Navigating the angel investing ecosystem – advice for angel investors and entrepreneurs
8 min read
01 February 2016
If the only time entrepreneurs communicate with their investors is when they need more money, this relationship is doomed, advises Simon Thorpe. Having analysed companies around the world, coached entrepreneurs at various business schools and invested in the technology sector, he offers unique insights into the angel investing ecosystem.
It’s important to keep in mind a global picture of any market. Borders are no longer the barriers to entry they once were. Angel investing in the UK is behind the US, but way ahead of continental Europe in terms of developing early stage investment. In the UK, tax incentives are very effective and attract many individuals to what is a very high risk sector. This has supported the growth of a huge number of startups in the UK. In 2014, there were some 180,000 startups created in London alone, according to StartUp Britain research.
It’s enough to look at what’s happening around the Cambridge Technology Cluster to guess where the future lies. Much of the Cambridge scene has developed around the digital economy; around technologies such as artificial intelligence, deep learning, knowledge management, big data, cyber security and life sciences. This is evident in the profiles of the start-ups there.
Insights for angel investors
If you wish to become an angel investor, you need to spend a significant amount of time researching the market to decide what you wish to invest in. If it’s digital economy, what themes do you wish to focus on? Do you have relevant expertise? You need to create a network of people and companies who could help you source and explore these ideas.
Angel groups, such as Cambridge Capital Group, and professional networks, like Numitas CFO Clubs, are essential sources of ideas and expertise. Some ideas appear in your inbox, but this usually means that it’s too late to take advantage of them.
Next, you need to decide what your criteria for investment are. The key one in my template of investment criteria is the management team: are they good enough to build the business to a significant scale? Do they have a good idea for solving a really difficult problem? Do they have proprietary technology? Are they targeting a market that is big enough to make them a commercial success? What investment return are you expecting? Do you have any social objectives?
Read more about angel investment:
- Five things to consider when seeking angel investment
- Tips on raising investment from angels and high-net worths
- Winning over the angels: Tips on pitching for investment
It’s worth bearing in mind that an angel investor’s success rate is only one or two in ten. You need two out of ten to be successful and make a good return. A test of your experience is knowing when to stop putting in more money. If a company goes bankrupt quickly, it is often a relief. A real problem is the business that keeps going for ten to 15 years without making any progress.
There is always a temptation to keep injecting more money in the hope that extra investment will make that long sought-after breakthrough. Generally, the companies which are successful are successful quickly, although it usually takes the team longer than they think.
The majority of VCs with whom I deal prefer to invest in a company that has two founders. Usually, these are two men or two women. They must have highly complimentary skills. One of them will be a sales or commercial person and the other will have technology know-how. When there are more than two founders, the founder shares are too quickly diluted down to small individual holdings.
Advice for entrepreneurs
Industry estimates show that only around five per cent of people have the personal qualities and aptitude required to be an entrepreneur. Many people don’t want the responsibility that goes with starting and running the business on their own. It can be a lonely place being a company founder, even when there are two of you.
I have a list of expectations in relation to entrepreneurs with whom I am happy to work with. What I look for in an entrepreneur is a compelling five-year vision for their business, unreasonable optimism and willingness to take risk. They should also be outstandingly capable, good at managing people and skillful managers of their workload and time. A successful entrepreneur will be good at taking advice and able to judge from whom to take advice. They must wear the “can do badge”.
I am sceptical of people who boast they have a “great idea”. A lot of people have good ideas. That is the easy bit. The difficult part is executing that idea. This means bringing various skills to the company and being able to work with different people, drawing on relevant industry knowledge.
Business courses, such as those run by Cambridge Judge Business School, have incubator and accelerator programmes that provide entrepreneurs with funding and advice on sales, marketing, finance, IP, technology, social media and networking to help them succeed. These programmes provide a support ecosystem which significantly increases the probability of success. During such courses, entrepreneurs pitch their ideas to mentors and investors where they get lots of feedback, some of it very harsh.
They go back and iterate again and again, until they get it right. Then, they might win a small grant (£5,000-10,000) and later perhaps an Innovate UK grant. This is usually followed by angel (or crowdfunding) and VC funding.
However, it should be remembered that, although a business school will give a young entrepreneur the skills and confidence to take their big idea to the market, the willingness and the ability to take risk are unique personal qualities.
Bringing on an angel investor is a lot like marriage. Once the honeymoon period is over, a bad angel can become more like a demon; interfering operationally and being time consuming and power hungry. Here are top tips to avoid getting into bed with one.
Simon Thorpe is angel investor, business coach and former COO of UBS Equity Research.