Dear Reader

Well amidst coughs, colds and flu, the AngelNews team is now heading towards Christmas and I hope you have a good run-up to the break as well. We are planning lots of exciting developments for 2008 which will keep us fully occupied over the next month or so and which we will start revealing to you next month. Watch this space!

This month, as we traditionally do, we have stuffed more jokes into our AngelNewsletter Online – many thanks to those of you who contributed them! There is also an amusing article sent to us by a veteran attendee at business angel networking events which we thought might tickle you. Lucifer is up to his usual tricks of course.

Keep an eye out for our second article on How to make money out of Angel Investing. We asked Carpmaels & Ransford to discuss the increasingly important issue of due diligencing intellectual property – too many deals are done because there is “IP protection” when many investors do not fully realise that having a patent is not the same as having a monopoly in a market. Carpmaels has also kindly supplied us with a Wing Tip on the changes to European patent rules which will considerably reduce the costs of filing.

This month we have interviewed Gavin Oldham of The Share Centre. Gavin is a true veteran of the early stage market and has grown his own major stockbroking business over the last 17 years, which he will float on AIM in early 2008. The Share Centre owns ShareMark which has been supporting AngelNews as a Preferred Partner for the last two years. To read the interview click here.

Just one date for your diary – if you are an entrepreneur or an investor in a fast growing company, reserve from 4pm-7pm on 30th January 2008 for our “How to raise £5m from a Venture Capitalist event” at the offices of Stephenson Harwood in London. More details further down the AngelNewsletter Online.

Have a great holiday and we’ll be in touch in the New Year.

Best

Modwenna

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

...that cheeky devil

A gang of entrepreneur’s broke into a VCs office one night. The old investor lions gave them a fight for their life and their money.

The gang was very happy to escape. "It ain't so bad," one entrepreneur noted. "We got £25 between us."

His angel investor screamed: "I warned you to stay clear of Venture Capitalist ... we had £100 when we broke in!"

I must have been to at least 30 events over 2007 and will doubtless match or, more likely, exceed that number in 2008. They vary enormously and style, type, time, location and so on. Perhaps you would like to hear about my experiences.

Safety in Numbers?
There occasionally seems to be a temptation, when networks are unable for any reason to get the usual 5 or 6 companies pitching, to shove a random spare company onto the platform to make up the numbers. One can imagine the conversation:

“Oh, hell, So-and-So Pharmatech has dropped out and now we’ve only got four companies, what shall we do?”
“What about Slightly Rubbish Internet Thing? I know we didn’t think they were quite good enough for our members, but someone might be interested.”
“OK”.

The best method in these circumstances is to stick with the few decent companies and then ask 3 or 4 really early stage companies to do 3-5 minute elevator pitches. This will keep the evening moving along and allow the very early stage companies to feel loved and cherished by the network. Prizes all round.

Yawn
Not all of us are gifted public speakers. The majority of us would prefer to extract our own teeth than get up in front of a bunch of total strangers. On the other hand, how many of us have sat through other people’s speeches and wondered how on earth they could be so bad? The worst offences are: inaudibility; reading straight off the slides (we can read it ourselves you know); not reading off the slides (tiny writing is still tiny on a screen); boring on forever about the speaker’s and his colleague’s previous jobs; being over-technical; being entirely obscure; rushing the financials.... Now I’ve started, I can hardly stop. Networks are well advised to video pitch rehearsals and play it back to the company with constructive comments.

Variety
Some networks are specialist, the majority more general. A recent experience illustrates the need for general networks to really be general: Of six pitches, five were computer/internet related, whilst the sixth was a simple retail product. For those investors not interested in computers or the internet this was Hobson’s choice and pretty tedious for 5 x 10 minutes. A themed event is great, so long as everyone knows it will be themed. In the case I mention, my neighbour at the event – a virgin angel - complained bitterly that none of the companies was his cup of tea and, whilst this might have been the case anyway, the apparent similarity between the companies was overwhelming to him.

Good Timing
If companies are presenting for 13 minutes, then their presentation should take 13 minutes. If it is meant to be 10 minutes, then 10 minutes is what we expect. Many networks are exceedingly strict and will cut presentations off mid-flow. Others seem strangely relaxed about sticking to their timetable and are apparently happy for the speaker to ramble on for as long as he likes. Not good. We are busy people and we want to get on. We can see the bar and the canapés. Keep companies within their slot, warn them when they have only a minute left and then stop them when their time is up. Although you can let them finish their sentence first.

Questions, Questions
Should the floor be invited to ask questions or not? In favour, it gives the chance for the company to expand on issues after a pretty compressed pitch in which many salient details will have been missed or left out. Against (the list is longer I’m afraid) it: gets long-winded and rambling; gets bogged down in technical detail; is often half inaudible to the audience; sometimes appears to be an excuse for the questioner to publicly display his knowledge of the field.

The audibility issue is particularly important. Sometimes even the speaker can’t hear the questions from the floor, let alone everyone else in the room. Do you have minions running about with microphones? Should the questioner stand up? Should the chair of the event relay the question to the wider audience? Perhaps it would be easier to keep questions out if it entirely.

The Right Venue
There are glamorous locations and not so glamorous locations. There are comfortable chairs and there are haemorrhoids in the making. There are big rooms, half empty and then there is an unwonted intimacy between neighbours. Can people look around the company stands without treading on toes or knocking over the stand next door? Is the venue great but the are the acoustics dreadful? Is there a draft or is it so hot that everyone is dropping off? Get all of this right and people will enjoy the event, want to come again and, most importantly, feel more benign towards the speakers.

At the end of the day
The perfect angel event will have lots of angels (not just advisors and investment managers) and lots of interesting companies selling a wide variety of concepts. The companies will have brought plenty of employees to talk to interested parties and everyone will have brought sufficient business cards. Timekeeping will be strictly adhered to. All will wear name badges, possibly colour-coded. There will be tea/coffee/drinks as appropriate to the time of day and plenty of biscuits/canapés. Get all of this right and you have the recipe for the perfect event.

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Is your business growing fast and absorbing cash like it is going out of fashion?

Do you already have turnover of over £2m or EBIT in excess of £1m?

Are you looking to raise VC money, but want to know how to avoid common mistakes?

We have brought together three people to speak to you about this crucial issue and to explain to you how to bag that critical expansion capital you need.

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...that cheeky devil

An elderly angel 82, just returned from the doctors only to find he didn't have long to live. So he summons the three most important people in his life to tell.

1. His entrepreneur
2. His Venture Capitalist
3. His Lawyer

" Well today I found out I don't have long to live. So I asked you three here, because your the most important people in my life. And I need to ask a favour. Today I am going to give each of you an envelope with £50,000 in it. When I die, I would ask that all three of you throw the money in my grave."

Well a few days later the man passed on. The entrepreneur said, "I have to admit I kept £10,000 of his money for the business. But I threw the other £40,000 in."

The Venture Capitalist said, "I have to admit also I kept £25,000 for my management fee, which will help the business succeed, but I threw the rest in."

Well the Lawyer just couldn't believe what he was hearing, "I am surprised at you two. I wrote a check for the whole amount and threw it in."

We believe that one of the biggest areas for angel investors to make mistakes when backing companies is in the area of IP. It is a common question asked of entrepreneurs about what degree of patent protection they have over their inventions. Usually the answer is that a patent has been applied for, but whether or not the patent has been issued is really only one part of the equation. We have asked Hugh Goodfellow of Carpmaels & Ransford to explain. So now it is over to you, Hugh.

In our capacity as IP advisors, my firm has now overseen this ultimate step for a number of our start-up clients. I have personally also seen this process from the other side, having acted on behalf of investors to provide an independent view.

The exercises in which I have been involved have involved separate due diligence strands under the principal headings of legal, financial, technical research and intellectual property (IP), but here I will focus specifically on IP, and particularly on patents.

Although you might think I would say this, I cannot too strongly recommend that you use qualified advisers to do your IP due diligence for you, and they must have experience of undertaking a due diligence project with a pragmatic approach. There are some advisers who seek to dot every “i” and cross every “t”, but in my view this kind of approach is misplaced because it will never be possible to guarantee that everything relevant has been covered and the lawyers’ caveats will always be there in the final report however comprehensive the analysis. Like many similar exercises, due diligence is subject to the “80:20” rule, and for this reason the project should be a compromise of providing investors with as much comfort as possible, given reasonable time and budget constraints.

This impression is anecdotal, but when I compare the current levels of sophistication of investors and analysts with those that were normal ten years ago, my impression is that things have moved on a great distance. Whereas once the majority of investors might have been happy enough merely that an IP report was included within the due diligence, giving impressive lists of patents, investors have now become more savvy and tend to take a more investigative approach. A healthy list of patent documents is all very well, but what is the likelihood that patents will grant in major territories with commercially relevant claims?

There are three principal aspects to the IP due diligence process. The first asks what approach the company takes to protecting its IP. The second gives details of the IP owned or licensed by the company. The third asks whether the company has freedom to operate (“FTO”) without infringing third party IP.

Taking these in turn, the company’s approach to IP protection is normally fairly simple for a patent attorney to articulate. For example, most sophisticated start-up companies should have some kind of internal mechanism for identifying IP as and when inventions are devised, and will have a structured approach as to how this IP is timely captured and enshrined in patent applications. This strategy varies with the type of technology, but each company will have an agreed strategy for moving forward to protect its inventions, whether this be aggressively, to get patents granted quickly, or by slowing everything down to save on costs. Do not invest in a company unless it has these processes established.

The second string of the project involves an audit of the company’s IP. This can vary in detail from minimal lists of pending patent applications and granted patents, to the other end of the scale, which gives a detailed summary of the IP captured in each patent family, and may provide an appraisal of the likely scope of valid claim. The latter approach is more common for companies which put significant value in their IP; in these cases, potential investors want to know that the company has a good chance of owning valid IP rights which a) cover the company’s intended activities and b) give a reasonable breadth of monopoly so that copycat follow-ons do not have freedom to make small design-around changes and so exploit the company’s technology for free. In all likelihood you will need an adviser to make these assessments for you, especially if you are looking at overseas patents.

Lastly there is the issue of freedom to operate. Freedom to operate is, in my experience, the aspect of the start-up company’s IP strategy which tends to receive the least attention. One reason for this can be a lack of understanding about the distinction between, on the one hand, the rights that stem from owning one’s own patents, and on the other, the problem of infringing patents that belong to someone else. I want to focus a little on this here.

I often ask the question “Do you have freedom from third party IP to do what you want to do”, only to be told in reply that the company’s patents are very strong and in really good shape. Of course, that is not the right answer.

At the risk of teaching a grandmother to suck eggs, I want to emphasise that a patent does not give its holder the right to do anything other than to prevent someone else from working within the confines of the granted monopoly. An invention may well be novel and inventive, such that the Patent Office has agreed to grant it a patent, but in making that assessment, no one will have looked to see whether others have broader claims that generically cover your activities. This scenario is very possible, and in some areas very likely, in that an earlier company “A” may have devised a general process or product and obtained broad claims which cover the activities of later company “B”, without explicitly disclosing or making obvious B’s precise invention. In this scenario, company B will not have freedom to work its invention without a licence from company A. Similarly of course, on the assumption that company B has a narrow patent itself, company A will not itself have freedom to work B’s invention without infringing its patent. In these circumstances, a so-called “cross-licence” situation may be one solution to allow both companies to move forward. However, in most circumstances there is no provision in Law that forces the senior party to licence the junior party and so the fact remains that without a licence from company A, company B will have no freedom to operate.

It is of course not always a lack of understanding that lies behind a company’s failure to embrace this FTO issue, because the kind of analysis that this requires can be very expensive. Furthermore, a company will not want to undergo this exercise without very good reason, and so if a product is only at a preliminary stage, or if no final decision has been made to go ahead with marketing the product, it may be too early to undertake this FTO analysis. At the end of the day, however, the prospective investor at any stage wants to be given a warm feeling of comfort that the company in which he plans to invest has all its ducks in a row. If no FTO analysis has ever been done, then he cannot gain that comfort, and in investing he will be taking a quite significant risk that there are no dominating patents out there that could in due course be used to prevent the company operating in the way that it hopes to. For that reason, some kind of FTO study will have to have been done by the time you reach to make your investment. As a matter of good practice, once you have invested you should fit an FTO into the company’s annual schedule from time to time.

In concluding, I would say that the investment process is inevitably made very much easier from the IP perspective if the company has a close working relationship with its own patent attorneys. Whether you choose to rely on the company’s patent attorney or to appoint your own to do due diligence, you will benefit hugely from the experience and breadth of knowledge they can offer.

For further information or assistance, please contact Hugh Goodfellow (hrg@carpmaels.com), Richard Jackson (rej@carpmaels.com) or Anne Wong (anw@carpmaels.com)

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If you had been investing back in December 1982 – there are the sort of opportunities that would have been on offer to you!

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 ).

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Earlier this month BERR announced three new Enterprise Capital Fund awardees – well actually two new ones and one repeat of an award made in the pilot round. So it seemed a good time to chat about the whole area of enterprise funding via government backed VC funds.

I must tread carefully when it comes to talking about this whole area, because I feel it is very important not to rock the boat too much. Many of my good friends currently manage either Enterprise Capital Funds or the myriad of other funds such as the Regional Venture Capital Funds and the regional seed funds. They are doing a grand job and there are now hundreds of companies across the UK that have benefited from at least one stage of funding from them. And some companies have benefited from getting more than one round, sometimes from more than one of the funds. The last thing I want to do is make life uncomfortable for the existing fund managers.

However, that does not mean the area should not be scrutinised thoroughly. There are some oddities which I have noticed and I wonder if any of our readers have also spotted them.

For example, I wonder why there has been no public explanation of why Dawn Capital has been awarded a second ECF when it failed to get its first ECF off the ground last year? Knowing how risk averse BERR are, they must have had an exceptionally good reason to make this award a second time, rather than to give a new team a chance – so why not tell us. It seems disingenuous to slip out the second award as if it is a “new” award. If I was one of the unsuccessful bidders in the second round, I would be demanding a detailed explanation. Actually as a UK tax payer, I also want an explanation.

I also wonder why it took quite so long to due diligence the second round of ECFs? It’s particularly relevant as the two awardees, in addition to Dawn Capital, are Lucius Cary’s Oxford Technology Group and Bruce Macfarlane’s MMC Ventures, both of which have 1st class reputations and long term experience as investors in early stage UK VC. If BERR is going (understandably) to give the money to “safer bets” that’s fine, but then there is no excuse for it taking so many months to assess the bids. If BERR only wants established names to have ECFs why not say so from the outset, rather than getting lots of new entrants to spend a lot of time and effort on bids which will surely be unsuccessful.

BERR is also going to have to face accusations that it is particularly favouring London and South East based applicants for ECFs. To date there have been 8 ECFs awarded, two in Cambridge (IQ Capital and Amadeus), four in London (Dawn Capital, Seraphim, Sustainable Technology Fund, MMC Ventures) one in Oxford (Oxford Technology ECF) and one in the Midlands (Catapult Venture Managers). Whilst all the funds are theoretically national – and some are investing nationally (Seraphim Capital is one example) – I would be very surprised once these funds are fully invested, if there is not a high correlation between the locations of portfolio companies and the location of the fund manager. If I was being mean I would have titled this piece “New ECF awards are a slap in the face for the regions.” I also wonder, about the market failure debate – is there really market failure in the £0.5m-£2m space in London, Oxford and Cambridge? Surely other regions can make a stronger case in this respect. It seems brave of BERR to expose itself to this accusation so early on in the ECF project.

One little piece of information that was slipped out with the ECF announcement was the news that a company called Capital for Enterprise Ltd has been created to manage the ECFs from 1 April 2008. It will also be responsible for managing the UK High Technology Fund, the Regional Venture Capital Funds, the Early Growth Funds and the Small Firms Loan Guarantee Scheme. So it will be a pretty powerful player in the UK early stage marketplace. But we have not yet been given any details about this company – who will own it, who are the proposed management team, what are the terms of the deal whereby government transfers the assets into this new business?

And long term, what are the plans for Capital for Enterprise Ltd? Is it to be a not for profit quango or a for profit enterprise? Will it be able to raise funds in the capital markets on its own account or will it have to go to the Treasury every time it needs new money? If it is a fund of funds manager, will it be able to set policy in respect of how it invests its money or will it have to do Treasury’s bidding? What happens if BERR is closed down or merged with another department – will this liberate Capital for Enterprise completely or will it move with BERR? I would also like to know how Capital for Enterprise proposes to deal with conflicting demands for capital from the SFLGS (which we know is really the small loans guaranteed firms scheme!) and for capital for VC funds, which effectively finance very different parts of the UK economy.

Meanwhile the RVCFs and Early Growth Funds are not being given any more money – which is stupid in my view. I can understand the decision not to launch any more funds, but the current ones, should they need it, must be given access to additional funds if necessary to follow properly their investments to a successful exit. Or alternatively why not let them raise C shares from third parties?

It’s almost the end of term and on doormats across the country school reports will soon be dropping. I wonder, if you were writing a report on BERR this month, how you would mark it for both effort and ability?

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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.

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...that cheeky devil

A venture capitalist calls his entrepreneur one day and asks him, "Can you come over the office and give me a hand with something?”

"Sure," he replies. "What's the problem?"

"Well, I started a really hard puzzle and I can't even find the edge pieces."

"Look on the box," the entrepreneur said. "There's always a picture of what the puzzle is."

"It's a big rooster," he said.

The entrepreneur turns up at the swanky venture capitalists office, "Okay, put the corn flakes back in the box."

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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