Are we in an Angel bubble? 

Lunching with a wise lawyer the other day, the topic of apparently obscene valuations came up.  His favourite story of the moment is a £5m round which is just closing for a near start up on a £50m pre money valuation.  What sector you might ask?  Internet, FinTech, EduTech?  No! It's in a sector which (to spare the blushes of those concerned) is in what I choose to call mobile food retail.

Then there's all those toppy valuations going through the crowd funding market - you will know the ones I mean - the fact the many of them are in alcoholic drinks does make me wonder whether the investors have been sampling too much of the product before signing the documents.

Meanwhile cynical experienced angels tut away about how "damaging this is to the companies" - how on earth will they be able to do an up round when the start-up valuation is higher than the typical "good trade sale price" for a UK exit is in the region of £20m and is frequently much lower.  They have a point, but this is still worthy of further discussion.

There are some very sensible basic rules of valuation.  Companies with profits can be valued on PERs and EBITDA multiples using nice sensible quoted comparables and precedent trade sale transactions.  My personal favourite rule is letting the new money take between 25% and 35% of a round and then working backwards from there based on the cash needs of the company until is it reliably cash flow positive.  Some people like to use a very simple valuation methodology, for example, £100k of value for great management, £100k for a great defensible product, £100k for an enormous market opportunity and so on. I recollect that Jude Cook the founder of ShareIn, the crowdfunding company, liked the pre-money valuation model based on amount of time and effort put into the business to date.

Nirvana would be to know what the exit price will be for the company and work backwards from there, but outside the comment above of a £20m exit being very respectable, we are inevitably in the Night Garden if we try to value on this basis!

Why are we in a bubble if you agree that this is the case?  Well, it's pretty simple really.  Angel investing has become fashionable, the rise of crowdfunding is driving tens of thousands more people to look at private company investing and inevitably some of these will turn towards angel investing as philosophically and strategically better for them personally as an investment class.  The fact that an unprecedented £1.4bn was invested under EIS (almost treble that invested in 2010/11) and £155m under SEIS (up £60m year on year) gives us one clue; The Sunday Times Rich List another. Quite simply there is an awful lot of money chasing deals, and some of the people holding that money think of £1m as a birthday present for a beloved daughter to "spend on something pretty".

At the other end of the financial scale, crowdfunding is now a cool middle class activity. Private company investing is no longer the preserve of the elite of cashed out entrepreneurs and a few others.

Rightly or wrongly, these new classes of investors are not hidebound by the "rules" of the traditionalists and they may be investing for reasons beyond simple investment returns.

The news that BrewDog is setting out to raise £25m without even using the formal angel or crowdfunding industries, but is confident that is can use its own website (approved by the way by the UK Listing Authority!) means that fundraising is being completely taken out of the hands of the advisory community who have precedent to guide them.  (By the way, once again it's the Scots showing us the way on this one.)

Is it dangerous to assume that we are in a Gold Rush?  What if you look at these valuations from a different angle?  Do they mean that entrepreneurs psychologically feel very much in control of their companies still and will their Selfish Gene drive them harder than the whip hand of many angels or VCs?  Will the people who buy a couple of shares in BrewDog for £95 really care whether that turns into £950 if they are actually buying ownership in a brand they love and it means discounts on their pints in the pub?  Ironically will their enthusiasm for drinking the product actually help the company to grow revenues quicker and therefore command a premium valuation? Have we the Brits finally understood that if a company is going to aim not for a £20m exit in 3, 5 or 7 or even 10 years, but for a £2bn or £20bn or £120bn exit, we are going a. to have to keep the founders with large stakes along the way and b. stuff loads and loads and loads of money into these companies. 

My sensible head tells me we are in a bubble and the world has gone mad, but my angel head, the one I wear when I want excitement, to take a risk, to back world dominating businesses, tells me that I should always listen to those who challenge me and sometimes it might be worth joining them in a new adventure.  

Do send me your own stories of crazy valuations and what happened next and, if you give us permission, we will publish them next month so the debate can continue -[email protected]  

What to invest in after the Election

In two weeks' time, the UK will have a new body of MPs at Parliament.  Whether a new government has been formed is another matter.  With the polls rightly or wrongly inferring a hung parliament, I thought it might be interesting to muse on what investing strategies might be best for angels once a new government has been formed.  Given the very different economic and political scenarios that will be created under different scenarios, here are AngelNews' thoughts on where angels will be able to make money from their investments during the next Parliament. 

Scenario 1 - a small Conservative majority or a Conservative minority government supported by minority parties.

If you believe the polls are wrong and that UK voters will take fright at the idea of a country run by a Labour/SNP pact, economically, the direction of travel we have been on for the last five years will continue.  With the government steadily reducing spending on the public sector forget backing businesses that will depend on state spending, perhaps with the exception of Defence in its wider sense, where investing in tech companies which provide solutions that protect the public and servicemen and women from the impact of war - everything from new materials, to IT security to remote controlled observation and weaponry. Pay attention to investments that will benefit the Third Sector, which is likely to pick up much of the burden of for solving the country's social problems.  This will be the age of Social Investment Tax Relief, but also use of SEIS and EIS in healthcare for the elderly and obese in particular. 

Watch out for the impact of a government that will have its beady eye on the EIS Scheme and will be looking to close anything that smacks of "unreasonable", if legitimate, tax avoidance via use of EIS.

The Tories will encourage the private sector to finance scale ups, not by subsidising private investors, but by reducing business taxes, such as Corporation Tax, to make larger businesses more financially efficient and to encourage companies to settle in the UK for tax purposes.  In contrast, the populist policies to refresh our global status as a Nation of Shopkeepers and start up tech companies will be maintained from the Start up Loans scheme to SEIS.  Prepare, as the economy strengthens, to see a reduction in the tax breaks available under the schemes, especially once the books are balanced.  In particular the government may have another go at restricting Loss Relief.

With Scottish Home Rule on the cards and therefore, in all likelihood in Wales too at some point soon, bear in mind the fact that the concept of trading internationally may come to include trading within the UK with all the related tax and regulatory challenges that will bring with it! 

The Tories desire to create a Northern Powerhouse should encourage angels to look outside London and the South East for deal flow.

If an EU Referendum goes the way many Tories in the right wing of the party want, watch for challenging times ahead for companies dependent on the EU for business - whether government or private sector.  Look to back companies that are instead facing west to the Americas and looking to the growth markets of Africa and near Asia. 

Key sectors where you will find opportunities:  Defence technology, social care (especially ageing), mental health, new education models, housing and sectors with little dependency on the state - consumer & retail, internet etc.

Scenario 2 - a Labour/SNP pact

The tragedy of true Scottish independence is that here in England we will cut our Gordian knot with the country that showed us the way to 21^st Century angel investing.  From Scotland, we have taken concepts such as modern investment syndicates and successful angel co funds.  Let us hope the Scottish fishes, if they win power in Westminster, do not take the opportunity to prevent the angels of North Britain from leading the way in the future.

Meanwhile, with a Labour party intent on protecting, as they see it, the citizenry from the wiles of big business, watch out for the impact on entrepreneurial companies of kicking out the non doms, ending of zero hours contracts, the introduction of rent controls and also fixed prices for utilities on entrepreneurial companies. Expect a collapse in funding from the private sector as money leaves the UK, although this will at least have the advantage of suppressing valuations for smaller companies. 

Invest in businesses that serve the State directly, especially those that proffer solutions that make managing the bureaucracy more efficient and also invest in sectors that are regulation light and/or defensive.   Bear in mind you are quite likely to see the re-emergence of state funding models for small businesses which will compete with you.  Maybe your best bet will be to give up investing and instead take a job with the government!

Scenario 3 - a Labour/Liberal Democratic/smaller parties coalition

In this world, which party actually holds the reins of power in different departments will be key, especially at HM Treasury and the Department of Business.  The influence of the smaller parties will impact on policy - will we see more emphasis on the Environment if the Greens end up as part of the coalition, for example, and spending on mental health if the Liberal Democrats get enough Cabinet seats.

If there is a loosening of the purse strings in an attempt to meet the promises of less austerity, expect more State funding of enterprise, in competition to yourselves.  At least the Scots will not be allowed to leave the UK, so we can rely on them to help us work out what to do!

Maybe it would be worth having a read of the smaller parties' manifestos to seek some clues on what else this Coalition will be focusing on.

This of course would be the time to be brave. Invest when everyone else is distracted or disillusioned as there will be bargains to be had.

Modwenna Rees-Mogg 

If People Are Your Biggest Asset Then Prove It!

Let's face it - the old cliché of "our people are our biggest asset" is one of those hackneyed lines trotted out by CEO's that's guaranteed to get eyes rolling in the audience every time it gets an airing. It's true that attitudes to leadership development in its various forms are becoming more enlightened. However it's a sad irony that whilst leaders and indeed investors talk about people as being at the heart of all commercial success so many still baulk at really investing in the very thing that they seem to grasp makes the most difference between success and failure.

Taking angel investors for a moment there's clearly a number of considerations for them to weigh up before deciding whether to invest in a fledgling business. For all of the due diligence which rightly takes place around a start ups potential growth, competitive position, barriers to entry for new entrants etc. the quality of the management team is consistently rated the most important factor for interested investors in shaping their decision as to whether to get their wallet (or purse) out or just keep walking.

For me before you even start to gauge the competency (or lack of) in a leadership team and part with any cash you've got to ensure that the people at the top exhibit raw passion for their venture from every pore. If the drive for carrying on through the barren months and adversity doesn't scream out at you then it may just be better to look elsewhere.

With passion as a starting point in your leadership team aligned to a viable product, some decent business skills and a willingness to learn you may now feel that your investment stands a decent chance of being a success. However just as investment may need to be made in plant, systems or marketing you can guarantee that you'll also need to put some time and money into building the capability of the people running the business. The good news is that many of the skills needed to build competency and capability in your management team can be developed if the desire is there. These newfound competencies can also often bring even bigger improvements than the more traditional areas of investment outlined above.

As an investor if you feel you have the right skills to operate as mentor, coach, confidant and shareholder to business leaders that you've invested in then make sure you commit to this with a passion to match theirs. However if that's not where your skills sit be prepared to work with them and discuss the range of options out there that could help them reach their potential and assist you in achieving a better and quicker return on your outlay.  There's a whole raft of options out there to help develop better leaders from executive coaching and mentoring to business advisory groups, executive education and accredited training- all with their merits. As an angel investor it's OK to not have all of the answers yourself for the management teams you've invested in but that doesn't mean you should stop looking for them. Expecting better or different behaviour without supporting people won't happen- strive for better and give the teams you're working with the tools to achieve it.

Ian Lloyd, Vistage 

#Financial_Promotions

The regulator's decision to maintain a "media neutral" approach in a world where technological development rapidly outpaces regulation seems sensible, even if it does throw up a few practical challenges, most particularly in "character-­‐limited" media such as Twitter.

The key requirements remain that all invitations or inducements to engage in investment activity, communicated in the course of a business, must be fair, clear and not misleading and promotional material must be clearly identifiable as such. 

To meet this latter requirement in the Twittersphere, the FCA had briefly championed the identifier #ad.  Alas, tech savvy respondents to the consultation pointed out the functional drawbacks of this approach (e.g. hashtags are hyperlinked to bring up all tweets utilising  the same tag) and the suggestion has therefore been dropped.  There is no direct replacement suggested for #ad - it is left that material which is obviously promotional needs no further exposition and only that which is camouflaged as celebrity endorsement or journalistic copy needs to include additional signposting. 

The FCA is far from alone in its initial mistake of thinking hashtags were an appropriate prefix for risk warnings.  The practice is widespread and will probably remain so despite the consultation until a new common approach is established. Given that your standard risk factor - say, "the value of shares can fall as well as rise" - can weigh in at 45 characters or more (fully one third of your per-­‐Tweet allowance) it is not surprising that more pithy options  have been preferred which, appropriate or not, rather suit the hashtag prefix with its scant regard for full sentence construction.  Common examples include #CapitalAtRisk (a slender 14 characters) or the ubiquitous, if rather meaningless, #InvestAware - the financial services equivalent of "Enjoy Tennent's Extra Strong Lager Responsibly".  The sentence "Your capital is at risk" (minus the hashtags and spaced normally) should still do the trick in a relatively quick and simple manner for most straightforward share and service promotions.  The spread betting companies (due to their less limited downside potential) and those with complex charging structures will need to go further.

It is possible to expand your Twitter word count using infographic content and some handy examples of compliant and non-­‐compliant promotions are included with the guidance here.  However, the FCA point out that the Twitter functionality that allows a user to switch off infographic content means that risk warnings need to appear in the body of the Tweet and cannot be confined to imbedded pictures. 

One thing that was not addressed in the guidance was how the advertising regime from the Prospectus Rules (PR 3.3) was to apply in social media situations.

If a firm wishes to promote a share offer made by way of a prospectus, all advertisements of that offer are required  to contain a bold and prominent statement to the effect the advertisement is "not a prospectus but an  advertisement and investors should not subscribe for the shares on the basis of the advertisement but only the prospectus". 

Even when rationalised down, this statement clocks in at 140 characters plus on its own - leaving no room to expound the merits of the offer nor inform would be investors of where they might locate the document (another requirement of the Prospectus Rules).  For the time being promoters may have to trust that common sense will prevail as it seems unlikely that many will want to expend their precious word count warning readers that each Tweet is "not a prospectus".

FrankDaly, RW Blears LLP