The real Dragons

Real Business, March 2006

What's it like to work with real business angels? By Tim Chapman

So you've watched Dragons' Den a few times, and think you know what business angels are about. But things are never quite as they are on TV. The real process of angel fundraising might lack the deliberate intimidation and take a lot longer to complete, but it can be no less dramatic and a lot more rewarding.

"Our investors are a lot kinder than the ones you see on Dragons' Den," says Pat Sutton, operations director at Birmingham-based Advantage Business Angels. "That programme has been a double-edged sword. It's told people what business angels do, but it's frightened a lot of people off."

"The propositions we look at are a hell of a lot stronger than anything on Dragons' Den," says Geoffrey Thomson, an experienced angel and chief executive of Braveheart Ventures. "And I wouldn't let any of our investors behave like that to a company."

The typical business angel might not be a dragon, but he's no cherub either. He (it's rare to meet a lady angel) is a successful entrepreneur or corporate heavyweight, now settling into middle age. They've made their money and they want to put it to work in new ventures, usually investing £250,000-£750,000, alone or in a syndicate. They do this both for the fun of it and because they want to make more money. If you're just starting out with your own business, an angel isn't just someone you want to know – he's who you want to be.

If you're lucky enough to know a likely angel investor personally, they should be your first port of call. Most investments are still made through personal contacts, despite the proliferation of angel groups and associations. The British Association of Business Angels has over 3000 registered investors among its member groups, making some £24m worth of investments in around 180 companies a year. But figures collected by online exchange DCX World suggests there are up to 200,000 potential angels out there.

Know your angels
Angels like to form groups – partly because they just like to network, but mostly because it helps them spread their risk and gives them access to a better variety of deals. "The overall quality of deals still coming to the market is very very poor," says Paul Gardner, executive director of the BBAA and managing director of C2 Ventures.

Angel groups come in various types. The largest category is the classic show-and-tell model, where half a dozen entrepreneurs present themselves to an audience of angels at regular events. These groups are the most likely to be regionally-based, and are often supported by development agencies and other quangos. These tend not to attract the best angels, but do often offer the entrepreneur match funding from an allied government-backed fund.

At the top end are highly professional operations, managed by people who are experienced angels in their own right, which take the angel model into the venture capital space. Firms like Pi Capital, Braveheart Ventures and Katalyst Ventures have exacting standards for the companies they take on, but virtually guarantee a successful fundraising for their companies.

"I don't like to think of ourselves as business angels – what we are is a private equity club with a twist," says David Giampaolo, chief executive of Pi Capital, which helps companies raise up to £5m equity. "The twist is it's our own money and our own intellectual capital."

Members tend to invest in syndicates of like-minded investors within their group. "Very few companies secure money from individuals," says Aisha Ejaz, network manager at London Business Angels. "Angels have become smarter and are looking out for their investments, and don't want to take the whole risk."

So when should you get in touch with an angel group? Unless your basic idea is truly brilliant, you'll need a fully worked out business plan to get a foot in the door. Ideally you'll be generating revenue, or on the verge of doing so. "We're looking for businesses that, with this round of funding, will see their way to at least break-even," says Alex Macpherson, chief executive of Katalyst Ventures. "The critical thing is a very strong idea of where the revenues are coming from, and understanding of the buying decisions of your customers."

Odds against
There's no guarantee that you'll be taken on – a traditional angel network might get 80-100 plans submitted every month and present just six, of which one or two might win funding. The VC-style groups typically cherrypick just six to ten companies a year to present to their investors. If your business does catch the eye, you'll be called in for an initial meeting with the group's managers and a friendly angel or two. There'll be varying degrees of sifting and grooming before you're presented to the angels themselves Ð this can range from a couple of days' advice through to a full-on restructuring and due diligence process.

Then comes the moment of truth. Several of the VC-style groups don't actually do initial stand-up presentations, but will expect companies to give more detailed presentations to angels who have registered an interest based on a detailed prospectus. Lesley Keen of Mixipix (see below) presented her business case at a forum for interested investors in the Braveheart network. "Only a small number of people came along to that because they trusted that Geoffrey and his team have identified good companies for them to invest in," she says.

But for most, it's the stand-up presentation in front of people who know next to nothing about your business. Networks typically have presentation meetings every month or two, with around six companies presenting at each. Expect an audience of 100 or more, with lawyers, advisors, journalists and other inveterate networkers alongside the serious investors.

The process is usually more structured and friendlier than on TV. "Dragons' Den makes good television, but I don't think it bears a great deal of similarity to the way we do things," says Jon Cox, manager of Oxford-based OION. "The presentations followed by questions from the floor format isn't very structured and doesn't work well with us."

Some groups do like to put on a show. London-based Envestors boasts a 'time lime' clock that ticks off the minutes and final seconds of each presentation. "It's very nerve-racking, terrifying for the companies," says partner Oliver Woolley. Dragons' Den does at least give a good representation of the types of issues that real investors raise, he argues.

Entrepreneurs can be critical of the stand-up model, however. "I don't know whether we'd choose to do it that way again," says one start-up MD who raised £200,000 at an Envestors event. "Our idea is quite complicated to communicate, and to try and pitch it in five or ten minutes and expect people to understand it is not really practical."

You won't be going home from a presentation with a cheque in your pocket. Even if you do win over some angels on the night, there'll be long weeks of hard work before the deal is closed.

Don't throw it all away
Inevitably, there'll be haggling about how much your company is worth, and how big a stake the angels get for their money. "There's a huge gap in expectations between the company and investor," says Woolley. "Typically the entrepreneur may think their business is worth £2 million pre-money, the investor might think £500,000 pre-money."

It's rare for a company to give up a majority stake at this stage. The earlier the business, the more you'll have to give away, but 40-45% is usually the limit. For that stake, you should expect a hands-on angel who will play a major role in helping your company develop.

Some angels like to take an active role in the investments they back Ð anything from occasional advice through to an executive role. The chance to add some heavyweight experience to your business should not be passed up.

"If anyone says they just want the money, that tends to be a warning sign for us," notes Macpherson. "The access to skills is worth a lot more than the financial investment in the long term."

Negotiations typically take a month of hard work to complete. "If the deal doesn't close in about eight weeks, it's not going to happen," says Ejaz. "Investors are probably bored by then – they've seen another opportunity come along."

But with a good business and the right attitude, you'll get the investment you need to take your business to the next level. If things keep up, who knows – ten years on, you could be sitting on the other side of the den.


Case studies

Mixipix marks the return of Lesley Keen, who a decade ago saw her computer games company Inner Workings become one of the first businesses to list on AIM before going ingloriously bust. Her new venture allows customers to send animated messages to mobile phones, with the twist that the cartoons can be sent and received by any brand of handset.

Mixipix was founded in 2002, as the first multi-media mobiles reached the market. Funding proved hard to find. "Because this was quite a new concept, I ran up against people saying come back when your technology is working, then come back when there's a market for it, then come back when you've got revenue," recalls Keen.

The company contacted highly regarded investor network Braveheart Ventures in early 2005, once the fundamentals of the business were firmly in place. "They were just starting to get revenue," says Braveheart's Geoffrey Thomson. "They were exactly at the right point of pressing the button for growth."The deal took five or six months from start to finish, he adds.

Keen says she approached the fundraising process in the same way as she prepared her earlier company for the public markets. "It's very much a more cutdown version of the same thing," she notes. Embracing the principles of accountability and due diligence early in a company's life can only make it easier to raise further funding or achieve an IPO, she says.

The mobile content market is currently poised for intense consolidation, which Keen acknowledges will make for a tough few years for Mixipix. "We're keen to make sure we make the right partnerships and get ourselves recognised as a strong quality player even though we're still quite small," she says. "The next couple of years are critical to prove we can realise the potential that Braveheart has seen in us."

Rapita Systems
Rapita Systems helps car manufacturers ensure that their airbags blow up only they're supposed to, and mobile phone operators keep their networks running, by ironing out the glitches in their embedded electronics. The company is based on software developed in the University of York's computer science department, as part of a European-funded research programme involving industrial partners such as Audi.

At the end of the project, Audi said it wanted to buy the fruits of the York team's research. Mobile phone group Ericcson were also interested. Lead researcher Guillem Bernat took a sabbatical from his university job to launch Rapita in April 2004, with support from the Science City York initiative. "We were able to run from university premises while we finished converting the prototype we had into a commercial product," he says. "We wanted finished products and customers. It's then a much easier proposition to take to investors."

The firm presented to investors at an event run by the Yorkshire Association of Business Angels. For a lecturer like Bernat, the stand-up presentation was no challenge. "Addressing audiences is not a problem. Some of the other guys didn't enjoy it, but for me it was very natural," he says.

Rapita won funding from the Viking Fund, a government-backed regional fund that invests alongside private investors. Five angels from the allied Viking Club joined in the round. "We did a lot of work so when we went to the meeting we had a very good, very well polished business plan," Bernat says. "That was the best selling point for our company – people said they didn't expect something so well finished for this size of company."

Being able to surf the net from a moving train isn't rocket science, but it's close. The technology being developed by 21Net comes from a European Space Agency project to exploit advanced satellite communications.
The firm produces the kit that allows train operators to offer high-speed broadband internet service to their passengers, even on European high speed trains.

21Net was founded in 2001 by a team of tech veterans lead by Henry Hyde-Thomson, founder of ventures such as Anglo Scientific and Speech Machines. The deal was introduced to private investor group Katalyst Ventures in late 2004, when Birmingham-based VC house Midven was leading a £1m first round of fundraising. Angels from the Katalyst network invested £212,500 in that round. "We presented it to our group at the end of November 2004 and completed investment literally at the end of the year," says Katalyst chief executive Alex Macpherson.

In a second round in late 2005, Katalyst members provided £562,000 of the £790,000 total. The high quality of the management team was a major draw for the angels. "They already had discussions going on with the main parties so we could start to see where the revenue streams were going to come from," says Macpherson.

Katalyst's investors have also provided some major non-financial assistance. One key part of 21Net's kit is the antenna mounted on top of the train. The prototype versions had a high dome shape, which made for obvious problems when trains went under low bridges. Enter one of the Katalyst investors, Richard Mayo, who knew he could use his own knowledge to build a flatbed antenna. Mayo and Hyde-Thomson subsequently launched a new company – Phasor Solutions, with 21Net's private investors again holding a major stake – to commercialise this antenna for a wider market.


Presentation tips
First impressions last. If you're giving a stand-up presentation to try and attract angel investors, most will make their first judgement before you're halfway through. Here are the top tips from the angels themselves:

Keep it short and sweet
Angel groups each have their own house rules, but most want no more than 5-15 minutes. Your presentation should include all the main points from your business plan, but in a simpler punchier fashion.

Show and tell
If you've something tangible to show, show it – even if it's just a photo of your product in use. If you're using PowerPoint, use no more than 8-10 slides.

Show passion
Angels make a judgement as much on you as your business plan. Show them you're committed, and that you're sharing the risk. Don't look like you're just reading from a sheet.

Don't use jargon
The audience won't all be specialists in your area, so avoid technical terminology. If you need to, explain it briefly and simply. Don't speak in management bullshit either.

Sell the company, not the product
The investors aren't buying whatever good or service you provide – they're buying into your business. Talk about the market and the need for what you're doing, not just what it does.

Know what you need
Show why you need the money you're asking for, what you're going to do with it, and what the business will be worth afterwards.

Be ready for questions
Have extra information to hand. If you just don't know something, agree to come back later. If investors are asking questions, it shows they're interested.

Don't be inflexible
The investment and valuation dictates what equity stake the investors will want. Exact values should be negotiated in the weeks after the presentation.

Practice makes perfect
Many angel networks and intermediary groups provide workshops to help you perfect your presentation, or hold dummy panels of investors and advisors. Use these opportunities, and practice on friends and peers for as long as they can stand it.