Plus operates the Utility Warehouse Discount Club. It was founded in 1996, raised £5m in 1999 via the prospectus in question and was listed on the London Stock Exchange a year later. Initially it offered cheap phone calls by routing calls to alternative networks but now offers landline and mobile telephony, broadband, gas and electricity and a cash-back card.
The company has grown quite exceptionally. Turnover in the year ending 31 March 1999 (just before the date of the prospectus offering) was £6m with a loss of £1m. This grew to £471m and a profit before tax of £31m for the year ending 31 March 2012 year. At the time of the prospectus offer, the company was valued at £10m before raising £5m, whereas mid 2012 it was valued at approximately £600m.
Investors who subscribed for shares in 1999 at 30p per share would have seen those same shares worth nearly £8.50 in mid 2012, a gain of 28 times. For the EIS investor that would have been close to 40 times their net investment tax free – a serious success story.
Learning point
The best prospectus deals can deliver big returns but be careful in your choice of deal promoter.
4. A rogue EIS operator
Having described a hugely successful offering from a reputable promoter in Case Study 3, I will now illustrate the other extreme.
Arc Fund Management (in various guises) promoted a series of prospectus offerings to its 100,000 strong mailing list. A few of these were successful but many were not. They were characterised by high share prices and costs.
It transpired that the chief executive of Arc was taking huge personal benefits by buying shares cheaply in small formative ventures and selling them at large profits in their prospectus offerings. He was eventually disqualified as a company director having conned many people, myself included.
Arc Fund Management went into administration at the end of 2009 but it was not alone in being unscrupulous when it offered shares to the public, so do beware.
Learning point
Dubious operators abound in the tax planning area and all public offerings should be viewed with great caution.
Summary
This chapter has discussed a number of the issues which you need to think about if you are considering either becoming a business angel for the first time or a more serious investor than you are now.
I would urge you to carefully think through my list of requirements to be an angel. This is not an activity to be undertaken lightly. It involves great risks, though these are coupled with the possibility of large profits – both of which can be helped by tax reliefs.
Even serial angels might consider some of the alternative approaches to investing in unquoted companies, such as VCTs or EIS funds, as a means of balancing their overall portfolio.
Throughout the chapter, I have emphasised the critical importance of understanding the risks of angel investing, of controlling those risks and of diversifying to reduce them. I make no apologies for repeating that angel investing is a dangerous game but with great scope for fun and satisfaction.
Chapter 3: Finding Investment Opportunities
Introduction
Finding good opportunities is key to good performance from your portfolio. At any one time, there are many entrepreneurs looking for funding and many angels interested in investment opportunities; the problem is finding each other, which is the challenge this chapter addresses.
Angels find deals in many different ways. Some meet an entrepreneur in a pub and invest in an enthusiastically described venture, some are invited to invest in a venture by a friend or financial adviser, and others have a structured approach and work their contacts or join angel networks or syndicates to access a stream of opportunities. This chapter urges you to take a structured approach.
Matching entrepreneurs and angels
Matching angels and entrepreneurs is a bit like young people dating – both parties are looking for a compatible partner, sometimes desperately. But there are differences. In the case of dating each party is broadly looking for the same thing, but this is not so in the angel world.
The entrepreneur wants money. He knows it is hard to find and presents his ideas in the way he feels will maximise his chances of success. If he not only gets the money he seeks but also gets the benefits of added value that is a bonus. But, first and foremost, he wants money and the terms, though important, are less important than the money itself. He believes his venture will succeed and so he sees the investment risks as low. He is not choosy about his investors and he is in a hurry.
The angel, on the other hand, wants to invest in several deals he feels comfortable with. He is aware he will lock his money into the venture and may lose all of it. He wants to spend time asking questions and considering the risks of failure and the chances of success. He may have value to add post investment. So he is choosy about his investments and he is in no hurry.
Due to these differences, there is an inevitable tension between entrepreneurs and angels (or any other investor) when a deal is being done and it is important not to allow a tough negotiation to damage the forward relationship on which success depends.
The importance of deal flow
Deal flow is a term used in the VC industry to describe the number of investment opportunities which a fund sees and is often quoted for a particular period.
The more opportunities you see, the more likely it is you can chose the ones you really like. As I stressed in Chapter 2, a portfolio of at least ten investments is needed to increase your chances of the occasional big winner. Only then can you expect angel investing to become financially rewarding.
The UK Business Angels Association (UKBAA) suggests on their website that “a typical business angel makes one or two investments in a three-year period”. If that is so the typical angel is not making enough investments to optimise his chances of an attractive overall return. By way of comparison, a professionally-run venture capital fund may take five years to invest its pool of capital in 20 deals. That is four a year and all VCs will tell you they screen hundreds of opportunities – though they would say that to justify their fees to investors.
The commonest complaint angels make when surveyed is that it is hard to find a broad range of opportunities – they can obviously only invest in what they see. Investing in the occasional opportunity that passes your way (which is what the “typical business angel” cited by the UKBAA appears to do) is fundamentally more risky than sifting through a steady flow of ideas looking for the gems and making ten or more investments.
So you should do everything you can to increase your deal flow.
How to find opportunities
Contacts
As with most things in business, the single best source of opportunities is your own contacts. As soon as people know you are interested in seeing deals they will start to come your
