Sunday 18 February 2018

Dublin network conference: Angels watching over me

As 300 business angels fly in for tomorrow's European Business Angel Network Conference in Dublin, we spoke with Ireland's most successful investors about the tricky business of aligning the interests of both the founders and the funders

Angels: But nothing is set in stone.
Angels: But nothing is set in stone.

Niall H Doyle

'ON the one hand you want a very high barrier to entry, in terms of a company's intellectual property, but on the other hand, correspondingly, you want a very low barrier to adoption." That's what Chris Horn, co-founder, CEO and chair of IONA Technologies and serial investor, looks for when deciding whether or not to invest in a company.

Investment, or the lack thereof, is a perennial stumbling block and source of sleepless nights for numerous start-ups up and down the land. The high-net individual wishing to invest in a company at an early stage, in the guise of a business angel, can sometimes appear to be as difficult to read for auspicious signs as the lesser-spotted venture capitalist.

While business angels apply different approaches to each proposal for their consideration, one unwavering imperative shapes their thinking above all others – "Will I get a return on my investment?"

When eyeing up an investment opportunity, Danny Moore places a premium on the management team. With a strong background in FinTech, the former CEO of Belfast-based trading technology firm Wombat Financial Software was acquired by NYSE Euronext in 2008. In 2010, he established Lough Shore Investments, also based in Belfast.

"Some people will buy a product or service with a view to replacing the management, but certainly my philosophy would be that they are a unique asset."

Which stands to reason, right? Especially, when you consider the profile of a typical business angel. They've usually built a successful business(es) and, in so doing, have acquired a broad range of skills and an enviable set of contacts.

As such, they are eminently qualified to guide a start-up through all the pitfalls of building a business, and, in theory, should be able to identify if the founders are also made of the right stuff.

The emphasis on a 'management-first' view is shared by Dylan Collins, not least because the offering or product is likely to go through several iterations.

Currently CEO of SuperAwesome , Ireland's best-known gaming entrepreneur co-founded DemonWare in 2003, which was acquired in 2007 by Activision Blizzard. Gamestop acquired a considerable stake in Jolt Online, another one of his ventures in 2009.

He said: "You would assume that their product or service will change, so at that level what you're backing is management – a founder's ability to get from A to B, whatever that takes."

So it's all about the management team, right? Not necessarily. Chris Horn holds a contrary view. For him, it's all about the product.

"If there are any weaknesses in the management team, it's usually possible to bring in further expertise, whereas the product or service has to be really sound, in the sense of being very competitive in the market."

Brian Caulfield, a seasoned investor with many successful exits to his name, agrees. Currently a Partner at DFJ Esprit, in 1992 he co-founded Exceptis Technologies, which was sold to Trintech Group in 2000. In 2010, he was the recipient of the Halo Business Angel Network's 'Business Angel of the Year' award.

"For me, the market opportunity always comes first – is there a large, valuable, unsolved problem that the company is addressing? After that, it's the team and then, finally, technology or product."

Ray Nolan, the former Hostel World co-founder, currently heading up UltimateRugby (with Brian O'Driscoll), Xsellco and Intalex, amongst other interests, is another investor who likes to focus "on the scale of the opportunity".

Speaking from Las Vegas, last week, where he was attending Collision – Paddy Cosgrave's first major US tech conference – he was critical of "stupid" government policy that "pushes people to put cash into property", which directly impacts, he believes, on start-ups' chances of survival.

"Entrepreneurs are finding it hard to fill even small early (investment) rounds, which often means that a project which may have worked dies."

Apart from the obvious capital injection that the company receives, angel investment is about empowering and helping the founders, whilst at the same time maintaining a healthy distance from the day-to-day.

When a business angel is brought on board, it's important, Nolan feels, that the founders are allowed "to get on with the job" of building the business and not have to worry about "investor relations".

However, there seems to be a general acceptance amongst investors that there will always be a certain degree of 'handholding'.

"Building companies is usually an ugly, messy, difficult, hard, nasty business; it's just no one talks about it in those terms, so if you're not prepared to roll your sleeves up and get involved, then you shouldn't be in the business of angel investment in the first place," says Collins.

Whilst high-profile success stories, such as Mark Little's Storyful, in which Nolan was an early-stage investor, garner headlines, the reality for most investors is often much more prosaic. For them, it seems, you've got to kiss a lot of frogs before you find your prince.

"You'd be surprised how few investors make money out of it," warns Danny Moore.

"The reality with early-stage investing is that it's generally going to be seven to 10 years before you get a win. Meanwhile, most early-stage tech businesses will fail within one to three years, so you're going to see your losers before you see your winners."

Diversification is one way of offsetting the high risks inherent in angel investment and having a portfolio of eight to 10 investments is advised.

"Put €20,000 into ten opportunities, not €200,000 into one," says Caulfield.

Angel investment is often seen as the kid brother to venture capitalism. Indeed, many successful business angels 'graduate' to VC investment, where the returns, potentially, are vast. But can the two co-exist side by side and what are the implications for the founders?

Dylan Collins, a partner in UK-based Hoxton Ventures, an 'early stage' VC that invests between $500,000 (€365,000) and $2m in tech companies across Europe, recently raised a fund of $40m.

They're attempting to address the funding needs of tech companies that fall somewhere between angel investment ($50,000-$250,000) and Series A funding ($5m). By focusing on this middle ground, Collins believes they're highlighting a wider investment issue, sector wide.

"It's not just in Ireland, you see it in the UK, in Germany and in other parts of Europe – the lack of availability of follow-on investment at seed level and series-A level. Fundamentally, we need more venture funds in Europe. We are underserviced in that respect. It's good that we've got a growing angel network but we need to make sure that acceleration capital and seed level capital are there."

Indeed, there are a number of these 'middle ground' investors emerging in the marketplace.

Danny Moore's Long Shore Investments has also directed its attention here, working with start-ups "in the web, mobile and enterprise space". Their goal is to bring 10 companies to exit or IPO by 2025. Note the timeline. Those looking for a fast-buck return should look elsewhere.

Be warned, as a company develops, its funding needs will too. Angels need to take a long view.

"Things usually take longer and require more capital than initially expected," says Caulfield, "so angels should expect to have to follow-on in some of their investments. If you plan on committing €100,000 to a company, start with €40,000."

And Ray Nolan strikes a similar note of caution. When venture capitalists become involved, it's often to the detriment of those who initially backed the start-up.

"Small angels need to fully assess their ability to stay with a project through future rounds. Raising rounds under financial pressure usually means earlier investors take a bath when VCs come in."

Early investors can, of course, include founders with 'skin in the game'. Keeping them onside as a company negotiates its way through various funding rounds is crucial, Dylan Collins believes, to a company's long-term prospects for success and that 'happy exit' that all investors, be they founders, angels or VC's, are after.

"When you are investing in a company, you want to make sure everything is aligned to maximise the probability of success. You don't want to get to a stage where the founders are too disincentivised.

"I think it's an older generation of investor that always wanted to get as much as possible and almost shaft the founders. That's just not long-term thinking.

"The last thing you want to be doing is setting up a situation where you have p***ed off founders in a year or two or three."

Sunday Indo Business

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