Angel Exits: about time too 

I fear we sometimes forget, in the excitement of getting into an investment and because of the great tax breaks on offer if you do invest, that the point of angel investing is to make a great positive cash return at exit, even if only on a few of your investments.   

I fear we sometimes forget, in the excitement of getting into an investment and because of the great tax breaks on offer if you do invest, that the point of angel investing is to make a great positive cash return at exit, even if only on a few of your investments. 

I wonder which reader has held an angel investment for the longest period without the option of an exit? I have a friend who made an investment over 12.5 years ago.  It's still sitting there, no sign of an exit and the CEO stopped bothering to return calls a long, long time ago.  Can you beat that?

Clever angels I know speak of typically being invested for 7-10 years, and hardly ever achieve an exit in the 3-5 year exit by trade sale or flotation marketed in many an investment pitch.  Maybe the quick flip investment is normal in Silicon Valley, but on this side of the pond, I hear tales of investors with 25, 30 or even more angel stakes in high growth potential companies that have been held throughout time it has taken for their children to start secondary school, go to university, take numerous internships and eventually settle into a "proper" career.  In fact for some I suspect the arrival of grandchildren will come before the "liquidity events" they believed would happen.

The challenge of a long term hold in an equity position is that it has a major impact on IRR, even if the cash on cash return looks great.  Even in our current low inflationary environment time value of money still applies.

Savvy marketers in the industry even celebrate the long term nature of angel investment - its "patient capital - well done you!"  It is little mentioned that patient capital is stuck capital. Perhaps it's time to move the discussion about angel investing away from putting the money in to when you will get your money out.  And I think you should have the option of getting that money out before the final exit event if you want to.

Lucky angels sometimes get the chance of a partial (and occasionally a complete exit) when there is a really big round of VC investment, but the normal pattern is for you to have to hold on until the liquidity event, that trade sale or flotation so often mooted in a pitch deck's exit slide.  And unless you pay to play by reinvesting in each new round your investee raises, the chances are that your ability to influence the exit will only decline as time moves on. 

There are some heroes amongst the VC world.  I recollect being impressed by DFJ Esprit who were profiled in an article way back when as being a house that saw the point of buying out angels if they could, and more recently the Business Growth Fund has tried hard to market its own capital to entrepreneurs and angels on the basis that it too will create an exit for angel investors if they want one.  But even if BGF and its ilk do make an offer to buy out the angels, as sole acquirer, it may be hard to know if they really are paying a true market price.

The rules of SEIS and EIS do not help the idea of being able to sell out of an angel deal before the final exit - being obliged to hold for 3 years to keep your tax breaks does a great job of tying you in - especially as the clock restarts for every new round of shares you buy following the first round. There is an illogicality to this.  If the Government wants to get capital into companies, does it really care or need to care who owns the shares once the investment has been made?  One could argue that allowing investors to flip their investments quickly will make money move more quickly and the economy turn faster.  If investors could sell "in the interim", might we not see the arrival of specific sub groups of angels - start up specialists who would sell out for a smaller, but quick profit and possibly a high IRR to early and growth stage angels and so on?  Would this not be a good thing?

Is it in the interests of the management of a company to have a shareholder base that can opt to sell as well as continue to buy before the final exit?  (It makes no real difference to the company itself who sits on the shareholder register after all). To those who claim it will be distracting for management, yes of course you are right, but if you turn the tables and create an environment where investors can sell, this will encourage entrepreneurs to recognise that they need to look after the interests of those who put up the true risk capital. Just as the arrival of the web and social media has made it easier and cheaper for entrepreneurs to engage with staff, customers and suppliers, so too can they look after shareholders effectively and cheaply.

I cannot recollect ever having a debate with anyone over what the optimal shareholder register should be at each stage of a company's life, but I bet it will not always be the shareholder list the company started with.  This is a debate I think we should all start to have. 

What is, for example the optimal shareholder base for a consumer start-up?  1,000s of crowdfund investors - probably; for a really high growth hardware start-up maybe you need a few big guns with really deep pockets.  Fast forward a couple of years though and that consumer start up may now need £ms to expand internationally from heavy hitters who understand the costs of expansion, whilst the new Apple may be looking to a flotation and might like to book build with a strong retail investor base that loves to own its products. We need to make it easier for these types of change in shareholder base to happen and more importantly we need to make it a basis for debate before the early rounds of money are invested. 

As you may be aware I have recently become a Non-Executive Director atwww.assetmatch.com.  The team is impressive, the business model is great, the potential is enormous - but I want to be involved and help the company grow massively because it offers a way for angels and indeed private investors in former BES and now EIS companies both to exit from and buy into private companies via a simple and transparent auction process.  AIM plays a vital role for companies that wish to be listed and offer a daily quote. Via a different technique - an auction - Asset Match creates a secondary market for private company shares as needed.  It is telling that despite being so young, investors are already trusting Asset Match to manage trades of blocks of shares in the £100,000s.

The lively auctions that Asset Match holds settle sales and purchases of shares at a price which is satisfactory to the buyer and seller.  No-one has to sell, no-one has to buy, but once old shareholders realise that there is a market price from a willing buyer from a new investor, it is a very liberating experience.  It is also far better than the rather clunky system that so often appears in shareholder agreements with their complicated mechanisms designed to dis-incentivise a sale. Auctions set a market price because new investors can bid for shares too.  The laws of supply and demand mean that transparent price will be achieved.

One of the many beneficial outcomes of allowing a secondary market in company shares is that the company can adjust its shareholder base to suit its particular phase of development, and this may not just be VCs or PE.  Interestingly often the buyers on Asset Match are also private investors - not necessarily the same people as true start up angel investors - but certainly not "institutions."  The capital available from this new source of capital needs to be encouraged. They would like to see more opportunities to buy into strong companies with a track record that can be analysed and have the capacity to invest new monies if required.  That should make most entrepreneurs' ears prick up I hope.

I hope that now entrepreneurs and investors have the option to create liquidity events before the final exit that every pitch deck start to incorporate a new line on the exit slide, which, as well as mentioning an exit via trade sale or flotation in 3-5 years, will also include a line that it will offer investors the opportunity to get out or get in via regular share auctions along the way.

.brands and .domain-hane-squatting in the new internet age

Successful entrepreneurs understand the importance of an online presence in creating a profile for your business. Your website, like your other marketing channels will evolve as your venture grows. Needless to say, most ventures opt for their brand name as part of their web address, as long as somebody else doesn't already own it. 

If someone else registers a web address using a word or name that you have registered trade mark rights over and they don't - whether you're the latest venture or a multinational - you can dispute their ownership with ICANN (the Internet Corporation for Assigned Names and Numbers), through its Uniform Domain Name Dispute Resolution Service.

Making sure your brand is not diluted online through use by other organisations is key to any business from the outset. As your venture grows, you will want to police any brand rights more and more assertively.

When it comes to domain names, things have just got a whole lot more complicated. Until recently, web addresses had to end with a top-level domain (TLD) like co.uk, .fr or .org. Each TLD is controlled by an ICANN-approved registry.

Earlier this year, we began to see a different kind of TLD out there - the generic TLD (or gTLD). These can be actual words, like .clothing, .cars or even brand names, like .tesco.

Amazon has applied for a whole host of domains, including .kindle, .smile and .amazon, and BMW has applied for .mini. With a $185,000 price tag, however, these individually branded gTLDs were never intended for start-ups. But, gTLDs like .books and .cars also offer more affordable opportunities to start-ups. Like the geographical TLDs before them, many of these domain names are being allocated to ICANN-approved registries.

This host of new branding opportunities also presents a host of new branding risks. The threat of domain name squatters, who take your brand name in bad faith and purchase it as a web address, has only become greater with the introduction of (potentially) thousands of new TLDs.

In addition to the Uniform Dispute Resolution Service, ICANN has created a specific body to ensure that registered trade mark owners can prevent abusive web address registrations: the Trademark Clearinghouse.

The Trademark Clearinghouse holds a central repository of trade mark information. If your trade mark information is held in the Trademark Clearinghouse, you get to enjoy an exclusive 30-day "sunrise period" whenever a new gTLD is launched, in which only you can secure the corresponding web address matching your trade marked brand. And, when the sunrise period ends, if anyone else applies for a gTLD web address with a term in it matching trade mark information stored in the Trademark Clearinghouse, the applicant is warned that there are trade mark rights over the address they are applying for. If they continue with the registration regardless, the trade mark owner is told and they can take action against the potential squatter.

To benefit from the Trademark Clearinghouse's services, you have to proactively submit to them your trade mark information either yourself or through a designated agent. The process is simple and the price is low, as unlike the gTLDs themselves, the Trademark Clearinghouse is intended for businesses of all sizes.

For more information on gTLDs, or to submit your trade mark details to the Trademark Clearinghouse, please contact Matt Sammon at [email protected]

Should old people invest more in Venture Capital? 

When does a person become old these days.  Is it at retirement, 70, 80 or 90+?  Or is being old just a mindset?  I think my definition of old is that you have declared yourself thoroughly retired, i.e. if you are still earning it is only small and possibly sporadic.  The reason I have chosen this restriction for the purpose of this article is that I want to muse on how important Venture Capital could become to these people in the future as a source of income, as a way to build wealth and as a way to pass that wealth onto their heirs. The other day I held meetings with some VCTs and also some angel investors with HM Treasury officials to discuss the consultation on the VCT, EIS and SEIS schemes.  The attendees were, without a doubt, older rather than younger and the eldest attendee was in her 80s.  All were highly intelligent, bright and knew what they were doing.  They were probably more likely than the young to read thoroughly investment prospectuses!

With the Chancellor's excellent plan to liberate pensions, older people are going to be looking to new ways to get a return that will pay for their retirement.  As more people breach the inheritance tax thresholds they will also be looking for ways to ensure that hard earned wealth can pass to heirs without being shrunk badly by the taxman. 

Although there are a growing number of younger angels, those with the most cash available (and that which they can afford to lose), will always be those who have already "made it."  And except for the lucky few, "making it" tends to take 20 years or more. So even if you start out as an entrepreneur aged 20, you are likely to be in your 40s or 50s before you really have your children off the balance sheet, your debts repaid and be bored with taking 5 sun-filled holidays a year. The chances are that you will actually be in your 50s, 60s or even 70s. At this point you need to start generating income from the wealth you have.

The VCT industry woke up long ago up to the needs of their older shareholders.  We will be discussing what they are doing to provide an annuity style income for investors at our VCT & EIS Investor Forum on 26^th November. Suffice it to say, the issues of a reliable tax free dividend yield, spreading risk to mitigate against the capital downside, discounts to NAV and liquidity will be top of the agenda. 

EIS and SEIS in the meantime, because of the way the rules work, discourage the payment of dividends to investors (capital gains are tax free, but dividend payments are not), but they do offer Inheritance Tax Relief.  I know of quite a few people who have power of attorney over the affairs of wealthy, very elderly (maybe senile) relatives (from whom they will inherit) and are taking advantage of the opportunity to put a limited amount of these fortunes into angel deals.  Good on them I say - as long as they are not investing more than 10% of the total wealth, they are only doing what is sensible. 

The question is however, whether older people should be placing far more eggs into the Venture Capital basket?  With the ease of crowdfunding, the reality is that in today's world it is going to become easier and easier to access high risk investment opportunities which may appear on the face of it to be fun and exciting rather than something where statistically you may have more than 50% chance of losing all your money.

It's an interesting thought.  Many Venture Capitalists are already reliably delivering in terms of outstanding absolute returns.  They understand portfolio risk and how to outperform.  If more can join them and between them they continue to use the VCT structure to provide gross yields of 5-8%+ per annum and invest in companies on behalf of EIS and SEIS eligible investors to create high quality wealth in an inheritance tax protected environment, it may be appropriate for the brains that think about these things  to start to encourage old people to invest 20,30,40 or even 50% of their wealth in a balance of VCTs and EIS/SEIS funds and companies rather than in bonds which barely beat inflation. 

And if we can enable more EIS/SEIS entrepreneurs not just to start, but to succeed and really build companies, not only will they get rich, but their crowdfund and angel investors will too, providing the money for that lovely retirement home and not 5 but 7 sun-soaked holidays a year.