Dragons’ Den makes great car crash TV. As in all ‘reality’ programmes the most compelling scenes involved those who go blank, sweat, stammer, before being heartlessly dispatched.
The reality of raising private investment is a world away – thank God. But what we really want to know is what it’s like having these angels breathing down your neck, pushing and prodding for a glorious pay-day four years down the track. Read on for the good, bad and the downright ugly realities of living with Dragons:
1) Managing your expectations
It’s pretty obvious money’s top of the agenda. Beyond that, you may want more besides from your angel. Figure out what that is, says David Kilpatrick, founder of £17m turnover technology business Edenbrook. He took on angels and VC investment in 2001, with £200,000 coming from private investors for a single digit equity stake.
He points to Dragons’ Den where the likes of Peter Jones and Theo Paphitis make three or four investments per series. “Yours probably won’t be their major investment – it’s effectively pocket money to them.” Ask yourself:
• Will they really commit enough time?
• Will my business be a significant part of their portfolio?
• What access to their contacts will I have?
• How credible are they in the industry?
Extreme Media Group’s Al Gosling took on two angels fi ve years after starting up, receiving £3m for 17% equity and in November last year was able to buy them out. He wanted proactive investors who could open doors and drive things forward. One helped implement board-level discipline. The other proved particularly busy with a vast array of other projects.
Dan Drury was left disappointed when promised sales leads failed to materialise from his angel investors. While he didn’t take the money for web analytics business WebAbacus for that reason the deal clearly didn’t meet his expectations.
2) Managing their expectations
As Actinic’s Chris Barling says, whether you like it or not, the likelihood is your sparkling business plan projections will not be hit. In 1998, after more than 50 pitches, he raised £165,000 for his small business software company, parting with 15%. He’s now sat on both sides of the fence and understands the pressures. “The chances are you’ll only reach 70% of projected sales,” he says. “If the investor doesn’t understand that, you’ve got a problem.”
Investors are either active or passive, so expectations will inevitably vary accordingly. Passive investors are likely to agree softer terms – and there are more of these by a factor of 20 or 30 says Gary Robins, chief executive of investment house Hotbed, which aggregates these investors’ funds.
Active angels who agree a hands-on executive role on the other hand will expect to be able to stick their noses in. “The underlying principle from an investor point of view is that they can monitor the investment and have reasonable access,” says Andy Curwen, who heads the corporate unit of Manchester- based law fi rm Rowe Cohen. “The problem is, if they don’t have a portfolio they can get bored and want to interfere all the time.” Professional private investors who have money in a number of companies are likely to be satisfi ed with monthly accounts and invitations to board meetings.
3) Day -to-day involvement
The bane of your life or something you can’t do without? This is an area where it’s hard to strike a balance. As Extreme Group’s Gosling admits: “I’m a determined entrepreneur who doesn’t want to be told what to do. Yet here I am saying I’d have loved more help.”
Chris Barling takes a similar view. “Our angel didn’t make a huge contribution, but given our egos that was probably for the best,” he admits.
Day-to-day operations should be sacrosanct, unless your angel agrees an executive role. Watch out for interference. There’s sometimes a sense you should do what served them well before. As one entrepreneur, who chose to remain anonymous, says: “Constant calls and emails questioning judgement calls, such as choice of supplier, recruitment policy and pricing structure became a complete pain in the arse but, given his shareholding, the last thing I wanted to do was piss him off.”
Another had the opposite experience, saying they had to ask for input more than they’d have liked because the angel’s other commitments meant that promised assistance and planned monthly meetings never materialised.
Gemma Lewis started private clinic Preventicum, which is based on a German concept, last year after raising £2m. She has zero equity at the moment and five parties bankrolling the project, including the German version of the business. She expects input, but adds that she feels it’s her right to be assertive. “There was talk of an ad campaign, which I didn’t feel was appropriate at the time as I’d rather we invested in sponsoring a major dinner. We reallocated the budget and went for the dinner.” So sometimes you just have to put your foot down. FreshMinds’ cofounder Caroline Plumb’s investors adopted a different approach with her business. The market research fi rm received £100,000 at the start-up stage from three angels for 20% equity. “They were quite deliberately hands-off and wanted to give us the feeling of complete control. They felt they’d been too involved in some other investments.”
If you do expect input, don’t push the angel for more than they’re happy to give. One serial investor we spoke to has actually found himself wanting to be left alone to concentrate on his core business. “I won’t make any more investments where the entrepreneur anticipates my involvement beyond the money,” he says. “It takes up too much time and I don’t get any payback. I could get the same fi nancial returns investing elsewhere, without the time and commitment problems. And I feel my own business has suffered through lack of my attention.”
4) Where angels add value
Almost unanimously the entrepreneurs we spoke to could identify a number of areas where angels have added value. As Robins points out they are likely to have a network of infl uential contacts, be they potential clients, suppliers or even other investors. They can also help mould management teams and offer sound commercial business advice.
Many also act as mentors, bringing on potential. As one unnamed angel says: “The companies I tend to invest in are run by the seat of their pants. It does help having someone experienced and independent on board to help form, shape and map out the business’ future.”
David Kilpatrick found that his VC investors relied on the company’s angels to tacitly rubber-stamp key decisions and cites one example where, having networked at a senior level with no luck, the angel brokered an introduction with the prospect’s managing director. “For the client it removed the risk of engaging with a relatively young business,” he says.
They can also bring structure. One of Gosling’s angels brought corporate level investor relations to the business, which proved invaluable as the company expanded rapidly. Plumb points to people management, which was a key area she and her co-founder had no experience of and is often overlooked when there’s a natural fl air for networking and client winning. She was also grateful for their ability to see the bigger picture. “When you have a ‘black day’ they force you to take a look above the parapet.”
The third area of value for Plumb was knowing when to hold fi rm in negotiations with a FTSE 100 client. “They made sure we didn’t expose ourselves on the contract,” she says. “They pushed us to negotiate on areas such as liabilities, which we would have given more ground to in client negotiation. We were worried we’d lose the whole thing and were so excited we would have let them get away with more than they should have.” Similarly, Innocent Drinks’ angel played devil’s advocate and challenged their thinking, says co-founder Adam Balon, and also encouragingly pushed for international expansion.
One of Lewis’ investors made his money in property. He helped her business secure premises and agreed the lease. Another investor, from the hospitality sector, helped source staff uniforms and crockery. And fi nally, the private investor Drury brought in as chairman at his former company, was infl uential in raising venture capital and bringing in another eight angels from his own network. After Drury identifi ed a potential merger, he also took care of negotiations, thrashing out the deal.