Return on Investment

A bus stop – but no bus

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I read an article this morning that got me thinking about exits – though that was not the intention of the article (http://benariltd.com/2017/10/a-happy-ending-when-the-bus-never-comes/)

It describes the situation outside a home caring for those with dementia. Sometimes the residents manage to get out – and a search will ensue.

An employee of the centre got thinking about how when residents escaped, they often managed to hop on a bus. This observation led to a solution. The Senior Centre built a fake bus stop right in front of their facility. A confused resident who manages to leave the centre sees it right away and sits down to wait for a bus. As they sit on the bench at the bus stop they relax and forget where they were going. Soon someone from the Senior Centre arrives and calmly asks if they’d like some tea, and takes them back into the centre and settles them back into their quit routine, thoughts of escape forgotten.

Got me wondering – how many of our companies are building fake bus stops to keep us investors happy, rather than real exits?

In the last few weeks I have seen two cases where it is clear the founders have become comfortable running their business, and have no intention of actively seeking an exit. At best they pay lip service to the concept, making the right noises if and when the investors bring it up.

Its the investors that have allowed this to happen, but not consistently and regularly, from the very first board meeting, measuring company performance against KPIs designed to build acquirer value.

If after making an investment you have ever wondered  “when should be start planning / talking about the exit?” you have probably already fallen into this trap.

The answer of course is – befor you make the investment, and consistently thereafter. Almost every board decision you are involved in – from who to hire and what customers to go after, should be considered against what will add the most value in the eyes of your exit partners.

Otherwise you might be sitting on that bench for a long, long time.

Angel Investing – Not Just for the Supper Wealthy (who are usually not very good at it anyway).

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The Best way to be an Angel Investor? Become a member of an established Angel Group of Network and join in lots of deals with other members, investing just a little initially in each one. Let’s say a company was looking to secure £250,000. That should be provided not by one of two really rich individuals, but by 10 or more individuals each investing between £10,000 and £40,000. Why? Because Angel investing is very risky – as many as 70% of the Angel backed companies in the USA fail to provide a return to the investor – so the reality is, however good that pitch looked, no one, however experienced they are, can pick the winners.

Angel investing can be highly profitable, with organised angels with a portfolio investing strategy achieving IRR returns of 25% (and one Angel friend showing a 101% IRR!). But you must do a lot of deals. Less than 6, and the probability is you will not get any return. You need to be planning to do 15 to 20 new investments over say a 5 year period, recognising that many will not manage to develop as planned. Then be prepared to provide follow on funding only to those that do show real development and in particular customer traction. Don’t keep funding the ones that don’t perform (and they will likely be the majority!). It’s only after the company has been actually operating for a few years that you will have any chance of starting to see which ones are likely to be the real winners.

And the only practical way to be able to invest the necessary cash, and time, across such a large number of investments is to do it as a “team sport”, investing with as many other Angels as you can, providing small amounts of initial funding each, and then building on the successes with more capital. A good rule of thumb is that for every £1 you provide as an initial investment, you need to plan on providing another £3 for follow on into the “good” ones.

Being part of a group has many other advantages.  Usually better access to deal flow as the Group will be better known than individuals, certainly more people and brain power to do screening and due diligence and access to much more post investment support.

And why are the Supper Wealthy usually not very good at it? They don’t share the deals, and put too much money into too few companies, and don’t have the time to provide adequate post investment support into a properly sized portfolio. Better to be a team player.