Investment Readiness as a panEuropean Issue

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Investment Readinessas a pan-European Issue
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Investment Readinessas a pan-European Issue
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Returns on Angel InvestmentsThe Bad News -

• 34 of Angel exits are at a total loss
• 13 at partial loss

(Venture Capital Working Paper No 16, Colin Mason
Richard Harrison, Universities of Southampton
Aberdeen)
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Do Angels Make Money?Experience from the USA
the good news

• 26 _at_ between 1x and 4x
• 15 _at_ between 4x and 6x
• 8 _at_ between 6x and 3x
• 4 _at_ over 30x!
• 10,000 in, 300,000 out

Jean Hammond, Launchpad Venture Group survey of
590 angel exits
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Mitigating Risk Portfolio Investing

• 2 investments in 10 will be big pay outs.
• Portfolio Investing
• 10 investments for diversification (over 3 / 5 a
  years).
• 200 reserve for follow on investment
• Angel Investment not to exceed 10 of net worth.

50k per investment Commitment - 1.5m Net Worth
- 15m.
5k per investment Commitment - 150k Net Worth
- 1.5m
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• 1) Discounted Cash Flow (DCF) or Net Present
  Value (NPV) Model
• 2) Exponentially Declining Sales Growth Model
• 3) The Chicago Method
• 4) Decision Tree Model (Modern Monte Carlo
  simulations)
• 5) The Venture Capital Method (VCM)
• 6) Options Pricing Model
• 7) The Warren Buffett Approach to Investment
  Decisions
• 8) The Risk Factor Summation Method
• 9) Cayenne Consultings Valuation Calculator
• 10) Bill Paynes Valuation Approach
  http//www.billpayne.com/definitiveguide.html)
• 11) The Double Haircut Method
• 12) 1X Year Five Revenues
• 13) The Three in Five Method
• 14) The Five in Three Method
• 15) The Double Twice Rule
• 16) The Twice and a Half Rule
• 17) The 1/9/90 Rule
• 18) The Rule of Thirds
• 19) A Third/A Million

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Investment Readinessas a pan-European Issue
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Lost Opportunities

• All investors continually receive investment
  proposals which intuitively have merit, but which
  are either not sufficiently developed or are
  inappropriately structured to be taken forward.
• (Loan and Equity Funding to SMEs in Central
  Scotland, Grant Thornton / Firn Crichton Roberts,
  1996)

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The Principal Funding Gaps not just a shortage
of cash
Equity (cash) Gap
Knowledge Gap
Skills Gap
Demand Side
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Poor Proposal Presentation

• The inability of companies to meet the needs of
  the potential investor in terms of the content
  and presentation of the proposition was
  identified as being a major obstacle to
  progressing proposals. Many business plans were
  described as being inconsistent, lacking in
  depth, and constructed purely in the interests of
  obtaining finance rather than acting as a
  blueprint for the Business.
• (Loan and Equity Funding to SMEs in Central
  Scotland, Grant Thornton / Firn Crichton Roberts,
  1996)

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Poor Proposal Presentation

• This was despite, or sometimes because of, the
  use of professional advisors to produce the
  business plan.
• (Loan and Equity Funding to SMEs in Central
  Scotland, Grant Thornton / Firn Crichton Roberts,
  1996)

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The Principal Funding Gaps not just a shortage
of cash
Equity (cash) Gap
Knowledge Gap
Skills Gap
Demand Side, Supply Side and Support Side
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Investment Readinessas a pan-European Issue
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Business Angels Bank Questions

• What are the maximum and minimum amounts of money
  invested by angels?
• What is the typical shareholding taken by
  angels?
• What types of protection do angels take when
  investing
• Explore the main issues for the company
  founder giving up control/shares of the business.
• Overview of the costs involved in Angel
  Investments
• Explanation of main differences between a VC and
  an angel.
• Ways of identifying Angel deals
• Amount of money required to get involved in Angel
  Investing
• Key elements of a "classic" angel deal

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Investment Readinessas a pan-European Issue
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Investment Ready - Basic Investability

• Explore the Entrepreneurs attitude to
  understanding of investment. Which form of
  funding is appropriate for the entrepreneur and
  the company.
• Assessment of the Investability of the proposal
  can the underlying business be made attractive
  to target sources of funding
• Investment return
• Security / risk assessment
• Potential exit opportunities
• Attractiveness of sector to funders

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Investment Readinessas a pan-European Issue
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Investor Ready Rip Off
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Investment Readinessas a pan-European Issue
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Business Angels Best Practice

• Business Angels are an essential part of the
  financing food chain and from public policy
  perspective they need to be well integrated with
  other sources of financing. The angels valuable
  presence in the early-stage financing should be
  utilised to the full by leveraging their
  investments with co-investments from venture
  capital funds or public sources.
• The EUs Directorate-General for Enterprise and
  Industry report Best Practices of Public Support
  for Early-Stage Equity Finance, final report of
  the expert group, September 2005

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Importance of Equity Backed Companies

• Vision for growth of 20 pa, most likely to
  seek external equity, financing for growth, make
  up only around 4 of current start-ups, but
• In ten years time they will provide about 50 of
  the employment of those firms remaining.
• (comparison of Business Angels Venture
  Capitalists, Mark van Osnabrugge, Said Business
  School, University of Oxford)

.. private equity backed companies increased
staff levels by an average of 20 p.a., compared
with a national growth rate of 0.6
p.a. Extracts from The Economic Impact of
Private Equity in the UK, British Venture
Capital Association, 2004
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Government Should Apply Best Practice

• The public sector investing in co-investment
  funds
• Raising awareness of business angels and angel
  networks.
• Collecting data from the business angel
  marketplace
• Paying attention to the effects of taxation on
  business angel activity
• Ensuring public financing of business angel
  network operations
• Promoting high ethical standards of business
  angel networks
• The EUs Directorate-General for Enterprise and
  Industry report Best Practices of Public Support
  for Early-Stage Equity Finance, final report of
  the expert group, September 2005

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Making Countries Ready for Equity

• Improvements to the bureaucratic systems.
• Removal of impediments to start businesses.
• Removal of monopolies and liberalisation of
  concessions.
• The involvement as much as possible of the
  private sector in infrastructure and
  privatisation of government functions.
• Improvements in the law relating to IP.
• Consistent application of the legal process.
• Funding for the commercialisation of research.

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Dont Depend on Transnational Investors

• The VC 400 mile rule
• Most Angels still invest close to home
• Most cross boarder deals are
• Specialist
• Blockbuster
• For aggregation of capital
• Cash can go out as well as flow in!

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Investment Readinessas a pan-European Issue