It was therefore very exciting when Brigitte Baumann, recent winner of the 2014 EBAN European Angel Investor of the Year approached me in the spring to assist her with creating a report on the investment performance of the Go Beyond investor group, based on audited statistics from all the investments all the members had made between 2008 and 2014, including failures as well as successes.

Go Beyond has grown from 20 angels in 2008 to 192 in 2014.  Between them, Go Beyond angels made over 10,000 investment decisions in the period, ranging from new investments to follow-ons, to decisions not to invest. Members of the group have invested in 36 start-ups, made 77 rounds of investment and had 7 exits of which 2 have generated sufficient returns to ensure that over 80% of investors who have been investing for at least one year, have received some cash back on their portfolio.  Overall members of the group have invested CHF10.6m and CHF 12.9m had been returned to investors by March 2015. The balance of the portfolio is showing a positive return on paper for over 80% of the entire investor group. The majority of the Go Beyond angels have seen >15% annualised returns to date.

Go Beyond operates more like an enhanced VC than a normal angel network.  It has the professional deal sourcing, investigation and management processes just as you would expect from a top quality VC.    Baumann attributes the success to date to the value added input of the angels in her group, especially in the areas of due diligence and supporting portfolio companies in their growth plan post investment. She also says that the value of the lead angel cannot be underestimated, particularly in negotiating new investment rounds and in managing the exit process.  Indeed Go Beyond places so much importance on this role that you are not permitted to be a Go Beyond deal leader until you have proven your abilities in a previous deal as a deputy lead and have an auditable portfolio track record of your own investments.  All Go Beyond angels are encouraged to undertake training and a certification program is offered by Go Beyond for those who want to become Deal Leaders. This is unique and very much needed in Europe. The Go Beyond model also has many characteristics of a crowd funding platform as it enables its members to make small investments in all deals via its syndicate offer and provides ease of use and best in class tools with its proprietary transaction and portfolio management platform.

Go Beyond invests globally, although mainly in western Europe and the US, in four sectors: Consumer, ICT (including FinTech), Technology and Industrial/Medical.  These sectors are well known for their high growth, high margin characteristics and also for their ability to scale globally. 

Go Beyond Investing's mission has been to develop a scalable approach to professionalise and democratise angel investing. One of the most interesting findings of the research was the fact that ticket size per investment round does not necessarily have an impact on investment performance, as long as those investors have the same rights as bigger investors including in follow-on rounds and at the exit. This is something crowd fund investors should take note of, as well as angels.  The Go Beyond angels investing less than CHF50,000 as an overall budget are achieving not dissimilar returns to those investing in excess of this amount. Spreading the funds you have available across at least five investments (either in separate companies) or across multiple rounds in the same business, is much more important than any individual amount invested.  Indeed, investing between CHF3,000 and 6,000 per ticket, can lead to a strong return.  You can be a "small" angel investor, investing out of income.  Even if you have significantly more funds to invest, the Go Beyond Investing research implies that you may be as well off making lots and lots of very small investments as you would investing larger amounts per ticket.  And if you translate this finding into the crowd funding world, you can infer that all those investors making several tiny investments, may not be so stupid after all, AS LONG AS the deals are of high quality and they have equal rights as direct investors and that there is an expert deal leader on the deal.

Go Beyond has more than double the normal number of females in its investor group. Baumann and her colleague Bethann Kassman, attribute this greater gender balance as a contributory factor in the success to date.  They also believe that the international diversity of the investor group (25 nationalities are represented) is vitally important.  Both aspects mean that there is a broader range of opinion when it comes to selecting deals and that there are more people "on the ground" to help companies as they expand internationally. 

Go Beyond plans to publish its report on an annual basis from now on. Inevitably some years, performance will be weaker and in others it will be far stronger than this initial release has recorded.  We hope that other investor groups will start to follow suit.  Only when we have clear, audited, regular performance statistics available from angel investors, will we be able to truly understand what works and what does not.  All credit to Baumann and her team for being the first to market in starting to prove that angel investment is an asset class that private individuals and wealth managers can understand and therefore invest their money or their client's money with confidence.  She dared to publish; she deserves to win the respect of the market and the attention of angel investors and wealth managers the world over.

Baumann's key recommendations to angels are:

1.            Invest in a group - so you can share knowledge and risk.  Aim to join investor groups that have real diversity in terms of gender, nationality and sector experience

2.            Get trained, so you really understand what you are doing

3.            Focus on sectors which have great growth prospects and where companies are likely to become acquisition targets.  Make sure at least a few people in your investor community understand the deals you are investing in.

4.            Aim to build a portfolio of investments steadily over time.  Do not worry about investing very large amounts.  It is more important to spread your money across a number of tickets in several companies.

5.            Back your winners in ever increasing amounts, but reduce the amount you invest in follow on rounds in companies that are not performing.

6.            Active investment management is the key to optimising returns. If you do not have time to do this for yourself, or you do not have the skills, subcontract or share this effort by joining a professional syndicate run by people who have more to gain by doing a good job for you. They should also be incentivised in a way that means they have more to lose than you if they fail. 

Crazy crowd valuations. It's the tax breaks stupid, or is it?

Rational and experienced investors, myself included, know of course that the Crowd does not yet understand the reality of using equity funding to finance the growth of a business.  The impact of down rounds, weaker trading than expected hitting profitability, the sheer length of time it takes to get a plum and so on.  And yet, in the hubris that is Crowd funding, we are seeing VCs and, no doubt, some angels, (e.g Pavegen and Sugru) permitting their portfolio companies to take advantage of market conditions to slip in a quick fund raising at valuations in other circumstances they simply would not accept.  Why not, if it raises the cash the company badly needs, without too much dilution to the existing shareholders? 

Of course, the bubble could be burst by established investors quite easily.  They only have to reveal, en masse, in detail and in public the performance of their own portfolios over time - showing the sorts of valuations companies used to achieve before crowd funding came on the scene, and what sorts of exit prices "normal" VC and angel backed companies tend to achieve - and pretty quickly the Crowd would soon come to its senses (By the way:  advanced thinking Go Beyond Investor Group has started to do this, which is why investors should get in touch with them, especially if they are thinking of investing in "FinTech" investment businesses). 

Or will the Crowd get real?

Let's face it, it is just possible that many crowd investors are not as naïve as you might expect.  What many people forget is that crowd funding is about much more than just making a financial return for many investors.

I was talking to a crowd investor the other day who had put money into Just Park.  He was well aware that he was taking a punt, but as he said to me.  "I have made £1,000 renting out my front drive via Just Park.  It did not seem unreasonable to invest £100 in its shares."  He likes the company. In all likelihood, over time he will make several £1,000s more by renting out his drive.  In fact if Just Park can raise more money to do more marketing, he may even make more money as increasing numbers of people rent his drive.  In buying shares he gets another connection point with the company and he feels good that he is helping a company that had and is making him money. This is the next stage of evolution of the Sharing Economy and we will only see it having more impact on investment over time.

Then we must consider novelty value of owning a piece of a company that you identify with.  It's long been known that football fans love to own a share or two in the club they support.  You feel good with a framed share certificate on your wall or tucked away in a drawer with the match brochures, scarves and sticker books.  "Serious" investors need to understand that the value of a share can be more than its face, or even exit, value.

Rewards are an interesting aspect of crowd funding.  In time, the Brew Dog fundraising may been seen as the peak of the crowd funding bubble, with its £350m pre money valuation, but if you run the numbers on the beer discounts on offer to small shareholders, you can see that for a sociable draft beer drinker, buying a couple of shares will pay for itself within a year or 18 months if you quaff 4-6 pints of Punk IPA a week.  If you have effectively bought your shares for £0, who cares what the valuation is?

We must not underestimate the power of tax breaks in crowd funders' minds.  Include a 50% or 30% income tax break and your average small investor, who previously simply could not access tax break deals easily, is obviously going to be more open to writing a cheque.  To their minds, they are buying shares at half or a third of the price the pre money valuation would suggest.  If the company goes bust, they will get their loss relief; if it succeeds, they will scoop the gains CGT free.  What is there not to like about that?  Arguably, assuming they spread their money across a raft of deals to disseminate some of the risk, there is simply not a better place to stick your spare cash in a world of low economic growth and even deflation.  Should we be suggesting instead that they just leave it in the bank or buy bonds, when inflation might start to ramp up almost before we have noticed.

Some people might argue that they should pop it into more established equity markets, the FTSE, investment or unit trusts or the suchlike.  But dealing costs preclude tiny investments and name me a CEO who wants 1,000s of £1,000 shareholders in their quoted company.  They are too busy attracting the attention of the institutions and wealth managers and IFAs who can write £m or £bn cheques. If anything they like to strip their registers of small investors or at least stick them into nominee accounts where their individual voice is lost.

OF course the simplest way to deal with valuations would be for HM Treasury to permit SEIS/EIS relief on convertible loans (even if the tax break can only be claimed when the loans convert).  This would allow the Crowd and angels, as well as SEIS/EIS fund managers, to delay pricing until the company is on a more established footing, but that is unlikely as it goes against the principle of the tax break existing for "true" equity risk.

No doubt, one day valuations in the Crowd will move closer to the valuations angels and VCs pay.  But don't underestimate the possibility that angels and VCs will have to move north as much as the Crowd moves south, especially if the top talent in entrepreneurship finds that it cannot only raise once, but twice, three times or more from the Crowd at valuations which means the Founders retain a stake in the business that really keeps them motivated to head for the £bn exit.

If entrepreneurs don't need angels or VCs for their cash, and these investors want to stick on traditional valuation methodologies, they are going to have to prove beyond all possible doubt, the value of their input and they are going to have to be able to communicate this quickly and effectively. They are also going to have to be able to speed up the investment process.  It will no longer be acceptable to spend 6 weeks, 3 months or even 6 months until you close.  Entrepreneurs simply will not accept tactics such as "waiting to see how trading goes" or arguments like, "we will consider investing once you have closed those crucial first contracts."  Advisers should take note.  All the due diligence must, I am afraid start being done up front and arguably before the angels even see the deal.  Angels in particular will have to accept that being a spreadsheet or due diligence jockey may become a thing of the past.

I wonder, if we all refocused our attention away from valuation and onto how we can all work with management teams to help them grow their companies into £bn giants, whether there might be another way and one which would create a better world for everyone?

The buzz at the moment in investment circles is Tech.  "We need to create more global tech giants and value added tech jobs" the politicians cry and the press reports.  But if you examine the constituents of the FTSE100 you see food, fashion, drinks (alcoholic and soft), retail, leisure, publishing and business services represented.  So there is no implicit reason why a Brew Dog, a Sir Hans Sloane Chocolates or even a Turtle Rabbit Travel should not make it one day, if we all stand behind it?

Until then, it is only when the angels' and VCs' mantra becomes something along the lines "after I have invested, I will fix those crucial first contracts for you", will they have the right to comment on the naivety of the Crowd's ability to understand valuation.

A Smooth Exit - from a career in investment banking to independent alternative asset management

The Financial Times recently reported that compensation costs per employee at global investment banks fell by 25% between 2006 and 2014 

The Financial Times recently reported that compensation costs per employee at global investment banks fell by 25% between 2006 and 2014. ¹ If this trend continues asset managers will be paid more than investment bankers by next year.  ²This analysis follows the first bonus round since the EU introduced a cap on bankers' bonuses which limits them to no more than 100% of pay - or 200% with shareholder approval - and we might expect further changes as bonuses remain high on the European and domestic political agendas.

In the UK, ahead of what promises to be a closely fought general election, the issue is already proving incendiary, not least because this bonus round comes after several large banks paid billions

to UK and US regulators to settle allegations of manipulation of foreign exchange rates.  In Europe, the EU is ramping up the pressure on bank bonuses. The European Banking Authority, which now supervises Europe's banks, published amended guidance on 4 March 2015, which requires the UK

and other member states to apply the rules on bonuses paid from 2016 or explain why not.  If the

EBA believes an explanation to be inadequate it may "name and shame" the local regulator.  In addition, the EU can take the offending member state to the European Court of Justice.  While remuneration is trending downwards, the tidal wave of regulation is showing no signs of subsiding.

Without commenting on the necessity and propriety of the level of regulation banks face, I wonder if the bonus cap is just another blow to bankers contributing to making banking an increasingly less attractive career option.  There is nothing new about bankers leaving banks to become science teachers or join charities, especially following the financial crisis of 2008, but there are other options.  We have recently advised a string of clients who have left their positions at some of Europe's largest private and investment banks on how to set up fund management and portfolio management firms and we are expecting this trend to continue.

Bankers deciding to set up their own fund or portfolio management firm will need to apply for FCA authorisation to perform the relevant "investment activities".  Though not difficult, this will take time.  These investment activities include: arranging investment deals in investments; advising on

investments; dealing in investments; safeguarding and administering investments; managing investments; and operating or winding up a collective investment scheme. As part of your application, you will normally need to prepare a regulatory business plan and a compliance manual.  The FCA will decide whether it is satisfied that your firm can meet and continue to meet the minimum standards (called Threshold Conditions), and that the persons running the firm are fit and

proper.  The FCA is required to process an application for authorisation within 6 months and you should expect to wait that long.  This time delay could have an impact on client retention. 

There is way forward through these complexities.  For some of our clients the best option was to enter into a tripartite agreement with an umbrella manager and their clients.  Umbrella managers are third party firms already authorised by the FCA to perform the "investment activities" and we work with a number of these.  In this arrangement, the umbrella manager satisfies the relevant regulatory requirements and your firm is appointed as strategic investment adviser.  Umbrella management has a number of key advantages. 

First, the umbrella manager rather than your firm will be responsible for complying with the FCA rules and, in particular, categorising the client and assessing the  suitability of the product for the client pursuant to COBS 9. 

Second, the umbrella manager is under a contractual obligation to manage the fund or portfolio in accordance with your investment advice.  It is not the role of the umbrella manager to become embroiled with investment decisions except to confirm that a proposed investment is not in breach of the investment policy, guidelines and restrictions contained in the tripartite agreement.   Therefore, you stay in control. 

Thirdly, your firm, as the strategic adviser, will receive any management and/or performance fees from your clients directly.  In return for its services, your firm will pay the umbrella manager a monthly fee.  The size of that fee depends on a number of factors, including the term of the agreement and the risk perceived by the umbrella manager. 

Finally, the agreement provides for your firm to replace the umbrella manager once it has obtained FCA approval.  At this point the umbrella manager's services are no longer required. 

Alternatively, if you do not mind sharing a portion of your fees with another firm, you can dispense with the FCA application and retain the services of the umbrella manager long-­‐term.  This way you can avoid navigating the FCA rules entirely.

¹FT Article "Asset managers' pay set to beat investment bankers" http://www.ft.com/cms/s/0/37cce456-­‐b507-­‐11e4-­‐b186-­‐00144feab7de.html#axzz3RukKloHk dated 15 February 2015.

²FT Article "Asset managers' pay set to beat investment bankers" http://www.ft.com/cms/s/0/37cce456-­‐b507-­‐11e4-­‐b186-­‐00144feab7de.html#axzz3RukKloHk dated 15 February 2015.

Contact:

Jessica Knowles-­‐Mofford, Solicitor, RW Blears LLP

125 Old Broad Street, London, EC2N 1AR

e:  [email protected]

w: www.blears.com

tel: 020 3192 5573