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Qi3 Ventures Insight

Qi3 Accelerator leads syndicate investment in Phase Vision

It always takes far longer to close a deal than I imagine at the outset. There’s always some hiccough or another that introduces a few weeks of delay.

Anyway, I’m delighted to be able to confirm today that Qi3 Accelerator, working with existing investors Octopus Investments, has completed a £1.5m investment in Loughborough-based industrial inspection business Phase Vision.  I’ve joined the board as a non-executive Director, to support the development of the business in the aerospace, automotive and nuclear markets, and to represent our substantial Business Angel consortium.  Our syndicate comprises a wide range of Cambridge, London and East Midlands based investors.  Great task sharing between Tim, Paul and me, together with support from other investors, made this a real team effort.  Most importantly, the management and staff at Phase Vision have been a pleasure to work with throughout, seemingly unflappable in the face of our persistent questioning.

And this is why we started Qi3 Accelerator; to find great British engineering companies and provide them with the financial and management support they need to accelerate their development.  Phase Vision offers for me the perfect combination of a strong team, a super product that benefits efficient manufacturing and reduces environmental impact, and global export opportunities.

I’m sure there will be plenty of problems along the way – it’s a risky game investing in High Value Manufacturing, particularly in the midst of a prolonged economic downturn.  But in life you have to choose whether to be a spectator or a doer, and I hope to see Phase Vision do well.

Advice for Entrepreneurs: Part Eight – Due Diligence Process

I’ve been asked to join the panel at a London Business Angels investor club night this week.  The event will focus on the topic of due diligence.  To get the juices flowing, I’ll focus here on some key aspects:

Staged due diligence is vital

The amount of time and effort put into gathering information needs to be staged to be fair to you and to the prospective investee.  In stage 1 we simply evaluate the business plan, presentation or other initial interaction.  In stage 2 we ask more questions but take the answers at face value.  At stage 3 we seek to reach a detailed conclusion as to whether we would like to invest in the company.  This is the main stage at which we take the technology, product/service and market apart and seek to understand them thoroughly.  Finally at stage 4, we seek to ensure that the legal and financial terms are fully acceptable.  Our experience is that the decision to pass from one stage to the next should be taken seriously and with regard to the time and implied commitment involved.

Decide how much to do before agreeing terms

We’ve varied in our approach to the amount of due diligence we do before agreeing investment terms. On one hand a greater degree of upfront research will indicate areas for further discussion and investigation.  It will also uncover issues that change our views on valuation or our interest in investing.  On the other hand, an early term sheet shows commitment and gains exclusivity.

The company seeking investment should provide the information

When I started investing, I would spend a lot of time undertaking my own research into the market prospects for potential investments.  Whilst we still do this on occasion, it’s far more valuable to understand what the company knows.  Our approach now is to provide the company with a set of headings for the main due diligence, and expect them to populate a dropbox folder with their information.  This has the twin advantages of helping us to understand the depth of the company’s own understanding and providing the basis for the warranty disclosure letter at the end of the process.

Talk to customers

An invaluable part of the diligence process is a series of calls to current and prospective customers.  Are they happy with their interactions with the company?  Does the product perform? Do their projected orders correspond with the company’s sales projections?  A few structured calls undertaken by a market research professional can be illuminating.

Don’t overdo it

It’s possible to overanalyse a prospective investment.  This can result in wasted time and thus deflate the return on investment.  With early stage technology businesses, especially those that are pre-revenue, some questions cannot be rigorously answered and the decision will come down to your personal judgement.  I always ask myself the questions “will this piece of research contribute directly to my investment decision” and “do I think that the management team will find the answers post investment”.

Undertaking a structured due diligence process is a super way of learning about the business and its management team.  Executed properly it leaves me with the confidence to entrust the company with my investment, or to walk away from the deal safe in the knowledge that ‘this one’s not for me’.

Who invests in High Value Manufacturing? We do…

Readers of Qi3 Accelerator Insight will know that we’re absolutely passionate about investing in UK technology businesses.  We’ll soon be making announcements about deals that have closed, or are about to close.  It’s been an exciting few months for us, working as a team to evaluate some exciting companies and working with a range of investors to form syndicates.

Meanwhile, I’m pleased to open the first call of 2012 for proposals for Qi3 Accelerator.  See the news item for details, and please take the time to read through this blog and the rest of the Qi3 Accelerator web site before sending us your proposals.

Many happy total returns

It’s one of those jobs I do over the festive break, checking on the performance of investments during the 2011 calendar year, and thinking about where different classes of assets stack up against the roller-coaster risk of angel investment.  It’s been a pretty scary prospect.

As a starting point, let’s look at equities in 2011.  The FTSE100 index started the year at 5899 and closed at 5572, a fall of 5.5%.  The FTSE100 Total Return (TR) index, taking into account the dividends paid by these companies, fell by 2.2%.  With a high of 6091 in February and a low of 4944 in October, you could have gained 3% or lost 16% from the start of the year.  Expanding this to the FTSE UK All Share index, total returns were -3.5% and the FTSE World Index performed even worse, with a total return of -7.6%.  That’s all pretty alarming, and if you hold these shares within managed funds in your pension plan, the charges would see you with falls of about 9-11%.  I know of very few investors whose shareholdings appreciated in value in 2011, and the ones I do know relied on an income and reinvestment approach, rather than on capital gain.

Compare that with cash.  With UK RPI inflation at 5.2% in December 2011, interest rates at say 3% were a built in guarantee of losses during the year.  Nevertheless, despite the risk of holding a fiat currency, at least cash performed better than equities.

Bonds were mixed in 2011 with UK and US treasury bonds ending the year at historically low yields under 2%.  Corporate bonds showed high yields but significant risk. The outlook for 2012 has to be generally negative for gilts and corporate bonds, with huge uncertainty around the key indicators of long-term inflation, interest rates, growth, bank and sovereign stability.  Gold and oil did well, with gains of 11.7% and 15.5% in the year.  House prices in the UK fell by about 2% during 2011, with only London registering modest rises.  Surely the UK outlook for house prices has to be continued modest year on year real-terms decline?

So with that gloomy review of 2011, and 2012 looking no better for any asset class, where does that leave me as an early stage technology investor in UK engineering companies?  Surveys in the UK and US point towards long-term annualised returns of 20-25%, and that’s before taking the benefits of the Enterprise Investment Scheme into account.  The real picture for angel investors I know is far more mixed, with a few substantial exits dominating overall return.

The reality for this investor is that I’ve written a number of cheques, and I’m happy with the performance of all of the businesses so far.  So my loss is either 100%, or else I’m sitting on a share of their future successes.  I’m a firm believer that technology creates a great opportunity for good management teams to build businesses with excellent market share, growth and profitability.  Economic downturns are for me the ideal circumstances in which to build businesses and invest for the future, so I’m looking forward to 2012 with gusto.

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