How things have changed in 10 years. When I started angel investing in 2009 just after the Great Financial Crisis (GFC), I could find revenue generating companies valued at less than £1m. Now an equivalent company would be £5m+. In those 10 years I have invested in 40+ companies, many founded by women. I have been fortunate enough to experience many successes and have learnt to accept failures with 1 or 2 investments out of 10 generating my return.
So, what have I learnt over this decade and what trends have I observed?
- Entrepreneurship and raising external capital have become more mainstream
- Many more female entrepreneurs have emerged especially in the last 5 years
- The UK leads Europe in many areas of tech investment including in artificial intelligence (AI)
- Some Universities are now much better organised at spinning out and commercialising their IP
- Incubators and accelerators have sprung up all over the UK (205 and 190 respectively)*
- Artificially low interest rates and significant tax reliefs have attracted significant funding to this asset class and pushed up valuations
Entrepreneurs and entrepreneurship
Outstanding entrepreneurs are a rare breed. No more than 5% of the population have the appetite to take the risk and only a tiny fraction of them have the capability to build innovative businesses to scale. Founders are critical to success and 2 founders with complimentary skills significantly increased the chances of success for me. If they are not right, then you can forget a good outcome. Changing teams can be done but it takes time and much effort. Often the market opportunity is gone in the time it takes to rebuild a team.
Revolution is an overused word but be in no doubt that there is a digital revolution going on and it has only just started. My successful exits have all applied digital technologies (mostly software) to existing or new industries. All my non-digital investments have failed. There is a new 'modus operandi' for starting and scaling a business as the barriers to entry are much lower.
Themes & Criteria
Setting your investment themes and then your criteria will guide your decision making and help you to invest in startups that are building your vision of the future. My themes are big data, artificial intelligence (AI), Internet of things (IOT) and digital healthcare. My criteria are Team, Tech, Intellectual Property and Market Size.
Successful businesses take 7-10 years to create real value and sometimes much longer. It’s called patient capital for a reason. Of course, I invest for a return but it’s also important to me that the businesses I invest in are socially useful, creating jobs and a net benefit to society.
Well it’s clear there isn’t much. It’s not about being politically correct, it’s about improving business performance. Boards and management teams need to mirror their diverse customers. I am encouraged to see many more female founders now than there were 10 years ago, but the funding hurdles are still too high and even higher if you are a man or women of colour. Female founders have returned 78 cents of revenue for every $1 invested while male-founded companies generated 31 cents (2018 BCG study).
Understanding your value add as an investor
Understanding the value, you can add to a startup is important. It helps you to provide targeted expertise to your portfolio and support companies at the right stage or decision points in their life-cycle. It also allows you to recognise when it’s time to step back, as the startup has surpassed the point where you can add the most value. How active or passive should you be? Can you make relevant connections?
Spending time to build a deep network is critical when angel investing, as the most promising startups will be found through warm introductions. A great network will increase the likelihood that you see startups that fit your themes and helps to access much-needed expertise in due diligence. It will also help you find like-minded well-informed investors. Angels should strive to collaborate with Venture Capital and other institutional investors as early as possible.
Syndication and co-investing
Working as a syndicate and collaborating with other investors helps to bring relevant people to a deal, provide relevant sector expertise to startups, and close rounds quicker. This is especially important if you have syndication partners across a startups life-cycle from seed to Series A and beyond. Who invests alongside you can be as important as the founders you are investing in. Some of my failures have been distracted by differing investor groups with different goals. Well-intentioned but certainly not always well informed.
The next decade
The tech ecosystem has developed rapidly, and I am positive about the outlook for innovation over the next 10 years, as paradigm changing technology such as AR, Quantum Computing, and 5G disrupt industries.
Look ahead, do your research, be bold and back your instincts.
* Source Beauhurst