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Qi3 Ventures Insight

Is there a future for High Value Manufacturing in the UK?

Two weeks ago, I was invited to the High Value Manufacturing 10th Anniversary conference. The series covered manufacturing and cleantech, attracting over 80 delegates, including some high-profile individuals such as the 2012 Nobel Prize (Medicine) winner – Sir John Gurdon, as well as the ex-Minister of Science and Innovation and current Chancellor of the University of Cambridge – Lord Sainsbury. I have known Lord Sainsbury for years, so it was nice to catch up with him and learn about his perspective on the current state of the economy.

There were a number of high tech companies from Cambridge and other locations at the conference. I personally presented a speech on ‘Investing in early-stage HVM gems’, and discussed the challenges of early stage investment. The presentation focused on opportunities that may open up for knowledgeable angels, in particular, the prospect for angel syndicates. I also highlighted some important investment factors, including: access to technical knowledge, business experiences, and required funding. Additionally, a good investor should consider the credibility of their co-investment partners. Naturally, this set a good platform to show the audience about the Qi3 Accelerator Evaluation process, and how this specific approach benefits early stage businesses. The presentation finished off with lessons learned from cohort analysis, emphasising a) the need for the team to show a credible business plan, b) realistic assessment of the technology, and c) the lead approach to business modelling.

Reflecting of the conference as a whole, it was clearly a meeting for cognoscenti. It will be interesting to see if it can influence and rebalance the UK economy and manufacturing industry.

Time for some quick due diligence?

There are so many investment prospects where I’m looking for some quick, independent feedback on whether the proposition makes sense in the wider market. Qi3 has recently introduced an Ask the Experts service to support investors undertaking due diligence, and entrepreneurs who seek to provide such independent evidence as part of their due diligence information.

The key when formulating this offering was just how amazingly interconnected Qi3 is with organisations and individuals in the innovation landscape.  The company has a huge range of access points to experts in a variety of domains.  So we’ve developed a strong but simple methodology to deliver this insight rapidly and at moderate cost.

Qi3 asked around and discovered that people would like to hear about 4-6 expert opinions accompanied with records of related conversations. They also like to understand the perspective of Qi3 in assimilating and consolidating the information. The desired time frame for such a service should be approximately 2 weeks. Obviously, the purpose is to provide an affordable service in this difficult climate, and a budgetary cost of £3,000-5,000 sounds good to most people I’ve asked.  Whichever side of a transaction you’re on, see how it can help you.

For further information, please visit our website or contact Nathan Hill

Advice for Entrepreneurs: Part 10 – 4 Steps Towards Understanding Your Investors

Just as it’s vital for me as an investor to understand the team and how it will deliver on the promises made in the Business Plan, it’s also essential that you as an entrepreneur get into bed with the right investors.

Many people are simply looking for financial support to take their vision from dream to reality.  But there are times when money is not enough to allow a business to blossom, and entrepreneurs can benefit from ‘smart money’. Here are four points that you should bear in mind when recruiting investors:

1) People who share your vision

A lot of investors – including me – wish to leave a positive impact on society by investing in fields such as cleantech and healthcare. As an entrepreneur, you should consider whether or not your proposition has such an angle and pitch to investors accordingly. Talk with your investors in detail and ensure that they know your sector and that their heart is in the right place.

2) People with more to offer than money

You have to know exactly the type of person you are looking for. For example: are you looking for a non-executive/executive director? Or do you want somebody with an extensive contact network and who knows potential customers or other investors? It is vital to find investors who have the right skillsets for your business.  As an investor, it gives me great pleasure to introduce companies to high-level contacts when the opportunity arises.

3) People who are reasonable to deal with

Check out your potential investor’s online profiles, think of it as a formal recruitment process to ensure you will be happy working with that person. There are a couple of issues that you should keep in mind:

a) Character. Do the investors always play hard ball or are they reasonable to deal with? Do they understand your needs and circumstances?  Of course you should put yourself in their shoes and try to understand their motivations.

b) Investment requirements. Make sure that you understand the investor’s desired return timescale. In other words, is the investor looking for a quick exit or does he want to invest in the business over a long time-frame?  Is this a big deal for the investor, or one of a large portfolio?

4) People who will support and understand your strategy

Timescale and cash requirements often change based on strategic decisions and external circumstances. It is important to ensure that your existing investors can follow your business and stand behind you through times of change. Otherwise potential new investors may question and become suspicious of your business if existing investors are not supportive.

A good investor is worth more than the gold he bears!

Five Ways to Finance Your Business

Financing a business is a tough decision making process – each entrepreneur’s circumstances are different, and equity fundraising is certainly not the best solution for everybody. Here are five common ways that start-ups finance their businesses:

1) Friends, family and fools

Despite the seeming disparagement, these people are far more likely to lend you money on easy terms and to be more forgiving if things go wrong.

My advice on this is a) do it with a proper legal agreement and b) visualise how your relationships will change if you lose all of the money. I speak from experience.

2) Get a hand-out (in old days from a charity, nowadays a grant)

If you qualify for a grant – for example, a product development grant from the Technology Strategy Board, or R&D tax credits from HMRC – then congratulations!

Grants are non-dilutive benefits and all that you have to do is to process a little paperwork and claim the money, after which you are responsible to nobody.

3) Angel investors

Angels are investing their own money.

Some (like me) see it as a diversification of assets into high risk, potentially high reward ventures. I also do it because it is fun – I like helping the companies in which I invest, and feel that I’m doing good by investing in manufacturing / engineering companies and supporting entrepreneurs whom I respect.

Some angels want to roll up their sleeves and have a lot of involvement with the business, whereas others just want to write a cheque and see you return it with a healthy profit on exit in a few years. Some are very wealthy, investing large six or seven figure sums in each business; the average individual investment is £25,000-40,000.

So to raise say £500,000, angels naturally form syndicates, where one (or several, like Qi3 Accelerator) leads the investment, undertaking the evaluation, due diligence and legal work on behalf of the group. But the principle is still the same – we are investing our own money and it hurts if we lose it.

Certainly if you are looking for help to develop the business as well as pure cash, angels are the best route. I have recently been involved in investment rounds ranging from £10,000 to £2.3m led by angels.

4) Crowdsourcing

Pretty new, but may be effective for some businesses.

My cautions would be on the legality of the arrangements (in some cases) and whether this route will raise you enough cash. On the other hand, it puts you – as the entrepreneur – in a stronger position if you have many small investors rather than a few larger equity-holders breathing down your neck all the time.

5. Venture Capital (VC)

By this I mean investment management houses that manage funds comprising other people’s money. During early stages of small business investment, these are mainly public funds (UK or EU). There are also a few remaining VCs who manage Venture Capital Trusts (VCTs) and other investment groups. VCs are generally interested in investing sums of £2m+ in companies although there are exceptions.

VCs generally seek tougher terms than angels, as the investment manager needs to monitor his investees. He needs to be accountable to his investment house for governance and generate management fees both from the investors and the investee companies.

So how should you decide which route to follow?  Of course you may well need different sources of finance as the business develops, but I’d suggest that you start by considering (a) the amount of money you need, (b) the strings attached by lenders / investors and (c) the support that investors can offer in addition to raw cash.  My starting point would generally be to model ‘bootstrapping’ the company with revenue from sales and income from grants / collaborative R&D partnerships before considering loans or equity finance.  As investors, we are always keen to help leverage these sources of finance, so our interests are well aligned.

Does your heart rule your head when you invest?

The Qi3 Accelerator investment evaluation process is (in)famously rigorous. We follow a defined series of steps in order to evaluate businesses against a series of criteria.  My head tells me that’s all good and rational, a business-like approach.  But experience tells me that many angels rely much more heavily on ‘gut feel’ to reach investment decisions. So what happens when the head and heart feel differently, and which should you follow?

It is true that the argument of using your head is strong and logical, and we should make our business decisions based on research and evidence. NESTA states that every investment should have three critical factors in place: 1) a great business idea 2) a great management team 3) great mentors. If any one of those is missing, then business angels would be better off encouraging the start-up entrepreneur to seek to improve their idea, management team or mentors before parting with cash.

But emotion will always be part of investing especially when facing convincing applicants. Recent statistics from SEI (http://www.seic.com/enUS/about/4895.htm) showed that more than two-thirds (68%) of high-net-worth individuals surveyed have let their emotions get in the way of making the best investment decisions. Additionally, Dr. Gerd Gigerenzer, social psychologist and the director of the Max Planck Institute of Human Development in Berlin, writes (http://paultrout.com/leadership/trusting-your-gut-feelings/), “… gut feelings are based on simple rules of thumb, what we psychologists term ‘heuristics.’ These advantage of certain capacities of the brain that have come down to us through time, experience and evolution, when people use their instincts, they are heeding these cues and ignoring other unnecessary information.” In other words, he argues that gut feelings help us to sense when something is afoot without having actual proof that it is.

Perhaps Dr. Gigerenzer has a point here. Looking at the statistics (http://f3fundit.com/blog/what-makes-a-good-business-angel-investment/) , approximately 80% of angel-invested businesses fail. However, if one observes angel investor activity from individuals who have been actively investing in the industry, then the failure rate drops to about 60%.

So head or heart? And before you ask – yes it’s a live case for me.

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