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. Well, things are never quite as they seem on TV. Yet while the real process of angel fundraising might lack the deliberate intimidation and take a lot longer to complete, it can be no less dramatic and a lot more rewarding. “That programme has been a double-edged sword,” says Pat Sutton, operations director at Birmingham-based Advantage Business Angels. “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 the 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. He’s made his money and he wants to put it to work in new ventures, usually investing £250,000-£750,000, alone or in a syndicate. He does this both for the fun of it and because he wants 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 (see “Angel Directory”, p60). The British Business Angels Association has over 3,000 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 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. We are a private equity club with a twist,” says David Giampaolo, chief executive of Pi Capital, who helps companies raise up to £5m equity. “The twist is it’s our own money and our own intellectual capital.” 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 even 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 of 50:1
There’s no guarantee that you’ll be taken on. A traditional angel network might receive 80-100 plans every month and present 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 investors. If your business does catch their 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 – 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.

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 the Oxfordshire Investment Opportunity Network (OION). “The format of presentations, followed by questions from the floor, isn’t very structured and doesn’t work well with us.” Some groups like to put on a show. London-based Envestors boasts a “time lime” – a fruit-shaped clock that ticks off the minutes and final seconds of each presentation. “It’s as nerve-racking for the companies as Dragons’ Den,” says partner Oliver Woolley, who believes the TV show does at least give a good representation of the issues that real investors raise.”

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 Ashley Beighton, managing director of Padlife (see Box above), who raised £200,000 at an Envestors event. “Our idea is quite complicated to communicate. To try and pitch it in five or ten minutes and expect people to understand it is not really practical.”

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

Don’t throw it all away now
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 £2m before the investment, but 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 per cent 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 – 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 Aisha Ejaz, network manager at London Business Angels. “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.

Mixipix wins backing after Keen’s years of slog Mixipix marked the return of Lesley Keen. A decade ago, her computer games company, Inner Workings, was one of the first businesses to list on AIM, before going spectacularly bust. Her new venture allows customers to send animated messages to any brand of mobile phone.   Mixipix was actually 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. As a revenue stream started to flow Keen contacted highly-regarded investor network Braveheart Ventures in early 2005, once the fundamentals of the business were firmly in place. “They were exactly at the right point to press the button for growth,” says Braveheart’s Geoffrey Thomson. The deal took five or six months from first approach to completion, he adds. Keen approached the fundraising process in the same way as she prepared her earlier company for the public markets. 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 believes. 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.” Top tip learned: Keep working at it. If the angels aren’t biting, your business may not be investment-ready.

Lone investor rescues Beighton’s prefabs Ashley Beighton knows what it’s like to face fiersome investors. But as Dragons’ Den has shown, it only takes one investor to walk away with the cash you need.   Beighton tried to raise finance for his construction firm early. He hit on the idea of prefabricated buildings in the midnineties, while he was working in the construction industry. Padlife’s buildings are a long way from the prefab blocks of old. This is state-of-the-art stuff, with a unique modular design that allows rooms to be swapped around at will. By 1998, he’d developed a new system, and by 2001 he’d secured patent protection and launched a company to exploit it. But the business plan just wasn’t right and he couldn’t attract backers. So Beighton went to Oxford’s Said Business School to tap the brains of the MBAs there. “They helped us write a more businessoriented business plan, rather than a construction-oriented business plan,” Beighton recalls. The company returned to angel group Envestors in June 2005 and Beighton presented in September. Even then, he got a less than rapturous reception. “They didn’t do that good a presentation because they just read it out. They got the lowest score from the feedback forms,” Envestor’s Oliver Woolley recalls. And here’s the thing. “In spite of that, they still got funded because they found one investor who thought it was absolutely fantastic.” By November, this angel had invested £200,000 seed capital and taken a non-executive seat on the board. Padlife is close to securing patent protection in all the major developed economies, and is busy working on prototypes. One particularly proactive developer has signed an order for 650 units. “The whole thing is moving forward at a pace,” says Beighton Top tip learned: A bad presentation isn’t the end of the world – if someone just fancies your business idea, you can still win out.

Investors prove the Katalyst for a whole new business The value that an angel investor can bring to the party is well demonstrated by the story of technology firm 21Net. The firm produces the kit that brings high-speed broadband internet services to rail passengers, even on European express trains, and was developed from a European Space Agency project by a team of tech veterans, led by Henry Hyde-Thompson, who founded 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 Katalyst invested £212,500 in that round. “We presented it to our group in late 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 a further £790,000 total in secondround funding. The high quality of the management team was a major draw for the angels. “They already had discussions going on with the main train operators so we could start to see where the revenue streams were going to come from,” recalls Macpherson. But 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 whenever trains went under low bridges. It could have stopped the deal dead in its tracks. 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. Sweet. Top tip learned: Angel investors aren’t just there for the nasty things in life like money. Their greatest value lies in their management advice and technical help – which may lead to whole new ventures.

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