finance

Baybars Altuntas, Chairman of the World Business Angel Investors Forum

Governments around the world have understood the importance of angel investment for boosting their economies, with many, particularly in Europe, offering generous tax incentives for angel investors.  Last summer, G20 leaders publicly acknowledged that angel investment would prove to be a crucial element in boosting and stabilising the economy, emphasising a current lack of angel investors and need for more of them.

The public policy trend in the world today is about supporting ‘supporters of entrepreneurs’, instead of directly supporting entrepreneurs. Public policy wants to benefit from the know-how, the network, and the mentorship that angel investors can provide for its start-up citizens.  A CEO-turned-angel investor can contribute to economic development by investing in start-ups, thus helping create new jobs, social justice and new wealth for economies — even after they retire.

CEOs: The Missing Link in Angel Investment

Angel investment is certainly not a new concept , but now more than ever, it is proving to be  a valuable lifeline for the SMEs and start-ups. Such investment in the early stage equity markets is crucial to the fostering of economic development in both the long and short term, but what entrepreneurs need is as much as the investment itself is someone with the knowledge and expertise to help drive that investment forward. Starting a new business and managing a business require different skills. CEOs of multi-million-dollar companies have excellent experience in managing businesses.

Most  CEOs by default in the UK with have years of experience, business knowhow and wide networks of contacts. They’ve experienced many situations and challenges and know how to overcome some of the more complex issues that fledgling businesses may struggle to solve alone. But in many cases, these CEOs make their mark in the corporate world, then fade away into retirement. By doing so, they miss out on opportunities to make a difference to the businesses of tomorrow, whilst generating additional revenue and  expanding their business portfolios.

In their retirement, corporate CEOs have more time to mentor start-ups, scale-ups, high-growth businesses and SMEs. They come with a good financial package and a vast network that they have built over the years. The only thing they may lack is know-how: they need to learn about the principles of investing in start-ups and about founding a company from scratch. By the same token, SME entrepreneurs and founders of start-ups need support in the form of mentorship, know-know, networking, and finance to grow their businesses.

Setting Expectations

CEOs may be surprised at the discrepancy between their expectations of angel investment and the realities they go on to encounter. Angel investors often make the mistake of ‘picking the jockey, not the horse’ when making decisions about where to invest. The issue is more complex than a simple binary choice and there are tried and tested strategies for evaluating ABC teams and making decisions. There are also many questions to ask, such as when a CEO considers an angel investment, how important is the background and personality of the CEO? What processes do CEOs favour for learning about the founder and the key team members? What percentage of the typical diligence effort should you spend on getting to know and evaluating the team? What kind of third party validation of the team should you seek, if any?

With so many questions likely to be present when embarking on angel investment for the first time, CEOs considering establishing themselves as angel investors could benefit from undertaking mentoring of their own, and looking to their many industry contacts is a great place to start. The principles of investment – and how they apply to different sorts of businesses at their various stages of life –  is essential knowhow for prospective investors, and getting to know the experiences of other investors across a range of circumstances will help to develop a familiarity with challenges commonly faced. Experienced investors are a crucial part of the mentorship chain that constitutes angel investment when a newcomer decides to make the transition from CEO.

A value-added investor

Most angels see themselves as ‘value-added investors’, meaning that they derive as much personal satisfaction from helping a new business owner as they do from contributing capital to the venture. Many were previously successful business owners. Angels bring with them ‘value added’ benefits including  prior industry experience, valuable knowledge about business itself, an ability to mentor, creative ideas, and contacts. Angels who are valued beyond their financial contribution are more likely to assist start-ups in ways never imagined.

An experienced angel investor who was a CEO of a multi-million dollar corporate was reported as saying:

‘It turns out to be easier than I expected, and also more interesting. The part I thought was hard, the mechanics of investing, really isn’t. You give a start-up money and they give you stock. You’ll probably get either preferred stock, which means stock with extra rights like getting your money back first in a sale, or convertible debt, which means (on paper) you’re lending the company money, and the debt converts to stock at the next sufficiently big funding round. There are sometimes minor tactical advantages to using one or the other. The paperwork for convertible debt is simpler. But really it doesn’t matter much which you use. Don’t spend much time worrying about the details of deal terms, especially when you first start angel investing. That’s not how you win at this game. When you hear people talking about a successful angel investor, they’re not saying “He got a 4x liquidation preference.” They’re saying “He invested in Google.” That’s how you win: by investing in the right start-ups. That is so much more important than anything else that I worry I’m misleading you by even talking about other things.’

In summary, CEOs are human power with a good collection of management skills and a wide network. Entrepreneurs too are human power, but their strengths are in creative thinking and an independent working style. Through angel investment, the two different mindsets can come together with a common goal: scaling a business and creating a global success story. The journey from CEO to angel investor promises to be an exciting and thrilling ride, for those who are willing to get in the driving seat.

About the Author

Baybars Altuntas is the Former Senior Advisor of the Elite Programme of the London Stock Exchange Group (LSEG), entrepreneurship and innovation guru, global leader, best-selling author, angel investor, columnist, star of the Turkish version of the television show Dragons’ Den, Chairman of the World Business Angels Investment Forum (WBAF), Vice President of the European Trade Association for Business Angels, Seed Funds, and Early Stage Market Players (EBAN), President of the Business Angels Association of Turkey (TBAA), the World Entrepreneurship Forum Ambassador to Turkey and the Balkan countries, and President of Deulcom International. One of the top global speakers on entrepreneurship, innovation and angel investment invited by former US President Obama to speak at the Global Entrepreneurship Summit in Kenya.