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      Publishing details

      HARRIMAN HOUSE LTD

      3A Penns Road

      Petersfield

      Hampshire

      GU32 2EW

      GREAT BRITAIN

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      Email: [email protected]

      Website: www.harriman-house.com

      First published in Great Britain in 2013

      Copyright © Harriman House

      The right of Richard Hargreaves to be identified as the Author has been asserted in accordance with the Copyright, Design and Patents Act 1988.

      ISBN: 978-0-85719-287-5

      British Library Cataloguing in Publication Data

      A CIP catalogue record for this book can be obtained from the British Library.

      All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior written consent of the Publisher.

      About the Author

      Dr Richard Hargreaves was educated as an engineer and conducted research in materials science before entering the world of venture capital with the 3i, as it is now called, which was at the time the largest investor in private companies in the UK. After ten years of making investments in unquoted companies, he left to start Baronsmead plc which he developed over 13 years until its sale in 1995. During this period Richard was involved in the development of the venture capital industry through the BVCA (the leading industry body and public policy advocate for the private equity and venture capital industry in the UK), where he became chairman. During that period he was involved in the BVCA’s tax lobbying, which saw the birth of the VCT and Baronsmead’s name is still on several of the best performing VCTs.

      After its sale, he managed Baronsmead for two years before he started Classic Fund Management Ltd. He sold that company in 2004 and co-founded Endeavour Ventures Ltd, which invests in young technology companies for its 250-strong client base of high-net-worth individuals.

      Richard has nearly 40 years’ experience investing in young companies and helping them grow. He is a highly experienced non-executive director and business angel.

      Preface

      Angel investment has become the UK’s most important source of equity capital for companies seeking up to as much as £2m. That alone makes it a very topical subject.

      Nowadays, it is frequently mentioned in the media and its importance to the economy has become apparent to government. In recognition of this, increasingly attractive tax breaks have been made available and government-supported funds, which match angel investment, have been launched.

      This book covers all aspects of investing in unquoted companies as a private individual, or business angel, as such investors are often called.

      It offers practical guidance, both to those who wish to make angel investments for the first time and to those have invested before but who would like to develop a more systematic approach than they have used previously. If you are looking to build a portfolio of investments in unquoted companies, wish to learn more about the technical side of investment – such as share capital structures and investors’ legal rights, or have capital to invest in entrepreneurial ventures and wish to do this in the most effective way, then this book is for you. It aims to help you find investments, how to assess them, how to structure them, how to manage them and finally – and very importantly – how to exit from them.

      If the book encourages some of its readers to become involved – or more deeply involved – with this fascinating activity and, at the same time, helps them avoid a few of the many pitfalls and thus improve their chances of success it will have served its purpose.

      Introduction

      Many people find the idea of helping entrepreneurs enticing and are attracted to the potential financial rewards it can offer. And, as a bonus, helping a young venture succeed – be it with money, contacts or mentoring – can be very satisfying. There are thus great attractions to being an angel.

      On the other side of the coin, the UK needs angels. Most of the economic growth and job creation in the UK comes from innovation and, in turn, much of that takes place in early-stage entrepreneurial businesses. These ventures are increasingly badly served by both banks and professional venture capital and the growing importance of angel financing to small companies, and thus to the health of the economy, is being recognised by many people – including government. As a result the government has provided increasingly attractive tax incentives to those who are prepared to take the high risks involved in angel investing.

      These risks are not always immediately evident because any promoter of an investment opportunity will stress the upside of the deal. This book will take you through many of the problems you may face and offer you practical help with understanding them and finding ways to take sensible precautions to minimise risk.

      Whatever your investment approach, you can always learn something from the experiences of others. The book draws on my own experiences as a venture capitalist as well as my own wide experience as an active angel and non-executive director. Over the years I have been involved with 100s of ventures many of which, latterly, have been angel financed using the tax benefits available for such deals in the UK. As a result, there is little I have not seen as companies have started in life, raised money, grown, dealt with challenges and exited. I have tried to convey the essence of these to the reader, both in main body of the text and in the many examples and case studies.

      I have had many successes and I have had many failures. So I do know a lot about the ups and downs of backing smaller companies. And I would not swap the excitement and satisfaction of that for something less absorbing.

Part A: Angel Investing

      Chapter 1: The Basics

      Introduction

      In this chapter I discuss what a business angel is and how they fit into the overall spectrum of sources of long-term capital. I also look at why entrepreneurs like angels and often prefer them to venture capitalists.

      The importance of angels

      Angels

      The term angel was first used to describe wealthy individuals who provided money for Broadway productions. Then in 1978, William Wetzel published a study on how entrepreneurs raised seed capital in the USA and used the term angel to describe the investors.

      Today, business angel, or just angel, is a term widely used to mean a private individual who invests his or her own money in early stage growth companies. The other principal source of long-term investment in such companies is venture capitalists (VCs).

      There are two fundamental differences between these two groups:

      1 Angels invest their own money whereas VCs manage and invest a pool of money belonging to others.

      2 The individual angel makes their own investment decisions whereas a VC firm will have an investment committee of partners who make decisions collectively.

      The scale of angel financing

      You may be surprised to learn that in the USA angel financing accounts for almost as much money invested as all venture capital funds combined – but into more than 60 times