registration service for investors and investees DOT.COMS: WHERE ANGELS FEAR TO TREAD Business angels find many of the opportunities to invest in internet start-ups ‘too speculative’, according to Bernard Hallewell, managing director of National Business Angels Network. Yet one third of the investment opportunities in the Network’s most recent bulletin are in internet or IT. The Network gives these tips for dot.coms seeking investment: – Research markets well. – Identify a critical mass of potential clients – enough who want to trade online. – Assemble a management team with good business skills. – Ensure you have genuine knowledge of the competition. – Develop a real branding opportunity. (But be aware that in the dot.com economy, young consumers have little brand loyalty.) – Create the potential to attack and win a share of international markets. Hallewell adds: ‘In the past few months, the number of technology-based opportunities has grown at a steady pace. There are huge opportunities for canny business angels. New businesses need cash, experience and common sense to go with their enthusiasm – qualities they’ll find in a good business angel.’