Dear Reader

I am delighted to announce that AngelNews has partnered with the Emerging Partner Programme at Oracle. We are delighted to be working with Oracle who will be looking to offer AngelNews companies considerable levels of support in the forthcoming months. In particular, Oracle would like to hear from companies which will be using IT as the backbone of their growing businesses and those who feel that working with Oracle will bring them the scale their customers are or are likely to be demanding. If you would know of a company that might wish to hear more about what Oracle can offer to them – and believe me, what they are offering is very special, please contact david.rajan@oracle.com or chris.eldridge-hinmers@oracle.com. We will be organising a number of events with Oracle at which you can learn more about how they can help as well as their views on the opportunities available to companies. More details will be announced in next month’s AngelNewsletter Online. In the meantime you will get a flavour of Oracle’s approach in their forthright – Not so tricky – working with a global corporate, below.

As we roll into August, we feel it is a good time to plan for the future and therefore I hope you enjoy some of the articles in our AngelNewsletter which provide some thought-provoking ideas about thinking outside the box when it comes to growing a business. We will be planning ourselves – in July we hit a new high with 66 companies signing up to our news service, which was cause for great celebration (a team lunch in the local pub!). More companies means more stories for our readers, more knowledge about the market and therefore more business getting done. Hurray!

From now on we will also be including more editorial for our angel readers. This month, Brian Williams of Vantis plc has prepared a neat Wing Tip on how you can pay less Capital Gains Tax when you sell your second home in the UK. We particularly wanted to cover off this topic as there are signs that the market may be becoming unsettled and not just in sub-prime lending; I am reliably told that many investors are getting out of domestic property and switching into commercial property at the moment. Do you have a feel about what is going on? Angels tell me that they have made a lot of money out of property investing and, dare I say it, possibly more than by angel investing, so it would be a nice to think that the tax man does not need overpaid when the gains are realised.

By the way, if you are looking for some high quality people, check out our Job ad of the Month. We have found two people who we think might be ideal for one of your investee companies. Please get in touch if you do need a particular post filled as we might be able to help.

Enjoy your summer.

Modwenna

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For more information on these stories look in the rest of the AngelNewsletter Online

Earlier this week on the BBC’s Radio 4, the Archbishop of York, John Sentamu named entrepreneurial people as one of the key eight groups who help the world to meet the Millennium Developments Goals. When you think about that, it is pretty cool – entrepreneurs being named alongside government leaders and others as people who can change the world. And the comment was made by one of the leading religious figures in the world, when historically religion and business have not always sat happily together.

Hearing this was the latest in a line of recent instances where entrepreneurs are engaging with the mainstream in a way we do not think they have really done so before. At a recent Oracle event, one bright 26-year old accountant spent a lot of time telling me about how he was supporting his friend in their entrepreneurial businesses based in a shed in the back garden. He brought in the cash to help finance it, but interestingly did not appear to have plans to chuck in his job for the business. So even 26 year olds can be a sort of angel these days and such involvement in supporting enterprise is a badge of honour, not a backstop if the day job does not work out.

I have also bumped into a number of bankers both senior and more junior around and about. They are much more keen on helping entrepreneurs now and have a pretty clear idea of the issues involved and the relevant stats. Bank managers are interesting people because embedded in their DNA is an understanding about how to offset risk and make money from supplying a service. When you come to think about it, these are pretty similar issues to those that angels and entrepreneurs face. They tell me they want to engage with angels whose involvement with a growing company mitigates many of the risks they see. Bankers also recognise that one day the entrepreneurs might be very rich themselves – leading to more business in terms of investment, property and other asset financing. What hits you in the face with bankers is that they understand that great riches will not come unless the entrepreneurial business can actually make and sell products and services profitably. Traditionally, they were uncomfortable with internet businesses, not because they were intrinsically bad, but because there were no proven profitable and growing business models on the net. This is no longer the case so the banks have crossed a BIG risk off their list and have opened their doors to us once again.

Among the big corporates entrepreneurship is suddenly cool again. In the old days this was known as corporate venturing, a term which never really worked because it was too generic. No-one talks about corporate venturing anymore, they are just striking deals which mean they engage with and support enterprise with the objective of making money for themselves at some point in the near future and long term future. Whether it through Oracle’s Emerging Partner Programme which has already helped such diverse companies at Practical Law Company or Trampoline Systems, or Alliance Boots forming a £3m joint venture with the University of Wales and Longbow Capital for a Boots Centre for Innovation in Swansea or BT hosting a conference at the BT Tower for AngelNews companies there are more and more examples to be found.

So the Church, politicians, bankers, corporates, and even 26 years olds have entrepreneurs in their pockets and seem pleased to have them there! What about the angels and Venture Capital communities’ attitudes in mid 2007? Well in some places life is pretty good – the West Midlands, Wales and the South West are areas where I know new deals are being done all the time, but generally the volumes are still pretty low compared with the number of opportunities that are available.

The reason? Well I am coming to the view that there is still not enough capital truly on offer for investment – whatever the theoretical available capital may be. I learned from a private banker the other day that 18,000 new millionaires are created in this country every year, but I would moot that the market does not see even 10% of that number turning up as prospective investors in entrepreneurial companies – maybe 2% or 3% but certainly not 10%. Meanwhile the government is still taking not releasing enough money from the Treasury, whether through tax breaks or funding initiatives such at the Enterprise Capital Funds.

One could navel gaze about what to do about this , but let’s not bother – its August and the sun is coming out. Instead let’s embrace the banks, the corporates, the young people supporting their mates in their sheds and plan for a truly integrated body of support for the billion pound companies of tomorrow. Happy holidays.

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What is the best way into a global corporate?

There are two routes: direct or through partners. Initially it’s best to find the most appropriate level person within a country. You need a champion within the business and somebody who will help you build a picture of the organisation, help interpret what that means and will help push you along. This person should be able to help identify “pain” points in the organisation, who has budget levels, who in reality is a key decision maker and who’s a mover /shaker. Once you have found your champion you then probe into pan regional contacts and then the global ones. Very few global corporates really operate globally. P&L usually sits at country level.

The alternative route is going into the corporate with a partner. These are typically the big management consultants, who should have an understanding of the organisations, key people, drivers, issues and a track record of delivering. You will need to find a champion within your partner organisation who will help you in the ways described above.

What are the lead times for winning business with a global corporate?

Typically it’s two years, however if you can break your solution down into smaller products/solutions it could come to 6 months if there is a relevant project. My definition of the lead time for winning business is from initial engagement, through winning the business, billing and receiving the cash.

What do I need to offer a global corporate so that they will start to do business with me?

Find a solution that will address a “pain” within the business. It must be a solution, not just a product. That way you can take their problem away, rather than just identify a possible solution that they then have to get involved in and implement. Ideally it should be something that will see return within the current financial year, something innovative, but not too risky. You also need a clear ROI, that fits within their own internal decision making process. Create a pilot that is low risk but has the ability to improve the whole organisation. It also helps to have a relationship with one of their established partner organisations e.g. a consultancy firm or another supplier or channel partner.

What will make a global corporate work with me for many years?

There are four key things:

1. Something that will improve their margins continuously.
2. Something that adds value to their own market proposition, that will create sales for them, or will make it easy for them to sell their own product/services.
3. Continuous interaction and pro-actively maintaining and building the relationship
4. Ongoing regular reviews to identify risks/issues.

What do I do if a global corporate wants an exclusive relationship with me?

Charge them an extortionate amount of money, large enough to allow you to realise the full value of the business if they hadn’t agreed the exclusivity! Put a huge up front fee into the proposal and have break out clauses so that if they miss any agreed deliverables the contract agreement could be terminated or they have to compensate you financially. Try to limit exclusivity to small discrete areas of business, opportunity and/or geography.

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We think you should look seriously at using an AIM flotation either to raise funds for your business or as a step towards exiting your business.

Who is better to tell you about the issues around an AIM flotation than the London Stock Exchange which owns AIM?

AngelNews has therefore negotiated a special 20% discount for our readers at any one of the three courses to be run by the London Stock Exchange on “Inside the AIM Market” during autumn 2007.

See below for details on how to obtain your discount when you book your place.

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Are you or your investee company looking to expand outside the first world? Perhaps you already work with partners in Europe or North America? But what about further away in the emerging economies, or perhaps The Gulf States? I recently attended two very interesting events which highlighted similarities and differences in two economically significant parts of the world. The City and GCC (Gulf Cooperative Countries) Conference looked at a variety of issues, including an overview of capital markets in the GCC. Shortly afterwards, Viadeo held an event to launch its new Euro-China link with Tianji. At both of these events issues around trading with emerging economies came up, showing that exploiting huge opportunities overseas is not as easy as you might think, but, oh boy, they are worth grabbing if you can.

The GCCs have an interesting issue. They have too much money. Huge capital surpluses in these countries, mainly from oil, are sitting there with relatively few domestic investment opportunities. Since 2003 growth in private equity and hedge funds has gone from $400m to $25bn, most of which growth occurred in 2005/6. Expectations are for a further fourfold growth by 2010. Think of all that money available for investment into high growth equity opportunities?

Remember though that raising investment must be conducted in line with Sharia law which means there can be high legal costs associated with deals done. Although Sharia law is sympathetic to equity investment, GCC investors are currently wary of such investment because of the poor performance of domestic stock markets, so there is a job to be done to convince them that they will make not only the right but also positive returns on their cash. However, on the side of western entrepreneurs is the fact that investors have made money from the US and European stock markets.

Having lots of cash means that GCC investors look at things with a different scale. They are not looking to make small sub £1m investments – they want to back the best deals in a big way.

Another issue about trading within the region is that it continues to be more like Europe than the US (in terms of geo-political breadth) but without a common market. The result is that scaling a business or a brand is hard. If you want to break into the GCCs, expect to have to set up a presence in each one. This has implications if you want financial backing for your business. Think about how to structure your fundraising. In particular consider whether it will work having backers from different countries in the region.

When it comes to trading, remember it will be difficult to scale a business across the GCCs. Few have done it and there are reasons, not least legal and political differences in each country. Therefore it may be worth looking at each country and developing a strategy for each one in turn. Don’t be surprised if you end up setting up different legal entities, with different backers, for every country you enter.

However, do consider seeking investment from the region. If you are a technology company, with a cash burn that runs into the £millions, you could do worse than look to the GCCs for some backers.

We all know that China’s GDP is currently rising at 10.7% per annum against 2.7% in the UK, but did you know that single companies are driving the creation and growth of urban China, not big corporates? As a result the market remains wide open for new SMEs to enter and thrive particularly if they are involved in health, education, environmental issues, financial services, ICT, construction, chemical, automotive, water and fashion/luxury goods – in fact almost anything! And you do not have to be the leader you’re your domestic market to make it to number 1 in China. In fact if you are a number 3 or 4 you have just as strong a chance to become market leader in China, but selling more volumes with much higher profit margins. You will also do a lot more business off the web, so you really will need to set up a physical presence in China (just like in the GCCs) if you want to succeed there. Remember, although there are not the same issues around how deals are structured in China, signing a contract is only the start of negotiations not closing the deal – which is a big difference for people used to doing business in the West.

The Chinese, like the GCCs are now enthusiastic about trading with the West – think of the support Barclays has received in its bid for ABN Amro, but there is not yet a feeling that the Chinese want to invest in non-domiciled businesses. One day this will come, and maybe soon, but in the meantime, it is probably more important to look to China for customers rather than investment.

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A little monkey business

A tourist walks into a pet shop in Silicon Valley, and is browsing around the cages on display. While he's there, another customer walks in and says to the shopkeeper, "I'll have a C monkey, please".

The shopkeeper nods, goes over to a cage at the side of the shop and takes out a monkey. He fits a collar and leash and hands it to the customer, saying "That'll be $5,000". The customer pays and walks out with his monkey.

Startled, the tourist goes over to the shopkeeper and says, "That was a very expensive monkey, most of them are only a few hundred dollars. Why did it cost so much?"

"Oh", says the shopkeeper, "that monkey can program in C with very fast, tight code, no bugs, well worth the money."

The tourist starts to look at the monkeys in the cage. He says to the shop keeper, "That one's even more expensive, $10,000! What does it do?"

"Oh", says the shopkeeper, "that one's a C++ monkey; it can manage object-oriented programming, Visual C++, even some Java, all the really useful stuff."

The tourist looks round for a little longer and sees a third monkey in a cage on its own. The price tag round its neck says $50,000.

He gasps to the shop keeper, "That one costs more than all the others put together! What on earth does it do?"

"Well," says the shopkeeper, "I don't know if it actually does anything, but says it's a Consultant."

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“Do they think we have a money tree in the garden, where we go and pick off the notes to pay the wages?” said my friend in exasperation about a team of people in their organisation who have not yet grasped that they need to bring in cash if they are to justify their salary.

This got me thinking about one of the problems about growing a business in the UK today. How do you get the right staff to deliver more than they are costing you?

When I started out in this industry angel friends told me that it was fair to pay a “just living” wage to managers in angel backed businesses. That’s not quite how they do it in the US where forward thinking investors believe that you should get top people and pay them well if you are to make sure they are not distracted at work by domestic money worries. Others in the UK believe in actually starving entrepreneurs of cash to ensure that they get a true idea of costs in the early days. I have sympathy with the latter point of view when it comes to buying stuff for the company, but am less sure whether it is a good idea when it comes to salary, as people will inevitably compensate for lack of pay by making greedy expense claims and more or just get overwhelmed with the pressures of this approach. The trite answer is that the best outcome is probably to avoid getting 2nd rank people who you end up paying well, but who do not deliver.

Once the business is growing, the issue of staff pay for the non-founders gets more interesting. Firstly, should you give later joiners shares or options in the business? Commonsense suggests yes, but how far should this extend? From time to time I hear about companies returning to their investors with a plea to extend the option pool. The investors get caught in a Catch 22 – more options equals more dilution, but no more options means you may loose the great new hire. I also see crazy situations where part or most of the option pool is granted to founder shareholders – i.e. they accept dilution, often with the expectation that they will only get back to a marginally larger stake than they had before the option agreement was put in place. Hardly motivational!

Though the really big issue comes later on. It is the 2nd, 3rd and 4th generation employees who were not there when the business was really small and don’t have the same understanding of how costs equate to revenues. The company they join has sales of many multiples of their own salary so they don’t worry in the same way as the early joiners did. Profit is something they believe the owners benefit from, not the employees. It is a good idea to try to break this idea and to encourage employees to see that they will benefit from profitability – look what it does to motivate the City. Watch out if offering to tie pay to profits does not meet with approval by the team – it may suggest that they have no faith in the business or are otherwise disengaged. The most unusual set of performance reviews I did involved a whole team of people marching, in one by one, each thanking me for and then declining my offer of a bonus as they would rather have a pay rise. We were bemused, but accepted the situation and gave them a pay rise instead of a pay rise and a bonus. The trouble was that this symbolised that the staff were not engaged with the business – they had all left within 18 months and that meant more hires of people who did not know the business and were another degree removed from its early days.

Perhaps a way to solve the issue of the financial performance of staff is to make it clear from day one. My grandfather taught me that you should bring in 3x your salary to justify your pay – 1/3rd for your salary, 1/3rd for your costs and 1/3rd for profit. For any profit centre staff this seems like a pretty good starting point for negotiations at the job interview stage. If interviews were more focused on really how someone was going to deliver an ROI on their cost, it would be healthier than asking wide questions encouraging people to talk. For back office staff, the rule also holds although it may be necessary to value their outputs as if they were sales, even if this is a notional calculation.

And come to think of it, if everyone looked at what they did in the context of making 3x (or whatever) ROI for their customers, their employers or their shareholders – we might all get a bit more focused why we are at work in the first place. It would also mean that business owners would not need a money tree in the garden or perhaps even Venture Capital funding!

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We know you all want to meet each other, get more out of us and our Preferred Partners and generally make AngelNews work for you. So we have decided to up the ante on the number of events we would like to invite you to. Here is a list of them. We do hope you will be able to make it to one soon.

For the full stories please click on the story and login at www.AngelNews.co.uk.

REMEMBER YOU CAN RECEIVE FREE EMAIL ALERTS FOR ALL NEWS STORIES AND SECTORS if you login at www.AngelNews.co.uk and select your preferences. While you are there you can also change your password to something more memorable.

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