Dear Reader

This is our fourth birthday issue of the Angelnewsletter Online. We have grown by 15x since our very first issue, so we are getting there! You have allowed us to get this far, so thank-you! Birthdays are a time to look forward and set new objectives. And ours is to continue serving you, the investor, and you, the entrepreneur, with best learning, intelligence and comment on the private investment market, and the best jokes!

The new AngelNews website is going down a storm. Feel free to post news to the site – its very easy – just go to AngelNews and follow the Submit News link. You can also link a YouTube video to your story. For now, send us the link to news@angelnews.co.uk and we will do the rest. Any day now you will be able to upload video for yourself. We will let you know as soon as it is ready.

We have recently featured on www.stumbledupon.com who praised us as a great learning site and we continue to add more content. Feel free to download our three new Wing Tips on Corporate Manslaughter, Technology and Corporate Contracts and Invitations to Tender in Technology and Telecoms from our Preferred Partners, Kemp Little and Stephenson Harwood. Check out our ALERT! which reports on Vantis’s strategic tie-up with PLUS Markets. They are now providing full analysis of PLUS markets’ share prices, including providing it with a much needed set of indices against which individual share price performance can be judged.

We have introduced a new section of AngelNews – AngelNews Recommends. I have paid to stay at Simon Woodruffe’s Yotels at Heathrow and Gatwick in the last couple of months. I recommend them wholeheartedly. The quality is excellent and the price is at a level that AngelNews readers will find compelling. So if you have an early or late flight in out of Heathrow or Gatwick, try them out. And if you have something that you think we should recommend, let us know!

Do you know who is?

He is a man who can literally revolutionise the revenue model in your business. Click on the picture to read our interview with him and find out why!

Enjoy the sunny weather!

Best

Modwenna

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Vantis publishes first PLUS market review

Vantis, the accounting, business and tax advisory group, has published the first ever detailed review of the PLUS Market. The review sets out a summary of PLUS-quoted companies and activity on the market during 2007. It is written to enable readers to consider whether PLUS now represents a realistic option for an Initial Public Offering (IPO) and for raising funds. To read a copy of the review click here.

According to Nick Winters, Head of the Public Companies Group at Vantis, companies have seen the traditional route to flotation via AIM become increasingly expensive and more heavily regulated: ‘‘While AIM, and even a full stock market listing, is right for some very large organisations, PLUS is proving a very attractive alternative, particularly for smaller IPOs. The total market capitalisation of all PLUS-quoted companies at 31 December 2007 rose to £2.38 billion and PLUS-quoted companies, which include Arsenal Football Club and Rangers Football Club, are diverse and growing in number and value.’’

“While there seems to have been a slowdown in the general level of corporate activity, this has perhaps had most impact on larger transactions. There were a further 13 new IPOs on PLUS in the first quarter of 2008 and £20 million of fundraising was achieved by 27 PLUS-quoted companies in that same period. We have seen a significant increase in interest about PLUS markets.”

In late 2007, PLUS obtained Recognised Investment Exchange (REI) status. This gives it the same rights and privileges as the London Stock Exchange. 60 new companies joined PLUS in that year, taking the total of number of companies at 31 December 2007 with their primary quotes on PLUS to 215.

The Vantis PLUS Review includes three new indices for PLUS-quoted companies. These are the PLUS All Share (all shares), PLUS 10 (largest 10 shares) and the PLUS Small Cap (all shares excluding largest 10 shares). The indices are calculated at each month end and are adjusted as necessary for changes in the constituents. These indices demonstrate that the largest PLUS-quoted companies and the PLUS market as a whole performed better than both the FTSE Small Cap and AIM All Share indices.

Vantis has also included in its a Review a breakdown of the business sector and location of companies quoted on PLUS, an analysis of companies that have joined and left and an overview of share price performance and trading volumes.

For further information please contact:
Nick Winters, Head of Public Companies Group, Vantis, Tel: 020 7467 4296, Email: nick.winters@vantisplc.com

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It is excellent news that HM Treasury, along with HM Revenue & Customs are currently consulting the market about the effectiveness of the Enterprise Investment Scheme here in the UK. It is an interesting consultation paper because it specifically states that HM Government is keen to ensure that EIS continues to be effective in promoting enterprise, encouraging investment and imposing the least necessary burden on users. To quote paragraph 1.3.

So it is not a consultation paper on whether EIS should be made more generous for investors. We have discussed the financial implications for HM Treasury of the EIS Scheme in the past, but in summary at current tax break levels, Treasury makes an excellent return on its investment in EIS. Putting it very simply, for every £100 of capital that is taken off deposit (where the taxman was taking around £2 in tax revenue from the interest earned on that capital) and invested in a UK company, the taxman receives £20-£40 in tax in employment and sales taxes alone from the company. This is a pretty healthy return on investment when you come to think about it. Even if they are sacrificing Capital Gains Tax receipts of 18% through the permitted roll-over relief, the return for them is still positive.

And for the relatively few investors that use EIS to shelter income tax, very roughly for every 20% tax break given to an investor, provided the money is spent by the company on staff, the taxman will take around 30% in employment taxes and somewhere along the job queue line, someone will be taken off unemployment benefit through the creation of a new job.

Clearly, if the company lasts beyond year one, the income benefits to HM Treasury magnify accordingly.

Catching my drift, there is no incentive for the taxman to ask us all if we want more generous tax breaks. From their point of view the numbers either have a minimal effect or worse if they made the tax breaks for investors deeper, they might even lose money in year one.

There is NO point in asking HM Treasury to give deeper tax breaks under EIS. They have already shown that they are willing to increase the volumes of investment that can be made at current tax break rates, so we can only assume they will continue to increase the volume limits. Any, anyway, so few people get anywhere near their maximum investment amounts, it is probably really just buying votes from a small number of high net worth investors.

So, back to the consultation which has raised some other much more important points.

• simplifying the scheme;
• reducing administrative and regulatory burdens; and
• raising awareness

all set in the context of promoting enterprise and encouraging investment.

This is a very clear message to us all and I believe that between us we can make some very helpful suggestions. If you want to read the consultation paper please click here: http://www.hm-treasury.gov.uk/media/4/C/bud08_eis_758.pdf, but in order to help you out and in order to help you point us in the right direction in the response we will be making to HM Treasury and HM Revenue & Customs, we have prepared a survey of the questions asked in the consultation paper. We have provided a series of suggested answers that fit with our way of thinking, but in the interests of fairness we have also left an open box for you to make your own comments, so do not feel you have to be guided by us!

You can fill in our survey by clicking here AngelNews EIS Survey 2008. I would be very grateful if you could just do two things before you start completing it which will help us enormously in preparing our report.

1. Please identify yourself either by name or with a reference unique to yourself so I have a proper audit trail of responses, and
2. Confirm whether you would like your responses to be passed onto government
a. under your name or
b. prefer them to be forwarded on, but not attributed or
c. prefer that we do not pass them on, but that we can use them to help us write our report.

Thank-you very much indeed for your help. I will report back as soon as we gathered your responses. I will also circulate the final draft of our report to you all for comment, before we hand it into HM Treasury on 19th June 2008. Expect to hear from us again on this topic in early June.

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AngelNews is now working alongside Daniel Stewart to publish their morning reports on the state of the stock market and to give you up to the minute research on stocks and shares covered by Daniel Stewart’s team of analysts.

We have been publishing these morning reports since 19th March, but here is an idea of how some of the shares have performed over April since Daniel Stewart tipped them:

The five best tips in April

Brokers’ Tips includes a short summary of the recommendations made by Daniel Stewart. We will also shortly be adding Daniel Stewart’s general sector research to our site.

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I suspect he is right; if you look at the telecoms sector, look at what Vodafone and Carphone Warehouse have achieved. In the pharmaceutical sector, check out the US biotech’s such as Amgen (founded in 1983) and Genentech (founded by venture capitalist Robert Swanson and biochemist Dr Herbert Boyer in 1976) which according to Wikipedia are the 14th and 19th largest pharmaceutical companies in the world. Let alone Google and Facebook in the TMT sector.

Earlier this week I went on a boat trip in Bath with a friend. Whilst putting the world to rights we agreed that one of the problems in business today is that so many people inhabit the “quite-er” mindset. “We quite like it, but”; “We are quite pleased”, “We’ve done quite enough, to keep them satisfied”, “We are not quite sure, let’s wait until you are a bit more established.” Sound familiar?

I attend a lot of events – and the one thing that stands out from the many amazing speakers I hear, those who have reached the tops of their ladders and deserve to speak out, is that they are particularly clear and confident in the path they are following. They have delivered time and again and know their stuff. Whether they go home and chew their nails, I don’t know. I suspect we all do at one time or another, but what I bet one word that is missing from their vocabulary is “quite”!

If only I could ban the word quite from the English dictionary, but I suppose it has its place, only not in the business lexicon. I don’t think “quite” is a word I hear passing the lips of politicians either. Whatever you think of an individual politician, as a breed they have each managed to convince a majority of their own electorate to vote for them. You don’t get that without having the courage of your convictions and, at least inferring, that you will deliver your objectives or even over-deliver.

Why do I talk about politicians now? Well because I am absolutely CERTAIN that current government policy supporting enterprise is flawed. I am CERTAIN it is designed to serve the bureaucracy, not the entrepreneurial community. I am CERTAIN that officials and their lap dogs are earning lots more in their pay packets as bureaucrats managing entrepreneurial schemes than they should be. I am CERTAIN that government policy is paying lip service to voters at the real expense of business, especially high growth business.

There is one other thing that I am CERTAIN about. Back in the post World War II period, the business that is now 3i was a government initiative called the Industrial and Commercial Finance Corporation. It dominated venture investing for decades. So I am CERTAIN that out of the current crop of government backed funds, one will become a FTSE100 company one day. And won’t it be ironic if they take 30 years, when really great entrepreneurs in other business sectors like TMT can do it in less than 10.

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Imperial Innovations, the IP commercialisation and investment company based at Imperial College London, was ranked second in the UK on volume of deals by Director magazine in 2007. We thrive on being at the forefront of innovation and start-up company incubation.

To enhance the quality of our deal flow pipeline in the cleantech sector, we are collaborating with the Carbon Trust and WRAP to deliver incubation services to the best low-carbon and recycling technology start-ups in the UK.

What's in it for us?

An opportunity to work with the best UK-based businesses and potentially invest in their further development.

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When I first fell into the business angel world back at the turn of the century, one of the first talks I heard was in a room packed full of older men. John Bates then at the London Business School reported that early stage investing was an exciting, but high risk game with only 1 in 25 early stage deals delivering 10x return on investment for the early stage investor. He also reported that just under half of those 25 would fail partially or completely.

Many pieces of research on the angel market have been published since then, but most of the ones I have come across have been based on UK research, until earlier this year when the Kauffman Foundation reported on their survey of business angel investment returns earlier this year. Based on a survey of over 500 US based angels, it reported that average annual returns were 17.7%. So the clear message is that the winners still more than make up for the losers and if you invest in enough deals you will get some of the best returns of any alternative asset class.

It was with relish that I attended the EBAN Congress last month because there was one session focused on the research projects that had been conducted in European countries recently, particularly in Italy and Sweden, both of which have very established business angel markets. We learnt some interesting statistics. IT appears that women are now becoming business angels. Five years ago, it was perfectly normal to see only 1or 2 women in each group of 100 angels. In Sweden you will now find that there are 4 and in Italy 3. Women are not there yet, but a 100% increase is not bad when you think about it. People, especially Sally Goodsell, CEO of Finance South East is working hard in the UK to spearhead the increase in numbers of women angels and in France there is a women’s only angel network called, unsurprisingly, Femmes Angels.

Angels are either getting younger or men are going grey earlier. In both Italy and Sweden the median age of investor is falling. In Italy the average age is 47 and in Sweden less than a quarter are over 65.

The stats showed that some, but probably not enough angels are now taking a portfolio approach to angel investing. Only 13% of Italians have more than 10 investments and in Sweden only 12% have 7 or more. Compare this with academic research that suggests you need 25 or more to be statistically likely to get a 10 bagger, and you can see there is still a big gap. Perhaps this tells us that angels are still preferring to work with a smaller number of deals where they can add real value personally, as a route to optimizing returns?

13% of angels in Italy have more than 45% of their private wealth invested in angel investments and in Sweden 12% have more than 25% of their wealth allocated in this way. So I guess this means once hooked you stay hooked as a business angel. Perhaps this is why it is so heavily regulated. I visualize a PhD being published one day on “Hard drugs and angel investing - the connection”!

The other statistic that intrigued me was the sources Italians have for deal flow. Only 46% came from business angel networks with 63% from entrepreneurs and 57% from the investors’ friends. This reinforces my comments in this month’s “how to make money out of angel investing” that you need to hunt around for good deals, and find a controlled way to let the wider market know you are active.

There are now more clues about investment returns. In Italy 39% of deals typically exited within 6 years led to a partial or full loss, but 30% had an IRR of 30% or more. Let us hope that this is a sign that angels are getting better at exiting from deals profitably. We will know more about UK angel performance as NESTA is conducting a survey of UK angel returns at the moment. There may be a clue about this apparent improved performance. Angels are not just investing in the earliest stage deals. 15% of Italian angels are investing in deals that are later than “early stage” and in Sweden 50% are later than start-up.

The last piece of information that I picked up is good news for us here at AngelNews HQ. Whilst most angels are still investing locally, within 50-60 miles (c.80-100km) from home, more are investing further afield. Somewhere between 25-45% of Swedish deals are now located further away. And signs of international investment activity are also emerging. The EASY Project has announced three deals where angels have invested internationally.

If you would like to read more about the statistics behind this article you can follow these links:

• www.eban.org
• www.earlystageinvestors.org
• www.kauffmanfoundation.com

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Without a doubt, the best deals are likely to come from people who already know how to spot a good deal. So, if you are looking for great deals the trick is to build up a high quality network that can drive deals towards you. Except for the odd angel who insists on flying solo, most angels will belong to a few formal business angel networks and will make sure that they are linked in with the organizations that promote large volumes of investment opportunities, but they will still have their own private sources of deal flow which may be where they are getting most (and the best) of their deals. So tap up your own network of contacts at regular points!

Just to let you know there are quite a few people planning to launch online sites of entrepreneurs pitching their businesses, so watch out for these launches. I will let you know about them as they emerge. Remember to look out for sites which have organized their regulatory status and understand whether it is you or the company they are promoting that is the client. It is only the client that can demand redress from the person promoting the deal. Post the Financial Services and Markets Directive, the regulation has got a lot more muddled.

Angels tell me that these networks ebb and flow in terms of deal quality, hence the need to belong to more than one. Every network will tell you about their strengths, but it is only by actually feeling the product that you will see for yourself if they can offer you the deal flow you need. One of the main things to check out is what type of deals the networks promote. Are the companies already revenue generating or are they raw start-ups; is the network sector or stage focused? Networks in university towns tend to be technology and bioscience based and are therefore a good hunting ground for these types of deals. Networks in London such as Envestors will show a lot of creative media businesses and also tend to focus on software companies. Currently sustainable technology and Web 2.0 are the flavours of the month – make sure the networks showing you these deals have a sector specialism to make sure they are showing you cutting edge deals not just the dross that has come to them as a last resort.

Ignore the regional networks at your peril. The quality of the deals shown will depend on the quality and intelligence of the network manager who selects the deals to show you. Look for network managers with a background in venture capital or investment banking. Some of the best network managers in the UK are based in the regions. Try out TVIN, South East Capital Alliance, SWAIN and xénos in the South. For others look at www.bbaa.org.uk And while talking about network managers, I recommend you get to know these people; tell them your investment objectives and you may find yourself getting a bit of pre-notification of good deals coming on stream.

Another reason to dive into the networks is that you will start to spot other angels who are particularly smart. Watch them quietly and learn from them. With a bit of luck and a fair wind you will be drawn into their own inner network and will start seeing deals from outside the “public” domain.

The disconnect between early stage venture capitalists and angels is disappearing. Nearly every network is now allied to or running a fund (check out London Business Angels and MMC Ventures). The VCs are increasingly forming investing in the best quality networks (check out Octopus Ventures which has been backed by Octopus Asset Management and Pi Capital which has Bank of Scotland Growth Equity as a shareholder). Other VCs that do not have formal links with networks may still be a good source of deal flow though. They often have deals that are too early for them and if you offer to baby sit it, especially if you are willing to work with the management team alongside your investment, you can put yourself in pole position for some excellent deal flow.

Hanging out with young entrepreneurs is also a good place to find deals. To find the good entrepreneurs you must go to the events which have grown organically out of a few entrepreneurs wanting to network together first, not the groups which are being organized by someone with a commercial objective to make money out of the networking event. The latter groups will have entrepreneurs there, but they will probably be hidden between a load of small time intermediaries trying to network the room too. And if the latter find out you are an investor…..

Angels are rich because they know how not to spend money and I have regular debates with angels about how much they should pay to see deals. The joy of angel investing in the UK is that there people operating every business model under the sun in terms of promoting investment opportunities. No deal (with the exception of just a few network operating within the RDAs) with come without you paying something (directly or indirectly) to the organization showing you the deal. If you don’t pay upfront, you will pay in the commissions when you invest.

Spare a thought for the people showing you deals. If you pay them a subscription, you buy their attention and become their formal customer. Therefore it is reasonable for you to expect them to give you some value added services and support. Remember that if the subscription is too cheap it will mean one of the following, either the network will have to:

• rely on fees from the entrepreneur who can probably ill afford it – there will be pressure to show deals even if they are not quite up to the mark; and/or
• commissions from funds raised – so they will be keen (even if they do not tell you) to get you to invest in a deal, which means you will have to look after your own interests particularly well; and/or
• sponsorship from people looking to target you or the entrepreneurs to sell services – which means you will have to listen to the messaging given by the sponsors, and more importantly, if neither you nor the entrepreneurs do business with the sponsors, you will find that the network staff will spend time not finding deals, but looking for new sponsors.

So have a think about the totality of the cost of finding deals and talk to entrepreneurs you are planning to back about it. If they have already paid some £1,000’s to find you and you have paid some £1,000’s to find them, what is then an acceptable commission to pay to the person who put you together? If the middleman is doing a lot of work for you, they are worth more than if they do very little. By the way, market norms are around ±5%, usually mainly paid as commissions on funds raised. (And remember to include this amount in the cost of your investment when you are calculating your returns one day!)

A last tip. Why don’t you try being proactive? If you spot a company you would like to back, try making a call to the CEO or the founder. You will have to sell yourself to them (probably an unusual feeling) but you may just find a deal you really want, rather than hunting in a pool of deals that other people think you may want.

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Why don’t angels use the withdrawal method of contraception?

Because they are worried that venture capitalists will rush in at the last minute and take over!

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Revolutions create rapid change, and as in historical revolutions, it is often the first champions, themselves drunk with power who become the victims of their ideals, are deposed and replaced by those able to carry on the values to a moral conclusion.

George Orwell’s parody of the Russian revolution in the book Animal Farm, saw that equality is great for mustering support but when the old regime is toppled so “all animals being equal” becomes less attractive than the opportunity for some to be “more equal than others”. As the newcomers seize power, so they find it hard not to emulate some of the oppressive ways of their predecessors and ultimately suffer the same fate. Lenin, Robespiere and Danton followed paths to this end, to name but three.

George Jaques Danton is of particular note. He was a leader of the French revolution who having reached a position of prominence, took advantage of his position and extorted money from opposing factions until his crimes came to light. His deposing led to a more stable and slower rate of revolution which concluded with The Republic.

Is Enterprise Linux the modern day George Jacques Danton of your datacenter?

Datacenters had been constrained in the past by the requisite UNIX hardware; its tenure marked by tyrannical expense. Applications often tailored for a specific hardware platform and with the proprietary nature of the operating system created a tie-in that made it difficult to negotiate a better deal; the power was with the institution.

The campaigners for open source had witnessed the broad acceptance of GPL software such as Apache, but it was the advent of Linux which embodied the ideal. The radical promise of Liberty, Equality and Fraternity from a ‘free’ operating system; its developers the populace it was designed to serve, was just the insurgence required to break the stranglehold and relegate hardware to the domain of commodity.

But who would heed the battle cry? Until 4 or 5 years ago there were few datacenters willing to adopt an extensive Linux strategy; unsure their abscondment would not be rewarded by a dearth of support from a disorganized, albeit passionate fraternity. Everyone grasped the strengths of the open source model; the security, stability and cost savings, but the perceived absence of corporate accountability, critical in the event of a failure, inspired the Linux leaders to act.

The scene was set for the champions of the revolution to lead the charge and so Red Hat and SuSE stepped up to the mark. A shift in paradigm saw ‘their’ Open Source packages certified by ISV’s and hardware vendors but more significantly, bundled with an update and support mechanism. Along with the version release and support cycles demanded by IT managers, Linux became the ‘not so’ renegade contender.

With the widespread adoption of Linux and the revolution complete, the libertarians looked at ways to ensure their dominance. Widely misunderstood licensing/subscription models allowed them to secure large support contracts by stealth without proportional costs and all too often poor delivery. Is it here that the venality of which Danton was accused and ultimately guillotined, surfaces?

It was not until the release of Oracles ‘Unbreakable Linux’, that the true composition of Enterprise Linux was revealed. The Linux model differs from the proprietary in that the software is free (the sole proprietary component of Red Hat Enteprise Linux, for example, is the logo) but you pay for updates and support. Herein lies a significant problem; software companies deliver software; they seldom achieve delivery of premium class support. Never more so is this evident than with Linux companies that have the added convolution of not authoring the software themselves. Nevertheless, they have grown rich on a model designed to overcome the ‘freeness’ of Linux whilst the support demanded by enterprise is still not apparent…… and the King deposer looks set to crown himself Emperor.

But wait! Whilst the newly enlightened commercial Linux market does not call for the head of Enterprise Linux, they lament the rise in support prices and demand a fairer model. At ‘The Linux/Open Source on Wall Street conference’ in New York last week an anonymous IT leader said “Linux is getting a faster, better infrastructure but if these vendors want to remain a viable solution, they need to remain competitive with other data center providers. They’re getting like everyone else…. It’s getting so that the support and maintenance are costing more than the servers themselves. We need to drive competitiveness back.”

And that’s exactly what the industry is seeing. Mid tier Linux support companies; LinuxIT, Heinlein, Obsidian, Helpdesklinux and the like, are offering datacenters the benefits of stable, updated Linux software coupled with cost effective, localized premium-class support. This is Red Hat or SuSE Enterprise Linux software with the update subscriptions in place but the support replaced by holistic systems support. This model offers significant cost savings and tailored Service Level Agreements according to the specific needs of the customer. It seems once again the power is firmly back with the people.

In reality, few revolutions result in the achievement of the ideals that motivated the people to revolt. In Linux and Open Source, however, the fight goes on and those that would subjugate are on an unsure footing.

Author: Peter Dawes-Huish

Peter is often styled as “The independent voice of Linux in the UK”

Peter is CEO of LinuxIT Europe Ltd winners of the Computing Award for IT Services Company of the year in 2006

Peter is also a member of Standard and Poor's Panel of Industry Experts as well as Gerson Lehrman Group Council Member.

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If you had been investing back in May 1983, these 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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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.