Original script for the speech that chairman of the Centre for Entrepreneurs, Luke Johnson delivered at the UK Business Angels Association networking dinner on 28th January 2014.
Angel investor is really a fairly new name for capitalist. And even before the word capitalist was invented, there were merchant venturers doing what we do – backing new projects. From putting money behind voyages from Venice to Asia or the Americas in the 16th century, to the initial providers of capital for the industrial revolution, angel investors have been behind most of the great entrepreneurial adventures over the centuries. Angels may not have invented the technology and products which comprise the modern world, but without them we would still be living in medieval times.
After all, almost every commercial undertaking needs finance. And that is what we do – we risk our cash in the hope of making a profit. And the point about angel investors is that they are the ones at the cutting edge – typically taking the biggest risks of all – but by the same token making some of the greatest returns of all when the stars align and you land not just a big fish, but a whale. Quoted investors, buyers of bonds, hedge funds, private equity – the risk they take are nothing compared to angel investors. And hence their home runs are nothing like ours.
I can count on less than two hands the number of whales I’ve landed in a career stretching over thirty years. One of the rules I have come to believe in is that it is these big winners which count: the rest is relatively unimportant. The magic about equity is the upside – in theory it is unlimited. And hence it is not inconceivable that if you are clever and lucky, you may enjoy a deal that shows a 10 or 20 or 50 or 100 or even 1000 fold return on your original stake. That helps pay for a lot of bad deals where you lose all your money.
I do feel that angel investing will always be high risk/high return. It is the wild west of the investing universe. If you do not have companies going bust, then probably you’re not trying hard enough. Obviously this can be heartbreaking and possibly damaging to one’s reputation, but it is the very nature of life that there can be no progress without mistakes. That is why adventurers like Christopher Columbus went forth, with backing from angel investors. His ships might have sunk. Instead he discovered America – surely the greatest investment of all time. Safe angel investing is a complete oxymoron.
What of course this means is that no-one should ever invest money in early stage projects – classic angel territory – unless they can afford to lose their entire stake. You can dress up your instrument as loan stock, or preferreds, call it what you will – but such language can actually give one a false sense of security. If the business goes wrong – you are very likely to lose 100% of your money. But as General McArthur said: “There is no security on this earth – only opportunity.” He was not simply a military man – it was he who laid the foundations of Japan’s extraordinary revival after the devastation of world war two – which was one of the greatest periods of sustained industrial growth in history. So McArthur knew what he was talking about.
I have been an angel investor of sorts for an awfully long time, and I believe very passionately in its importance in the overall economic system. We are on the frontier, finding the superstars of tomorrow, going where banks and venture capitalists fear to tread. Soon after I left university I was risking my savings from my salary to back projects of one sort or another. From software to retail, from construction to classic car restoration, from engineering to healthcare, from advertising to publishing – you name it, I’ve probably had a go. I lost count many years ago of the numbers of schemes I’ve supported – start ups and established companies, family businesses, subsidiaries of PLCs, opportunities bought out of administration, spin-offs, secondary buy-outs, probate sales and the rest.
Sadly I cannot say I know a cast iron set of rules to follow which guarantees bonanza profits. Part of the fascination is that investing is as much an art as a science. Much of the judgement comes down to the people – are the management team real money makers, or no hopers?
And of course the real joy of being involved in expanding companies is seeing something do well, and feeling as if you are part of that achievement. During the last seven years we’ve grown Patisserie Valerie from a business breaking even with six branches to one with 120 branches and £14 million of profit. That has been an exhilarating journey and I’m very proud to have been part of the rollercoaster – just as I was with companies like Topps Tiles, Strada, Integrated Dental Holdings, Giraffe and now Gail’s bakeries.
One of the other enormous privileges of having spent 30 years as a capitalist is working with some magnificent entrepreneurs as partners. I spend a huge amount of time trying to understand the psychology, motivations, characteristics and distributions of entrepreneurs – partly because I write a weekly column every Wednesday about them in the FT. And the truth is they are an unpredictable, quirky bunch, and impossible to easily categorize. But what I can say without doubt is that they are the most terrifically stimulating and invigorating company. Their restless, ingenious personalities mean life is never quiet when you’re working with founders and owners of emerging companies. And I wouldn’t want it any other way.
I wish I had kept an accurate tally of my returns. I don’t just mean the capital gains. Perhaps more important have been the jobs I’ve helped create, and the support for innovation. Most of you I’m sure know that generally speaking large corporates do not generate new jobs overall. It is new companies – in particular the special 7% so-called gazelles – which produce the majority of the new net job creation within the private sector. And as a Gallup research survey confirms every year all across the world, the issue that people care about more than any other in almost every society is access to a permanent job. So funding start ups and early stage ventures, small and big, is a truly vital role that really only angels and friends and families do. Without us, so many companies would never get to the stage where formal venture capital is available, or bank lending of any kind.
And smaller, newer firms are also the ones that so often inspire the freshest ideas and breakthrough concepts which turn whole industries upside down. I have spent long enough within large organisations to know that real pioneers struggle to get heard in such corporates. Too much time is spent on office politics, bureaucracy, and on avoiding risk at all costs. Unfortunately, in bigger firms the penalties for a failed experiment tend to be greater than the rewards for success – so there is too little incentive for management to take the plunge. And that is why we all need upstarts – to challenge the status quo, find better ways to do things, and offer consumers new experiences, products and better value.
Last year I co-founded a new think tank called The Centre for Entrepreneurs. Our aim is to promote entrepreneurship, and educate politicians, the media and citizens generally about the economic and indeed cultural importance of entrepreneurs. We are carrying out various pieces of research, and one of our targets for 2014 is the crucial importance of angel investors within the entire enterprise ecosystem. We hope this will be the most revealing research ever undertaken into the number of angel investors in the UK, and their impact. We are working with the UKBAA on this endeavour. The existing research is somewhat out of date, and we hope to demonstrate that angel investing is of even greater economic significance than previously thought. Anyone who wants to contribute in any way to this work should please contact me.
In a way angel investors are the unsung heroes of the capitalist system. We angels control a tiny fraction of the money commanded by the institutional fund managers. But increasingly the institutional houses focus their energies on listed multinationals. We meanwhile are discovering the multinationals of the future – right here in Britain. Many will fall by the wayside, but some will make it. The country certainly needs more high flying private firms, growing fast and recruiting talent. We need companies that pay tax here, and generate exports from the UK. Even government now sees the importance of angels, and has helped through initiatives like EIS and SEIS. The more tax breaks the better – it all encourages those who have the resources and the energy to consider placing some bets on the potential of exciting new ventures.
The angel market is much more organised than it was in the past, partly thanks to organisations like the UKBAA. There are many networks and syndicates of investors operating, and a variety of incubators and accelerators. New channels like crowd funding are increasing the choice open to entrepreneurs seeking finance. The range of information and advice available to anyone starting a new business has never been better. I chair an organisation called StartUp Britain, and we monitor the numbers of new businesses formed – last year was an all-time record, with over half a million new undertakings. I am hugely encouraged by such developments, and believe the enthusiasm among young and old for the freedom and independence that entrepreneurship can offer will pay great dividends for the nations in the years to come.
All this is great news for the British economy. And the fact that the country will probably grow at 3% this year is also to be celebrated. There will always be perfectionists who seek an ideal balance, with lower deficits, less debt and a better mix of geographic and sector expansion. My view is that conditions don’t get much better than this, so we should enjoy it and make the most of it. Certainly most businesses I’m involved with are seeing positive trading, and I am receiving lots of interesting investment prospects, which suggests confidence is rising and animal spirits are bubbling.
In general Britain has a wonderful history of invention, favourable demographics, a highly sophisticated finance sector, enjoys the rule of law, strong property rights, world class universities, pretty free markets, an ideal geographic location and is the mother of the language of business. Our currency is strong, tourism is booming, unemployment is falling and technology is providing an unprecedented array of possibilities for those who have the courage to launch something new.
As Winston Churchill said, “The empires of the future are the empires of the mind.” Mankind has always only ever been limited by its imagination. History shows that it is the optimists who win the day – no one remembers the cynics who said such-and-such would never work, or that things were getting worse. In virtually every aspect of life you care to mention, bold risk takers are making improvements – medicine, communications, transport, agriculture and so on. Productivity and efficiency gains on an extraordinary scale happen remorselessly, mostly unreported, delivering higher standards of living to billions all over the world who are part of the free enterprise system. Most of these advances are thanks to innovators and their backers – very often, in the really early days, angel investors – who believed in a brave horizon, despite the odds.
The unbeatable combination of entrepreneurs and angels is one of the greatest partnerships ever devised. Together we are creating the future – and I believe it to be a very bright future indeed. Thank you for listening.