Business Angels

…more than just money

Brian Hale LINC Scotland

www.lincscot.co.uk

The Scottish Early Stage Investment Market

• One of the most mature business angel marketplaces in Europe

• Angels the dominant investors in spinouts

• Emergence of structured groups / syndicates in recent years

• Growing public sector and institutional interest in co-investing

• Young Company Finance Guide to Finance

• www.ycfguide.com

So What Is ‘Angel Investment’?

• Not family and friends

• Objective, direct investment in unquoted

companies by private individuals

• Active participation & value added

• Funding usually in the “Equity Gap” (in the UK this = £20,000 to £500,000)

• Larger sums from syndicates

Business Angel ‘Syndicates’ What Do We Mean?

• ‘Syndicates’ = structured co-investing groups

by and for angels

• May be ‘Manager Led’ or ‘Member Led’

• Can include ‘private offices’ if investment

decision made by those who own the wealth

• Shift of balance in Scotland over 8 years:

from 400 individuals & 5 syndicates to c.100

individuals and 20 syndicates (900+ angels)

Reasons for Emergence of Syndicates

• Diversification of risk

• Value of shared experience

• More efficient use of time

• Increase capital available to sustain company

• Larger rounds can negotiate more attractive terms

and valuations

• Group social benefits

The Funding Gap

Founder, Friends & Family

Grants

Stage of Development

Seed Start - up Early Growth Established

Business Angels

Venture Capitalists

Quoted Markets

Banks

The Funding Gap

Founder, Friends & Family

Grants

Stage of Development

Seed Start - up Early Growth Established

First Customer

Venture Capitalists

Quoted Markets

Banks

LINC Members Activity 2013

68 deals with £18.2M invested by private investors

Overall investment £27M inc other leverage

Average angel deal size = £169,502

LINC Members Activity 2014 (30 June 2014)

38 deals with £11.2M invested by private investors

Overall investment £15.8M inc other leverage

Average angel deal size = £252,000 (£116K)

• Angels invest close to home

• Assessment and negotiation will take an

average of 4 months

• Company will need 3 or 4 further rounds

• 6 years to a (successful) exit

• Have potential for high returns--(5X to 20X)

Characteristics of ‘Professional’ Angel Deals

Event Probability

Sufficient capital 80%

Capable management 80%

Successful product development 80%

Sourcing and manufacturing successful 80%

Competitors behave as expected 80%

Customers want product 80%

Pricing predicted accurately 80%

Patents issued and enforceable 80%

Combined probability of success 17%

The Probability of Success?

• 10 in 100 proposals worth looking at

• Of the 10, invest in 2 or 3

• Of every 10 investments:

• 5 will crash and burn

• 3 will return the value of the investment

• 2 will pay out big

2 in 100

• Basics - defining the business model

• Choosing your angel

• Understanding diligence

• Understanding the investment process

• Manage the Investor’s Risk

Improving Access to Angel Investment

Likely scope of Diligence

Market Technology PR

Size Technical Risks Patents

Trends Competing Technologies Trademarks

Competition Product Manufacture Know-how

Oppts & Threats Design Rights

Sales & Marketing People

Value Proposition Management

Business Model Key Staff

Sales Forecasts Roles & Responsibilities

Routes to Market

Operations Finance Legal

Product Delivery Balance Sheet Staff

Customer Support Cash Flow Premises

Systems/Controls P&L Suppliers

Health, Safety Management Info & Customers

Environment Internal Controls

What Companies Need to Demonstrate

• High calibre of team that will listen

• Large growing market

• Real understanding of customers

• Scalable and sustainable revenue model

• Scope for at least 5X money return

• Shared vision on direction and exit

• Manage Investor Risk

Survey of LINC Members on Key Factors Influencing Decision

Tax breaks - 22%

Business Plan - 30%

Sector - 39%

Advisors - 2%

Investor opinion of Entrepreneur / Team - 89%

Tax Environment

Enterprise Investment Scheme

SEED EIS

• Must be eligible company

• 30% / 50% income tax relief at point of

investment

• Relief on losses at highest personal rate

• Tax free gains if held for qualifying period

• SEED EIS – since April 2012

Not all angels are the same so think about :

• Sector relevance – contacts and market

knowledge

• Experience and skills

• Investment capacity – can they follow on?

• Their role in your business

• Understand Shareholders Agreement

• Understand EIS

Choosing Your Angel

Truisms of Valuation

• It’s only worth what someone will pay!

• What company is now more valuable than

a future promise

• All assumptions are subjective

• Supply of Capital always wins – Angels

don’t have to invest

• “Blow” your own credibility!!!

Other Options

• Online matching services for example

www.fundingcircle.com

www.syndicateroom.com

www.angelsden.com

www.venturegiant.com

www.angelinvestmentnetwork.co.uk

• Crowdfunding etc www.crowdcube.com

www.seedrs.com

www.sharein.com

www.squareknot.co.uk

• elite.londonstockexchange.com

• Local Connections