The Archangels of the angel market

The publication last week of a seminal piece of research on Scotland's longest established angel network, Archangels, by Dr Niall G MacKenzie and Margaret Coughtrie is essential reading.

I first came across Archangels back in 2003 when I was gathering data on the sub £1m investment market in the UK. With knowing me, the team there kindly sent me the Archangels deal data every quarter without fail for several years and I remain grateful for their selfless generosity when I was just starting out with AngelNews. 

So I was delighted to receive a copy of their report "Archangels:Impact evaluation of activities, 1992-2015" last week and settled down to an enjoyable read of it this weekend. 

I can summarise the history of Archangels using a pretty graphic they sent me which is set out below. 

 

 

It tells a good story, doesn't it. The openness of the report is satisfying, discussing failures as well as successes. In this sense it picks up on the spirit established in Go Beyond's report published earlier this year. 

Overall, the long term Archangels should be pretty satisfied with their performance.  Some of the numbers that stood out for me were:

o   Between £14.34 and £20.39 of turnover is generated per £ invested by Archangels’ companies – in excess of previously documented US VC performance of $6.23 for every $ invested.

o   Failures comprise 44% of Archangels’ total number of investments, but just 14.9% of the monies invested. Archangels spots failures quickly with an average investment period of 3.66 years, compared to 8 years for sold companies.

o   Since Archangels’ formation, £36.6m has been invested in companies that were successfully exited, returning £100.4m of value to investors. A further £38.6m has been invested in the current active portfolio of 23 companies, some of which are nearing exit events.

o   Archangels 10 year returns to 2014 were 20.9% compared with the BVCA’s 14.9% for the same period. The Archangels returns are unleveraged, whereas the BVCA returns will have benefited from structural leverage.

The history of the Archangels investment activity show the diversity of interests in the group.

 

 

And then I suspect the state of the portfolio today will be familiar to many established angels. Mature angel investing by volume is a story of holding out for the future!

 

 

It was interesting to see what Archangel Portfolio outcomes by volume have been: 

 

 

There are four interesting and varied case studies of portfolio companies - Oregon, Touch Bionics, Optos and Airborne Energy - which will be worth reading when you have a moment.

I also enjoyed the extensive and academically sound analysis of Gross Value Added, Exits and the analysis of the importance of Patient Capital. It was interesting to see how much R&D investment has increased over time in this selected group of companies. The Archangels investments have also created jobs - thousands of jobs. 

And my favourite fact of all can be found in the Optos case study. After 31, yes 31 rounds of investment, starting in 1992, the company was floated in April 2006 for £164m and then sold to Nikon this year for £259m, but it remains in Dumfermline Scotland, employing 391 people and remains a world class research and development facility in opthalmology, optics, and photonics.

Those canny Scots are showing us all the way, yet again, and good on them. To the next 25 years Archangels - we salute you!

 

 

 

7 things the Punks can teach angels - plus one thing most angels can only dream of!

If you have not been following the latest Brew Dog fundraising, then I would recommend you take a look.  The audacious founders of Brew Dog from beautiful North East Scotland continue to break new ground in terms of what an explosive growth investment opportunity can look like.

And from their exploits there are lessons to be learnt by all of us.

1. There really is a new way of thinking about early stage and growth finance which is much more inclusive and just plain fun (for investors) than traditional models, Brew Dog with its clever issue of a prospectus, rather than use of the certificated investor exemptions under FISMA, has enabled it to "speak to the world" - well the EU, about its £25m fundraising.

2. It really is ok for a shareholder register to include addresses from Arhus to Zaragoza. This is the world of Tell Angus and Pedro and Nils. Beer is bringing European investors together in a way that wonks in the Financial Markets department of the European Commission could only dream of.

3. Brew Dog has taken the concept of "I liked the product so much that I bought the business" to the masses.  Passionate drinkers of Punk IPA have as much right to own as to imbibe.  Maybe more angel backed FMCG and B2C customers should seek part of their next round of funding from their customers (note speak to Oliver Woolley at Envestors if you are interested in this route!)

4. Maybe we need to rethink valuation for the really ambitious opportunities.  Brew Dog's valuation is about 60% of 184 year old pub chain Young's and not far off that of Fullers which was established in 1845, but it wants to conquer the world not just a region of one country and the founders need to keep a big enough stake that they stay incentivised to win the war not the battle.

5. Investment does not need to be that hard, but big ambition needs big money. To get big money you need to understand financial marketing. The Brew Dog prospectus is a dream example of explanation and justification of their funding requirement. Many entrepreneurs should take note about how best to communicate a funding need to investors.

6. The UK explosive growth market is not just tech and not just urban.

7. Those Scots are pretty canny.  Maybe we should all be looking for funding teams to have a bit of Scottish blood in their make-up?!

AND now for the dream...

8. All the investors in Brew Dog will have something that most angels can only dream of - the chance to take profits along the way, in all or in part.  Check out note 4 to the Prospectus (p29) to see how BrewDog is enabling this to happen.

Of course the Brew Dog story may end up with the investors drowning their sorrows Dogma or Cocoa Psycho, but at this stage the jury is most definitely out.  Just as the great tech unicorns of the US have market caps that make the world's FMCG giants pale, maybe a giant that started life as an upstart Scottish beer brand will come to dwarf those Shoreditch app companies that right now seem to be the next big thing.

 

 

The latest cool trend in angel investing

The publication last week of a seminal work on Archangels, Scotland's longest established angel network (see separate article) has a wonderful list of motivations of angels. I quote:

 

"The group's business ethos is underpinned by four fundamental pillars, which are to:

 

1.      Give something back;

2.      Help young Scottish companies;

3.      Generate attractive investment returns; and

4.      Have fun."

 

In the traditional angel world, the concept of giving back and helping has been contextualised around creating businesses that grow and become worth more, with the hope of an exit.  Angels are prepared to accept the immense risks of investing because the of the value they receive from the mixture of giving back, growing something that will, in a way small or large, change the world and of course, when it works financially, it really works! If you have cash to spare, angel investing is one of the best possible ways to use it to do something good.  And as experienced angels can attest, you can spend hours and hours and hours occupying yourself with your angel activities.

 

The skills set of the UK's angel market is now second to none.  Angels are "doing it" successfully all over the country.  Thanks to their efforts innovation is being commercialised, jobs are being created and in many sectors we are the envy of the world.  As we welcome another wave of migrants into the country, I am delighted to predict that we will see another surge in entrepreneurship as these people assimilate themselves into our economy over the next decade, with our angels backing the talented entrepreneurs who will inevitably be scattered amongst our new neighbours. 

 

As many of you will know, on 14^th October we are holding a very special conference, SI=MC², aka, Social Investment = money x collaboration².  Every angel does social good when he or she makes an investment.  As I mentioned they create jobs, enhance innovation and more, but there is another very important theme that it is vital for the angel market to address.

 

This is the issue of how we all help the most disadvantaged in society, by using our skills to improve their lives.  In the old days there was philanthropy but as everyone knows giving someone a rod and teaching them how to fish is far better than handing out a meal. The Migrant opportunity (I refuse to call it a Crisis) will highlight this over the next few months and possibly years.  The good news is that helping organisations by sharing money and skills that do something to redress the gap between the advantaged and the disadvantaged creates greater human value and more satisfying fun even than "normal angel investing."

 

The challenge is that to date it has been perceived that backing organisations which prioritise social impact, ahead of raw financial return will not necessarily deliver the cash rewards to your bank account that would reflect the risks taken.

 

But the world is changing.  For a start the concept of a B Corp is coming to the UK, the idea that a for-profit company has a social mission "locked in" to its articles - in perpetuity, however big it becomes.  Secondly the government is stimulating investor interest with Social Investment Tax Relief which enables investors to get tax breaks if they invest in "not for profit organisations such as charities and Community Interest Companies (note you can get a tax break on debt using SITR!).  Thirdly we are seeing the social angel market beginning to take off.  Talented people like Daniel Brewer at Resonance and the team at ClearlySo are leading the charge with increasing numbers of angels joining them in the latest cool trend in the angel market.

 

What makes an investment social?  Funnily enough it is one of those things where everyone can spot it when they see it, but historically it has been incredibly hard to put in a box or even a series of boxes, let alone it being easy to understand what is the right social investment to make personally.  The default has been "at the end of the day" each angel's social investment is the one they think most suits their social objectives.

 

The trouble is without establishing a clear framework which compares different socialinvestments on a rational basis, then it is far harder for someone new to social investing to know what to back or not and what to expect in return. 

 

One of the main purposes of our conference will be to engage with the angels who are coming and garner their insights so we can start to create a new investment framework, which angels new and old alike can use to measure and map their investments, especially their social investments.  I hope on the morning of 15^th October, we will have this framework available in beta form and then we can continue the debate thereafter.

 

Some of the issues we will be discussing are

 

• The balance of returns you should expect from the risk you take, including financial:

If for example, you would expect a 25% IRR from a conventional "tech" investment, what social benefit and/or personal value should be delivered/extracted to justify a financial return of perhaps 6%.";

• What is a better social investment if all other things are equal?

A ltd company childcare business that works in socially and economically deprived areas that looks after the under 5s from 40 families on benefits or a charity which provides hospice care to twenty terminally ill babies with the funding provided by the NHS;

• Should you allocate your social investment monies from your conventional pot of risk investment or from your philanthropic pot? And
• Should a business have a social mission from the get go or should you wait until the money has been made and then do an Andrew Carnegie?
• Is it better to spread your social investment monies across many organisations in one area e.g. children or in smaller amounts across many areas.

 

I know that angels are curious.  And they are very human with larger than normal amounts of emotional and business intelligence.  This will make the debates at SI=MC² some of the most exciting of 2015, if not the decade. And those involved will be contributing to a new angel order which may, one day, will become the norm throughout the entrepreneurial world.

 

 

Commercialising university IP (tax) efficiently

Since Gordon Brown first proposed in 2006 that universities should prove their economic contribution in order to secure funding, the spinout sector has steadily grown into a varied and exciting territory for IP-rich technology businesses.  And with good reason: the UK boasts some of the finest academic institutions in the world, with a cohort of experienced professors and post-graduates unearthing new and impressive discoveries across a wide range of technology led sectors, including life sciences, advanced materials and digital.

"University spinouts provide a vital source of disruptive start-up technologies, which in turn offer investors the chance of investing in unique IP within potentially diverse and high growth sectors," says Dr Nicola Broughton, Investment Director and Head of Technology Transfer at Mercia Fund Management, one of the leading technology investors in the UK.  "The rate of successful spinouts has also been increasing over recent years, with many achieving successful commercialisation of their IP."

According to the Spinouts UK Annual Report 2015, the number of successful exits by UK spinouts is continuing to rise, with the attributed IPOs, trade sales and mergers for the sector increasing year on year for the past four years.

Despite this success, and the UK's fertile breeding ground for IP-rich investment opportunities, there is still a large funding gap that needs to be addressed if investors are to take full advantage of the exit potential of spinouts.

"Traditionally, university spinouts have struggled to find knowledgeable, hands-on investors with the breadth of capital to accelerate and scale the growth of university spinouts," Dr Broughton says.

"There is also a gap known as the "Valley of Death" for spinouts," Dr Broughton says.  "Investors are either committing very small, early stage amounts which won't see a company through to development, or they are choosing to invest at the other end of the scale, once the business reached a suitable size.  This gap in funding can be detrimental to the early stages of the business, and consequently deprive the market of valuable technological discoveries."

This may be due, in part, to an uncertainty of the true commercial potential of each business which, Dr Broughton argues, can be combatted by building up a strong management team - an inherent challenge for university spinouts whereby the expertise of the founders may lie solely in the technology field itself, leaving a gap in the commercial skillsets required to develop and grow a business.

She says: "Undeniably, working with spinouts can be challenging.  Quite often, the IP that is being commercialised has never been seen on the market before, making it difficult to predict how the market will react.  On top of this, the academics behind the technology may have less experience in commercialising their work.

"However, if you can build a strong management team that can take care of marketing, sales and business building, then you are more likely to realise a successful exit for the spinout and its investors."

This is where a dedicated technology transfer team steps in, supporting spinouts in the early stages and building a strong team around the IP. Dr Broughton and Dr Brijesh Roy, an Investment Manager formerly of Isis Innovation, the research and technology commercialisation company of the University of Oxford, form just such a team at Mercia Fund Management.

Dr Broughton says: "At Mercia, we have strong partnerships with nine universities in the Midlands and we are increasing this network in the North and in Scotland, providing enviable deal flow opportunities.  We also have a dedicated technology transfer team who support these companies through to commercialisation.

"The Complete Capital Solution offered by Mercia, combining third party managed funds (which can carry significant tax advantages) and direct investment from Mercia, enables us to offer a single investment partner solution which can help commercialise spinouts from their infancy right through to exit with both capital and strategic support."

A key problem in the provision of capital to support the UK's university led start-ups is the historic geographic bias of capital to London and the South East, an issue which plagues early stage investment generally.  The result is that the UK may be losing innovative, high-growth businesses from universities which don't have the support to help commercialise their IP.

Dr Broughton comments: "The Gold Triangle of Oxford, Cambridge and London is still very much the main investor focus, despite the fact that 52% of all active spinouts originate from the Midlands, North and Scotland.

"At Mercia, we are continuing to build and strengthen our university investment partnership network across the Midlands, the North and Scotland, where we are seeing fantastic, and largely untapped, opportunities across key technology led sectors."

"As part of our commitment to supporting our enhanced university network across the Midlands, the North and Scotland, we are also about to open a dedicated EIS & SEIS tax efficient fund, the University Growth Fund, for commercialising university spinouts from this network, across key technology sectors in which we hold deep expertise."

Nationally, the community of established spinout companies continues to expand and consolidate.  The sector has become much more efficient, with more successes and fewer failures, making it an interesting proposition for investors looking to diversify their portfolio.

For Dr Broughton, however, there's also something to be said for supporting a growing business from scratch.

She says: "Apart from the obvious cash rewards, spinouts are also about taking an academic's life work into market, which can be incredibly rewarding.  Even if it isn't a life-changing medical discovery, spinouts offer technology that has the potential to be truly disruptive - they contribute to the economy and they create jobs.  It's great to be a part of that.

"Despite the challenges IP intensive spinouts can present, the right technology, alongside the right team, the right investment partner and the right timing, have the potential to do very well for investors."

Mercia's University Growth Fund, combining EIS and SEIS tax advantages, will be launching Monday 10^th August.  For further information or to request a copy of the prospectus, visit the Mercia Fund Management website or contact Talon Golding at[email protected]