Location, Location, Location

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There is an old saying in real estate that the three most important factors are location, location, location. Given the hype around startup hubs, one might think that the same holds true for company and investment prospects.

Lots of places around the world have been trying to position themselves as the next Silicon Valley (while at the same time, people have criticized the echo chamber nature of the Valley). Even with favorable trends, Europe certainly still has some homework to do: Among the top 20 cities of the world as measured by venture capital investments in the $5-200m range, 5 are in Asia compared to currently only 2 in Europe (London and Paris; no, not Berlin, and not Vienna yet either), the recent study Rise of the Startup City: The Changing Geography of the Venture Capital Financed Innovation found. However, Europe does continue to get more and more attention as a location for startup hotspots, as evidenced in a recent Forbes article.

While the hype is often superficial, there are sound economic and policy reasons for supporting specifically the kind of companies that are also attractive to early-stage investors like business angels and venture capitalists. Companies geared towards high growth are responsible for disproportionately high contributions to important economic indicators. The Octopus High Growth Small Business Report examined the situation in the United Kingdom and concluded that high growth small businesses (defined as £1-20m turnover and >20% average annual turnover growth), while accounting for only 3.4% of gross value added in absolute terms, contribute 36.2% to the growth of national gross value added, and a whopping 68% to employment growth.

No wonder then that countries like Austria are not content with qualitative indications like the tremendously successful annual Pioneers Festival (which regularly sells out its 2,500 available tickets to participants from all over the world), but also start to look at quantitative measure in earnest.

Now where does all this leave us with respect to the overarching question of how to deal with the location factor? Everybody seems to agree that among all kinds of economic growth, the growth of startup ecosystems is particularly desirable. But maybe we should look beyond the pure numbers and the “we (try to) get the largest slice of the pie” mentality by remembering some old wisdom of early-stage investors: That making a larger pie together can benefit everybody much more than fighting over how to slice the existing pie ever could. This also applies to locations for startups and investors. We should promote more and better knowledge transfer not just within startup ecosystems, but also across borders. Let’s all talk. Let’s all win.

FFF – Family, Friends, Fools

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Love Money vs. Smart Money

Small start-ups are always in search for promising financial support. Usually there are two favored options, either to turn to family members and friends or to hire a Business Angel in order to get the business started. In other words we are speaking of love money adverse to smart money. However, what exactly does this mean? Love money is received primarily from the people in the environment of founders like friends and family, whereas smart money takes a step forward and provides money, besides knowledge and important know-how. Smart-money investors are generally sophisticated business people, who bring an understanding of the financial markets, strong networks and an intuition for spotting trends before others with them.

The advantages of love money are obvious: good rates, lenient credit standards and the chance for FF-investors to take part in the start-up entrepreneur’s success. However, there are some notable disadvantages to love money that should be considered too. First of all, relations can suffer. The personal connection might lead love money-investors to ignore the uncertainty of such a high-risk business venture. Expectations regarding repayment, for instance, can be too high which leads to disappointment, if the friend or family member had not been clear about the possible risks. Another problem could be a lack of documentation. If an agreement is too unclear and not properly documented, it could lead to troubles later on. Furthermore, if the terms and conditions are documented, another potential obstacle could be failing to follow them. The best paperwork is useless, if you do not care about supervision.

 

 

Conflicting interests

One special case concerning troubles in this area of investments is now a Business Angel who takes on the role of an FF-investor. This of course could happen, if a family member or friend needs financial help to build up an enterprise. A Business Angel – usually investing in third-party companies – finds himself in the situation of providing both, love money as well as smart money. Obviously this is a very attractive combination for any aspiring entrepreneur, but it brings definitely some difficulties for the investor with it. The most important difference for a Business Angel who invests in some friends or family member’s start-up, is the way of communication which will not be the same as with any stranger. Everything will be discussed in a rather cautious manner, since you are dealing with very familiar people. They may very well address the “private” person in you, however the issues are predominantly relating to business. This leads to a discrepancy that is not so easy to handle.

Warning and advice

To manage the delicate tightrope walk between being the generous friend or a family member on the one hand and a cautious as well as a reliable investor on the other hand, it is extremely important for the Business Angel to be aware of the risks behind such an FF-investment. It could easily happen that you don’t judge things the same way you would do with a normal business client. Regular updates from the start-up entrepreneur, for instance, take a crucial part in the mentoring process. If they are missing, appear in irregular intervals, or do not address critical business issues in-debt, a Business Angel would normally disapprove. On the contrary, the same Angel is in danger to overlook this behavior, if he knows the person very well in private. But then look out: a nice friend might not necessarily be a good businessman! As for any other investment as well you should always keep in mind that the friend or family member could also fail. Some Angels do not invest, if there was no FFF-seed investment placed, as they will figure: “Not even the family of a founder trust him, why should I?” All in all handling the circumstances and paying attention to separate emotional and business issues as clearly as possible should be of first priority.

 

 

Caroline Ramberger, Bakk. phil.:

Miss Ramberger finished her studies of Journalism and Communication Science at the University of Vienna and is currently studying International Business Administration at the Vienna University of Economics and Business.

 

 

Sources:

Debaise, Colleen: The family plan: https://online.wsj.com/article/SB119562618703400389.html# (2013-07-25)

Ennico, Cliff: Accepting money from friends & family: https://www.entrepreneur.com/article/51542 (2013-07-09)

Robbins, Stever: Asking friends and family for financing: https://www.entrepreneur.com/article/44612 (2013-07-09)

Zwilling, Martin: How to get funding from friends and family: https://www.entrepreneur.com/article/217651 (2013-07-09)

Zwilling, Martin: Don’t hurt friends and family investors who love you: https://www.forbes.com/sites/martinzwilling/2013/04/16/dont-hurt-friends-and-family-investors-who-love-you/ (2013-07-09)

The Deals of VIPs – Celebrity 4 Equity

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Celebrity 4 Equity is a big trend in the venture industry but why? Being famous opens doors to events, people, media and wealth. The combination of access to a great amount of capital, a worldwide network and experience of dealing with the public view through media is very attractive for fortunate entrepreneurs. Big businesses have been using this for years, investing a lot of money in testimonials to align their brand with some star appeal – think of George Clooney and Nespresso. Celebrities and their public impact have proven to be one of the best marketing strategies, but it need not be remunerated in cash. Start-ups are usually in a constant shortage of cash, which makes them very creative when it comes to media impact, like guerrilla marketing for instance. Celebrity for equity is a concept where celebrities offer their media effectiveness as a testimonial, receiving equity (company shares) or participation in sales in return. Convincing the right star, with significant impact in target groups and markets can lead to phenomenal results.

A recent example for this type of investment is given with the famous Rap-Super-Star “50 Cent”, who supported the Vitamin Water Glaceau as a testimonial. Glaceau was sold in 2007 for 4.1 Billion Dollar in cash. In exchange for his marketing and brand-building activities “50 Cent” received 10% in shares of Glaceau which resulted in a profit of almost 400 million dollars. Celebrities investing in startups may be seen as classical Business Angels, like Ashton Kutscher. Ashton has been investing in quite a few US and Berlin-based startups yet.

Entrepreneurial Investments

In contrast to business angel investments, some celebrities place conventional venture capital or private equity investments via associate companies. One of these famous companies is Elevation Partners founded by Bono (U2) in 2004. Apart from investments in media, entertainment and technology businesses Elevation Partners bought 2,3% of Facebook in 2009 for 90 million dollars. After the initial public offering IPO of Facebook, the stake was worth about 1,5 billion dollars.

Another celebrity who turned into an entrepreneur is the television personality Kim Kardashian who founded a clothing brand D-A-S-H [Update: Dash closed in 2018] together with her sisters Kourtney and Khloe which leads to the so-called classical celebrity investments like restaurants, fashion-labels, nightclubs, record labels or fragrances. Probably these businesses are easier to understand and therefore celebrities feel more comfortable with them.

However, there are very few celebrities with such a strong commitment to the startup scene like Ashton Kutcher but the demand for start-up-multipliers in Europe is rising. Nevertheless not every celebrity is capable of offering expertise to support a project with the so-called traditional way with funding, deep business know-how, the knowledge of classical management competences and network.

What about social entrepreneurship and celebrities?

Some celebrities are serial entrepreneurs like Victoria Beckham or P-Diddy. Both of them have built quite a decent amount of businesses, like Bad-Boy Entertainment, a holding for various companies or DVB Style, a fashion label by Victoria Beckham. Even so, both use their fame to improve awareness for some social issues like funding a business school in Harlem or supporting a fashion campaign against skin cancer together with Marc Jacobs. Another example of social and clean-tech investment is Kevin Costner’s oil-water separator, which was used in the BP-Deepwater Horizon oil rig disaster in the Gulf of Mexico in 2010. Kevin Costner invested about 20 million dollars over more than a decade into the business.

How about failing?

Of course, there are some celebrities who failed in business-like “The Hills” star Heidi Montag who founded a clothing line called “Heidiwood” which failed poorly after one year. Another example is “The Fashion Café”, which was established by the four mega supermodels Claudia Schiffer, Naomi Campbell, Elle McPherson and Christy Turlington, which had do be closed after three years of struggling.

The idea of uniting synergy effects between celebrities and startups is a very well-known and proved concept of investment even though these projects can fail. Generally spoken celebrity for equity can be a serious benefit for both sides.

“Talk to as many angels as possible before you start investing!”

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While the European Business Angel Ecosystem is yet to mature, it is already well established in North America. In our interview, Marianne Hudson, Executive Director of the Angel Capital Association, explains differences and similiarities in the angel ecosystem in Europe an North America.
First, please tell us a little bit about yourself so that our readers get to know you better.
I have led the Angel Capital Association, the professional association of angel investors in North America, for six years and helped in its startup before then. ACA has 200 member angel groups, which is about 8,500 check-writing business angels.  I’m based in the Kansas City, Missouri area – right in the middle of the United States – because our angel education and research work got its start from the Ewing Marion Kauffman Foundation, a philanthropic foundation in Kansas City and I wanted to stay here.  I am an angel investor myself and belong to two angel groups in Kansas City (both ACA members, of course).  It has been great fun to work with angels here and other parts of the world. While no two think the same way, I find they really want to share their experiences and ideas with each other, and are just a lot of fun.

How well are business angels organized in North America?

It’s interesting.  ACA has about 375 American angel groups in our database, which may be the most of any country in the world.  However, about five percent of all American angels belong to angel groups.  Instead they invest individually or through informal groups of friends.  I believe the groups are very important as the hubs of deal flow in their communities, often connecting with other smart investors in their social networks.  They also syndicate with “unaffiliated” angels, family offices, VCs, and other private equity investors.

Many American and Canadian angel groups are very active and sophisticated, and importantly they have become very good at co-investing with each other in order to provide the amount of capital that innovative entrepreneurs need while diversifying their investments.  About 70 percent of these groups are networks, in which each investor decides whether they want to invest in a particular company.  Another 22 percent are funds, where members pool their capital up front and then take a majority vote on investment opportunities, and the remainder are networks with sidecar funds, kind of a cross between networks and funds.  In North America, all angel group members must meet specific requirements for wealth or income because of our securities regulations, and many groups set guidelines for total investment and participation in the group, such as serving on a due diligence team.


Do individual business angels tend to behave differently in North America than elsewhere?

That’s a good question, and I don’t completely know the answer.  From the people I’ve met, I would say there are often similarities in how angel investors throughout the world make investment decisions.  It may be that North Americans are not quite as conservative or risk averse as investors in other continents, but I always need to point out that much of America is very different than Silicon Valley or Boston – there is plenty of fear of failure in large parts of the US and Canada.  Another difference might be that American angels are more privately based than many other countries, meaning that there is less connection to government support programs and policies.

In the US and other countries that have been involved in formal angel investing for a longer period, there is likely a larger percentage of the business angel community focused on what happens after an investment is made.  How do we as angels make sure the entrepreneurial company successfully grows and exits?  There is considerable focus on mentoring, being a good board member, connecting companies to follow-on investors and partners, and helping portfolio companies through the corporate acquisition process.  This is good for the entrepreneur and the investor.


What kind of training for business angels do you have in North America?

ACA’s education and research partner, the Angel Resource Institute, is a global leader in educating angel investors, entrepreneurs, and other key parts of the startup support community.  ARI conducts 60 to 70 in-person seminars and workshops every year, mostly in the US but increasingly in other countries.  The focus is on practical best practices in angel investment, from thinking through portfolio strategies, to finding deals, screening and due diligence, term sheets, valuation, and supporting the companies post-investment.  ARI also has courses on how to start an angel group, trends and statistics in raising equity capital, and pitching to investors.  ACA supports these workshops with two professional development conferences each year – 660 investors attended our 2013 ACA Summit in April.

These one-day or half-day courses are a great way to build investment skills and activity.  Many long-time angels have said they wished they had taken the seminars earlier, as it would have saved them lots of money they lost.  We know, however, that many angels need shorter, on-going training via the Internet or through monthly angel group meetings.  So ACA, ARI, and other organizations put on Webinars and provide quick background for quick education sessions.

What would be your most important advice for future business angels?
There are so many things, but I think it is important to talk to as many angels as possible before you start investing and read up on best practices and experiences of good angel investors.  This can help you set expectations, understand some basic terminology and practices, and help begin your personal strategy for angel investment.  It may also help you understand the value of angel groups and getting some education in the practice of angel investment.

Launch of the Business Angel Institute

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The Business Angel Institute professionalizes angel investors through research, education and networking.

During today’s EBAN Congress the new Business Angel Institute is officially launched and presented. Founded and sponsored by Venionaire Capital, the Institute is an international organization located in Vienna, where this year’s Congress is held. The Institute

  • approaches the subject of business angels on a scientific level
  • promotes an international exchange of experience
  • and provides further education to existing and future business angels.

“Alternative forms of financing and angel investments are becoming ever more important for funding companies. Therefore, we look at business angels and their relationship with startups from a scientific perspective”, explains Dr. Herwig Rollett, president of the Business Angel Institute. The Institute’s establishment is also geared at making angel investments more widely known as a source of funding.