As mentioned in November’s blog I have been an active business angel since 2001.
My VC activities have been a little disappointing with much success being made of too little and many complete failure as may be expected of course. I have had some success although never as good a return as anticipated. Perhaps about even over all the point being I would probably have been just as well making investments in listed companies or products with quantifiable risk rather immeasurable risk with no control over my exit decision.
Even now I am hoping to hear about one consumer electronic company which either may be bought and also has been trying to raise funds for expansion since the early summer 2012. I also wish to attend a long awaited investor’s briefing on a round planned all year. It seems to take far too long for these small companies to secure and complete funding round before their plans are compromised. Market opportunities and trading environments change quickly which affects the growth potential of small innovative companies. The purpose of business angels syndicates was to provide such funding in a timely manner so what is going, if not, wrong but askew?
My motivation for investing in new or innovative companies requiring capital for growth was to achieve a higher than expected return than on mature companies listed on exchanges or privately held. I also wanted to meet other like-minded fellow investor’s and have a “band of brothers” or group of people over time whom I could co-invest with in such ventures. I though business angel syndicates were the best way of achieving this but alas there appears a problem with the type of opportunities, the size of both funds required and syndicate size thus leading to its complexity and lack of successful exits.
The investment opportunities can often be too complex or specialised to be understood by most on a syndicate thus leading to many people unable to help with an investment resulting in others being used too often and spread too thinly especially with media, medical (include biotech) and electronics (include optical-electronics). As an investor trying to judge a market opportunity is extremely difficult with highly complex or miniscule proto-type products. Simpler opportunities would be welcome however wave or tidal energy projects are easier to understand but require huge amount of capital and resources. The other problem being is that most business angels just aren’t rich enough and very soon these types of ideas need larger VC companies to fund them. BBC Dragons’ Den type investors are not the typical syndicate investor. Although Ultra High Net Worth investors (£30m+) do exist most are only HNW meaning £250,000 of investable assets or £100,000 pa earnings. More Ultra HNW investors would be most welcome and perhaps our Chancellor should encourage the never ending surge of billionaires in to London to look to helping fledgling UK companies instead of buying very expensive property. It would certainly make them feel more welcome with the locals. Only a very few investments ever make it to the multi-million funding rounds. Therefore, smaller syndicates with wealthier business angels with good access to better funded venture capital funds should be encouraged more by government to these individuals.
When a normal syndicate is able to fund a company the ability to make an expedient investment is vitally important to ensure the company receives funding to develop and meet market demands and investor expectations. As business angel syndicates grow in number and not necessary financial resources they needs to employ people and charge fees. Greater number of investors leads to an increasing amount of documentation produced and multiple agreements sought including public sector co-investment funds. This can often lead to lengthy delays in a funding round. The investee company’s plans and development are threatened. Often investor’s may lose patience with their portfolio companies as a result of slow progress, delays or lack of communication. The deal fees charged by the syndicate to pay for all the legal and financial requirements can be a burden on the investee company which can little afford such fees in the first instance.
Successful exits need to improve and increase. On a sale often last round or later stage and lower price investors make a return while the longer term ones just receive their cash back if lucky over the interim years of the company’s development. I have certainly experience of this as an investor and have a current investment from 2002 and counting. It is worth noting that 3 years are required to qualify for tax relief on investment round. Timely and sufficient exits to refresh and rejuvenate investors’ appetites for further participation should be paramount with syndicates’ management or they will find a dwindling “band of brothers” in the future.
As a rule of thumb the return should be 5x your money as a syndicate member or cheque writer or don’t bother because the risk of execution, lack on control and time required make a venture capital investment the riskiest of all.
Merry Christmas and LDC blog is now 1 year old.
LDC