When an angel could turn out to be a devil in disguise

By Jonathan Moules, FT.com

In the current economic climate, you would be stupid not to accept an offer of funding, wouldn't you? Not according to a number of ambitious entrepreneurs.

George Bevis recently turned down "two very prominent" angel investors for his young internet business Speedsell, which buys and resells video game consoles for people.

"The offer was rubbish, the terms were absolutely absurd," Bevis says, noting that too many people, especially at the moment, willgrab the first offer they get.

He insists that it was the right choice for him but admits that it was an easier decision to make because he was looking for "tens of thousands of pounds", instead of the millions of pounds that some internet start-ups need.

His aim was to use the extra funds to increase working capital so Speedsell could grow faster.

"We buy items from customers but we resell it later so, for a week or two, we have to fund ownership of the stock," he explains.

The 30-year-old knows a bit about the value of money having worked for several years as a banker at RBS, nurturing his personal business venture in his spare time.

Bevis claims to have put as much as £100,000 of his personal savings and wages into Speedsell before quitting his day job last September, the Friday before the collapse of Lehman Brothers sent the banking sector into a tailspin.

According to Bevis, the angel investors he came across were too greedy in their valuations of his fledgling venture.

"With an early stage investor, it is very important that you have someone who will be your friend. If they are trying to show off to you on terms up front, then they are just not acting in the right way."

Bevis, who expects to break even this August on a turnover of £1m, was better able than some early stage entrepreneurs to say no to outside funding because he was not desperate for large sums of cash.

Although he says he has no rich family members to help him, Bevis has been able to raise the money he wanted by tapping various personal contacts.

"Frankly, if you are an entrepreneur who cannot find a rich person to help you out, then you are not going to get anywhere," he says.

Cases like Speedsell are exceptional, according to those in the venture capital business, who have found themselves in the happy position to call the shots when it comes to investment. Not that they are rushing into deals. Pi Capital, an investor network, has evaluated over 20 businesses seeking finance in the last six weeks and decided not to put money into any of them.

David Giampaolo, Pi Capital's chief executive, says 15 of these businesses were "just no good". The rest were interesting, but the entrepreneurs concerned had unrealistic expectations, he explains.

"Sometimes you need to be more focused on return of capital rather than return on capital," he says, noting that he would rather keep money in a low-interest bank account when the current economic situation makes future performance of any business so difficult to gauge.

Entrepreneurs see the world differently, though.

Simon Campbell, who went to 25 outside venture capital firms before launching his innovative mail business ViaPost, claims that there is often a conflict between the aims of venture capital (VC) firms and ambitious owners of growing businesses.

"VCs love smart-looking business plans, and a level of forecasting detail which is not really appropriate for a start-up," he says.

The problem with raising early stage backing for ViaPost, which turns computer documents into physical mail, was that potential investors were insisting on a proof of concept before the service went live.

"That wasn't reasonable," according to Campbell, who ended up raising £450,000 from a private investor and his chairman.

After successfully launching his service in 2007, Campbell raised another £600,000 from angel networks last October.

Despite what might be considered appalling timing, given the state of the global economy, he had raised all he wanted by January this year.

Campbell did attract the attention of one VC firm during the latest funding round, but turned it down.

"They procrastinated a little bit and we said, don't bother. My attitude now is: you weren't there when we were early stage so why would we want you now?"

The decision to turn down outside investors is often more of an emotional choice rather than one based on economics, according to Gerard Burke, director of the business growth and development programme, a course for ambitious entrepreneurs at Cranfield University.

"There is a mindset issue about private equity," he says. "The vast majority of people are in business because, at least in part, they have strong needs for autonomy and control - so when they look at private equity taking part ownership, they see a loss of autonomy and a loss of control."

Mary Pratt, founder of Norwich-based recruitment business Cocoabean, says there are good reasons for guarding such autonomy: to retain the culture of her company and enact new strategies quickly.

"With recruitment, you don't need a massive investment. Your investment is your staff," she says.

"I have seen business owners see the pound signs before their eyes, taken it and regretted it."

'Funding is a two-way street'

Duncan Cheatle, founder of The Supper Club, a networking group for owners of high growth businesses

"A venture capitalist (VC) will often have deep enough pockets and want to do follow up rounds. So, if you are looking to scale substantially, this might be a better route than an angel investor.

"The right VC in the right sector can add value and aid an exit. However, valuations are lower so you should ensure you are happy with the dilution now and in any anticipated future rounds.

"Look at the rest of the VC's fund. Do your plans fit with theirs? Also, do due diligence on the VC in the same way they will do with you. Speak to several or all of their investee companies, not just the ones that have worked out well. Remember that if things do not go according to plan, VCs will want to remove anyone from the management team that they feel is not delivering, including you.

"Finally, try to ensure you have more than one investor interested, if you can, in the same way you might on an exit."

Alex Macpherson, chief executive of Octopus Ventures, a venture capital firm for early stage businesses

"Any entrepreneur should be cautious with regards to taking funding when you are not entering into what I would describe as a partnership. Any investment we would do is of our making: investment into a team to take a project forward. If it is not going to be a partnership, you have to question it.

"Then the question is what is likely to make it feel like a partnership, and that is down to deal structure - whether equity or debt is correct. Clearly, there will be elements with regards to price. If you don't feel you are getting a fair deal, then it is not going to be conducive to a partnership.

"If there is no leverage as to the skills of the VC, then questions have to be asked as to whether this is the right deal to do.

"Funding is a two-way street. If we are looking to invest into an entrepreneur who just wants our money and doesn't want the added value, it is not an investment and we will walk away."