23/04/2012

By Modwenna Rees-Mogg, AngelNews

For years angels have been fed a diet of burgers — from the gourmet in a velvet lined restaurant in W1 to the online drive thru — until now, in just 12 months, a smorgasbord of opportunities to invest and make money by backing fast growth potential businesses is now on offer.

The main course has been given a new twist with the arrival and early success of Crowdcube with its Chef’s selection of bonne bouchees. Why buy one dish of Fugu, when you can share 10 delicate alternatives amongst friends new and old alike?

And it’s not just the main course of standard equity investment that has been reinvented. The desserts on offer are now just as varied, with the arrival of a selection of debt funding alternatives.

No longer do you need to buy shares in the Big Four banks as your way of helping to finance the cash starved SMEs of the UK. The genius that is Market Invoice (get it right and you are looking at pretty much guaranteed returns of 12-25% per annum) with its auction service for SMEs invoices, offers a comprehensively thought through and very valid way of helping small business by supporting their cash flow requirements by advancing them monies against quality invoices. And there’s ThinCats and Funding Circle and more besides to provide variety to the menu with their alternative debt funding models.

Meanwhile the new starter course has been supplemented by Seed Enterprise Investment Scheme (EIS) which is expected to deliver upto £100m (though probably less) per annum of equity funding by private investors into the most risky start-ups. Brown Windsor soup is off; replaced with chicory and orange salad with ginger dressing or baked figs and goat’s cheese with raddichio.

I heard on the news today that Muhammed Yunus is now bringing micro finance to the UK; it will highlight the good work the CDFA membership is already doing by offering quality financing alternatives to help companies rejected by mainstream funders. And that is just the tip of the iceberg lettuce!

In the VC market the arrival of the Business Growth Fund has created £100millions of capacity in the £2-£10m space. Combine that with the changes to VCTs and EIS which will allow far larger sums to be invested into businesses and you can see how the capacity to fund the upper end of the “equity gap” is soon to be a thing of the past. And with expertise should come a better record of returns; with that will come more investment from institutional funders (note: HM Government please allow tax breaks for pensions funds to invest in VCTs).

Until now, the equity gap has been a term that has weirdly had become one looked on with pride. Why? Because belief in the equity gap has justified government support for the jobs and activities of hundreds of people and organisations across the UK.

But rightly the Government has recognised that it’s role is not to be the restaurant or even the restaurateur; it is create place where the chef can choose to open a restaurant, and allow that chef a reliable lease so they can operate, minimise his taxes so he can reinvest in his business, and then allow him the opportunity to source the ingredients from the market, chop, mix and cook them into something delicious and palatable; and serve them with relish to the customer who is so satisfied that they pay the bill with pleasure and book again. A good meal nourishes the customer and leaves them better off physically and emotionally than before they ate it. It may even inspire them to try to create something similar at home. And that chef will also train up the future talent so it can spread to every city, town and village in the country.

Now, in the UK, word is spreading that these new restaurants are opening. The beef and two veg places are adapting and aiming for their very own Michelin stars, the ones that fail to adapt will sadly have to close. There will no longer be any need to stop off late at night for a kebab from a dodgy burger van or pick up a sour cheese and pickle sandwich in a pub.

For some investors this new world is frightening. After all, any good angel or indeed VC has been in a virtual monopoly and certainly an oligopoly for years now, particularly if they have been sector focused. In the old world you never quite knew if your dish of Fugu sushi would poison you, but you knew if you ate in the right restaurants you were (probably) ok, especially if you took a good look at the kitchen and checked out the chef’s credentials before you ordered.

Spoilt for choice and able with some justification to moan that the challenge was that there were simply not enough good quality opportunities to back, recognising that the vital ingredients might just be snapped up by another chef in a restaurant you have not yet been to, inevitably stokes fear of malnutrition, but I can promise that this is not necessary. The best caviar will always only be available to those with the gold credit cards, because the caviar producers will want it that way to protect their brands and their profits. And the worries that the new restaurants may not have the same standards of cleanliness, is also unjustified. It does a disservice to the new restauranteurs.

Of course, looking and the menu and even the taste of the food as you wash it down with a nice glass of red do not by any means guarantee the nutritional value of the meal and certainly do not prevent the chance of food poisoning in advance. But in an open glassed restaurant where you can see who is eating and what they are selecting and the kitchen too, we drag everyone forwards. The onus of responsibility now lies with experienced investors. They must invite themselves to the parties of their kith and kin at these new restaurants and explain why it is important to insist that any dirty cutlery on the table is removed and that any incidents of food poisoning are reported to the health and safety people.

Angels and VCs are going to have to adapt, alongside the deal makers. They are all going to have to communicate, more powerfully, their own unique benefits and advantages and look into their own cookers and fridges for signs of mould and get out the Cillit Bang. They are also going to have to decide whether to stay isolated and wash up on their own or whether to share their washing up liquid with the newbies.

They are also going to have to recognise that maybe, just maybe great deals for them one day will come with them the baggage of a crowd of small investors or other funding arrangements in place.

It will be of course be their choice whether to reject them, join the party or even copy that select group of advanced thinkers who have recognised that offering early stage investors the opportunity to exit in part or in full at the new A round is the best way to ensure that we create a culture of serial entrepreneurs and better still serial angel and early stage investors, which, in turn, will bring even more great dishes to enjoy in the future.

Some angels and VCs will choose only to eat Fugu in W1 going forward, but I suspect that, perhaps unwittingly, many are already crowd fund investors. After all, what is the gap between a syndicate of 10, 20 or 30 and a crowdfunded deal with a similar number of shareholders? And more to the point, in terms of getting that amazing 100x exit (and I understand that to be really cool these days you need to be aiming for that level of return) I cannot help wondering if we might learn something from the gentlemen in the coffee shops of 18th century London who created the machine that was to become the London Stock Exchange in recognition of the fact that a crowd of investors, offered a liquid way of trading their stocks and shares is an essential part of the business financing mix. Will we ever see Crowdcube bid for the London Stock Exchange Group or Market Invoice bid for the London Metals Exchange? Not now, certainly; perhaps never, but it may be worth popping into the bookies on the way home from La Gavroche and putting down a tenner on the chance as I think the odds may be better than the 14million to One odds offered by the National Lottery.
Happy eating everyone.


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