George Dibben, co-owner of the Winchester-based serviced office providers Hampshire Workspace and chair of the business investment network Angels 5k gives some insights into the process of investing in businesses.
What Is Angels 5k?
Angels 5k was set up by an accountant called Ken Ball. He had a lot of clients who had sold businesses and made quite a lot of money, so he said why don’t you guys all get together and let’s look at investment possibilities and, if we find something we like, perhaps each of us can put in £5000. That has gone on and we’ve now got a membership of nearly 100 of whom some 50 are active angels. In the last couple of years collectively we’ve invested £3 million into about 15 companies, some of them new and some of them follow-on finance.
Why should businesses seek investment?
Companies find their way to us because they think, for instance, ‘I’ve got a good business idea or we’ve reached a point where development capital is needed or I’d like to draw in some additional expertise.’
Often cash is the limitation at that stage of the proceedings and most Finance Directors will say that whilst it’s attractive to borrow and gear up, there’s a limit to that process and it much increases the risk. On balance to build a capital investment in your business from angels and others is the better option for the longer term capital gain.
How do the Angels decide which businesses to invest in?
The businesses are often at an early stage, even pre revenue. So the data sets are not available to the investors for the sort of work done by investors later in the life of these businesses. Consequently, the Angels make their decisions less scientifically. However, there is a considerable depth of experience available within Angels 5K which is invaluable to the appraisal and the due diligence process. Also, members are very well connected and often know other professionals who can make significant contributions.
Some of their lines of enquiry would be as follows. How viable is it? How big an unmet need is this satisfying? How different is what you’re doing? Is it capable of being grown under your or others’ leadership? What is needed to make it grow? How easy would it be to scale up the business?
At the same time, they’ll be very interested in ‘Suppose good things are achieved, who is going to buy it?’ Investors are attracted to those that have done it before because they understand the exigencies of making it easy for a new owner to buy it.
One of the other important things that people running small businesses don’t really understand is that if they’re building up a business in an orderly and understandable way, they are automatically putting on the clothing of greater sustainability.
Initially we decide which ones interest us after a presentation and an opportunity to chat through with the proposer and amongst ourselves. Then the group of our investors appoint a leader and commence doing the due diligence on the business. Provided all that is in order then the investment is made.
What happens next?
Once the Angels have made an investment in a business, it’s in their interest that it succeeds. The investors usually appoint somebody to be their representative as a Board member or as an observer which should work in keeping us informed.
Emotionally many of the successful investors in Angels 5K are willing to go much further to support the investees than would at first sight seem sensible. It is because they like the people, share their belief and want to support and help them on their way. Members can often spot potential opportunities and problems which help considerably with putting businesses on a better track. Of course they want to be successful in their investment activity but also they want to think that they helped create a business.
What problems do investors encounter?
The company have got the money and occasionally they lose interest in their investors and fail to tell them very much, even though they said they were going to report monthly. So a horrible silence descends on the relationship. It is worth remembering to keep your investors on side because they know things change, usually for the worse, like taking longer than planned. However in their career they will have experienced this. So when the troubles come along, with their longer term and experienced view, they’re the best people to have on your side.
Angels understand that, when raising finance, it is the art of the possible. Companies do not necessarily put forward their worst case cash requirement and that often business targets take longer to achieve than planned. The rate of consumption of money is always a matter of great debate because many of the investees imagine their next need for communication with the investors is when they need some more money whereas the best advice to them is to communicate regularly so the investors can share in the ups and downs and they’re fully prepared for when more money is required.
With a proper dialogue, adjustments to the agreed plans can be made to correct matters.
What is the aim of investors?
Investors are exactly the same as everyone else; they want to know when they’re going to get their money back. So they want those involved with the business to be grooming their investment for an Exit.
If you look at the world of investment, say venture capital, an item discussed at every board meeting is the progress towards the capital event that will repay or reward our investment. We’ve had very few capital events in the life of Angels 5k, probably four or five. Investors have equity so a capital event could be a trade sale, a flotation, the owners buying out the equity holders with an agreed profit or it goes bust.
The trade is the obvious route for so many because somebody buys a business which they just bolt on to their existing business. They lose some of the costs associated with that business being independent and gain the profits, they’re buying the profits quite cheaply actually. That’s a well understood transaction.
Is investment right for all businesses?
Not everybody’s ready for that process for all sorts of valid reasons. You have to go through the cycle of understanding that you no longer have 100% of your business, and you’ve got other people to take along with you. That is a big change for many and not always an easy thing. We’ve all had conversations with people who won’t give up any equity but half a loaf is better than none. If you release half the equity on proper terms, you’ve got somebody else on board and the opportunity to grow.
The next transition- from owning to being owned- isn’t comfortable for many Executives. However, properly conducted, an Angel investment brings a structure and disciplines which could be similar to that which new owners would wish to exert.
What’s it like to invest?
It’s not as simple for the investor as the person promoting the business. You promote a business because you understand it and are passionate about it but, as an investor, you have many options for using your money. Most investors would put their Angels investment at quite a low proportion of their wealth. It’s the sort of money they’re prepared to lose which is why the tax breaks are there. So, if you start from that position, then anything you get back is almost a bonus. Over time the winners should outweigh those that fail. To try to ensure this outcome Investors tend to assemble a diversified portfolio of early stage investments. Angels 5k make this possible with the members able to take a relatively small exposure to a number of companies, investing alongside other angels who have sector specific expertise.
When it goes right, you can’t believe so many people are falling over each other to pay you so much money for prospective income. But that’s a rarity and not everybody’s experience by any means
What has been your greatest success as an investor?
I invested in the radio station Wave 105 which was based at Hampshire Workspace before moving to Segensworth. Once it was successful, the build-up of listeners and consequently advertising revenue was slower than planned, requiring shareholders to commit further funds. However, all the angst was forgotten when it was sold after two years, right at the top of the dotcom boom. It’s the best deal I’ve ever been involved with and I believe that the same applied to many of the other investors. We had a great time and really enjoyed it.