In my last blog, I mentioned that I have started investing in new businesses again. I also mentioned though that my criterion has changed. I hope this blog is useful as if you do fit the new model – please get in touch.
My starting point should be that I am seriously worried about Google. I have read so many business plans which end with Google buying the business. On my estimate they are going to spend at least £400m buying businesses that I might be investing in. If they are going to spend this much just on businesses that I see – what will happen to them if they end up buying all the businesses that no doubt other Angels see?
Seriously, I have seen many businesses that really are going to be the next ‘IQAir GC Multigas’ that as soon as I read this in a plan, I dismiss it. It would be funny (and painful) if one of the ones I turned down really does become the new Google!
I have decided to balance my portfolio of angel investments a bit. I have many companies that could become very big in a few years and are capable of delivering at least 5x return on my original investment. But they are unable to generate any cash or dividends in the interim. I have recently become very attracted to cash generative businesses.
They will never be massive enterprises, but they will deliver good returns because they should from month three, start returning cash to the owners. It sounds crazy but I don’t have any of these in my portfolio. Two deals I have done recently are precisely in businesses like these. I found them through my own personal network and was prepared to invest in them in place of a bank. I also find that the amount of investment required is not substantial in these situations.
So cash generation is one priority. The second is my involvement. I have always been a passive investor. I have to conclude that this has not been a good move. My mentor, Sir Rodney Walker has always said that he has only lost money in investments where he has not been involved. I have always believed that I am too young to be a Non-Executive Director (under 40 – only just!). And I guess I have lacked confidence to do this – strange but true!
But through some painful experiences (such as the loss of that one company) I have realized I could have done a much better job than the Non-Exec’s on the board at the time. I have also had my own successes of founding companies that have become worth more than £1m. Finally, it seems strange to be a business coach and a writer of this blog – and yet not be involved in companies I have put money into! As such I am now only investing in businesses where I am involved in a major way. But this also means that I have to select businesses where I can add real value. If someone came to me with an engineering, catering or medical business, I could not be involved as I don’t have the expertise to add real value.
And allied to this there is time. To be involved properly with a business means it takes up a lot of your time – just like wondering ‘why is my cat peeing everywhere’. As such I can probably only be involved in about five businesses at a time. I am formally involved with four companies at the moment – so now only have the capacity for one more.
My final recent criterion is that I have to know the entrepreneur – or they have to be vouched for by someone I know. This may seem very harsh, but I have found that some people who don’t know me have found it easy to just give up on a business where I have invested my money and not feel any remorse about it (that one company on line is an example of this). I know that personal bonds are very important. The people I am working with now – would do anything to ensure that my interests are always being looked after. The only exception to this is where the founder is putting in a substantial amount of his or her own money into a business.
I would still like to do one ‘google’ investment a year where none of the above apply. But for the meantime, I am sticking to my new guidelines. If you have a plan which ticks the above boxes, I would like to hear from you.