For a Lower Investment Return – Agree to a Covetable Note or SAFE Structure.

For a Lower Investment Return – Agree to a Covetable Note or SAFE Structure.

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To say I am not a fan of Convertible Notes or SAFE as a form of investment would be somewhat of an understatement. The big reasons I see for Convertible Notes being so damaging is that Angels using Notes rarely get their agreed terms of conversion.

One of the most common cram downs on Angels with Notes is the class of shares they end up with (as opposed to, were promised). The Angels enter a note with a 20% discount (what experienced Angel thinks 20% valuation growth in 6-12 months is anywhere close to adequate?) and a promise that their Note will convert into the same class of shares as issued at the next round. The VC round (or pretty much any other investor) at the next round says “No way!”, they can’t have my preference shares, let them convert into ordinary, or at best, a preference behind the new investor. So now the ridiculously low discount rate, the probably over generous (high) cap and the failure to achieve preferential terms means the Angels with Notes are not even getting basic dilution protection on the round.

Of course, the Angels would not normally agree to such abuse but, as a Noteholder they are not at the negotiating table for the new round (the Note does not give them the full investor protections typical in a priced round). Ultimately, they are presented with a ‘take it and get f*$ked’ deal. It is not uncommon for other terms of the Note to be abrogated too.

Fortunately, I live, and largely invest only in a geography (the UK) where Convertible notes and SAFE are effectively unknown (and given that the UK is the largest Angel market in Europe, that in itself points to the fact that neither are necessary to ensure companies get funding!).

The use of both Convertible Notes and SAFE has emerged from the USA, and initially largely the West Coast. In practice SAFE’s are not used nearly as frequently as they are talked about by early stage entrepreneurs. They are a minor part of early-stage investing, account for just 4.7% of seed deals in the USA[1]. SAFE’s account for about 10% of seed deals in California – influenced by Californian Incubators. Elsewhere investors are less enthusiastic. A recent post by Launchpad Venture Group described them as “a cancer of the investing world[2].

Convertible Notes are more common, accounting for up to 50% of seed deals in the USA[3] (for series A deals, just 12% were Convertibles). So definitely used – but as many commentors suggest, not necessarily the preferred choice of many investors. See https://www.rockiesventureclub.org/frontpage-article/ten-reasons-not-to-use-convertible-notes/  for 10 reasons not to use Convertible Notes.

And now for reason 11 – if you use Convertible Notes your investment returns will suffer. Launchpad Venture Group looked at 484 individual investment rounds that the group has made using Total Value to Paid-in-Capital (TVPI) return multiples. This metric measures the current value of the investment (both realized and unrealized) as a multiple of the cash invested.  They found that their returns were significantly lower when investing in Convertible Notes (1.1x) and SAFEs (1x) in comparison to Equity (2.2x)[4].

The Launchpad TVPI multiple on convertible notes and SAFEs is half what it is for preferred equity, and this difference is sustained over 258 rounds of equity investment and 188 rounds of investments in convertible notes. 

Digging Deeper – Why are Convertible producing such a poor relative return?

  1. Positive Exit – For 5% of note rounds, this was the last round of financing and the company successfully exited without needing to raise additional funding. This is a best-case scenario where notes were used as a bridge to an exit, and the investors received a 1.55x return on their investment. A positive return, but lower than the average equity returns of 2.2x because noteholders only receive the benefit of their discount or cap at the time of exit rather than benefiting from any growth of equity value.
  2. Note Converted to Equity – 35% of Convertible Notes behaved the way they are supposed to and converted into equity at the next fundraising round. The average returns of 1.3x in this outcome reflect the note discount or cap, but are below average equity returns. This highlights the likelihood that the majority of discounts are set too low (25% is just not enough), or the caps too high (eye off the ball, allowing too high valuations).
  3. Not Yet Raised Another Round – 11% of the rounds were recent enough that the company hasn’t yet raised another round of financing, but the company is still active. These notes are being carried at their original face value of 1x investment.
  4. Company Failed – 4% of the note rounds were the last investment before a company failed, and they returned nothing.
  5. Raised Another Note Round – This may be the area of significant issue for Angel investors – 44% of note rounds were subsequently followed by yet another note round. Serial-note rounds kill investor returns by delaying a conversion to equity and hence delaying the point at which the investors benefit from real company value growth. Investors are effectively receiving debt-level returns for equity-level risk taking. Many companies that raise capital through a succession of note rounds (often motivated by fear of dilution – possibly driven by lack of value creation?) remain under-funded and continue to struggle to hit real value inflection points. In many cases investor controls within the Note are limited to non-existent, so the investors have no say in how many notes are issued in the future.  For such companies, the Launchpad returns were just 0.84x.

It’s hard to achieve positive returns as an Angel Investor. Do you really need the added drag of a Convertible Note or SAFE structure?


[1]The 2019 HALO report found that SAFEs were most frequently used in Mid-Atlantic Region at 12%, likely heavily influenced by US Federal DOE, NSF, NIH, and other grant money which does not permit debt as a liability while grant funds are in use, hence early stage companies who do not wish to price their round are opting for SAFE notes.

[2] ACA Data Insights, 22 July 2021.

[3] 2019 HALO report

[4] To get a clear picture of round-level returns, they linked back the ultimate playout from a company to the actual round where capital was invested. For example, if invested in a convertible note round that later converted into equity as part of a subsequent fundraising, and then paid a return over two separate milestone escrow payments, they needed to determine what portion of each escrow payment came from shares converted in from the note into equity in order to determine that note’s ultimate return.

For Increased Returns – Plan Future Rounds and be Capital Efficient.

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Having seen many Angel investors be washed out by dilution and the preferences held by later investors into a company, particularly VC’s, I have adopted a stratey of looking for capital efficient investments (that won’t need VC to exit).

These tend to be B2B business with some real IP. Its necessary to develop some sales – to quality customers, but not necessary to scale the business to show value.  Acquirers need to see that “the dogs will eat the dogfood”, but you don’t need to feed every dog to do this. Just the big dogs that acquirers are likely to care about. Then sell the business, not on the PE multiples of the investment business, but on the acquirers PE – the value of the futures sales and profits they will make pushing the product through there much larger distribution channels.

Yes, product sales need to be scalable – but that scaling does not need to be done by us to prove value.

Typically, we are looking at total lifetime investment values of up to $5m – so a 10X return on a $50m exit. Which just happens to be the average published exit value.

Till now this has been intuitive – a belief that this is an effective strategy.

The American angel Capital Association (ACA) have just published some data looking at the returns achieved on 105 investments within the Launchpad Venture Group portfolio.

Turns out that those investments that were done on a capital efficiency basis – Thinking about future capital requirements and giving preference to capital efficiency (where the diligence team did not think it would need to raise more than $5M in outside capital over the course of the business) increased returns by 35%.

Capital efficiency and future planning – less capital at risk, spreading your investments over more (smaller capital need) deals, less dilution and likely earlier exits, with a 35% better return. What’s not to like?

SAFEs – not so safe

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Had a call from an investor friend whose angel group (not in the USA) were looking at a deal where the company had presented them with a SAFE agreement that they wished to form the legal basis if the transaction. This on the basis, according to the company, that “Its the way they do things in the USA, so it must be the right way”.

The SAFE (Structured Agreement for Future Equity) was invested by Y Combinator in 2013. They are intended to be short, simple (and therefore cheap – no legal advice needed), documents that outline investors’ right to purchase equity in a start-up at some time in the futures when the company does a prised round of funding. So like a Convertible Note – but with fewer terms and, as a result, fewer investor protections than found in a Note:

  • SAFEs have no maturity date. Without a maturity date, there is no mechanism to require the start-up to repay the investor or to force the founders to convert the investors’ money to equity.
  • SAFEs don’t have a right to dividends – so in the (unlikely event) the company becomes cash generative before a conversion – SAFE holders don’t have a right to any of that cash.
  • SAFE holder receives neither debt nor equity. So legally have no protection offered by the fiduciary duty of the management to act in the interests of shareholders, nor by the legally enforceable debt terms.
  • A SAFE has no interest rate. Therefore, when the SAFE converts, the investor does not get the additional shares that come from accrued interest under a Note.

All these things make a SAFE a much less attractive structure than a Note for an investor –  and from my perspective a Note is not that good for investor (or founders) to start with:

In a 2017 survey of Angel Capital Association Members[1]:

  • 82% prefer to do priced rounds for their initial investments BUT
  • 78% had done at least one convertible note in the last 18 months.

It seems that US investors don’t want to use them, but feel they have no alternative if they want to get into the ‘good deals’. (as if any of us actually know what the ‘good deals are going to be – what they mean is ‘hyped’ deals – also associated with being overvalued deals). So glad I primarily invest in the UK, where they are, thanks to the angel tax regulations, simply unknown.

Why to the Investors not like Notes? (just a few here to set the tone)

  • The biggest problem with the convertible note is the pricing mechanism. The typical discounts to the next round is 20%. This is far too low to be fair to the investors unless the conversion occurs very quickly ( within say 6 months) after the angels invest. This discount really needs to be a minimum of 50% to make any sense.
  • The Note holder in practice has no negotiating power to protect their position at the next round.
  • The investor has none of the minority protections normally included in an equity deal.  No seat on the board, no real information rights, no participation rights etc.

But let’s get back to the problem of the company looking to get investment by a SAFE – and the investors wondering how to deal with that request.

Its actually quite easy –

Just say No.

The entire precept being put forward by the company is false.

SAFE’s are not actually used very much in the USA.

The Angel Capital Association, Angel Founders Report 2020, found that:

“While SAFE notes have captured the attention of many investors, especially accelerators on the West Coast of the USA, angels investing larger sums of money still prefer traditional deal structures. SAFE-driven incubator rounds are typically smaller investments, and when it comes to increased amounts, angels value investor protections, stronger governance and more balanced deals provided by prised equity”

So what are the typical structures used in practice by USA angels?:

  • Preferred Shares (prised round –        52%
  • Convertible Debt (Notes) –                 37%
  • Common Shares –                               4%
  • Other –                                                 4%
  • SAFE and similar –                           3%

This is consistent with the finding of the 2019 Angel Resource Institute 2019 HALO Annual Report on Angel Investments.

“While we continue to see the use of SAFE notes they are a minor percentage of all Seed transactions at 4.7%”.

Where SAFEs are used, the primary reason does not seem to be anything to do with investment anyway, but rather regulations relating to US grant funding:

“We did find SAFEs were most frequently used inMid-Atlantic Region at 12%. The Mid-Atlantic use of SAFEs may be heavily influenced by US Federal DOE, NSF, NIH, and other grant money which does not permit debt as a liability while grant funds are in use, hence early stage companies who do not wish to price their round are opting for SAFE notes.

California was #2 in SAFE usage at 10%, influenced by California incubators and possibly by science companies vying for Federal grant funds”.

The SAFE investment agreement – not a good basis for an investment, and not actually used very much.


[1] https://www.forbes.com/sites/mariannehudson/2015/08/12/convertible-notes-the-debate-continues/?sh=6c614ac87fc0

Are Angels in Denial About Exit Valuation?

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There are three variable that drive the financial return for Angel investors (and founders):

  • Pre-Money Valuation.
  • Subsequent Dilution.
  • Exit Amount.

Instinctively founders seek as high a valuation as possible. It must be a ‘good thing’ to ‘give away’ as little equity as possible. Typically, founders will seek to find comparatives to justify their valuation proposals. If company X is worth $6m then we must be too.  (Let’s put aside for the moment that the comparative being used is likely on a different continent, and probably has quite a different set of skills in its team, different experience in its founders, and different intellectual property).

And it seems many investors have been going along with this. Perhaps out of fear of losing out on ‘the best’ deals – though I have yet to meet anyone who can actually pick winners at the first round (or follow on actually) – if angels could do that then presumably the percentage of their portfolios that fail to return capital would be less than 70%.

A big part sems to be a failure to think strategically about a deal – looking not just at a first-round valuation, but at the total cash that business is going to need to get to an exit (and the resulting dilution on their ownership %), and the actual likely exit value achievable.

And this in turn is likely significantly due to the media fixation of Unicorns. Without appreciating that it’s the valuation of most unicorns that is a fantasy. Because so much talk is about $1bn companies that’s become the perceived normal – the bar against which all else is measured – and found wanting.  But over the last 10 years just 1.7% of all UK high growth company exits have achieved a value of $1bn or more.

The unicorn culture has stopped people talking about, and admitting to, the reality – most exits are much, much smaller. And no, its not because we lack ambition in the UK – the exit values in the USA are largely at the same level. As with most commercial transactions the buyers have a price band they are comfortable paying. Trying to ‘scale’ past this comfort zone (which is a reflection of the acquirer’s commercial reality) is more likely to create a non-exitable company – and certainly massively dilute the early investors, and probably the founders as well – than crate added exit value.

Triple Point and Beauhurst have produced a report looking at 2,724 exited UK companies between 2011 and 2019[1]. Of these they have exit value data on 604. It’s likely the bulk of the non-disclosed deal values will be at smaller values. Big deals are publicly announced (either publicly or in financial accounts). Small deal value announcements are likely inhibited by embarrassment under the prevailing unicorn culture.

The data shows that 87% of exit values are under £200m. But digging deeper, 51% are at £30m or less.

Most Exits are ‘Small’. www.beauhurst.com/research/Exits-in-the-UK

This is not a reflection of lack of ambition by UK founders – or a lack of UK scale up capital. The 2016 ‘Global Tech Exit Valuations’ report by CB Insights showed 54% of exits globally were at $50m or less (and they also pointed to the fact that the majority of smaller exit values are not made public, so that figure will likely be significantly overstated). Rob Witbank’s study presented to the American Angel Capital Association conference (ACA) suggested that 87% of US exit values were $50m or less (perhaps significantly impacted by the high level of ‘acquihire’ transactions, where a large tech company purchaser a small tech company just to get the technical team – the acquired company being quickly shut down. The technical skills of the team being seen as more valuable to the likes of Google than the  product they were working on).

Exit value is critical in determining the financial return on all investments made into a company, including the very first. It’s hard to see how you can get the target 10x return from a deal (the generally agreed target needed to archive a 2 – 3x return at portfolio level given the very high, 70%, level of deals that will produce a negative return) if the first round valuation is north of £3 million, and the probable exit vale will be sub £50 million (even without considering any future funding dilution, or preferential returns introduced by subsequent funders).

The report shows that 97% of exits have been via an acquisition (as opposed to an IPO), and the average acquisition exit value has remained unchanged over the past ten years. Yet data from Pitch Book shows entry valuations have been significantly increasing in the UK, with Angel and seed valuations rising from about £1 million in 2010 to £3 million in 2019.



Mean Acquisition Exit Values Flat over 10 years.
www.beauhurst.com/research/Exits-in-the-UK

There is no rational reason to accept an increase in entry valuations of 3x while exit values have remained flat. Perhaps it supply and demand – all that SEIS / EIS incentivised (dumb money) investment chasing quick deals to beat the tax deadlines. Perhaps it’s that before COVID chased them away Angel tourists thought it was cool to get into some ‘hot’ deals. Perhaps we investors have just not been looking for, and using, the realities of the data to negotiates sensible valuations, and been willing to walk away from the daft ones.

How do you calculate the ‘correct’ valuation? Comparatives have some merit, providing you are using a genuine comparative. Don’t go comparing your e commerce, shoe comparison site with a San Diego Biotech company.  The Score Card method can help focus on the key issues to be used in due diligence, but if the management team is not excellent, you don’t compensate by lowering the valuation. You just don’t do the deal.

Truth is, startups have no value. How can they, if 70% end up failing to return capital (and obviously we don’t know which are in the 70%!). The 70% are probably worth less than zero at initial funding – because your going to lose money on them.

So how does valuation actually work? The early investors need to take 20-30% ownership to manage future dilution and have a decent ownership at exit, to derive that 10x potential return. This assumes a reasonable level of investment is going in, depending on location, say $100,000+. The valuation is derived based on that percentage, and the amount of funding the company needs to achieve credible, critical value add mile stones. If the company needs £500,000, and the investors take 25%, the post money valuation is £200,0000, and the pre £1,500.000. If the company needs £700,000, that valuation is £2.8m.

(The founders get the balance of ownership, less the 15% or so that is popped into the share option pool. Always get that set up at the time of your first investment – otherwise it will add further dilution when the next investor require it).

Is that £2 million valuation sensible? Depends on how much more cash needs to go in to get to exit, and the resulting dilution on the investors. That needs to be modelled on a future looking cap table, showing each expected future round, amount, valuation and dilution effect.

And then look to see what is the probability of achieving an exit big enough to get a 10x return. In simplistic terms, a £2 million entry with no further funding or dilution needs a £20 million exit. The data we have above suggest that 62% of exits are at values above £20m. Reasonable odds, as long as there is no more dilution. But it’s a rare company indeed that gets to exit, especially above £20 million, on a single round of funding.

This suggest that you would likely not want to be going above a £2 million valuation. And yet clearly the data indicates that investors regularly are. Perhaps all the higher valuations are for companies that are just that much more ‘special’.

Valuation is important, and does need to be considered in conjunction with future capital needs, dilution and the realities of exit value. Exit values of genuine comparatives, of similar companies in the same geography. And investing on the same terms. A valuation of £3 million is a very different value when the investor has a 3x preferential return built in.


[1] www.beauhurst.com/research/Exits-in-the-UK

10 is Not Enough

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According to the, the American Angel Survey[1] the typical angel investor has a portfolio of just seven companies.

This despite a general perceived wisdom and ‘best practice’ requires that they should spread their money across at least ten different companies. The probability is that any one investment will result in a loss. Data suggests that as many as 70% of Angel backed companies fail to return capital (not all of the 70% enter liquidation. The worst ones continue to hang about the portfolio as zombies, sucking the time and reputation of their investors for no return).

The majority of investors in the UK are also not following this advice. The UKBAA and British Business Bank reported that 42% of Angel investors have ever only made five or fewer investments in their portfolio[2]. 64% have made ten or less (56% of those survey had five or more years’ experience as an active investor).

Equity Crowdfunding investors do even worse.  Crowedcube notes that their average investor has a portfolio of just 2.4 investments[3].

But it turns out that while the typical angel investor is not following perceived best practice, even to do so, and have a portfolio of 10, is not sufficient to properly diversify risk and maximise returns. Launchpad Venture Group (https://www.launchpadventuregroup.com/analysed) anonymized individual investment returns for 278 individual Launchpad members over the past 20 years. They looked at their current Total IRR (including both realized and unrealized returns). The results highlighted the need for a diversified portfolio, and showed that to maximise returns more than 10 investments are needed.

Individual returns from investing in only one or two companies ranged from +100% to -100%. Median returns for such portfolios were relatively low, and the standard deviation of returns dwarfed the median return, meaning you are about as likely to lose money as make money this way. It seems that the return on such portfolios is largely driven by pure luck.

Increasing the number of companies in a portfolio to 5-10 bumped median IRR up by a factor of 3-4x. Only a few individuals suffered aggregate portfolio losses with this level of diversification. More is definitely better.

Real diversification however takes more than the 10 companies of conventional wisdom. it is only once you get beyond 15-25 companies in the portfolio that median IRR comes out at around 4.5x what it was with just 1-4 companies.

So – 4.5 times better return if you have a portfolio of 15-25 companies rather than just 1-4.

How do you build a portfolio of 15-25?

  • Work with an angel group, and create large syndicates at the first round.
  • Even if just one or two of you could do the deal – open it up to a wider initial investor base. Don’t invest £100,000 by yourself in round one – invest £10,000 with 10 friends.
  • Follow in with additional funding into those that are actually crating value. Remember it’s your ownership percentage at Exit, not round one, that will drive your returns. So, keep 4 times your initial investment for follow on.
  • Accept that some companies will fail – and let them do so without wasting more time or cash on them. Divert that cash to new investments – and sustaining to good ones.

[2] The UK Business Angel Market, UKBAA, British Business Bank, 2018.

[1] http://media.wix.com/ugd/ecd9be_8e208b2da3e343509cd4957fb9521b27.pdf

[3] https://www.crowdcube.com/explore/blog/investing/invest-in-a-range-of-businesses-today

The Valuation Myth – Part 2

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The biggest driver of valuation is not the quality of the management team or the size of the market. There should influence the investment decision in a binary manner – if you don’t have a good team, or a big market, you don’t reduce the valuation – you just DON’T DO THE DEAL!

The biggest driver of valuation is Geography. Where is the company operating?

And specifically – how much it costs to do stuff in that location?

By ‘Stuff’ we mean something achieving a millstone that in the eye of the next round funder or exit partner adds real value. (The biggest value drivers are usually related to customer engagement / evidence that customers value the product – not tech ‘features’).

So valuations look higher in say San Francisco than Ohio simply because you have to put 4x the cash into the Valley company to do the same stuff that costs so much less to do in Ohio (salaries and rent are now almost prohibitively expensive for startups in the Valley now) – but you can’t take 4x the equity, or you would own more than 100%!

A resent analysis of valuations for Tech Coast Angels suggested they were 50% higher than the rest of the USA – due to geography.

Valuation of early stage companies is not really valuations at all. It’s not like valuing a house, or a picture, or even a traded stock market investment – all of which can be relatively easily turned into cash if you need to do so.

Early stage company valuation is really a way of expressing how the cake is being divided between the investors and the founders.

Angel investors, who are putting their time and reputations into deals, not just their cash, look for a sizable ownership percentage on an initial investment. This reflects both the perception of present risk – but also critically the level of future dilution they face as the company takes on more and more rounds of funding. It’s the ownership they have at Exit that is critical, not the ownership on initial investment.

The specific numbers will vary a bit from case to case, but for any meaningful amount of funding (say $200,000 or more), the early investor(s) will likely look for between 25% and 30% ownership.

10% – 15% will be put aside for share option incentives in the futures, leaving the founders with between 65% and 55%.

And the numbers don’t really change much whether it’s a $200,000 investment, or $500,000, or (for my groups most resent investment $800,000).

The valuation driver is the amount of cash going in – the size of the cake.

If the investment is $200,000 the valuation is likely based on the lower end of the ownership band – 25% – so a valuation of $600,000. If the cash going in is $800,000, then the higher end of the ownership range will be used – 30%, so a valuation of $1.8 million.

So quite different ‘valuations’ for the identical company. The difference driven by how much cash needs to be put in to achieve key millstones (what needs to be done to get the next round funding, or an exit).

Now benchmark that valuation against likely exit values (using exits in the location of your company) – a $1.8 million value today needs a credible likely exit value of $18 million – without the company taking on any more funding (the investors not suffering any dilution), to archive a potential 10x return – needed to get a potential 2.5x – 3x return at a portfolio level, when you account for the companies that will return zero.

Perhaps investors should be encouraged to study Geography, not Maths, to get an understudying of valuation.

The Valuation Myth – Part 1

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I was asked recently to provide some feedback on possible valuation benchmarks for a company raising its first external equity funding.

Of course the funder has been looking at valuations from Silicon Valley. Largely one suspects because they are larger than the local ones in Latvia.

The use of comparatives is a sensible way to benchmark valuations – what valuations have been achieved by similar companies?

But they are usually used badly – because the definition of what is ‘similar’ is too narrow.

Similar is not only (or indeed primarily) those in a similar industry or tech vertical.  

What is more critical are factors such as:

  • Achievements to date – critically customer engagement and meaningful revenue generation.
  • Levels of actual Intellectual property (patents applied for, granted and freedom to operate reports).
  • Experience of the management team – have they previously successfully built and exited a company?

Comparatives ignore the most critical influencers of future value for early investors.  For investors the return on investment is driven by three factors:

  • How much ownership of the company you have at initial investment (the outcome of the initial valuation).
  • How much ownership you have at exit – a function of dilution – how much more money will the company need to get to an exit, and how much of that will the initial investors be able to provide?
  • The actual exit value achieved.

Investors who only look at the first of these – the initial valuation, are likely to do badly in the end.

Providing $200,000 for 10% of the company (which gives a pre money valuation of $1.8 million, is meaningless, unless we know what future dilution we will suffer. Say the company needs $100 million of VC money to get to the exit – what ownership will you then have? And even if you have say 1%, if the VC’s have just a 1x preference, then unless the company sells for at least $100m, you will not get one penny back (did I mention that most successful exits are for around $25m – $35m?).

Valuation is not about what a company is worth today – or indeed what it is going to be worth on exit – but what ownership percentage you will have at the time of exit, and what the terms of that exit are. Those terms will not be set by you – but by the provider of the last round of funding.

Valuation therefore begins with a deep analysis of Comparatives – the comparative of EXIT values and the total funding that has been required to achieve them.

Is it Angel Training – or Angel Education?

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I have received some comments from experienced Angel investors challenging whether the use of the word “training” is appropriate in the context of developing business Angel investment skills and knowledge.

It is suggested that the use of the word may actually be off putting to individuals who regard themselves as extremely successful business people.

However, the principal challenge to the use of the word ‘training’ relates to the impression it may give that on completion of a “training course” a novice will be fully skilled in all matters required to be a successful investor.

In practice the most significant impactful elements of Angel learning occur as a result of new Angel investors learning from experienced Angel investors while processing a live investment opportunity.

Angel investing is a practical rather than a theoretical activity. The term “training” often seems associated with learning that is done by rote and is somewhat prescriptive. i.e. There is a “right and a wrong” way of doing things.  Such prescription does not apply to the Angel investment environment, where there are many areas of disagreement, even between the most experienced Angel investors.

When Angels gather together there will be frequent discussions, and disagreements, as to the most appropriate forms of valuation (and the extent to which valuation is critically important or not in the investment process) the key factors of due diligence (typically between business opportunity and management team) and forms of investment (convertible notes versus preference stock) to name just a few areas of potential discord.

A preferred term may be “education”, which has a connotation of a continuing (lifelong) process, where the learners are encouraged to think about the concepts presented, and where appropriate to challenge them. Any point is open to discussion.

In developing the skills and knowledge of the Angel community it might be that encouraging education on a continuing basis, rather than suggesting Angels undergo training, which may be seen as a relatively one-off activity, would be more effective. 

Investing In Scotland Grows In 6 Months to June 2020

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Investment by LINC (the Scottish Angel Capital Association) members increased from £7.84m (41 deals) to £15.27m (58 deals) in the first six months of 2020 compared to the same period in 2019.

In addition to the £15.27m invested in the period by LINC members, their deals attracted an additional £14.60m from private co-investors, and £11m from Public co-investment funds. So a total of £40.87m into those 58 deals.

All LINC members are Business Angels – so not Venture Funds of crowed investors.

Many of these deals were of course in the pipeline before COVID issues hit, and the majority of the investments went into existing portfolio companies (typical of a mature angel market).  It may be anticipated that the second half of the year will be more challenging for companies seeking funding, especially ‘new’ companies seeking their first external Angel funding.

(data source – LINC Scotland).

The Reason Most Angel Training Misses the Mark

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The key role for “training” in emerging markets should be to provide nascent Angels with an understanding of tactics to deal with high risk, and thus confidence to join with others in making their first investments.

Technical training (Valuation, Financial Modelling, Due Diligence etc.) is a necessary but insufficient component of building this confidence. More vital are the elements that address critical risk factors.  These include the development of investment strategies that look beyond just the initial investment transaction, to the life-long funding requirements of the company, and post-investment support. We refer to this as “Strategic Angel Investing”.

Angel investing is a personal activity. Angelsinvest their own money in deals they select. They are free to conduct their investment activity in any (legal) way they wish.

A program must not try to impose a particular methodology or investment thesis, but rather find ways to support individuals to become confident to make investments in the manner that works for them. This does include using ‘best practice’ examples to demonstrate how others have become successful.

But ‘best practice is still subjective, and definitely needs to be adjusted to take into account the realities of local circumstance – the number of investors, availability of follow on and exits, the nature of deal flow and the like

Almost every aspect of Angel investing, from deal sourcing to exit, is subject to discussion about what methods, processes and techniques are most effective. The most effective learning comes from real life stories and examples, relevant to the region (tales of Silicon Valley are rarely appropriate), delivered by inspirational speakers, who are themselves experience investors. By which we mean not only that they have done some deals, but that they have taken a few companies through to a successful, profitable, exit.

An experienced and dynamic programme delivery team, who can adapt to local circumstance is the critical success factor.