HNW Magazine July 2013 Issue

£2.95

LINKING ENTREPRENEURS & INVESTORS UK-WIDE High Net World Magazine July 2013 Issue

INTERNATIONAL 268,000 US Angels

ENTREPRENEURS Marketing Your Business to Investors

WEALTH Expert Commentators?

Au Contraire!

ANGELS Valuation vs Ownership

THE FUNDING ISSUE BOOTSTRAPPING - CROWDFUNDING PITCHING - MARKETING - PLANNING

Q Court, 3 Quality Street, Edinburgh, EH4 5BP For further information, please contact Stephen Paterson on: Telephone: 0131 625 5151 spaterson@hwca.com

FIRST WORD Expert Commentators? Au Contraire!

A Dresdner Kleinwort study looked at Wall Street’s predictions of interest rates over a 15-year period and com pared them with what interest rates actually did, with the advantage of hindsight.

It found an almost perfect lag. If in terest rates fell, Wall Street would wait six months and then predict that interest ates were about to fall.

When interest rates rose, Wall Street would wait six months and then de clare that interest rates were about to rise.

All this after-the-fact prediction posturing is a longhoned tradition amongst Wall Street analysts and economists who have consistently missed these significant market turning points for nearly a century.

"Analysts are very good at telling us what has just happened but of little use in telling us what is going to happen in the future," the report concluded.

JK Galbraith described them as the folks who exist only to make Astrology look respectable!

Hey, if I forget my phone number will these guys help estimate it for me?!

Yet, despite the type of losing record that would relegate a football club from the top division to the empty-stadium leagues, these same folks remain the quote machines for the headline writers.

Sadly there’s more. From 2003 to 2007, Standard & Poor’s predicted that 0.12% of a certain type of mortgage bond would default.

In hindsight, every ‘expert’ claims they knew the 2008 crisis was coming; the loony lending and leverage, the mezzanine mixtures of good and bad debt, the runaway noughties housing market.

Yeah, right.

Yale economist Robert Shiller said: “In particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said.”

In reality, 28% did. Thereafter in 2008, analysts predicted the S&P 500 would earn $94 per share. In reality, it earned $15 per share. This was followed by a 2008 prediction by oil giant Gazprom’s CEO who said oil would soon hit $250 a barrel. Instead, it soon hit $33.

What’s next? A specialist who can get the past wrong?

If we know the Wall Street wunderkind are continually getting it wrong at all the important points then why listen in that direction? Why give them your money?

Why not look the other way instead.

The next time they say the good times are here, run for the hills. And when they tell you the skies are going dark, grab your sunglasses. Hey, I think they call that contrarian!

By Alan Steel P.3

Steel’s View P.8

ARE YOU PAYING TOO MUCH FOR POOR INVESTMENT ADVICE? IS YOUR PENSION FUND GROWTH BEING HELD BACK BY EXCESSIVE FEES? HAVE YOU RECENTLY RECEIVED A LETTER INCREASING THESE COSTS YET AGAIN? HAVE A CLOSER LOOK AT HOW MUCH YOU ARE NOW PAYING AND WHAT YOU GET FOR IT, AND THEN COMPARE THOSE NUMBERS WITH THESE:

3% 0.6% 0.0%

The annual growth your investments and pension fund have to achieve each year to simply cover the total annual and switch fees now charged by many wealth managers.(1)

The maximum annual management fee charged by Scotland’s’ largest independent wealth manager – Alan Steel Asset Management.

Practical Business P.32 The fees imposed by Alan Steel Asset Management on all portfolio and pension fund rebalances and fund switches.(2) The percentage of existing Alan Steel Asset Management clients who would recommend Thewealth Basics for our and pension management services to a friend or a family member.(3) Running Your Business The number of times Alan Steel Asset Management have been voted “Best UK independent investment advisers”. This is more than any other Wealth manager in the UK.(4)

01506 842 365

Or visit www.alansteel.com

The no obligation number to call today to find out how to get your investments and family wealth back on to a tax efficient, fair cost and better performing track.

Mike Williams Alan Steel Asset Management is authorised and regulated by the Financial Services Authority registered in Scotland No. 58014 /VAT registration No. 446593714 / Nobel House, Linlithgow, EH49 7HU / Fax: 01506 845074 (1

Assumes annual charge of 1% and 2 x 6 monthly portfolio rebalances at cost of 1%.

(2)

Source: ASAM (3) Source: Moneymarketing magazine. (4)Source: ASAM.

CONTENTS

Steel’s View P.8

First Word Expert Commentators

P3

Emerson Financial Markets Halftime

P7

Alan Steel Thoughts from the Beach

P8

Mike Williams Beyond Summer’s Haze

P11

Infographic The Eurozone

P17

Feature The Halo Report

P19

WAW What Angels Want

P20

WEN What Entrepreneurs Need

P21

International 268,000 US Angels

P23

Feature The Biotech IPO Market

P25

Funding Special Reports: Crowdfunding Business Sugar Daddy The 9 Pitching ‘Must Haves’ Bootstrapping to VC

P27 P30 P31 P32

Practical Business The Business Plan Stickiness

P35 P37

Diatribe Batista’s Missing $Billions

P38

GDP - Gross Distortion Predictions

Mike Williams P.5

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EDITOR

The Financial Markets’ Score at Halftime It went fast. With the first six months of 2013 in the record books (literally) we’ll take a quick pause to see what’s passed us by and what’s to come.

Hindsighters aside, most market soothsayers would not have predicted January to June as pushing major market averages up to their best start to a new year since 1999.

And before you start playing pre-dot.com bubble associations, the dynamics now look a lot different than they did then.

Sure, the market’s been a yo-yo at times but the Dow Jones is up a gravity-defying 14%, undoing the historical precedent where US stocks have slumped during a president’s first year in office (usually only up about 5% going back to 1949), first or second term, and Obama fans on Wall Street are harder to find than a happy Facebook IPO investor just now.

Austerity be damned, the boys in D.C. who cleaved $85 billion from the Federal budget witnessed little by way of ensuing street mayhem, or Fiscal Cliff misery for that matter.

In fact it would be exceedingly fair to say the European markets have held their own despite the European Union bailouts and recessionary-state economies…so far…with Germany’s DAX up over 4% and even France in the black and up around 3%.

Sadly, the not-so-great 2008 recession saw big bank CEOs remain in position, including JP Morgan’s Jamie Dimon and Goldman’s Lloyd Blankfein, who in the more sadistic (nay medieval) era known as Reagan’s 1980′s, may well have been knighted by now…perhaps those accolades are yet in the post.

Equally wretch-inducing was the benchmark report from Rolling Stone who revealed the part played by ratings agencies Standard & Poor’s, Moody’s and their ilk in the cash-for-triple-AAA-ratings scandal that helped shovel coal on the noughties credit and trading excesses.

They, alongside the FSA or FCA have been impressively inconsistant in their pursuit of fiscal monitoring.

Short tirade now ebbed, we end on the the perhaps-toolate investor herd finally migrating away from bond funds in respectable masses (now that they’ve missed out on four years of equity market gains) moving out over $60 billion in June and breaking the record for that month.

Hopefully they’ll put that money into stocks and enjoy the ride through what looks to be a continuing, albeit yo-yoing, secular bull market.

By Ed Emerson P.7

STEEL’S VIEW

Thoughts from the Beach

By Alan Steel If you saw the picture of David Cameron and his wife having lunch on an Ibiza beach you will now know where I had a long Ibiza lunch (lots of liquid refreshment, seafood, and laughter) a couple of weeks back on Cala Benirras.

Fran and I and a young cousin from Canada were joined

by Jim and his 3 mates at Restaurant 2000 right on the beach famous for its sunset hippie drummers.

I first met Jim 32 years ago when he used to call on me as a young impoverished fund manager, though being based in San Francisco running a US fund probably helped his future prospects.

And we'll return to Jim later.

Let me paint the picture of what investment and stockmarkets looked like in 1981 when Jim and I first met.

In 1966 the Dow Jones Index, a so called measure of US corporate wealth, topped out at 995.15, up over tenfold from the start of a long term Bull Market which began in 1942 when economists at the time predicted years of misery given the state of the world at the time (WW2).

As we have come to expect since they were completely wrong. And just as an aside, to demonstrate the scale of their errors today, analysts at JP Morgan prepare a list each year of "Stocks to buy" --- and "Stocks to avoid at all costs."

P.8

However one of the Stocks to avoid, over the last year, has outperformed 71 out of the 72 on their buy list.

From 1966 world stockmarkets then fell into what's known as a Secular Bear Market, which is obviously the opposite of a Secular Bull.

These are long term cycles, for example, over the last century there were 3 Secular Bulls, from 1921, 1942, and 1982.

Between 1966 and 1982 the Dow Jones fell from 995.15 to 776.9, that's a long time going nowhere, the consensus at the time was that this underperformance would continue for years, given that economists saw no hope for the US economy in particular.

Now of course history books show 1982 was a time of opportunity for optimists, given the Dow Jones went from 777 to hit over 11,723 by March 2000, and that ignores reinvested dividends which over long periods can amount to over half total returns.

And what were the "experts" saying as we moved into the New Millennium?

Do you remember the headlines? "A golden era" or, regarding stockmarkets, "a plateau at worst" --thousands gave up their jobs to day trade stocks, and anything with dotcom in its name was a sure fire winner. But sure enough

by March 2009 the markets had fallen 44%!

STEEL’S VIEW-

Against The Herd Now I know I write often about the benefits of going against the herd but I concede it's not at all easy, thanks to how our brains have evolved over thousands of years, where the least bit of perceived danger fires adrenalin from the hypothalamus encouraging panic to win over considered thought.

And I often explain how difficult it is to spot a trend.

Despite years and years of folks seeking an alternative, there is no better method to build wealth than to Buy Low and Sell High.

And buying low is at its most effective when you are early into a trend. But trends are obvious to the majority only in hindsight, which is too late as you discover when you've followed the herd once again. (Some wag said, just buy high, sell low, and keep repeating this until you've no money left).

I describe trend spotting as this --- you walk along a road you've walked along before, often and without incident. A brick hits you on the head. No-one there!

What is it? A fluke! For a while you walk along this road rather nervous, but no more bricks so you become confident again --- then bang, it happens again!

What's your conclusion? A coincidence perhaps. Can't be a fluke, eh? The third time it happens though it's a trend! Pity you didn't spot it sooner.

Now let's return to the stockmarkets. When you examine the growth returns --- never mind the gains from reinvested dividends --- from the beginning of Secular Bull Market periods, until the end, it's plain that spotting the trend early is worthwhile --- a six fold increase from the 8 year Bull starting in 1922, a tenfold gain in the 24 year bull beginning in 1942, and a fifteen fold increase from '82 to 2000!

So is there a way to spot the probability of a trend more quickly than suffering the third brick? After 40 years in this business looking for answers and, as a slow learner, I'd say it's about studying the habits of those experts rarely quoted who have dedicated a lifetime to studying what works and what doesn't.

Take Ned Davis Research for example, who study all manner of historical data. Their unique studies of investor sentiment give you an edge at market turn, short and long term.

Global Strategist Tim Hayes the other day , on the subject of Secular Bull Markets, said "if it looks like a duck, sounds like one and swims like one, it's probably a duck" --- or in this case a Bull.

While most investors have been running to the edge of the mental playground thanks to the never ending predictions of Armageddon, in the 4 years since March 2009, the US stockmarket is up over 22% pa, as it was from 1921, 1942, and 1982.

As to my old pal Jim, who foresaw the Tech boom from these early days 32 years ago, his spells of fine tuning the 3 bricks indicator to only one, has helped him to a position within the UK top 100 Rich List. (But at least he insisted on paying the bill).

And as Tim Hayes and the font of all knowledge Joe Kalish believe, we are heading for years of stockmarket outperformance, what's Jim's thoughts these days?

He reckons the next big thing, perhaps bigger even than the Tech boom, is Biotech.

He's written a book on it - "Cracking The Code" - and a fund is being launched soon, not for the fainthearted I'd guess, (and do remember Regulators have stopped me giving advice).

But with Jim's record I'll be slinging in a few bob, and if it works, and I'm spared, I'll pick up the tab next time Jim and I sit down for an Ibizan lunch.

Salud!

Alan Steel Chairman Alan Steel Asset Management P.9

VIEW FROM MANHATTAN So what’s going on?

The short answer is that companies are not spending as much. They have record earnings but they are holding on to a lot of the money.

Consider the places where they would spend their money:

Beyond Summer’s Haze

By Mike Williams

● Capital expenditures have not risen much ● M&A activity has been modest at best ● Buybacks have increased, but they are nowhere near levels before the financial crisis.

For example, actual buybacks were $100 billion for the first quarter of 2013. If you go back to Q4 2007, there was $142 billion in buybacks, Q3 2007 there was $172 billion ● Dividends have gone up slightly, but they have gone down as a percentage of earnings.

For the S&P 500, the payout ratio (the dollar amount companies are paying out as a percentage of earnings) is currently 36 percent; in Q3 2007 it was 45.8 percent.

Why Is This Happening?

The mind is a terrible thing when it comes to markets and emotions.

We did a video several months ago for American Airlines pilots as a part of a program to help them gain benefit from the changes afoot at their company.

Specifically, it was designed to show how much today looks a whole lot like 1982 (don’t worry, it was really crazy then to say the future was bright…..I was there!

One more thing; when and if we do get that big pullback to shake the crowd up, rest assured you will feel that I’m a total dummy to suggest good things about the future. That’s your clue to, well, buy the setbacks.

All About Cash Cash set a record in the first quarter of 2013 on an absolute basis: $1.093 trillion in the S&P 500. In fact it has set a record for 18 of the last 20 quarters.

Now it’s a bit early to say for sure what will happen in Q2, since only about 25% of the S&P 500 has reported, but early indications are Q2 will be well into a new record as well.

They seem uncomfortable spending the money.

Why? The commentary seems to indicate they don’t have a lot of visibility or confidence in future growth.

In other words, the 200809 events scared the $%^& out of them too. Further, their crystal balls have not cleared enough yet since then to tell them ”the future is always cloudy” you boneheads.

The good news is that with so much cash, companies are likely to at least continue to raise dividends.

Could this help cushion the massive shift which still needs to unfold as trillions of dollars learn the hard lessons about bonds over the next few years?

We surely hope so.

And The Winner?

The sector that has the most cash is technology. That sector accounts for 41% of all the cash in Q1. And the cash hoard is growing fast, up 11% year-on-year.

P.11

HEAT 100 VIEW FROM MANHATTAN

The HNW HEAT Scotland 100 High Growth Company Publication & Event Series Half Way There So here we are at roughly the mid-point of the dreaded summer haze, which always seems to grip the market as the heat grips the country.

And with the masses moving on toward vacation there's plenty of time for folks out there to create hype at the media desks and support their own business models and agendas.

Tuesday 21st this May 2013 Remember above all; it is no longer about valid,

important news. It is all about traffic, eyeballs, clicks and ad revenue.

Once you get your head around that, the knee-jerk reactions based on fear tend to subside.

The Latest?

Well, let's see. We've seen many market ghosts dissipate over the last few weeks. In particular, fears of the Fed screwing us all by jacking up rates has subsided, as have those about Syria, Iraq, Greece, Portugal, etc., etc., etc. We may even be getting to see the early stages of a bond bounce in the cards. But remember to sell rallies from here.

The Gold guys are still around. Paulson boldly told a conference last week "he was not worried about gold's fall."

Of course he isn't. Did anyone really expect that type of admission before he has a chance to liquidate?

That's good news by the way.

Everyone agrees thatSPEAKERS Europe is in a growth recession that could be secular rather than cyclical. That, in turn, is slowing the growth of emerging economies by Ray McLennan, Angels Den depressing their labour-intensive manufactured exports, along with their commodity exports.

Stephen Paterson, Haines Watts

No one is expecting a boom or a bust out of the US.

Carlos Alba, Carlos Alba Media

It's Really About Earnings Right?

Ed Emerson, HNW Magazine

Even with the paltry assumptions about global growth, industry analysts are remarkably upbeat about earnings.

They expect that S&P 500 earnings will increase 6.9% this year and 11.4% next year to a new record of $123.61 per share. For the S&P 400 MidCaps, they expect gains of 6.7% and 15.4%.

And for the S&P 600 SmallCaps, they are estimating whopping growth rates of 14.9% and 21.5%. Even if we shave a few points off these elements, the market is far from "bubbly".

But the loud debates aren't always about issues that investors care about. More often than not they tune out the noise.

That, however, was impossible to do during the summer of 2011 when S&P downgraded Treasury debt as a result of the impasse over the debt ceiling.

The resolve back then was a bipartisan agreement to sequester $1.2 trillion in federal government spending over a ten-year period if no other agreement could be reached to reduce the federal deficit.

And right on time that Act was implemented on 1st March of this year, with a spending cut of $85 billion for the current fiscal year. The next round of $109 billion for the 2014 fiscal year will start on 1st October.

Got to Mix In Bad News Right?

As a backdrop, Dr. Ed Yardeni (Yardeni Research) and his team remind us that, "...last week, the IMF once again lowered its forecast for global economic activity this year, and next year."

The deepest part of the haze lay dead ahead, in the doldrums of August. We are indeed on the lookout for a summer dip before the next "upside surprise" arises. The support is there for corrections so let's hope we get some.

P.11

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P.14

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The national association for business angels in Scotland, with a membership network of hundreds of investors including those operating individually, many of the best known groups and syndicates, and a number of significant private offices.

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P.15

FEATURE: EUROZONE

P.17

“As entrepreneurs we understand that our biggest risk will always be the performance of our business.”

Pension led funding for growing your business may be the answer (see page 35) Your part-time, commercially focussed Finance Director.

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HALO REPORT

What Angels Want & Entrepreneurs Need‌.

P.19

HEAT 100 WHAT ANGELS WANT It’s the limited partners who get screwed by this stuff. If they had money in both firms, one deal would have turned $2mm of their money into $16.4mm (8.2x), the other would have turned $5mm of their money into $17mm (3.4x).

The HNW HEAT Scotland And the firm offering $5mm for 20% will likely have a $500mm fund size (or more) and will be making 100 High Growth $10mmCompany or more per year in management fees.

This happens all the time in the VC business. And it is Publication & Event Series why USV is committed to small fund sizes, small rounds, and smaller valuations.

What Angels Want & Tuesday 21st May 2013

Entrepreneurs Need….

Valuation vs Ownership

By Fred Wilson, AVC The Challenges Facing the VC Industry Some investors are ownership focused. They want to own 20% of the business but care less about the valuation.

Let’s take a hypothetical Series A round. An entrepreneur comes to USV and pitches us and we like what the company is doing and we offer $2mm at $8mm premoney/$10mm post-money.

The $2mm buys us 20%.

Another firm shows up, a firm that is less valuation oriented, and they offer $5mm for 20% of the business, which works out to $20mm pre/$25mm post. The entrepreneur suffers the same dilution but gets $3mm more to work with.

From the VC’s perspective, there isn’t that much difference. Let’s say the company sells for $100mm at some point. The first deal would produce $20mm in proceeds at sale, an $18mm gain, and a $3.6mm carry if you charge 20% as we do at USV. The second deal would produce the same $20mm in proceeds, a $15mm gain, and a $3mm carry if the other firm charged 20% carry. If they charged 25%, as many do, then they make $3.75mm, which is more than the $3.6mm.

P.20

We lose a SPEAKERS lot of deals to firms whoRay aren’t committed McLennan, Angels Den to any of those But Watts Stephen things.

Paterson, Haines that’s life. Carlos We have made Alba, Carlos Alba Media our LPs a Ed fair bit ofHNW money Emerson, Magazine and we expect to make them a lot more in the coming years. We keep the fees low and try to produce big gains. That’s our model.

You might ask “how can taking $2mm for 20% be better than taking $5mm for 20%?” and you’d be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.

David Karp raised $600k, then $4mm, then 5mm, then $25mm, then $80mm (or something like that). And at the time of the sale to Yahoo!, he owned a very nice stake in the business even though he had raised well north of $100mm.

He did that by keeping his rounds small in the early days and only scaling them when he had to and the valuations offered were much higher.

It’s a big money game of asset allocation. When you team up with VCs who are playing that game, you are playing that game.

WHAT ENTREPRENEURS NEED Focus your mission statement Make sure that everything your business does is focussed around what you want to achieve. This should be something important to you and the business, but also should be something that your desired investor will be able to latch onto. Everything about your business should be coherent, make sure that none of your motives contradict each other and that you have a clear business identity.

Financial Security If you have to hire extra help, then do so. Your books will have to balance perfectly, with absolutely no loopholes. If an investor finds a problem with your numbers then they will pull out straight away.

Your finances have to be honest and correct or you won’t stand a chance of attracting investors.

What Angels Want &Haze Beyond Summer’s

By Mike Williams

Entrepreneurs Need….

Marketing Your Business to Angels

By Richard McMunn, How2become Angel Investors can mean life or death for small companies, and can give your business the urgent capital that it needs to grow and develop.

There are a few things that you can do to help attract investors to your company, but the main thing is to make sure that you make people believe that they will get a solid return on their investment. There is no way that people will pump money into something unless they are reasonably certain that their money is safe, and that it will grow in the future.

What type of investor do you want?

Since angel investors are all individuals, there is no one-size-fits-all way of attracting them. Before you do anything to attract anyone, you need to decide exactly what type of investor that you’re looking to attract. Are you looking for someone who is excited by the prospect of creating something new, with a real passion for the product or service you are providing?

Are you looking for a pseudo-philanthropist, someone who wants to see a good cause being undertaken, who is not so driven by profit? Do you want somebody who is purely interested in figures; who will be pushing for high returns? Or are you looking for something else altogether? Once you have decided exactly who you want, then you can start to focus on attracting your investor.

Active Involvement Make sure you show any potential investors that there is room for them to be actively involved in your business.

There are very few investors who will be happy to part with their money and then just sit back and wait to see what happens to it.

Let them know that they will be consulted on major decisions and that they can see first-hand what is going on in the company.

Exit strategy There will be a point at which your investor will want their money back, and the profits that you have generated for them. They will want to see before they invest that you have an exit strategy lined up for when this eventuality does occur. Make sure you have thought through the process of how the business will make the transition to cope without the involvement of your investor.

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Business angels More than just money Millions of ÂŁs, Thousands of jobs, Hundreds of deals, One Network...

LINC Scotland is the national association and representative body for the business angel community in Scotland, and was a founder member of the European Business Angels Network (EBAN).

Since our establishment in 1993 our members have made investments in hundreds of companies.

EUROPE & SCOTLAND European Regional Development Fund Investing in your Future

of millions of their own risk capital, on average levering three times more from other sources.

Just as importantly they have invested their own skills and experience in the next generation of SMEs. The companies supported have created thousands of high quality jobs in the Scottish economy.

www.lincscot.co.uk

INTERNATIONAL 268,000 US Angels with $23BN in 67,000 Co’s

By Kent McDill The world is changing for angel investors, the ultrawealthy looking for start-up companies to fund.

For decades, angel investors, who have an ultra-high net worth, have placed huge sums of money in the hands of start-up entrepreneurs, getting in on the ground floor of what they hope will be successful investments.

The fact that they are extremely wealthy allows angel investors to take chances whether others might not be able to.

They usually demand a high return on investment as What Angels Want & reward for taking a chance on an unproven commodity.

Entrepreneurs Need‌.

The Center for Venture Research at the University of New Hampshire estimated there were some 268,160 angel investors in the US in 2012, with total investments of $23 billion in more than 67,000 companies.

But now, with the significant drop in start-up costs related to a similar decrease in technology costs, angel investors are able to get in to a company for as little as $25,000, according to a story by Financial Advisor.

that a new relationship has been forged between registered investment advisors and angel investors.

While some angel investors operate solo, many angels are banding together in angel groups, who use expertise and contacts from different members to create a larger pool of resources and knowledge while spreading the risk involved.

Angel investors are not the norm even in terms of Ultra High Net Worth investors.

A Spectrem Group study from Q1 of 2013 found that among the UHNW ($5m to $25m net worth, not including primary resi dence), 94% consider the level of risk with investments, to be the highest consideration.

When asked to pick one concern, only 39 percent of the UHNW investor selected level of risk associated with investments, where 26% selected the tax implication of investments.

Smallbiztrends.com said average investment size has dropped from over $500,000 in 2006 to just over $300,000 in 2012.

A 2012 Spectrem Group Perspective on investors with net worth over $25 million indicated they had 25 percent of their portfolio in what is considered alternative investments.

FA revealed that the drop in cost for start-ups is such

This includes private placements.

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FEATURE: BIOTECH IPO’S

What Angels Want & Entrepreneurs Need….

The 2013 BioTech IPO Phenomenon

By Luke Timmerman The year is only half over, but one of the biggest biotech stories of 2013 is going to be the resurgence of the biotech IPO market. It’s a good news/bad news story, depending on where you stand, and how far you look out into the future.

First, the good. The IPO surge is a vote of confidence in biotech from generalist investors who have spent years ignoring the industry. It’s good news for biotech entrepreneurs and venture capitalists who back them.

A lot of money will get pumped into researching and developing drugs for diseases that have been long neglected, likeDuchenne Muscular Dystrophy. Regional innovation clusters will get a boost.

Many small companies will have more negotiating leverage when they talk to Big Pharma companies about acquisitions. It might spur more much-needed venture investment in biotech startups.

That’s all wonderful. But here’s the downside.

This IPO party won’t last long, probably no more than a few months. There are only so many good private companies worthy of graduating to the public markets.

If the past is any indication (remember the genomics craze of 2000?), there will be a hangover when it ends.

Quite a few investors, big and small, will lose money and lose interest. Companies would be wise to fill up their coffers now, and stay disciplined in their spending.

So far this year, 24 life science companies have debuted on the public stock markets, based on my review of data from Renaissance Capital.

That’s about double the number of IPOs you’d normally see in an entire year in the cautious world of post-financial crisis investing.

In very short order we could see as many as five more biotech companies take advantage of the new investor appetite for biotech.

Agios Pharmaceuticals, Cellular Dynamics, Heat Biologics, Conatus Pharmaceuticals, and OncoNova Therapeutics are all on deck.

What’s driving this surge? There are some fundamental reasons to be positive about biotech, but this is also about herd behavior in the markets, and greed.

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CROWDFUNDING The Breedon Report

By Jude Cook, Sharein When you’re working hard to build Scotland’s first equity crowdfunding platform, it’s critical to have access to every piece of relevant information about how the crowdfunding sector in general is developing.

So I was eagerly looking forward to the recent publication of a report commissioned by the Glasgow Chamber of Commerce entitled ‘Crowdfunding – The Scottish Perspective’

What & I should sayAngels at the start thatWant I was delighted to provide some input into the research process carried out by Tim at Twintangibles. I’ve summarised a few of the key points from the Report below.

Entrepreneurs Need….

Do SME’s in Scotland need money?

A no-brainer. Yes. The Report shows that SME’s are looking for cash for innovation and new product development, followed by expansion, R&D, startup seed capital, working capital, with company maintenance and miscellaneous reasons bringing up the rear.

The Breedon Report estimated the supply and demand of finance for SME’s at £26 billion and £59 billion respectively. With estimates showing that $2.7 billion was raised via crowdfunding globally last year (est. $5 billion 2013), the question is can crowdfunding can help the 56% of Scottish SME’s who have stated that they’re actively seeking finance.

Yet, on the available statistics, crowdfunding seems to be taking off slowly in Scotland.

Let’s look at UK figures: £200 million raised with crowdfunding last year (est. £300m 2013). With the Scottish economy representing around 8% of the UK economy, you might expect to see a similar proportion of funds raised via crowdfunding (i.e. £16 million). In reality however, estimates show that funds raised north of the border last year might be significantly lower – perhaps even as low as £1 million.

Why? A business community that understands crowdfunding?

It’s encouraging to read that people do seem to be aware of what crowdfunding means in general terms. But dig a little deeper and it’s not all positive.

The Report identifies a lack of detailed understanding about the different types of crowdfunding (reward, equity, peer-to-peer lending and donation-based).

Although P2P lending is the most successful type of UK crowdfunding in terms of funds raised, it is the leastP.27

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CROWDFUNDING Breedon Report (…cont.) well known. The highest profile model is reward-based crowdfunding – no doubt due to the high profile of Kickstarter.

Part of the reason for this limited awareness might be the fact that there are very few platforms based in Scotland. At this point in time, none that provide the ability for companies to seek equity crowdfunding – something that we’ll change with the launch of ShareIn of course.

Encouragingly, there’s evidence that institutions and organisations are starting to understand crowdfunding – whether that’s in the form of the West of Scotland Loan Fund becoming increasingly comfortable about match funding against cash raised via crowdfunding methods or banks that are increasingly recognising it as a viable alternative in situations where they are unable to lend funds.

Why Is Equity Crowdfunding So Important?

I’ve blogged about it before so I won’t simply repeat myself here about why it’s so important for us to make sure high growth companies can access funding. But the Report confirms that the UK is identified as a leader when it comes to equity crowdfunding.

We might have complex legislation but the reality is that crowdfunding via equity is often heavily regulated and only allowed in certain countries. In the UK, we’re seen as being at the forefront of developments. For example, the US are experiencing tortuous difficulties in

enabling the JOBS Act. Equity crowdfunding campaigns in the UK raise around £150K on average.

Compare this with the average figures for P2P lending (£50K) and donation (£22K) campaigns. The larger sums will tend to be more attractive to high growth businesses.

As you would expect, it’s also important to appreciate that the average size of investment per individual is much smaller than traditional investment methods when using equity crowdfunding.

The model works because of the long tail, as shown by the research which indicates that the average sum invested per equity crowdfunding is somewhere between £600-£2,500 – significantly lower than if the money had been raised using more traditional methods.

Is Scotland Different?

At this stage, it’s impossible to collect ‘Scottish’ figures accurately. Yet there is one point that is hugely important to all of us here at ShareIn – and indeed was a major part of the reason why we’re committed to getting our platform up and running successfully.

To quote directly from the Report:- ”…no Scottish project has successfully raised equity crowdfunding on any of the main platforms” This is astounding to me, clearly identifies the need for progress to be made and provides yet more evidence that there’s a demand for a platform such as ShareIn that can facilitate this process.

It certainly looks as if Scotland is behind the crowdfunding curve.

What Does The Future Hold?

Now that it appears to be commonly accepted that crowdfunding will become an increasingly important part of the funding solution for many growing companies, it’s my hope that this Report will act as a clarion call for us all, within the crowdfunding industry and further afield within the wider business community, to work to encourage a greater understanding of crowdfunding and where it can be used to help businesses succeed.

It’s great to see Twintangibles making the initial foray into collating the information that’s so badly needed about crowdfunding in Scotland.

It’s clear to everyone that the sector is on the cusp of explosive growth.

We now have a solid base to accurately assess what’s going on and I for one will eagerly await any updated reports in the future.

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HEAT 100 FUNDING

Why Do Our Businesses Need A Sugar Daddy?

dered Sir Alan being reminded lastweek by advisor Karren Brady that he had chosen an all-female final line-up?) but in terms of investors.

By Jude Cook, Sharein

Current statistics show that whilst women own nearly half of the wealth in the UK, the percentage of business angels actively investing in the UK is no more than around 5% of the total. It’s a shocking statistic and simply just not good enough.

OK I admit it. I watched the final of The Apprentice.

Billed as a tumultuous tussle between baking and botox, a somewhat divisive (and often-derided) form of business-lite entertainment peddled for the masses it may be.

But even when viewed through the lens of entertainment, the show can still shine a light on so much more than just the comedic failings of individuals from a range of backgrounds whose every false step under pressure is beamed back to a gleefully critical public.

Let’s deal with the business issues first. Where to start?

Lack of defensible intellectual property. Non-existent talent management team.

Flimsy experience.

The UK Business Angels Association has carried out much work in this area and Jenny Tooth will be leading a high-profile campaign to ‘Beat the 1:20 Ratio’ during the coming year.

How crowdfunding is helping to address the imbalance We’re still in the early days of a revolution that’s taking place in early-stage funding, but my strong belief is that by crowdfunding, you are breaking down the old boys network mentality and democratising finance.

The list could go on. Ignoring the apparent failings of both embryonic businesses, it prompted me to reflect on the gender issues surrounding start-up finance.

We are opening up opportunities to invest and by removing perceived barriers, we’re increasing the flow of money to the businesses who need it most. It’s about finding people who are willing to invest in businesses they believe in. And the greater the flow of cash there is, the more successful all of our early stage businesses can be.

Female investors are desperately needed. Not in terms of the competitors (who can forget a somewhat bewil-

It doesn’t have to be all about the Sugar daddies. Let the mummies have a go as well!

(Tip: never tell someone that you have no intention of exiting when asking for an investment.)

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We’re doing ourselves – as a country – a disservice if we fail to lower the barriers which are somehow preventing women from investing. To put it bluntly, entrepreneurs – both male and female – are missing out on cash that should be available to help their businesses grow.

FUNDING

The 9 ‘Must Haves’ In An Investor Meeting

4) Solution Describe what the solution looks like. What features or aspects within your solution address the problem?

By Aswin Natarajan, Techstars

We’re officially past the halfway mark at Techstars. With only 4 weeks to go until the end of the program, the teams are gearing up for the final sprint towards Demo Day and securing investors.

Today, Luke Beatty gave a talk about how to make an investor pitch desk. It was loaded with tons of tactical advice and I think it covers some valuable basics.

‘Must Haves’ in an Investor Meeting 1) Problem You have to explain why your company needs to exist.

You can do this in lots of different ways. But the problem you describe needs to be as clear as possible.

2) Business Overview “We use X to solve Y by way of Z.” This may be similar to what others do – for example both Zappos and Nike are companies that sell shoes online – but they do so differently and offer different value propositions to their customers.

3) Insight Is there anything that gives you unique authority, insight or access to information which others can’t easily acquire themselves. Give them a reason to trust that you will know how will solve your problem.

5) Traction Communicate traction by revenue, customer acquisition and usage.

6) Team You have to be able to sell your team. It doesn’t always have to be on your educational pedigree but that helps too. Talk about hustle, domain expertise, camaraderie and experience. Reiterate why you’re worthy of being trusted.

7) Revenue Model What’s your business model? Annual? SAAS? Monthly? Licensing? Rev-share? You don’t need to include numbers so much as the formula that shows how you’re going to get to where you need to go.

8) Financials How much money have you raised? How much are you planning to raise?

9) Appendix Have additional slides within which could answer questions that may come up but are not directly related to your pitch.

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HEAT 100 FUNDING Fortunately, our core team was capable of engineering anything that we wanted to build, which allowed us to develop unique technology without hiring any employees, but our rate of development was what I’d call “slow and steady.”

This is not a rate that we were used to. Eric will kill me for saying that, as he put up a herculean effort to get to where we are in the timeframe that we did, but objectively, having built deep technology with a team of 10 at Hyperpublic, as contrasted with a team of 3 at Coopkanics, as you might imagine, things moved slower…

Bootstrapping Your Business to Venture Capital

It was fine, we weren’t burning any cash, and our market is so far out that there is no saying that entering it a few months later as opposed to earlier is good or bad, but still…it took us longer to answer questions and assumptions than it would have had we raised a seed round in January.

I expected that slower pace going in…well worth the tradeoff along this axis.

By Jordan Cooper There is a common adage amongst startup veterans that goes something like “bootstrap as long as possible before taking venture capital.”

The thinking behind this approach is that the early days of developing a company are where you can build a ton of value, so that when you absolutely need the cash, it will not be nearly as dilutive as if you had raised money earlier.

I think there’s a secondary current behind these words that suggests that early stage execution in the absence of investor meddling is somehow a recipe for greater efficiency.

The first reason makes sense. The second I don’t personally buy, but some founders have a chip on their shoulder I guess…and to each their own.

Often bootstrapping is not an option…and for many early companies, a seed round or angel round is the only way to make an idea into anything more than an idea…

Early in our development of Coopkanics we made the decision that we would like to bootstrap until we had made enough progress to skip a seed round and go right to raising a Series A. We worked without pay or any resources for about 6 months, and then closed a $3 Million Series A round about two weeks ago.

That financing, was, in fact more money at a higher price than we would have been able to get had we raised shortly after coming together back in January…the plan worked…BUT, it was not without sacrifice.

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What I didn’t account for that we are just brushing off as a company, was the impact that sustained bootstrapping has on the mindset and culture of a startup…there is something to being tough and hunkering down.

The Spartan culture created an insanely effective war machine after all…but being a Spartan probably wasn’t super enjoyable day to day…The week we closed our round, we went out for a team lunch and for the first time when that check came, it was “on the company.”

I know that sounds trivial, but the lightness of that gesture in contrast to the Spartan battle we’d been fighting, really highlighted some of the more intangible implications of bootstrapping to an A round.

The heaviness of being cash constrained, of skimping on office supplies, of going head down and suffering for the reward of a better round in some ways translated into this culture of mental toughness…it was almost as though in this period, we wouldn’t allow ourselves to smile…this period was not a time for comfort and joy, but rather a time to sweat it out…

FUNDING

Bootstrapping (cont..) and although not explicitly, and although completely rational, this mindset wears on folks after a while…how can we have fun in this Spartan stage?

The only thing that was going to get us out of it was hard work and discipline…and so we adopted a culture that lacked the lightness you might find in a more normal startup environment.

Luckily for us, we were able to rest on our extremely tight bond and past experience managing the “hard days” at Hyperpublic…but we are still undoing some of that Spartan influence weeks after capital breathed new oxygen into the company.

There is this feeling of “oh yea, I can go enjoy my softball game without impacting our army’s integrity…oh yea, I can joke around and laugh while we’re doing this…I can invest in culture without every minute going toward production…I can smile.”

The other day after reading Andy Dunn’s essay on the “hard days” at Bonobos I thought to myself: “So much of being a successful founder has to do with a person’s ability to execute when the smiles are few and far between…there is something to how effective you can be in your debilitated form…”

I won’t say that bootstrap mode was debilitating, but smiles started to spread out…

So anyway, I am proud that we had the toughness and discipline to execute on this Spartan strategy, but if I could do it again, I would go in knowing that the corners you cut are felt, no matter how tough or capable you think you are. It’s not about dollars and cents, but about the mindset of conscious deprivation and what that does to the collective mindset of a small founding team…

Pretty happy to be out of bootstrap mode. Feels good to let a smile slip here and there.

Leonidas might not approve, but I was always more of an Achilles anyway.

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PRACTICAL BUSINESS HNW Magazine’s Practical Business section looks at key areas of business needs across legal, accountancy, marketing, finance, leadership, strategy, research and other areas of support.

5 BIG QUESTIONS FOR EVERY BUSINESS PLAN - Megan Totka

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STICKINESS - WHERE ENTREPRENEURS MOST OFTEN FAIL - Ben Yoskovitz

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DIATRIBE: BATISTA’S MISSION $BILLIONS - Emerson

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PRACTICAL BUSINESS

5 Big Questions for Every Business Plan

By Megan Totka Every small business needs a business plan. It’s an essential document that’s not just for start-ups and expansions – because a great business plan can serve as a road map for your company and help you make the right adjustments when things go wrong. Your business plan should be a living, breathing portfolio that evolves along with your company.

With that said, a business plan is still one of the most vital tools for a start-up or expansion, because this is when your document will convey the viability and potential of your idea (or existing business) to other people – usually people you’re trying to convince to invest their hard-earned cash in your company.

How can you do that?

By making sure your business plan answers the right questions. Below are six crucial points that you should address with your business plan.

Business Plan Questions to Answer Is Your Product or Service Innovative?

This does not mean the core offerings of your company have to be completely different from anything that’s out there on the market now. In fact, having what amounts to an alien concept can be detrimental to a business pitch, because you’ll have no foundation to compare your company with.

Instead, your business plan should highlight what is different, exciting, or inspiring about your product or service.

An element of innovation will underline the viability of your concept, and help to persuade investors that you can succeed.

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HEAT 100 PRACTICAL BUSINESS What Have You Got That Your Competitors Don’t?

The competitive edge is more than just a corporate buzzword.

A great business plan articu lates the differences between your products or services and similar offerings from your competitors.

You should be able to describe why people will choose your widget over the next one in line, and therefore why your business will be profitable once you’re established.

Will People Pay for What You’ve Got? As a business owner, you can’t just put in your 40 hours and cash a paycheck at the end of the week.

What Are Your Staffing Plans?

Your product or service needs the ability to earn its keep, so that eventually it’s turning enough of a profit to cover the overhead costs of your business, the salaries of any employees you have or plan to hire, and your own cost of living.

Few companies can remain viable forever as sole entrepreneur operations. Eventually, you’ll need to hire people as your company grows. Investors want to know that you have smart, realistic staffing plans in place for your start-up or expansion.

Your business plan should outline the potential revenue for your company by showing how much you plan to charge for your products or services, and why people will pay that amount for what you’re offering.

You might start with assigning multiple roles to yourself and/or your existing staff, and then outline the milestones that will necessitate hiring new people, and offloading roles to them.

This piece of information shows investors that you know the real worth of your company, and you’re prepared to avoid collapse and bankruptcy with realistic projections.

Is Your Target Industry Growing?

Pitching a business that’s going to “revitalize” an industry is a tough sell – mostly because it takes more than one company to save a sinking ship.

Investors like to see new or expanding businesses in industries that are either stable or growing because it presents them with a better chance that their investment will pay off.

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By taking the time to describe your competitive advantage, you’re also giving yourself a foundation for a solid marketing plan.

It’s important to have your business plan show that you understand the need for management and collaboration – and that you have good timing.

Are Your Goals Rooted in Reality?

You may be completely confident that your business is going to make a million dollars by the end of the first year, but that’s not something you’ll want to say to investors. Your business plan is a place for reasonable goals, with carefully considered, even conservative projections.

One of the best rules for customer service is to underpromise and over-deliver, and your business plan should follow that rule. Use it to outline a business forecast that you can reasonably expect to meet, and then wow your investors when your (private) wild speculations come to pass.

PRACTICAL BUSINESS you’re asking them to do something new with you, which is another reason to keep the ask small.

People need to get hooked on the behavior, which means getting hooked on the result.

The core value you provide has to be awesome. It can be tiny, but it has to be awesome.

Stickiness - Where Most Entrepreneurs Fail

By Ben Yoskovitz Early on, once you’ve identified a problem genuinely worth solving, you need to build a Minimum Viable Product (MVP) and put it into the hands of early adopters.

In Lean Analytics, we call this the Stickiness Stage. I recently wrote that most startups fail at this point–they simply don’t get the traction they need (in terms of regular usage, engagement and retention) to keep going.

Sometimes they move ahead anyway and hope they can acquire (customers) their way out of the problem…it doesn’t work.

Thinking about this further (and having been asked numerous times about what makes a good MVP and how do you know if you’re ready to move forward), I said to someone recently: “What you’re trying to do is create a tiny, new, addictive behavior. It’s something small and ‘simple’ that you want people to do, which they get value out of it (when they do it), and so do you.”

I put ‘simple’ in quotes, because doing this isn’t easy, but it’s helpful to think about the MVP and product development in this way.

Repetitive usage is key (at least for most startups / products).

That may be daily or weekly. If usage is spread out much more than that it’s going to be hard to keep people’s attention. To get someone to do something over and over, you want to keep the ask small; you don’t want to overburden or overwhelm them, because they’ll give up.

The behavior you’re trying to get people to do is new.

They haven’t done it with you before, although they may have done similar things in other products. If that’s the case it may be easier to get them to do what you want them to.

If it’s totally new, that’s a harder climb. No matter what

Instagram filters were awesome. (One might argue they are less awesome now because they’ve been copied, but they created an emotional response that drove people to post more photos, which is what Instagram needed to succeed.) Tweeting and getting retweeted is awesome. Seeing a song identified in Shazam is awesome.

You want to go after the most basic of emotions possible. Dave McClure says it very well: people want to be made, paid, laid or unafraid. You need to appeal to people’s desire for reputation/popularity, money, sex or security.

You might want to take a look at the seven deadly sins too (just in case you forgot ‘em!) The tiny, addictive, new behavior doesn’t have to be negative, that’s not the point, but it has to speak to people, emotionally, at the most basic of levels.

This tiny, addictive, new behavior forms some kind of loop.

User A does A then B then C and boom–they’re rewarded. And part of that reward drives them to start all over. It also builds value for you, and possibly for other users as well. So User A does A then B then C, gets rewarded and sets User B in motion (possibly doing the same loop, getting rewarded and engaging User C…and so on…)

Getting retweeted is an example of one user’s tiny behavior driving another user to take a tiny action, which creates value for everyone. User A tweets then User B retweets. User A feels awesome, and so does User B. With Twitter there’s an even earlier example of this sort of thing happening around following and being followed back. Simple, tiny and super addictive.

Remember: The tiny, addictive, new behavior creates amazing value (early on it’s only in short bursts, which like a drug, drives people to do it over and over ) and results in creating value for you as well.

Eventually these tiny behaviors start to build upon themselves creating more and more value for everyone involved.

You have to find that one tiny, addictive, new behavior and make that the core of your MVP. Nothing else really matters. If you can’t find that tiny, addictive, new behavior that drives frequent usage (and in turn drives virality and easier user acquisition going forward) you’re going to struggle mightily to succeed.

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HEAT 100 DIATRIBE The son of a former energy minister became a millionaire at a very young age buying Gold from suppliers in the Amazon and re selling to shopkeepers in Rio de Janeiro.

The move led to the creation of his EBX Group in 2001 through the amalgamation of six companies and the pursuit of gold mines in Brazil and Canada and a silver mine in Chile, and all the while an increasingly flam boyant lifestyle.

Batista’s Missing $Billions

By Emerson Three years ago it was the equivalent of a Brazilian Taurus pistol duel at dawn between the vociferous billionaire Eike Batista and Mexican tycoon, and then richest man on earth, Carlos Slim.

It was Batista, whose fortune made him one of Brazil’s highest profile figures, who started the war of words by making the daring announcement that he intended to take Slim’s title.

Speaking with the BBC at the time, he said: “I told Carlos Slim that he should clean both of his rear mirrors, because I would not warn him on which side I was going to overtake him.”

Once the eighth richest man in the world according to Forbes, Batista’s fast growing empire spanned energy, ports and mining, taking advantage of the buoyancy of the Brazilian economy and big demand for commodities from China.

But times change, even for billionaires.

While Mr Batista’s dramatic drop in personal wealth, from an estimated $34bn to circa $2.9bn, has occurred within the space of 18 months, the reality is that he’s a long way from the bread line.

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And therein lays the problem; the trappings of wealth, the speedboats and playboy model wives, can quickly strip mere mortals of hu mility and convince them that they’ve transcended into King Midas.

Not long after his bold pronouncement, Mr Batista’s EBX Group is now highly in debt, and the markets seem to have turned on him.

Brazil’s economy has cooled in recent years and foreign demand for commodities has dropped off. Investors became particularly edgy last June when his oil company OGX announced lower than expected production levels.

And more recently, OGX indicated it may now stop its activities in the Tubarao Azul oil field by 2014.

The bottom line: EBX has lost 90% of its value in just over a year, alongside a $60bn share value slide since peaking last year, and the once uber-confident Batista has announced he will step down as head of the board of his energy company, MPX. He even had to sell his plane, an Embraer Legacy, for $14m.

The lesson here? When you play, play hard. And when you’re working, don’t play!

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