Startups, angels, and milestones…

As your tech startup grows, it’s always a huge relief to reach milestones – particularly when (thanks to the way bootstrapping makes development cheaper but s-l-o-w-e-r) they can be a fair old while in coming.

Yesterday’s big milestone here in Nanodome Towers was getting our final camera PCB to boot from a memory card far enough to print  “Hello world” out to a serial console. OK, it ended up at 57600 baud rather than the 115200 baud I had intended, but who cares? It worked! Next I’ll sort out the clocks & the memory, and then try to get it to boot from Linux (machine type 3248 “Nanozoom“, for any passing ARM Linux people): but all of that should now be a matter more of graft than of prayer… fingers crossed, even so.

(Just so you know, the PCB’s 3V3 line ended up slightly lower than intended, so all I needed to do was remove the undervoltage detector chip and it came out of reset fine. A Swiss Army Knife hardware mod!)

All of which is not quite chill-the-Krug excellent, but a fantastic (and tangible) milestone nonetheless. Even so, there’s a bigger point about progress and startup finance to be made here. For… what is a milestone, exactly?

For angels, milestones are usually a linear sequence of de-risking plateaux, i.e. each milestone should clearly remove a source of development uncertainty, and hence reduce the startup’s financial exposure to fail cases. In this case, if the assembled PCB hadn’t worked at all (and we had no idea why, and could see no way of fixing it), chances are we would have had to design & build afresh around a completely different SoC. And how much would that cost? Oy oy oy!

Yet for entrepreneurs, milestones are a parallel sequence of moves towards full engagement with their market, i.e. each milestone should tangibly improve access to market opportunity. For example, having a demonstrably working set of boards (and particularly all assembled as a working camera) arguably gives Nanodome firmer access to bank finance as well as the ability to make ever more persuasive product demonstrations to its customers.

(This is why entrepreneurs are often advised to include both a “past milestones” slide and a “people” slide in their Powerpoint presentation ‘decks’ – the former to show what has already been achieved, the latter to give investors confidence that the people running and implementing the startup’s ‘vision’ will be able to overcome the innumerable day-to-day hurdles to hit future milestones.)

Of course, both positions are equally correct: they’re the twin sides of the coin that’s eternally bouncing on its side, like the bomb above Springfield’s dome in The Simpsons Movie. And startups need to combine both financial pessimism and market optimism if they are to be at all realistic: in the past, this has sometimes been cited as why entrepreneurs need angels to counterbalance them, a yin to their yang.

Yet these days, UK angels seem unable to see beyond their traditional side of this coin, and seem collectively unable to build up any sense of faith in startup people’s abilities to solve problems in order to reach future milestones. They write entrepreneurs off as having “reality distortion fields” (a dismissive way of saying ‘charisma’) while writing off their skills as irrelevant, inapplicable or simply overhyped. At the same time, many (if not actually most) of the entrepreneurs I’ve met over the last year seem as a generation to have already internalized this whole lesson, this whole yin-yang balance. They don’t need angels to tell them how difficult the world has become, they already know – it’s their world.

All of which leads me – at long last – to today’s quasi-religious irony to ponder: that angels seem to have lost their faith in people and/or in the future. So, your starter for ten is: does an angel without faith deserve to be called an ‘angel’ at all?

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If I were a business angel, what would I look for?

Never mind what UK angels actually do look for, what kind of company would I put my own money into if I were a business angel? True, given that I’m not writing this from a Home Counties mini-mansion with a £250K mini-fund in the bank for speculating with, this is a somewhat idealistic exercise: but run with me, you’ll see where I’m going with it quickly enough…

As with anything like this, there are numerous things I’d specifically look for:-

• Trend awareness: the older I get, the more it seems to me that businesses consciously aligned with underlying societal / global trends are the most substantial and tenacious. So I’d look for entrepreneurs that have not only a short-term tactic in mind that genuinely needs capital to exploit a market opportunity, but also a longer-term business fit that is aligned with larger-scale trends. Basically, a ‘project‘ / ‘hack‘ that clearly has the capacity to be nurtured and grown into a business.
• MVR: a “Minimum Viable Raise”. Unless someone comes up with a better way of funding companies, opening and closing multiple small (£20K? £40K?) rounds will always be a waste of everyone’s time. Even £100K is questionably small from my viewpoint: so £200K and up is probably sensible as of right now.
• Marketing: particularly if it was a tech startup proposal, I’d scrutinize the marketing side closely, because few tech guys I’ve met seem to fully grasp how commoditized most technology has become – and hence how crucial marketing (& particularly PR) has become. Basically, managing supply efficiently is useless without simultaneously stimulating and managing demand:  “it’ll go viral“? I don’t think so, sorry.
• Sector focus: I’d also prefer hardware startups, partly because I believe that hardware has become “the new software” (one of those mega-trends I mentioned above), but mainly because I think hardware (and specifically manufacturing) is so out of fashion that there’s enormous contrarian opportunity there.
• Temperament: I’d also look for entrepreneurs who combine persistence and risk aversion with a talent for not spending money. While planning how to spend a pile of money is easy (business schools are a good preparation for fantasy football, though not so good for running real-world companies), creatively finding ways to avoid spending it (in order to keep your long runway in place) can be hard, and not everyone has the temperament to do this.
• IP structure: the three most important things of all are arguably IP; IP; and, errrrm, IP. And this is not just because patents offer a quasi-monopolistic state licence (that VCs, in their own endearing way, sometimes call “choke points”). Rather, because VC funding is coming in ever later, I think that we will see startups sidestepping VC funding completely by consciously structuring IP ownership for securitizability – by which I mean placing intangible assets into an SPV, exposing the cash-flow from them to the accounts, and then setting up some kind of mezzanine-level borrowing against them. Hence I’m really not sure I’d be comfortable funding a startup that didn’t have a deliberate IP structure in mind right from Day One.

All very clear and rational: but what I don’t get is why the angels I’ve met don’t appear to think in anything like these terms. Only one has shown interest in marketing mechanics; trend awareness is held hostage to their cashflow concerns; while none genuinely has a hardware sector focus, not even those few angels who have made money out of manufacturing. What’s more, IP structure seems to be a total non-issue to them: all talk of SPVs / securitization / mezzanine funding comes across as ‘fantasy business’ Powerpointery to them, because they collectively seem to have lost belief that any growth curve beyond ‘miserably-bumping-along-the-bottom‘ is possible. Do I need to extend this miserable list any further? No, not really.

Ultimately, the point of this post is that between the mechanics of funding and the mechanics of actual business, I think a broad gap has opened up – one which moreover seems to be trending ever wider. I suspect he business world has changed too significantly since the days of the “soft money” bull markets where nearly all angels made their money for them to be truly comfortable: perhaps they are unable to see business circa 2010/2011 for what it really is.

Could it be that different days simply require different angels?

How to mind-read business angels…

As an entrepreneur, much of the time I’ve wasted spent looking for angel funding has gone into role-playing conversations with angels before they happen. Basically, figuring out in my own head what it must be like to sit on the other side of the table… i.e. being bought lunch by a haystack-full of hapless startups & trying to work out which one is the shiny needle you’re looking for.

For job interviews, this kind of scenario-modelling usually works pretty well, because the minute you can figure out what the company is actually looking for (rather than the box-checking nonsense that tends to go into job specs) your chances of getting hired (or realizing that you absolutely have to make your excuses and leave within microseconds) instantly improve. Preparing the right questions to ask in advance to get you beyond the surface symptoms has got to be a good thing: and an entrepreneur talking to an angel must surely share many similarities with this particular setup, right?

However… there’s a problem. My people instincts – which are normally pretty sharp – don’t seem to work so well for the angels I’ve met. The whole point of having customers is to enchant and entertain them (as Arthur Miller was reputed to say, “give the audience what they want but not how they expect it”) – and you achieve this by knowing them so well that your products or services almost give them the impression you read their mind, their secret inner life. But UK angels are too smart for anything this straightforward: instead, what comes across to me is that they start by assuming you’re gaming them (whatever you say or present), and that a defining part of the entrepreneur’s nature is Dragon’s Den-style self-delusion.

But this is just ludicrous: I’m not some chancer trying to con bidders on an online auction, I’m a rational guy with an MBA who wants to find an equally rational investment partner (but with a different resource set) to grasp an opportunity. And that mismatch is really the core challenge: what entrepreneurs see as match.com, UK angels see as eBay, and – for now, at least – never the twain shall meet, not even at pay-to-pitch meetings.

How, then, can we ever mind-read angels if we’re not even the same site (let alone the same page) as them?

Firstly: if mistrust has (as I believe) become their default starting position, then as far as I’m concerned you’ll have to work roughly three times as hard than you might think in order to regain their trust. Basically, they are carrying around emotional baggage from all the failed startup investments (theirs and their peers’) that have happened, which you have to somehow neutralize before you can get to the arid yellow Fields of Indifference, never mind to the fruitful green Fields of Trust.

I therefore argue that you and your startup both need to find a way to demonstrate a (frankly) extraordinary level of trustworthiness to angels before you even consider pitching an executive summary to them. Look, why should anybody trust you? You’re 25 years old, just out of Uni, and even though you’re mentally sharp as a pin, you can have no real idea at all how vicious and dirty the world is, how painfully arbitrarily the {succeed-|-fail} dotted line is marked out in sweat and blood, and what bad stuff you’ll have to do in order to stay on just the right side of that shaky red line. Where on your CV does it say anything about making hard decisions and seeing them through? About firing people and about making enemies? About doing the right thing even when it hurts?

Secondly: over the last few years, IPOs have died a death while the whole issue of exits has silently transitioned from ‘when’ to ‘if’; all of which utterly frightens the Calvin Klein pants off angels. Can you imagine being 60 years old and facing the prospect of dying before any of your portfolio of investments matures into anything so solid as money? Hence the unspoken question entrepreneurs have to answer here is this: why should I have any confidence at all you’ll be able to sell your poxy Internet startup before I depart this miserable mortal coil?

If you can even begin to frame and answer those questions in your mind, then I think you’ll find yourself starting to mind-read angels, because these are the questions right at the forefront of their minds when they look at startups. Really, UK angels are not looking at opportunity and growth any more: they’re looking at failure and death… your failure and their death. You wanted to see inside their minds? Well, there you are – it is what it is, make of it what you will.

Of course, the paradox is that to get past the numerous gatekeepers & ping onto their angelic radar screens at all, you have to produce a business plan that fixates in minute detail on the opportunity/growth side of things, when what actually dominates their decision-making is the failure/death side. Happy mind-reading!

The Ghost of Startups Future…

It’s been an interesting few days here following my Top Ten UK Startup Finance Myths (IMHO) post on TechCrunch, in which I boiled several months of grouchy blog posts here down into a meaty 1500-word stew. But now that it has rolled off TCE’s front page, it’s arguably time for a mini post-mortem: so… right now, is UK angel funding honestly as bad as my article made out?

The proposition that it is is a lousy argument to want to win – and in fact I quietly hoped to be proved wrong, that someone would eagerly stride forward to demonstrate that UK startup investing is indeed alive and flourishing, though perhaps not in the way I expected. Sadly, I don’t think anyone did (but even so, a huge thank you to the many people who very kindly left comments there (and also emailed & phoned me)), so there you go. It is what it is.

But look – blatantly inspired by this year’s Doctor Who Christmas Special, here’s a message from The Ghost of Startups Future (lobbed in our direction from a passing Tardis), which – very surprisingly – is addressed directly to us. It reads:

A Merry Christmas from the glorious future to all you dismal startups, angels & VCs of 2010. Sitting here toying with this year’s diamond-studded iPad 9’s while dipping our toes in Courvoisier-filled plunge pools, our minds randomly flashed back to all your long faces and pervasive negativity, and we thought: someone really ought to put you out of your misery. So why not us, given that (since the Wayback Machine was hacked to send data back in time) we now can?

You people suspected you were in an impossible impasse – and you were! All that ridiculous sense of entitlement to finance (on the startup side) and that ludicrous fire-sale mentality (on the finance side) was clearly going nowhere fast. So why-oh-why didn’t you two sets of idiots ever think to work together from the start of development (when you can make a difference), rather than at the end (when it’s basically too late to do any kind of rational matchmaking)?

Here in the future, you’ll be pleased to hear we don’t have VCs any more (the mezzanine securitization market wiped them out long ago): but we also don’t have anything you’d recognize as angels, startups, or even pitch meetings (and by the way, what on earth is “pay-to-pitch“? None of us here can make sense of the concept, even with our Google Brains implants. Just a historical footnote, it probably doesn’t matter.)

The way we work nowadays is painfully simple: massive, hugely diversified Internet funds identify emerging opportunities, super hungry entrepreneurs, & kick-ass product teams and stitch them all together at high speed, kind of the way VCs used to do back when they had a clue. The daddy of them all is IncubateTheWorld.com: apparently, before they pivoted they used to be called “IBM” – but don’t worry, they’re making really serious money now.

What should you do? Oh, you crazy, useless guys – “bang the rocks together” isn’t even close. So here’s your starter for ten: money makes money. That is, to make money, you need to start from a position of having money – which, even you can work out, means working together. If you want to speculate on ideas, feel free to go all retrotextual (you know, “write books”, or “take a degree”, ha!) to get them out of your system. But honestly, don’t waste your time thinking anybody will ever buy your ideas, no matter how much you ‘develop’ them: no, that’s just plain delusional.

Hope this helps a bit – have a good life, and see you by the pool!

Happy New Year to you all!

Hilarious post every entrepreneur should read…

Entitled “What if New Business Owners had to tell the truth?“, Ramsey Dellinger’s post is nothing short of a blogging tour de force. By sledgehammering so many points on the head in a row, he almost makes satire look like a competitive sport that his inner demons drive him to win at. Have a read, you’ll enjoy it, I’m sure.

By way of comparison, “What if UK business angels had to tell the truth?” might look something like this:-

“It’s great to meet you: I got rich mostly by not spending money, so because  you’re sucker enough to pony up for these canapés / this meal / these drinks, I don’t honestly mind surrendering a bit of my time.

Really, these angel pitching events are a bit like ‘Dragon’s Den‘ for me, insofar as I get to watch a whole load of second-rate pitches from afar which I’ll forget inside five minutes. Realistically, the chances that your proposed business and I have any point in common is atrociously thin – I made my money in such a different way from you (and in such a different time and market) that we might as well be on different planets.

Besides, my wife/husband has a veto on all the investment deals I come up, and the last ten proposals she/he’s said no to were all vastly more convincing than yours, so please try not to get too encouraged if I fail to laugh out loud in derision. But cheer up, it could be worse – at least you’re not pitching to VCs, eh?”

Hmmm…

PTZs, eyes, and other tiny miracles…

Even though startup finance absorbs a great deal (if not actually far too much) of my time, I continue in parallel to develop Nanodome’s security cameras – right now, for example, I’m developing the boot (startup) code to bring a new camera to life, so am currently bouncing back and forth between arm-linux-gcc and about ten USB development gadgets. Just a normal working day for most startup people. *sigh*

But I do think about other things too, and it struck me this morning just how curiously similar Pan / Tilt / Zoom (“PTZ”) cameras and human eyes are: for example, the narrow band of flexible cables connecting a PTZ’s camera to its wallside board is a lot like the human eye’s optic nerve.

Digital image compression has its equivalent in the eye too, insofar as the eye’s ~127 million photoreceptors (i.e. rods and cones) reduce down to only 1.25 million ganglions, which is already effectively a 100:1 compression ratio. The receptive field size of the ganglions also changes – smaller near the centre (the fovea), but progressively larger towards the periphery – giving a kind of spatial compression effect. All of this is so that the optic nerve can be as narrow as practical, yet still contain enough data to reconstruct the image in the brain.

Moreover, few people realise that the retina really doesn’t just capture images like a piece of film or an image sensor: it also processes them. Effectively, ‘on’ and ‘off’ ganglions convert what the retina picks up into a sparse edge-detected image which they then send down the optic nerve. The brain then processes this edge stream and silently reconstructs a gloriously detailed colour image back from it, which we then imagine that we saw (even though, technically speaking, we didn’t really): put like that, vision is an almost magical image pipeline built from an extraordinarily complex set of parts, which vision scientists are only just beginning to work out.

Of course, compared to the millions of years of mammalian retinal evolution, PTZs have only been around for 30-odd years: and so for all the marginal bells and whistles sales teams insist get added to differentiate their own company’s product lines, PTZ cameras still remain at heart brutally simple beasties (and, in many ways, not simple enough by half).

But there’s change in the air: the kind of ‘next generation’ camera my startup is building is dominated much more by software than by hardware. And  because software evolution is normally that much faster than hardware evolution, the big industry trend looking forward is arguably going to be the rapid evolution of software-centric cameras as applied to specific problem domains. Errrm… which is exactly what my startup is doing, of course. 🙂

Given all this, I do wonder whether we would even recognize PTZs in 25 years’ time as PTZs, and (more to the point), whether we would even still recognize cameras from then as cameras. Hmmm… now there’s something to think about!

Is it time to pivot?

Pivoting is an enormous comfort blanket, that warms you with the reassurance you that it’s better to do something – anything – than persist in some perceived wrongheadedness. But… who says that you’re wrong?

Recently, I was lucky enough to have a conversation with an extremely experienced UK security camera principal, who generously let me see a little ‘behind the curtain’ to how things work in his security camera focused organization. He also advised me that though what I was doing was good, he thought I might have slipped a fraction behind the UK market and that I should now make a fairly significant pivot to attack quite a different segment to stay ‘in play’.

I agonized over this for a couple of days: should I follow the numbers I had on my desk and just keep on going, or should I drop what I had been doing and follow his (genuinely very informed) take on the UK market? Persist or pivot? Stick or twist? Should I stay or should I go?

And then it dawned on me that the kind of high-level ‘extreme pivoting’ Mike Maples talks about only makes sense if you haven’t really engaged with your customers from the start. Because if you haven’t built your startup around what your customers repeatedly tell you they need, then you basically deserve to fail: so extreme pivoting is just another way of saying “we failed miserably but still had enough VC money in the bank for another roll of the dice“.

Hence it seems to me that Eric Ries-style pivoting (learning from low-level exposure to customer feedback) is almost antithetical to Mike Maples-style extreme pivoting (learning just after it’s too late from a Game-Over failure case, but having enough credibility or cash to try again). Yes, they’re both “learning”: but Ries tries to learn before the failure (to avoid it), while Maples almost seems to be advocating a Nietschian learning after the failure (so as to emerge, phoenix-like, from the flames) – that which does not kill you makes you strong, etc.

In many ways, they’re both wrong – Ries arguably promotes learning too early (customers often don’t really know what they want, so how much can you sensibly interpret what they tell you when you show them an early version?), while Maples arguably promotes learning too late (failure can be a equally lousy teacher too, if you don’t honestly know why you failed).

In the end, the security camera principal guy was absolutely right, but he’s fixated on competing in his particular corner of the UK market and I decided that I’m looking at quite a different (and much larger) picture. But all the same, I researched and researched until I found a way of adapting our existing security cameras designs cheaply and quickly to allow them to compete in broadly the way he proposed (albeit in a completely different manner).

Demo’ing early product to customers is a kind of statistical sampling, in that you aim to take on board what they tell you to make a better product in the next iteration – but it’s pretty obvious this is replete with potential sampling errors. How did you select your customers? Have you selected enough of them to form a worthwhile dataset? Are they being honest with you? How did you decide what to ask them? How can you be sure that they’re responding in the spirit you think they’re responding in? How are you ensuring that you’re not suffering from confirmation biases (etc)?

In short, just because you can pivot doesn’t mean you should pivot. Something to think about, anyway.

The Dragons’ Den delusion…

Edited about 1:30 into a short video on London Business School’s ‘Enterprise 100’ homepage (click on the [Play] button near the top right to see it), there are two short presentations by BBC TV presenter Evan Davis. His presence there should be no great surprise: Davis’ pre-TV background was as an economist at the Institute for Fiscal Studies and at London Business School itself (for a while). I’ve transcribed what he says below, because I think it’s quite revealing as to what Dragons’ Den is all about:-

“[…] I don’t think television people had clocked (until Dragons’ Den came along) what a funny lot – and interesting and entertaining lot – entrepreneurs are. And so this whole new sort of sector of the world has just sort of walked forward to show off their delusions and their insecurities, and their hopes and their dreams. And I mean, the truth is personality – mostly – is what makes TV good, and I have come to the conclusion that entrepreneurs are an interesting and funny lot: and by and large, you don’t have to be deluded to be one but it does help.”

Davis then continues to warm to his theme in a second section:-

“The qualities of good investors are those that see through the excesses and delusions of the people presenting to them, and can also see through the weaknesses of the people presenting to them. They’re not just looking (I think) for somebody who is going to be pitch perfect… you want to see if they’re not pitch perfect, whether the proposition is still fundamentally sound despite, errr, you know, a weakness in the pitch or a failing in the business plan.”

The point I think he’s making is that Dragons’ Den is all about exploiting delusional entrepreneurs to make good TV.

Really, for all the popularity of Dragons’ Den, it leaves me stone cold both as “entertainment” and as entrepreneurial business: the people who pitch there are not statistically representative of the startup people I get to meet. No: applicants are filtered out, initially by self-selection (you don’t have to be mad to apply there, but it helps) and then by the producers (for what do you think they want, good investment opportunities or good car crashes?), until only the (very few) madly bright and the (majority) brightly mad remain – the outliers on the startup bell-curve.

To acknowledge that this all came from an LBS promotional video, here are all my thoughts on the subject brought together using that most classic of MBA consultancy tools, a 2×2 grid. There is a fine (and, in this case, dotted) line between self-confidence and self-righteousness, as well as one between positivity and delusion, and from my point of view it seems that Dragons’ Den joyously fetishizes exactly the wrong side of both of those lines:-

All the same, if Dragons’ Den was merely a Schadenfreude-soaked reality TV business show whose most notable achievement was sustaining rating success without dispatching truckloads of cash to Jordan’s capacious bullion vault, I probably wouldn’t find it so awful. But right now, we’re in a gigantic startup financing crisis where VCs have abandoned any pretence at early stage venturing in favour of late stage expansion, and where angels have abandoned risk altogether (they want bank-level risk with “home run” 10x payouts) – and what conceptual template does Dragons’ Den offer? Whether delusional nerds and greedy egomaniacs can find a workably inequitable way of collaborating. Riiiiiiight.

As to its overall cultural impact… though I don’t for a minute believe that Dragons’ Den has caused the current UK startup finance crisis (even TV producers’ egos aren’t quite that big), I do think that its contribution to the overall discourse on UK startup culture has overall been thoroughly negative. While many UK angels are looking for ‘top left’ role models (there’s certainly no shortage of angel money in the UK, even if most of it was made in a bull market), surely Dragons’ Den’s relentless focus on the ‘bottom right’ unreality of startup business and the apparent egomania of its “Dragons” make it probably the last place anyone should be looking for them. Oh well!

UK angels: the Venn diagrams of death…

As I mentioned in a previous post, I strongly suspect we are witnessing the end of an era: the end of UK angel investing.

To my mind, the world operates in a kind of “fuzzy Venn diagram” way, by which I mean that a whole group of different low-level infrastructural conditions have to overlap nicely, leaving a “fuzzy zone of possibility” in the middle for high-level stuff to happen. The angel investment fuzzy Venn diagram used to look like this:-

However, things have changed a lot over the last few years, to the point that what we are now seeing is a landscape much closer to this:-

Over much the same period, angel networks have moved from being subsidised by the government to being paid for by entrepreneurs, yet their dealflow has become so low that few (if any) can be in any kind of comfort zone right now. They’re waiting for the ‘investment mojo’ train to return to their stations, but… perhaps the points have changed.

Hence, while I’m in favour of positive government action to encourage angels to start investing again, I can’t help but wonder whether this would now only turn out to be a very short-term help. The big trick would be – Wayne Gretzky-like – to aim where the puck is going, rather than where it was a few years ago (in the anti-Newtonian hope that everything will magically reverse direction, just because you want them to): but if you look at the diagram above, I don’t currently see any trends moving towards a new angel investment setup in the UK. Please tell me if you think I’m wrong!

Long-term, I think the best thing for the whole sector would be for a whole load of disintermediated international angel networks to set up – and in the process write all the current (i.e. the last) generation of angel networks out of the picture. Sure, they’re all run by lovely, helpful, positive people – but the whole concept is little more than a bull-market hangover, Cellini imperial salt cellars sat on tables full of empty plates.

In the short-term, I think that the best policy hack for London would be for the government to revise the terms of the Enterprise Finance Guarantee so that banks simply aren’t allowed to require entrepreneurs to use their primary residence as collateral. This small (and actually very equitable) change would mean that the kind of low-level funding required for a good number of London-based startups would – if you can produce a suitably bank-friendly business plan that you can back up with evidence – be directly fundable, without recourse to angels at all.

UK angel investing, RIP…

Time, gentlemen, puh-lease!

Yes, I’m calling time on UK angel investing – it’s the end of the line, take all your bags with you, thank you for travelling with the UK startup industry, nothing to see now, move on.

And here’s why.

As with most complex systems, there’s no single reason for UK angel investing to have slowly died on its feet in the way that it clearly has. But there are some big trends at play, some of which I discussed in yesterday’s post on The sucky Tao of bootstrapping:-

• The accelerating speed of change – this means that opportunity windows are ever-narrower
• Withdrawal of matched startup funding by UK banks – these days, unsecured facilities over £25K are rare
• Loss of faith in business plans as a means of communication – angels feel these are being used to ‘game’ them
• Loss of faith in MBAs and business school training – hence only successful serial entrepreneurs need apply
• Lack of European role models – many high-profile angels have exited with singed (if not actually burnt) wings
• Loss of grants as an effective R&D development tool – apart from R&D tax credits
• Startup support aimed at regenerating deprived areas – far, far from angels’ Home Counties mini-mansions
• Loss of IPO as a viable exit route for the immediate future
• Ever-lengthening time to trade sale – was five years, then six years, now who knows?
• Pervasive inability to confidently value startups using any basis
• UK angels’ increasing time-to-invest – in the last 3 years, this has gone from ~6 months to 12+ months
• Strong desire to excessively delay investment – getting better valuations by letting startups burn themselves into desperation
• Strong desire to avoid leading a round – everyone (and I do mean everyone) now wants to come in second

What’s there to like?

Furthermore, UK angels’ investment practice is very rarely economically pragmatic. Any sensible economist would tell you that a robust investment portfolio should contain investments that are unconnected, so that you don’t lose the lot if sector X just happens to catch a cold (one big market sneeze can kill a startup) – yet the mythology of the “smart angel” would have you believe that you should only invest in areas closely linked to your experience and business expertise. As a result, I think the unbalanced portfolios held by UK angels are partly to blame for so many of them having been burnt over the last few years.

UK angel networks have tried to semi-professionalize startup investment, but it seems they have been more effective at spreading some kind of canapé-carried indecision virus than in promoting positive investment action. For a £200K angel raise across multiple UK networks, an entrepreneur would probably have to write off ~£20K to account for the costs of making that raise if successful, and ~£10K if (more likely) unsuccessful. All of which means that pitching to the rich is currently little more than an expensive hobby – who could honestly deny that UK entrepreneurs would generally be far better off putting spare £10K tranches into product development and customer development?

So, does the end of UK angel investing mean (shudder) the end for UK startup financing? Actually, no – not even close. I think that in 12-ish months’ time, UK entrepreneurs will come to see all this as no more than the end of an era, as we all move from the bad old days (i.e. now) of jittery, parochial angels towards the strangely inspiring new days (i.e. soon) of virtual angels.

“But Nick“, I hear you ask, “How will we recognize these semi-mystical ‘virtual business angels‘ you’ve just made up?”

“Simples“, I say, “I have a list of bullet points describing them you can pin beside your PC. You’ll just know. Oh, and relax – they probably won’t look much like Dave McClure.” Here you go!

• Where they aren’t: paid-for angel networks (so don’t even bother looking there), other intermediaries
• Where they are: LinkedIn industry groups, Facebook (maybe), Twitter, informal networks, other timezones
• Things they don’t like: small rounds, being on the board, putting more than $30K in, paying for a CFO, seeing money burn
• Things they do like: transparency, monthly progress updates, Skyped pitches, productive engineers, hungry salesmen, due diligence bedtime reading
• Turn-off phrases: bootstrapping, viral, Freemium, pivot, Minimum Viable Product
• Turn-on phrases: economical, PR, sales, Minimum Sexy Product

Really, all this comes down to is that angel networks offer exactly the kind of intermediatory function that you’d have thought the Internet ought to have killed. Well, maybe – indirectly – it has. It’s now time for people to invent entirely new ways of connecting angels and startups – but the big trick will be doing this within FSMA guidelines (specifically, the part dealing with making a promotion to more than 99 people) and other international regulatory investment guidelines.

Hope this is a helpful guide to the future!