You Want Money? Management First, Please!
By Modwenna Rees-Mogg, Founder & CEO of AngelNews
How throwing out the angel funding rule book can boost entrepreneurs’ success rates and investor returns alike.
Many of you might have come across Dan Somers. From a career in management consultancy he became a serial entrepreneur before turning to angel investing. Today, based on his experiences of how challenging pre-venture capital funding can be (from both an entrepreneur’s and an investor’s perspective), he has decided to turn the tables on the traditional models of angel funding. What he is doing is fascinating, not least because, whilst it’s early days, it appears to be working.
You may be familiar first-hand with the typical world of angel funding: ‘Dragon’s Den’ style meetings or events with a motley of entrepreneurs from all kinds of sectors, and with a wide range of experiences and capabilities. From an angel’s perspective the challenge is sifting through the ‘world’s worst ideas’ and flaky also-rans to the quality investments and unpolished diamonds. From the entrepreneurs perspective, the challenge is to try to rise above the noise, and strike a chord with one or more angels who ‘get it’.
Eventually there is an offer. A round of meetings commences, intermingled with a bit of due diligence. Term sheets or offers appear on a table somewhere, at some point; terms are negotiated, lawyers get involved, the angels write a cheque and get something resembling a share certificate and a shareholders’ agreement in return, possibly accompanied by some paperwork to do with EIS (Enterprise Investment Scheme). Some champagne might flow. But the end result is that the angel is now an investor and the entrepreneur can buy a new pair of socks. Hurray!
Of course, this is where the real challenge starts, not ends. Give me an angel who has never seen it go horribly wrong post investment, (myself included!) and I will happily buy you lunch in the local pub near our offices in Somerset. Let’s be honest, most angels are resigned to the fact that they will have to do 10 or more deals to find a “10 bagger”, even though the stats suggest that doing 3 in 30 deals is the strategy you have to follow to make the returns work.
Similar horror stories appear from entrepreneurs about angels meddling, bullying or worse. Why is there such an apparent disconnect between investors and management. Aren’t they both in the same boat?
Dan doesn’t mince his words on this issue. “The inherent problems on both sides of the fence are that the economics of angel investing for rigorous corporate finance, support and due diligence just don’t work the same as for venture capital, whatever anyone tells you. It is somewhat an inherently amateur activity despite the professionalism of the angels concerned: However shrewd they were as businessmen, they simply don’t have the time or inclination to scrutinise their investments as they would have scrutinised their own businesses, and often treat angel clubs as social events and investing as a hobby or even worse a casino with tax breaks.”
Dan continued: “On the other side, many entrepreneurs, particularly first-timers, believe that money is the answer to all their prayers and do whatever it takes to raise it. This disconnect is ultimately bad news even if they are successful in raising funding.”
Of course he would not be so bold, if he didn’t have a successful track record as both an entrepreneur and angel investor himself, nor if he couldn’t proffer another, more successful and proven strategy for entrepreneurs and angels in high growth businesses.
What is Dan’s track record then? Amongst other things, he is the man behind several telecoms and IT start-ups, particularly VC-Net, the video conferencing business, which he exited this year. He’s felt the pain on the entrepreneur side, but he has also done deals on the investor one, through his investment vehicle Boundary Capital.
I challenged him about his own rate of success: “the industry accepted norm is 1 in 10 successes. ‘Spray and pray’ they call it. I don’t buy this. It is early days — touch wood — but through our process we are seeing the opposite.”
What is the big opportunity in angel funding from Dan’s perspective? Funnily enough it’s about what some might see as a fairly simple change in approach, namely de-emphasising the money need, and focusing on the management challenge. As you can imagine given our own Pitching for Management concept, this view is very dear to my heart.
“The secret is finding a fellow investee for the entrepreneur who is integral to the management team but who is also a fellow investor to invest alongside. If the venture gets the right person, then this person will be inherently trusted by both parties and the problems of due diligence and business support are rapidly overcome. It sounds simple and obvious but achieving the right formula is something we researched and learned for our own benefit.”
But Dan isn’t just talking about the odd person or two joining the teams at Boundary Capital’s investments. He has hooked up with Stephen Barter of NXD Services fame, to found www.venturedirector.com, where the focus is all about connecting high-growth potential businesses with all the executive human capital it needs. USPs include the fact that they, and the other “Venturers” can fund you along the way, if necessary, until the time is right for the larger fundraising. An example of this people-centric approach to angel investing is CertiVox:
“A first-time entrepreneur approached us needing help with raising money, but upon examination required a lot more than that, even to get the money. We saw a rough diamond and helped, initially by finding the right Venturer (we didn’t call it that at the time) who had specific sector expertise and could open doors. We then helped with the business plan and even went out to customer meetings to help sales. The added value for the business is better understanding for us. Before long we all understood the business, and what it would take to succeed. We corralled an angel round alongside the Venturers and a few months later we helped secure venture capital from two leading VCs.”
Another one going through the process is a tech business called NovaParking which has just been introduced to the ex-CEO of NCP plc, but there are many other examples now and we have refined the process along the way.
Dan continued: “The recipe can vary to suit the situation, but the only essential two ingredients are a self-aware entrepreneur and the makings of a sound proposition.”
Because the Venturers invest their own money, and help to open doors, they make the venture inherently more investable to angels and VCs alike. As a result, I am now just waiting for the photo of the snaking queue of entrepreneurs stretching away from the Venturedirector offices in London, business plans in hand, to break on Twitter!
As Dan says, management need in the context of the angel world isn’t about finding the odd helpful, successful business person from within the angel syndicate, with vaguely appropriate skills, to do a bit of mentoring or act as an investor director. It’s about understanding that the team needs exactly the right personnel, in the correct amounts, who will roll their sleeves up when needed (whether full or part time) and, most importantly of all, see the role as a job, not a hobby or a way to protect their investment.
Will Dan, in the long term maintain his record at both people and deal selection? Time will tell, but he tells me he is pretty selective about the entrepreneurs and Venturers he chooses to work with. And I think he has a better chance than most, because of the rest of the experienced team at Venturedirector, led by Stephen Barter. With many years working with high net worth CEOs, MDs and Non-Executives, Stephen knows a lot of the right kind of people. If you are an aspiring entrepreneur, that’s a good reason alone to talk to Venturedirector.
Stephen comments on the Venturers: “They have to have the right mindset, for a start, as well as the capabilities and capital” he says. “Initially we only worked with people we knew, as we had to know exactly who they were, what they could do and what made them tick. As the volume and diversity of the deal flow has increased, we have expanded our pool of Venturers but we haven’t compromised on the rigour of our method, or quality of the Venturers provided given what’s at stake.”
“What is it like being a Venturer?” I asked Dan.
“Well think of it like being in a premiership rugby club, rather than an old boy’s club,” he said. Both have a collegiate and supportive network, but the former inspires the highest mutual professional respect and self-improvement.” Not being a rugby fan myself, AT ALL, the simile is a bit lost on me, but I catch his drift and I am sure many of you reading this will know exactly what he means!
So where is Venturedirector looking for deals? They are already targeting certain segments. They work with venture capital, private equity and angel syndicates who need to boost management teams (for good reasons or bad), drive the value of their investment and de-risk it. They are also chatting to Tech Transfer teams at universities that are facing challenges commercialising their technology: “We can make golden calls into Microsoft, P&G or Pfizer today if that’s what’s needed, Modwenna. This can help ensure that the technology has a market need and what the proposition needs to look like” said Dan “and also to those institutions packed full of incubates or spin-outs: We love unpacking this market and finding the gems, but also advising the current stakeholders when it’s not going to work, which can save them a lot of time and expense. We have also pioneered Venturelicensing where we can assist to turn their licensing opportunities into cash, without necessarily creating a spin-out.”
Venturedirector also wants to hear from companies in trouble or growing businesses, maybe with incomplete management teams that might have turned first to the angel market for money, in the belief that this will solve their problems: “We can give them working capital if they need it, while we work with them on getting the team, the plan, the real fundraising need and the fundraising itself, sorted. And we are not scared by distressed deals either.”
They want to speak to companies that can’t wait to break into new markets whether sector or geographic: “That’s exactly what Venturers know how to do; they are sitting at the top of businesses doing that sort of thing every day of the week. We’ve even launched a service called Connect where we can, through the Venturedirector network, reach out to a specific company or country on a success-fee basis. We can get you into China without anyone joining the Board if that’s what’s needed.”
As the number of Venturers grows (and it needs to according to Dan because of high deal flow volumes already) one might wonder how the business is going to scale. Will it really be worth becoming the 1,900th Venturedirector? I suspect that Dan with his IT background and Stephen who was an expert in supply chain & logistics, have a few tricks up their sleeve to make sure that it will.
To be frank, in my view, if you are or know of a hot prospect which needs people as well as, or perhaps more than, money, it would be well worth giving Dan, Stephen and the Venturedirector team a call on +44(0) 20 7620 6189* as soon as you can and let them speak for themselves.
*For those of you who prefer email, you can reach the Venturdirector on email@example.com
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