Dear Reader

I am delighted to announce that we have two new Preferred Partners for AngelNews.

The first is Daniel Stewart www.danielstewart.co.uk, a forward thinking and proactive investment bank offering both corporate advisory and institutional stockbroking services, with a focus on small and mid –size companies – making it a perfect partner for us in this field. Another reason we believe that the range of services and the high quality of the support offered by Daniel Stewart will strike a chord with our community is that it was founded by a team of entrepreneurs led by the current Chairman, Peter Shea, who we have known for several years. If you have any immediate questions suitable for an investment bank, we suggest you email peter.shea@danielstewart.co.uk – I am sure you will find a warm reception. And look forward to hearing about some new initiatives that we will be working on with Daniel Stewart over the next few months.

Our second Preferred Partner is another business with an entrepreneurial culture at its heart and with years of experience of helping entrepreneurial businesses achieve 10x or 20x growth. It is Pera www.pera.com. Pera’s strapline is “Innovation through a global perspective” which speaks for itself. Pera helps companies at all stages in their business cycle and has particular expertise in helping companies to source best practice technological and business solutions from across the globe. We have joined up with Pera because we believe its current and planned offerings to support AngelNews companies will be unusually attractive to our companies and our angel investors. More news will be forthcoming, but in the meantime, if you have a particular question about how they might be able to add value to you please email Paul Tranter paul.tranter@pera.com.

Since our last AngelNewsletter Online we have had the pre-budget report and the resultant fall out. Read our article “Warming the plate under the jelly” not only to hear what we think, but more importantly what AngelNews companies think. You may also be interested in the follow-up to last month’s article on Freddy – this month we will tell you a bit about who is hugging Freddy these days!

Following our report into the EIS statistics, HMRC re-evaluated the numbers they had published at the end of September 2007 and discovered that in fact they had not gathered all the claims made through to August 2007. Therefore we are delighted to report that the relevant year on year comparison is actually only £3.7m down on the same period in the previous year. So it appears that the government figures are in fact pretty much in line with previous years – not the sharp collapse as the government statistics previously reported. If you would like to see the revised statistics which have now replaced the ones published last month please click here: http://www.hmrc.gov.uk/stats/ent_invest_scheme/menu.htm.

All the usual bits and pieces are still in the AngelNewsletter this month, but it also might be worth you while taking a peek at our Reader Offer and also our Wing Tip from Intramezzo on how to appoint an interim manager as well as our latest edition of Flightplan where Gabriel and our Partners have provided some advice on how to expand your global business footprint.

Hope to see you at Stephenson Harwood’s event on IP in India in late November.

Best

Modwenna

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

As a small child I would go to my friends’ birthday parties and long that one day at one of my own parties out would come the most magnificent jelly – ruby red, shaped like a Walt Disney castle, tasting of sunshine soaked strawberries. The thought came back to me the other day as I pondered the whole issue of enterprise in this country. I am sure everyone, entrepreneur and investor alike, gets involved in enterprise because they are dreaming of having their very own jelly. And for the Labour government of course they were given it in 1997 by the Tories – not just the mould and the ingredients, but the full Monty and delivered on a shiny silver platter.

The platter is, without a doubt, the economic strength of the country, with a light dusting of regulation and tax – just enough to keep things running smoothly, enough to set-off the magnificence of the jelly, but not enough to affect the flavour.

Wise (and older) entrepreneurs I know who have been in the market for over a decade tell me that they spotted the problems with the platter and the dusting back in the late 1990s – small signs such as the government’s implicit desire to support US$ exporters more than Euro-zone exporters. But for those who have started up their entrepreneurial businesses since 1997, it has been like going to that friend’s party, seeing the jelly and realising that perhaps one day they could have one, even more magnificent for themselves one day. And for many they have either got one or are very, very close. Until last month that was, when they noticed that their great creation was about to suffer and suffer badly. Not because of what they were doing, but because someone has placed a candle under the platter and the dusting has turned into a blizzard.

I am sure that everyone was amazed that it should be the proposed changes to UK Taper Relief that washed the stardust out of our eyes. After all, as the Government is now putting it – the changes are only a reduction in a tax break from 90% to 82% - it doesn’t seem so bad that way around does it? And growing businesses have for a long time been unfairly hit with tax – taxed on their profits because they cannot avoid by using clever tax schemes, taxed on creating jobs through Employers’ National Insurance contributions, taxed with excessive business rates and increasingly taxed through the costs of bureaucracy.

But the changes have caused outrage for the mass of entrepreneurs (although there is the odd exception). We surveyed 60 AngelNews companies of all sizes about the issue and some others and this is what they told us:

1. Stop treating us a stupid – depending on which type of tax you are talking about 71-88% of us thought about the ramification of taxes on our businesses when we were setting up our businesses
2. The majority of us think that not only CGT, but also employers’ National Insurance and business rates are currently too high.
3. 76% of us do not think VAT is too high – (after all for most of us we are just passing it on as a cost)
4. We are almost equally divided on whether Corporation Tax is too high or not, but 85% of us want the Government to reduce the ability of the largest corporations to avoid it.
5. 75% of us believe that if you are currently abroad you will be negatively affected in your decision to set up a business in the UK now that the CGT rate will rise to 18%
6. 81% of us think the Government does not give enough support to fast growing businesses.
7. Until the pre-budget statement 62% of had not thought about taking our businesses abroad despite the possibility of better market opportunities, employment regulations and bigger market opportunities.
8. Post the pre-budget statement that figure has fallen to 53%.
9. Only 12% of us not going to change anything because we are happy with being in the UK. Either we are sensibly planning a move abroad or we are now planning to sell our businesses or over 55% feel we are currently disempowered from effect this sort of change over our business
10. When we do go abroad eventually (that’s 68% of us by the way) we will probably head for the US or Western Europe – we are not yet thinking about going to India or China in any but small numbers
11. Half of us think the government could balance the books without harming smaller businesses by closing down Business Link and the Department of Business Enterprise and Regulatory Reform! 40% of us think the Government should reduce taxes so more people are prepared to pay them. 30% of us think government expenditure on the NHS etc should be reduced. 36% of us would like to see higher taxes on alcohol and tobacco.
12. 91% of us think that the CGT changes will make it more difficult to raise money from angels from April 2008 onwards and 77% believe it has immediately been made it more difficult.

So thanks a lot Mr Darling! The only comfort you can take away from your action is that most people blame your party or Mr Brown for this rather than you personally.

What is amazing is that despite an overpowering sense of ill treatment, the respondents to our survey, when we asked what they will do when they sell their business, they said:

1. 57% of us will use some of the profits to invest in another business;
2. 31% of us will use some of the profits for charitable giving; and
3. over 55% of us will use some of the profits to set up a business either in the UK or abroad; whilst only 16% of us will stay in the UK and retire.

So perhaps you can now also see the irony in the latest move by the government on CGT – where only over 55 year old retires will get an extra tax break.

I could write pages and pages about the iniquities in treatment of entrepreneurial businesses, especially when they are young and unproven. Instead, I have decided to take the unusual step of giving you access to a PDF of the comments 34 of the 60 respondents gave us at the end of our survey. They can all say it better than I can.

And to the people who are unsympathetic, I say that getting the perfect jelly to the table is more difficult than you can possibly imagine. Next time you take a spoonful of that delicious jelly remember that once upon a time the creator was probably just like one of the entrepreneurs whose comments you have just read. He will remember even if you don’t.

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Is there a website which will tell me everything I need to know about doing business or investing in India?

Yes – we have found a World Bank website which gives an excellent briefing on most aspects of doing business in India

I hear there is a boom in India, but what sort of boom?

One boom is the economic one – namely the burgeoning middle class in a country of over 1bn which is expected to add 10s of millions to its population over the next few decades. The growth in population has created an enormous opportunity as these people will increasingly be demanding a more “western” set of economic opportunities and outcomes, but it also brings with it the potential economic problems in the management of that change.

Another less well known boom is the boom in valuations in Indian businesses at the moment. This is a challenge for the investor community.

Are infrastructure problems in India an issue?

In certain regions infrastructure in India can cause problems, but a, the market opportunity usually more than compensates for this, b, the Indian government is working to resolve infrastructure issues and c, there are some regions e.g. Calcutta where the pressure on resources is less high than in others e.g. Bangalore, but there is still a great pool of educated talent from which to find staff.

How will I be taxed in India?

India has a double tax avoidance treaty with the UK, but you should seek specialist advice from an expert accountant whether you are an investor or an entrepreneur entering the Indian market.

If I had to choose should I go to India or China?

This is a big debate for almost everyone with international ambitions at the moment. You may find it helpful to read The Dragon and The Elephant by David Smith (Economics Editor of The Sunday Times), http://www.economicsuk.com/bookblog/.

If you are looking at India you could do worse than consider that these days traffic between India and the UK goes both ways. For example Tata Group (India) acquired Corus Group (UK) and Blackstone has recently invested in a leading Indian construction company. So plan your own business in this context.

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RSVP: Paulette Fisher by Monday 12 November 2007 using the reply-paid tear-off slip or:
Telephone: +44 (0)20 7809 2188  |  Email: paulette.fisher@shlegal.com

I have spoken to many angels recently who seem concerned about how and when they will make money out of their myriad of investments.

So it makes sense to launch a new regular feature in the AngelNewsletter Online about how to make real money out of angel investing. This month we look at the issue of multiple funding rounds.

Some investors tell me that as long as they buy their shares for 1p and sell them for a £1 they will be doing OK and that you have to look at the market like you do quoted shares, but they are missing a crucial point – that the money you make relates not just to the number of shares you own, but also to the percentage of the total value of the company those shares represent. In the quoted world significant fundraising events representing the sale to new investors of a very large percentage of the enlarged equity based of the company are rarer than they are normal. But speak to an ex GEC/Marconi investor and they will tell you what it feels like to be washed out by new investors when things go terribly wrong.

In the angel world multiple fundraising events come with the territory. One of the moans of some “passive” angels is that they invest in an early round only to find that this is just the start of a long journey of follow-on rounds and rights issues with all the paperwork, decision-making and additional money that this involves. Do you “follow your money” or give up and accept the dilution? And the problem is that depending on the valuation of the subsequent fundraising the effects can be significant.

Catalyst Venture Partners has kindly allowed me to show you this diagram which helps to explain.

When there is a further fundraising round (assuming you have not given away your rights to subscribe to new shares in the company) you really have three options.

1. Follow your money to maintain your shareholding.

This may be the right route if you knew when you first invested in the company for say 10% of the equity, you wanted to own 10% when you exited. But remember what you do will have an impact somewhere along the line – the money you invest in later higher value rounds will not generate the same returns as the original sum you invested.

In the example above you would get 13.3x for your original investment, 5.3x for your second investment and 2x for your third investment. So your overall return will be much lower, but you will still be pretty happy.

2. Buy a larger percentage of the business

As with the scenario above this will cost you more than option 1 in absolute terms and you will get a lower return on that money than on the original sum you invested. Using the scenario above just pretend you are investor 2 and investor 3 as well as investor 1.

Be aware that if you choose this scenario, there will be a resultant shift in the balance of power between you and the other original investors. In the scenario above this means that it will be you and not the entrepreneur who controls the company, with all the ramifications that this contains. It will affect day to day relationships and if you are an EIS investor it may affect your tax breaks.

3. Do not follow your money

If you do not re invest in the business in the next fundraising round where the valuation of the round is higher than that in which you invested, you will have to accept that other investors will get a healthy stake in the business for less risk, but if all goes well you will ultimately make a higher return on your money than they have on theirs. This is the scenario shown in the diagram above for investor 1.

Sensitivity tends to arise when early investors realise that whilst they have turned £0.5m into £6.7m – if they had maintained their shareholding at 25% of the business it might have cost them a further £2.1m but they would have exited with £15m which even though it would represent a lower overall ROI, in absolute terms feels like a whole lot more.

Where the real problem arises

Problems are never so big when things are going well as when things are not going so well. Changing the above scenario ONLY so that the second round of investment is done at the same valuation at the first round shows how share of proceeds is taken away from the entrepreneur and the first round investor and is handed to the second round investor.

The entrepreneur takes away £11.25m rather than £20m, the first round investor takes away £3.75m rather than £6.7m and the second round investor takes away £25m rather than only £13.3m.

Clearly if the valuation of the second of later rounds is lower than that at which you invested, the situation is magnified accordingly.

The conclusions

1. You can see clearly why venture capitalists and second round investors like to invest at a later stage than others.
2. Before you invest really do your research on how much money a company will need to grow to a successful exit and decide what you want your ideal return to be. Then work out how you will invest your cash over the period to exit. Remember that, almost without exception, all growing companies will need further investment either because things are going well or because things are going badly.
3. Adopt the “if you can’t beat them, join them” school of thought and start looking for “value opportunities” where good companies have come back to the market for more money at the same or even a lower round than in the past.
4. Seek out opportunities that are rapidly going to be self financing out of operating cashflow or that will be able to fund their growth through bank borrowing after you have invested.

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This month we thought we would delve further back in time to see what angels were being offered as investment opportunities. We thought we would head for November 1979 when the Iranian hostage crisis started began with radical Iranians invaded the US embassy in Tehran and took 90 hostages and in the UK four men were found guilty of the murder of Carl Bridgewater/

Meanwhile back in the UK angel world there were some quite interesting deals.

Did you back any of them or do you know someone who did? Perhaps you know what happened to them for some other reason. If so, please let us know – we would love to find out (email replies to modwenna@angelnews.co.uk ).

Note: these were the days when there was still a 75% unearned income surcharge!

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A new arrival, about to enter hospital, saw two white coated doctors searching through the flower beds.

"Excuse me," he said, "have you lost something?"

"No," replied one of the doctors. "We're doing a heart transplant for a venture capitalist and want to find a suitable stone."

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Hidesign an Indian based maker of handbags and leather goods is challenging preconceptions in the usually Western European dominated market for luxury goods around the world. It started as a hobby of founder Dilip Kapur in 1978 from his workshop in Auroville, the "universal city" community near Pondicherry. Today it is a US$80m turnover business selling is branded goods in eponymous boutiques in India, but, significantly, also overseas in major stores including Bergdorf Goodman in the States and Selfridges in the UK as well as others in South Africa, Dubai, Russia and Hong Kong.

In September LVMH, owner of luxury brands such as Louis Vuitton and Moet & Chandon took a 20% stake in the company – stating that it liked “the home grown nature of the brand”. Hidesign has a strong emphasis on hand craftsmanship, the use of vegetable dyes and tans and takes product control so seriously that is has its own brass and buckles factory in Chennai.
Where the Hidesign story is unusual is that most of its customers actually think it is a UK brand – perhaps a function of the fact that it has design studios in Milan and London and that its chief designer was formerly at Giorgio Armani.

Mr Kapur does not suffer from an inflated ego. He said he was completely shocked by LVMH’s interest in the company and all the more so because the company is still going through the growing pains of transition. However, the market must be thinking that this pain will now be significantly alleviated as Hidesign leverages LVMH’s skills in design layout and marketing. LVMH, of course, is able to benefit from the value added offerd by Hidesign.

Meanwhile, other global corporates also have interesting stories to recount about their entrance into India. McDonalds, after couple of false starts successfully introduced its brand and business model by adapting its product range by developing products such as the Veg Pizza McPuff and McAloo Tikki Burger, without pork or beef, whilst Unilever learnt that it could sell shampoo to the rural community by putting it in single-wash sachets rather than in bottles.

Sony (Columbia Pictures) invested into India when the regulations permitted that foreign owned companies could own a certain percentage of Indian operations. Limited by these regulations, structures were put into place to ensure management and economic and voting control rested with Sony. There then followed a period of time when regulatory changes resulted in and forced various restructuring (some potentially diluting Sony's stake). Since then liberalisation in the legal regime has allowed Sony to restructure once again and call its Indian operations, an Indian company, yet maintain control.

Thanks, inter alia to David Smith, Economics Editor, The Sunday Times and Pawan Sharma, Stephenson Harwood.

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Last month I wrote about the issue of how the imperfect investment opportunity should be supported http://server1.vcrdirectory.co.uk/attach/edition_41.htm. Shortly afterwards I paid a long planned visit to Jyväskylä a Finnish city some 200km north of Helsinki. I had been invited to visit by Technopolis which is one of the largest technology centre operators in Europe with sites in 6 cities in Finland and one in St Petersburg. As luck would have it, I fell upon a place where it was clear that both Freddies as well as the perfect entrepreneurs are well and truly hugged!

I had a pretty good two days on my trip seeing how Freddies are treated in Finland interspersed with a white water rafting trip – (those of you who know me well should not laugh too much at this point) and lots of friendly chat – everyone who is anyone bumps into each other in Jyväskylä.

But what seemed to make the environment in this city slightly unusual was that everything seemed so joined up. Hi-tech entrepreneurs do not just wander around trying to build their businesses, seek funding and generally cope with life. Instead, at the earliest stage possible they are brought into the Technopolis incubation scheme and are typically housed for 18 months in the incubator. During their time in the incubator they are given significant amounts of one-to-one support from the team and other mentors who help with everything from market research to early product development to preparing a business plan. It is a justifiably proud boast of the incubator that everyone who leaves the incubator will, at the very least, have fully understood their market opportunity; even if this means that the market opportunity does not exist and they become a consultant in their field. There is no attitude of “Sorry, it did not work out/I can’t help – bye” here.

Whilst going through this preparatory stage the entrepreneurs are introduced to Finnvera – a specialised financing company which is funded by government with various specific objectives including funding domestic and international expansion of Finnish based businesses and also funding export credit guarantees. Thanks to government subsidy this lending can be made on competitive terms despite the higher than usual risk profile of the companies Finnvera lends to. Clearly Finnvera knows who is in the incubator and Technopolis has a hotline to Finnvera.

Using these relatively small amounts of funding, the companies are encouraged to prepare properly for their first round of external equity funding, which will typically be provided by one of the local VCs, all of whom also clearly know who is in the incubator and who are then ready to consider the opportunity with some background knowledge in place if and when they are approached for funding. The VCs include Midinvest which is privately owned by a handful of venture capitalists and cashed out entrepreneurs and which has €100m of funds under management. Clearly these VCs know Finnvera and know the company’s mentors well so the joined up thinking follows through right until the time the company is ready to be launched on the world. Based on the experience to date it looks as if the returns for the investors will be correspondingly better – the proof of the pudding.

I met or learned about entrepreneurial companies in all sorts of sectors from nanotechnology to materials, high tech manufacturing and software, but thanks to Nokia one o