LINKING ENTREPRENEURS& INVESTORS UK-WIDE

High Net World MagazineJuly 2013 Issue

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THE FUNDINGISSUE

INTERNATIONAL268,000 US Angels

ENTREPRENEURSMarketing Your Businessto Investors

WEALTHExpert Commentators?Au Contraire!

ANGELSValuation vs Ownership

BOOTSTRAPPING - CROWDFUNDING -PITCHING - MARKETING - PLANNING

Q Court, 3 Quality Street, Edinburgh, EH4 5BPFor further information, please contact Stephen Paterson on:Telephone: 0131 625 5151 spaterson@hwca.com

A Dresdner Kleinwort study looked at Wall Street’s predictions of interest rates over a 15-year period and com pared them with what interest rates actually did, with the advantage of hindsight.

It found an almost perfect lag. If in terest rates fell, Wall Street would wait six months and then predict that interest ates were about to fall.

When interest rates rose, Wall Street would wait six months and then de clare that interest rates were about to rise.

"Analysts are verygood at telling us what hasjust happened but of littleuse in telling us what isgoing to happen in thefuture," the report conclud-ed.Hey, if I forget my phone number will these guys helpestimate it for me?!

Sadly there’s more.  From 2003 to 2007, Standard &Poor’s predicted that 0.12% of a certain type of mort-gage bond would default.

In reality, 28% did. Thereafter in 2008, analysts pre-dicted the S&P 500 would earn $94 per share. In reali-ty, it earned $15 per share.  This was followed by a2008 prediction by oil giant Gazprom’s CEO who saidoil would soon hit $250 a barrel. Instead, it soon hit$33.

What’s next?  A specialist who can get the pastwrong?If we know the Wall Street wunderkind are continuallygetting it wrong at all the important points then whylisten in that direction?  Why give them your money?Why not look the other way instead.

The next time they say the good times are here, run forthe hills.  And when they tell you the skies are goingdark, grab your sunglasses. Hey, I think they call thatcontrarian!

By Alan Steel

P.3

In hindsight, every ‘expert’ claims they knew the2008 crisis was coming; the loony lending and lev-erage, the mezzanine mixtures of good and baddebt, the runaway noughties housing market.

Yeah, right.

All this after-the-fact prediction posturing is a long-honed tradition amongst Wall Street analysts andeconomists who have consistently missed thesesignificant market turning points for nearly a century.

JK Galbraith described them as the folks who existonly to make Astrology look respectable!

Yet, despite the type oflosing record that wouldrelegate a football clubfrom the top division to theempty-stadium leagues,these same folks remainthe quote machines for theheadline writers.Yale economist Robert Shiller said: “In particular, ifyou look at the Great Depression of the 1930s, nobodyforecasted that. Zero. Nobody. Now there were, ofcourse, some guys who were saying the stock marketis overpriced and it would come down, but if you lookat what they said, did that mean a depression is com-ing? A decade-long depression? That was never said.”

Expert Commentators? Au Contraire!

FIRST WORD

Steel’s View P.8

Practical Business P.32

Mike Williams

The Basics forRunning YourBusiness

Alan Steel Asset Management is authorised and regulated by the Financial Services Authority registered in Scotland No. 58014 /VAT registration No. 446593714 / Nobel House, Linlithgow, EH49 7HU / Fax: 01506 845074(1Assumes annual charge of 1% and 2 x 6 monthly portfolio rebalances at cost of 1%. (2) Source: ASAM (3) Source: Moneymarketing magazine. (4)Source: ASAM.

The annual growth your investments and pension fund have to achieve each year to simplycover the total annual and switch fees now charged by many wealth managers.(1)

The maximum annual management fee charged by Scotland’s’ largest independentwealth manager – Alan Steel Asset Management.

The fees imposed by Alan Steel Asset Management on all portfolio and pension fundrebalances and fund switches.(2)

The percentage of existing Alan Steel Asset Management clients who would recommendour wealth and pension management services to a friend or a family member.(3)

The number of times Alan Steel Asset Management have been voted “Best UK independentinvestment advisers”. This is more than any other Wealth manager in the UK.(4)

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Steel’s View P.8

GDP - Gross Distortion Predictions

Mike Williams

CONTENTS

First WordExpert Commentators P3

EmersonFinancial Markets Halftime P7

Alan SteelThoughts from the Beach P8

Mike WilliamsBeyond Summer’s Haze P11

InfographicThe Eurozone P17

FeatureThe Halo Report P19

WAWWhat Angels Want P20

WENWhat Entrepreneurs Need P21

International268,000 US Angels P23

FeatureThe Biotech IPO Market P25

Funding Special Reports:Crowdfunding P27Business Sugar Daddy P30The 9 Pitching ‘Must Haves’ P31Bootstrapping to VC P32

Practical BusinessThe Business Plan P35Stickiness P37

DiatribeBatista’s Missing $Billions P38

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Par Equity invests in innovative young companies with high growth potential. Our approachis hands-on, investing where we can add value through our Par Advisers, deploying intellectualas well as financial capital. We offer qualifying investors access to both EIS and conventionalventure capital collective investment vehicles.

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Par Fund Management Limited is authorised and regulated by the Financial Services Authority. Funds managed by Par Fund Management Limited are available only to electiveprofessional customers, who are able to invest in unregulated collective investment schemes. Retail investors will not be eligible to receive information about, or to invest in, such funds.

In fact it would be exceedingly fair to say the Europe-an markets have held their own despite the EuropeanUnion bailouts and recessionary-state economies…sofar…with Germany’s DAX up over 4% and evenFrance in the black and up around 3%.

Sadly, the not-so-great 2008 recession saw big bankCEOs remain in position, including JP Morgan’s JamieDimon and Goldman’s Lloyd Blankfein, who in themore sadistic (nay medieval) era known as Reagan’s1980′s, may well have been knighted by now…perhapsthose  accolades are yet in the post.

Equally wretch-inducingwas the benchmark reportfrom Rolling Stone whorevealed the part played byratings agencies Standard& Poor’s, Moody’s andtheir ilk in the cash-for-tri-ple-AAA-ratings scandalthat helped shovel coal onthe noughties credit andtrading excesses.They, alongside the FSA or FCA have been impres-sively inconsistant in their pursuit of fiscal monitoring.

Short tirade now ebbed, we end on the the perhaps-too-late investor herd finally migrating away from bondfunds in respectable masses (now that they’ve missedout on four years of equity market gains) moving outover $60 billion in June and breaking the record forthat month.

Hopefully they’ll put that money into stocks and enjoythe ride through what looks to be a continuing, albeityo-yoing, secular bull market.

By Ed Emerson

The Financial Markets’Score at HalftimeIt went fast.  With the first six months of 2013 in therecord books (literally) we’ll take a quick pause to seewhat’s passed us by and what’s to come.

Hindsighters aside, most market soothsayers would nothave predicted January to June as pushing major mar-ket averages up to their best start to a new year since1999.

And before you start playing pre-dot.com bubble asso-ciations, the dynamics now look a lot different thanthey did then.

Sure, the market’s been ayo-yo at times but the DowJones is up a gravity-defy-ing 14%, undoing the his-torical precedent where USstocks have slumped duringa president’s first year inoffice (usually only upabout 5% going back to1949), first or second term,and Obama fans on WallStreet are harder to findthan a happy Facebook IPOinvestor just now.Austerity be damned, the boys in D.C. who cleaved$85 billion from the Federal budget witnessed little byway of ensuing street mayhem, or Fiscal Cliff miseryfor that matter.

P.7

EDITOR

However one of the Stocks to avoid, over the last year,has outperformed 71 out of the 72 on their buy list.

From 1966 world stockmarkets then fell into what'sknown as a Secular Bear Market, which is obviouslythe opposite of a Secular Bull.

These are long term cycles, for example, over the lastcentury there were 3 Secular Bulls, from 1921, 1942,and 1982.

Between 1966 and 1982 the Dow Jones fell from995.15 to 776.9, that's a long time going nowhere, theconsensus at the time was that this underperformancewould continue for years, given that economists sawno hope for the US economy in particular.

Now of course history books show 1982 was a time ofopportunity for optimists, given the Dow Jones wentfrom 777 to hit over 11,723 by March 2000, and thatignores reinvested dividends which over long periodscan amount to over half total returns.

And what were the "ex-perts" saying as we movedinto the New Millennium?Do you remember theheadlines? "A golden era"or, regarding stockmarkets,"a plateau at worst" ---thousands gave up theirjobs to day trade stocks,and anything with dotcomin its name was a sure firewinner.  But sure enoughby March 2009 the marketshad fallen 44%!

If you saw the picture of David Cameron and his wifehaving lunch on an Ibiza beach you will now knowwhere I had a long Ibiza lunch (lots of liquid refresh-ment, seafood, and laughter) a couple of weeks back onCala Benirras.

Fran and I and a young cousin from Canada were joinedby Jim and his 3 mates at Restaurant 2000 right on thebeach famous for its sunset hippie drummers.

I first met Jim 32 years ago when he used to call on meas a young impoverished fund manager, though beingbased in San Francisco running a US fund probablyhelped his future prospects.

And we'll return to Jim later.

Let me paint the picture of what investment and stock-markets looked like in 1981 when Jim and I first met.

In 1966 the Dow JonesIndex, a so called measureof US corporate wealth,topped out at 995.15, upover tenfold from the startof a long term Bull Marketwhich began in 1942 wheneconomists at the timepredicted years of miserygiven the state of the worldat the time (WW2).As we have come to expect since they were completelywrong.  And just as an aside, to demonstrate the scale oftheir errors today, analysts at JP Morgan prepare a listeach year of "Stocks to buy" --- and "Stocks to avoid atall costs."

P.8

Thoughts from the BeachBy Alan Steel

STEEL’S VIEW

Global Strategist Tim Hay-es the other day , on thesubject of Secular BullMarkets, said "if it lookslike a duck, sounds like oneand swims like one, it'sprobably a duck" --- or inthis case a Bull.While most investors have been running to the edge ofthe mental playground thanks to the never ending pre-dictions of Armageddon, in the 4 years since March2009, the US stockmarket is up over 22% pa, as it wasfrom 1921, 1942, and 1982.

As to my old pal Jim, who foresaw the Tech boom fromthese early days 32 years ago, his spells of fine tuningthe 3 bricks indicator to only one, has helped him to aposition within the UK top 100 Rich List.  (But at leasthe insisted on paying the bill).

And as Tim Hayes and the font of all knowledge JoeKalish believe, we are heading for years of stockmarketoutperformance, what's Jim's thoughts these days?

He reckons the next big thing, perhaps bigger even thanthe Tech boom, is Biotech.

He's written a book on it - "Cracking The Code" - and afund is being launched soon, not for the fainthearted I'dguess, (and do remember Regulators have stopped megiving advice).

But with Jim's record I'll be slinging in a few bob, and ifit works, and I'm spared, I'll pick up the tab next timeJim and I sit down for an Ibizan lunch.

Salud!

Alan SteelChairmanAlan Steel Asset Management

Against The Herd

Now I know I write often about the benefits of goingagainst the herd but I concede it's not at all easy, thanksto how our brains have evolved over thousands of years,where the least bit of perceived danger fires adrenalinfrom the hypothalamus encouraging panic to win overconsidered thought.

And I often explain how difficult it is to spot a trend.Despite years and years of folks seeking an alternative,there is no better method to build wealth than to BuyLow and Sell High.

And buying low is at its most effective when you areearly into a trend.  But trends are obvious to the majori-ty only in hindsight, which is too late as you discoverwhen you've followed the herd once again.  (Some wagsaid, just buy high, sell low, and keep repeating this un-til you've no money left).

I describe trend spotting as this --- you walk along aroad you've walked along before, often and without in-cident.  A brick hits you on the head.  No-one there!What is it?  A fluke!  For a while you walk along thisroad rather nervous, but no more bricks so you becomeconfident again --- then bang, it happens again!

What's your conclusion?  A coincidence perhaps.  Can'tbe a fluke, eh?   The third time it happens though it's atrend!  Pity you didn't spot it sooner.

Now let's return to the stockmarkets.  When you exam-ine the growth returns --- never mind the gains from re-invested dividends --- from the beginning of SecularBull Market periods, until the end, it's plain that spottingthe trend early is worthwhile --- a six fold increase fromthe 8 year Bull starting in 1922, a tenfold gain in the 24year bull beginning in 1942, and a fifteen fold increasefrom '82 to 2000!

So is there a way to spot the probability of a trend morequickly than suffering the third brick? After 40 years inthis business looking for answers and, as a slow learner,I'd say it's about studying the habits of those expertsrarely quoted who have dedicated a lifetime to studyingwhat works and what doesn't.

Take Ned Davis Research for example, who study allmanner of historical data.  Their unique studies of inves-tor sentiment give you an edge at market turn, short andlong term.

P.9

STEEL’S VIEW-

So what’s going on?

The short answer is that companies are not spending asmuch.  They have record earnings but they are holdingon to a lot of the money.

Consider the places where they would spend theirmoney:

● Capital expenditures have not risen much● M&A activity has been modest at best● Buybacks have increased, but they are no-

where near levels before the financial crisis.For example, actual buybacks were $100 bil-lion for the first quarter of 2013. If you goback to Q4 2007, there was $142 billion inbuybacks, Q3 2007 there was $172 billion

● Dividends have gone up slightly, but theyhave gone down as a percentage of earnings.For the S&P 500, the payout ratio (the dollaramount companies are paying out as a per-centage of earnings) is currently 36 percent;in Q3 2007 it was 45.8 percent.

Why Is This Happening?

They seem uncomfortable spending the money.

Why? The commentary seems to indicate they don’thave a lot of visibility or confidence in future growth.

In other words, the 2008-09 events scared the $%^&out of them too.  Further,their crystal balls have notcleared enough yet sincethen to tell them ”the futureis always cloudy” youboneheads.The good news is that with so much cash, companiesare likely to at least continue to raise dividends.

Could this help cushion the massive shift which stillneeds to unfold as trillions of dollars learn the hardlessons about bonds over the next few years?

We surely hope so.

And The Winner?

The sector that has the most cash is technology. Thatsector accounts for 41% of all the cash in Q1. And thecash hoard is growing fast, up 11% year-on-year.

The mind is a terrible thing when it comes to mar-kets and emotions.

We did a video several months ago for American Air-lines pilots as a part of a program to help them gainbenefit from the changes afoot at their company.

Specifically, it was designed to show how muchtoday looks a whole lot like 1982 (don’t worry, it wasreally crazy then to say the future was bright…..I wasthere!

One more thing; when and if we do get that big pull-back to shake the crowd up, rest assured you will feelthat I’m a total dummy to suggest good things about thefuture. That’s your clue to, well, buy the setbacks.

All About Cash

Cash set a record in the first quarter of 2013 on an ab-solute basis: $1.093 trillion in the S&P 500. In fact ithas set a record for 18 of the last 20 quarters.

Now it’s a bit early to sayfor sure what will happenin Q2, since only about25% of the S&P 500 hasreported, but early indica-tions are Q2 will be wellinto a new record as well.

VIEW FROM MANHATTAN

Beyond Summer’s HazeBy Mike Williams

P.11

The HNW HEAT Scotland100 High Growth CompanyPublication & Event Series

Tuesday 21st May 2013

SPEAKERS

Ray McLennan, Angels Den

Stephen Paterson, Haines Watts

Carlos Alba, Carlos Alba Media

Ed Emerson, HNW Magazine

HEAT 100

That's good news by the way.

Everyone agrees that Europe is in a growth recessionthat could be secular rather than cyclical. That, inturn, is slowing the growth of emerging economies bydepressing their labour-intensive manufactured ex-ports, along with their commodity exports.

No one is expecting a boom or a bust out of the US.

It's Really About Earnings Right?

Even with the paltry assumptions about globalgrowth, industry analysts are remarkably upbeat aboutearnings.

They expect that S&P 500 earnings will increase6.9% this year and 11.4% next year to a new record of$123.61 per share.  For the S&P 400 MidCaps, theyexpect gains of 6.7% and 15.4%.

And for the S&P 600 SmallCaps, they are estimatingwhopping growth rates of 14.9% and 21.5%.  Even ifwe shave a few points off these elements, the marketis far from "bubbly".

But the loud debates aren't always about issues thatinvestors care about. More often than not they tuneout the noise.

That, however, was impossible to do during the sum-mer of 2011 when S&P downgraded Treasury debt asa result of the impasse over the debt ceiling.

The resolve back then was a bipartisan agreement tosequester $1.2 trillion in federal government spendingover a ten-year period if no other agreement could bereached to reduce the federal deficit.

And right on time that Act was implemented on1st March of this year, with a spending cut of $85 bil-lion for the current fiscal year.  The next round of$109 billion for the 2014 fiscal year will start on1st October.

The deepest part of the haze lay dead ahead, in thedoldrums of August.  We are indeed on the lookoutfor a summer dip before the next "upside surprise"arises.  The support is there for corrections so let'shope we get some.

So here we are at roughly the mid-point of the dreadedsummer haze, which always seems to grip the market asthe heat grips the country.

And with the masses moving on toward vacation there'splenty of time for folks out there to create hype at themedia desks and support their own business models andagendas.

Remember this above all; it is no longer about valid,

important news.  It is allabout traffic, eyeballs,clicks and ad revenue.Once you get your headaround that, the knee-jerkreactions based on fear tendto subside.The Latest?

Well, let's see.  We've seen many market ghosts dissi-pate over the last few weeks.  In particular, fears ofthe Fed screwing us all by jacking up rates has subsid-ed, as have those about Syria, Iraq, Greece, Portugal,etc., etc., etc.  We may even be getting to see the earlystages of a bond bounce in the cards.  But remember tosell rallies from here.

The Gold guys are still around.  Paulson boldly told aconference last week "he was not worried about gold'sfall."

Of course he isn't.  Did anyone really expect that typeof admission before he has a chance to liquidate?

Got to Mix In Bad News Right?

As a backdrop, Dr. Ed Yardeni (Yardeni Research) andhis team remind us that, "...last week, the IMF onceagain lowered its forecast for global economic activitythis year, and next year."

Half Way There

P.11

VIEW FROM MANHATTAN

P.13P.13

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FEATURE: EUROZONE

P.17

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P.19

What Angels Want &

Entrepreneurs Need….

HALO REPORT

What Angels Want &

Entrepreneurs Need….

The HNW HEAT Scotland100 High Growth CompanyPublication & Event Series

Tuesday 21st May 2013

SPEAKERS

Ray McLennan, Angels Den

Stephen Paterson, Haines Watts

Carlos Alba, Carlos Alba Media

Ed Emerson, HNW Magazine

HEAT 100

It’s the limited partners who get screwed by this stuff. Ifthey had money in both firms, one deal would haveturned $2mm of their money into $16.4mm (8.2x), theother would have turned $5mm of their money into$17mm (3.4x).

And the firm offering $5mm for 20% will likely have a$500mm fund size (or more) and will be making$10mm or more per year in management fees.

This happens all the time in the VC business. And it iswhy USV is committed to small fund sizes, smallrounds, and smaller valuations.

We lose a lot of deals tofirms who aren’t committedto any of those things. Butthat’s life. We have madeour LPs a fair bit of moneyand we expectto make thema lot more inthe comingyears. We keepthe fees lowand try toproduce big gains. That’sour model.You might ask “how can taking $2mm for 20% be bet-ter than taking $5mm for 20%?” and you’d be right ask-ing that question. The answer is you can get the other$3mm later at an even higher price. That has been thehistory of many of our investments.

David Karp raised $600k, then $4mm, then 5mm, then$25mm, then $80mm (or something like that). And atthe time of the sale to Yahoo!, he owned a very nicestake in the business even though he had raised wellnorth of $100mm.

He did that by keeping his rounds small in the earlydays and only scaling them when he had to and the val-uations offered were much higher.

It’s a big money game of asset allocation. When youteam up with VCs who are playing that game, you areplaying that game.

The Challenges Facing the VC Industry

Some investors are ownership focused. They want toown 20% of the business but care less about the valua-tion.

Let’s take a hypothetical Series A round. An entrepre-neur comes to USV and pitches us and we like what thecompany is doing and we offer $2mm at $8mm pre-money/$10mm post-money.

The $2mm buys us 20%.

Another firm shows up, a firm that is less valuation ori-ented, and they offer $5mm for 20% of the business,which works out to $20mm pre/$25mm post. The entre-preneur suffers the same dilution but gets $3mm moreto work with.

From the VC’s perspective, there isn’t that much differ-ence. Let’s say the company sells for $100mm at somepoint. The first deal would produce $20mm in proceedsat sale, an $18mm gain, and a $3.6mm carry if youcharge 20% as we do at USV.

The second deal would produce the same $20mm inproceeds, a $15mm gain, and a $3mm carry if the otherfirm charged 20% carry. If they charged 25%, as manydo, then they make $3.75mm, which is more than the$3.6mm.

Valuation vs OwnershipBy Fred Wilson, AVC

WHAT ANGELS WANT

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What Angels Want &

Entrepreneurs Need….Active Involvement

Make sure you show any potential investors that thereis room for them to be actively involved in your busi-ness.

There are very few inves-tors who will be happy topart with their money andthen just sit back and waitto see what happens to it.Let them know that theywill be consulted on majordecisions and that they cansee first-hand what is goingon in the company.Exit strategy

There will be a point at which your investor will wanttheir money back, and the profits that you have gener-ated for them. They will want to see before they investthat you have an exit strategy lined up for when thiseventuality does occur. Make sure you have thoughtthrough the process of how the business will make thetransition to cope without the involvement of your in-vestor.

Angel Investors can mean life or death for small com-panies, and can give your business the urgent capitalthat it needs to grow and develop.

There are a few things that you can do to help attractinvestors to your company, but the main thing is tomake sure that you make people believe that they willget a solid return on their investment. There is no waythat people will pump money into something unlessthey are reasonably certain that their money is safe, andthat it will grow in the future.

What type of investor do you want?

Since angel investors are all individuals, there is noone-size-fits-all way of attracting them. Before you doanything to attract anyone, you need to decide exactlywhat type of investor that you’re looking to attract. Areyou looking for someone who is excited by the prospectof creating something new, with a real passion for theproduct or service you are providing?

Are you looking for a pseudo-philanthropist, someonewho wants to see a good cause being undertaken, whois not so driven by profit? Do you want somebody whois purely interested in figures; who will be pushing forhigh returns? Or are you looking for something elsealtogether? Once you have decided exactly who youwant, then you can start to focus on attracting yourinvestor.

WHAT ENTREPRENEURS NEED

Beyond Summer’s HazeBy Mike Williams

P.21

Marketing Your Businessto AngelsBy Richard McMunn, How2become

Focus your mission statement

Make sure that everything your business does is fo-cussed around what you want to achieve. Thisshould be something important to you and the busi-ness, but also should be something that your desiredinvestor will be able to latch onto. Everything aboutyour business should be coherent, make sure thatnone of your motives contradict each other and thatyou have a clear business identity.

Financial Security

If you have to hire extra help, then do so. Yourbooks will have to balance perfectly, with absolutelyno loopholes. If an investor finds a problem withyour numbers then they will pull out straight away.Your finances have to be honest and correct or youwon’t stand a chance of attracting investors.

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What Angels Want &

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that a new relationship has been forged between regis-tered investment advisors and angel investors.

While some angel investors operate solo, many angelsare banding together in angel groups, who use exper-tise and contacts from different members to create alarger pool of resources and knowledge while spread-ing the risk involved.

Angel investors are not thenorm even in terms ofUltra High Net Worth in-vestors.

A Spectrem Group studyfrom Q1 of 2013 foundthat among the UHNW($5m to $25m net worth,not including primary resi dence), 94% consider the level of risk with invest- ments, to be thehighest consideration.When asked to pick one concern, only 39 percent ofthe UHNW investor selected level of risk associatedwith investments, where 26% selected the tax implica-tion of investments.

A 2012 Spectrem Group Perspective on investors withnet worth over $25 million indicated they had 25 per-cent of their portfolio in what is considered alternativeinvestments.

This includes private placements.

The world is changing for angel investors, the ultra-wealthy looking for start-up companies to fund.

For decades, angel investors, who have an ultra-highnet worth, have placed huge sums of money in thehands of start-up entrepreneurs, getting in on theground floor of what they hope will be successful in-vestments.

The fact that they are extremely wealthy allows angelinvestors to take chances whether others might not beable to.

They usually demand a high return on investment asreward for taking a chance on an unproven commodity.

The Center for VentureResearch at the Universityof New Hampshire estimat-ed therewere some268,160angelinvestorsin the USin 2012,with totalinvestments of $23 billionin morethan 67,000 companies.But now, with the significant drop in start-up costs re-lated to a similar decrease in technology costs, angelinvestors are able to get in to a company for as little as$25,000, according to a story by Financial Advisor.

Smallbiztrends.com said average investment size hasdropped from over $500,000 in 2006 to just over$300,000 in 2012.

FA revealed that the drop in cost for start-ups is such

INTERNATIONAL

P.23

268,000 US Angels with$23BN in 67,000 Co’sBy Kent McDill

P.22

New TechnologiesNew EconomyNew Scotland

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To find out more visit nvtgroup.co.ukTel. (+44) 08453-893-300

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What Angels Want &

Entrepreneurs Need….

Quite a few investors, big and small, will lose moneyand lose interest. Companies would be wise to fill uptheir coffers now, and stay disciplined in their spending.

So far this year, 24 life science companies have debutedon the public stock markets, based on my review of datafrom Renaissance Capital.

That’s about double thenumber of IPOs you’d nor-mally see in an entire yearin the cautious world ofpost-financial crisis invest-ing.In very short order we could see as many as five morebiotech companies take advantage of the new investorappetite for biotech.

Agios Pharmaceuticals, Cellular Dynamics, Heat Bio-logics, Conatus Pharmaceuticals, and OncoNova Thera-peutics are all on deck.

What’s driving this surge? There are some fundamentalreasons to be positive about biotech, but this is alsoabout herd behavior in the markets, and greed.

The year is only half over, but one of the biggest bio-tech stories of 2013 is going to be the resurgence of thebiotech IPO market. It’s a good news/bad news story,depending on where you stand, and how far you lookout into the future.

First, the good. The IPO surge is a vote of confidencein biotech from generalist investors who have spentyears ignoring the industry. It’s good news for biotechentrepreneurs and venture capitalists who back them.

A lot of money will get pumped into researching anddeveloping drugs for diseases that have been long ne-glected, likeDuchenne Muscular Dystrophy. Regionalinnovation clusters will get a boost.

Many small companies will have more negotiating lev-erage when they talk to Big Pharma companies aboutacquisitions. It might spur more much-needed ventureinvestment in biotech startups.

That’s all wonderful. But here’s the downside.

This IPO party won’t last long, probably no more thana few months. There are only so many good privatecompanies worthy of graduating to the public markets.If the past is any indication (remember the genomicscraze of 2000?), there will be a hangover when it ends.

FEATURE: BIOTECH IPO’S

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The 2013 BioTech IPOPhenomenonBy Luke Timmerman

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What Angels Want &

Entrepreneurs Need….

Yet, on the available statistics, crowdfunding seems tobe taking off slowly in Scotland.

Let’s look at UK figures: £200 million raised withcrowdfunding last year (est. £300m 2013). With theScottish economy representing around 8% of the UKeconomy, you might expect to see a similar proportionof funds raised via crowdfunding (i.e. £16 million). Inreality however, estimates show that funds raised northof the border last year might be significantly lower –perhaps even as low as £1 million.

Why? A business community that understands crowd-funding?

It’s encouraging to read that people do seem to be awareof what crowdfunding means in general terms. But dig alittle deeper and it’s not all positive.

The Report identifies a lackof detailed understandingabout the different types ofcrowdfunding (reward, eq-uity, peer-to-peer lendingand donation-based).Although P2P lending is the most successful type of UKcrowdfunding in terms of funds raised, it is the least-

When you’re working hard to buildScotland’s first equity crowdfundingplatform, it’s critical to have accessto every piece of relevant informationabout how the crowdfunding sectorin general is developing.

So I was eagerly looking forward tothe recent publication of a reportcommissioned by the GlasgowChamber of Commerce entitled‘Crowdfunding – The ScottishPerspective’

I should say at the start that I wasdelighted to provide some input intothe research process carried out byTim at Twintangibles. I’ve summarised a few of thekey points from the Report below.

Do SME’s in Scotland need money?

A no-brainer. Yes. The Report shows that SME’s arelooking for cash for innovation and new product devel-opment, followed by expansion, R&D, startup seedcapital, working capital, with company maintenanceand miscellaneous reasons bringing up the rear.

The Breedon Report  esti-mated the supply and de-mand of finance for SME’sat £26 billion and £59 bil-lion respectively. Withestimates showing that $2.7billion was raised viacrowdfunding globally lastyear (est. $5 billion 2013),the question is can crowd-funding can help the 56%of Scottish SME’s whohave stated that they’re ac-tively seeking finance.

CROWDFUNDING

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The BreedonReportBy Jude Cook, Sharein

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enabling the JOBS Act. Equity crowdfunding cam-paigns in the UK raise around £150K on average.Compare this with the average figures for P2P lending(£50K) and donation (£22K) campaigns. The largersums will tend to be more attractive to high growthbusinesses.

As you would expect, it’s also important to appreciatethat the average size of investment per individual ismuch smaller than traditional investment methodswhen using equity crowdfunding.

The model works because of the long tail, as shown bythe research which indicates that the average sum in-vested per equity crowdfunding is somewhere between£600-£2,500 – significantly lower than if the moneyhad been raised using more traditional methods.

Is Scotland Different?

At this stage, it’s impossible to collect ‘Scottish’ fig-ures accurately. Yet there is one point that is hugelyimportant to all of us here at ShareIn – and indeed wasa major part of the reason why we’re committed to get-ting our platform up and running successfully.

To quote directly from the Report:- ”…no Scottishproject has successfully raised equity crowdfunding onany of the main platforms”

This is astounding to me, clearly identifies the need forprogress to be made and provides yet more evidencethat there’s a demand for a platform such as ShareInthat can facilitate this process.

It certainly looks as if Scotland is behind the crowd-funding curve.

What Does The Future Hold?

Now that it appears to be commonly accepted thatcrowdfunding will become an increasingly importantpart of the funding solution for many growing compa-nies, it’s my hope that this Report will act as a clarioncall for us all, within the crowdfunding industry andfurther afield within the wider business community, towork to encourage a greater understanding of crowd-funding and where it can be used to help businessessucceed.

It’s great to see Twintangibles making the initial forayinto collating the information that’s so badly neededabout crowdfunding in Scotland.

It’s clear to everyone that the sector is on the cusp ofexplosive growth.

We now have a solid base to accurately assess what’sgoing on and I for one will eagerly await any updatedreports in the future.

Jude Cook, Sharein

Breedon Report(…cont.)well known. The highest profile model is reward-basedcrowdfunding – no doubt due to the high profileof Kickstarter.

Part of the reason for this limited awareness might bethe fact that there are very few platforms based inScotland. At this point in time, none that provide theability for companies to seek equity crowdfunding –something that we’ll change with the launch of ShareInof course.

Encouragingly, there’s evi-dence that institutions andorganisations are starting tounderstand crowdfunding –whether that’s in the formof the West of ScotlandLoan Fund becoming in-creasingly comfortableabout match fundingagainst cash raised viacrowdfunding methods orbanks that are increasinglyrecognising it as a viablealternative in situationswhere they are unable tolend funds.Why Is Equity Crowdfunding So Important?

I’ve blogged about it before so I won’t simply repeatmyself here about why it’s so important for us to makesure high growth companies can access funding. Butthe Report confirms that the UK is identified as a lead-er when it comes to equity crowdfunding.

We might have complex legislation but the reality isthat crowdfunding via equity is often heavily regulatedand only allowed in certain countries. In the UK, we’reseen as being at the forefront of developments. For ex-ample, the US are experiencing tortuous difficulties in

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dered Sir Alan being reminded lastweek by advisorKarren Brady that he had chosen an all-female finalline-up?) but in terms of  investors.

Current statistics show that whilst women own nearlyhalf of the wealth in the UK, the percentage of busi-ness angels actively investing in the UK is no morethan around 5% of the total. It’s a shocking statisticand simply just not good enough.

We’re doing ourselves – as a country – a disservice ifwe fail to lower the barriers which are somehow pre-venting  women from investing. To put it bluntly, en-trepreneurs – both male and female – are missing outon cash that should be available to help their business-es grow.

The UK Business Angels Association has carried outmuch work in this area and Jenny Tooth will be lead-ing a high-profile campaign to ‘Beat the 1:20 Ratio’during the coming year.

How crowdfunding is helping to address the imbal-ance

We’re still in the early days of a revolution that’s tak-ing place in early-stage funding, but my strong beliefis that by crowdfunding, you are breaking down theold boys network mentality and democratising fi-nance.

We are opening up opportunities to invest and by re-moving perceived barriers, we’re increasing the flowof money to the businesses who need it most. It’sabout finding people who are willing to invest in busi-nesses they believe in. And the greater the flow ofcash there is, the more successful all of our early stagebusinesses can be.

It doesn’t have to be all about the Sugar daddies. Letthe mummies have a go as well!

OK I admit it. I watched the final of The Apprentice.

Billed as a tumultuous tussle between baking and bo-tox, a somewhat divisive (and often-derided) form ofbusiness-lite entertainment peddled for the masses itmay be.

But even when viewed through the lens of entertain-ment, the show can still shine a light on so much morethan just the comedic failings of individuals from arange of backgrounds whose every false step underpressure is beamed back to a gleefully critical public.

Let’s deal with the businessissues first. Where to start?Lack of defensible intellec-tual property. Non-existenttalent management team.Flimsy experience.(Tip: never tell someone that you have no intentionof exiting when asking for an investment.)

The list could go on. Ignoring the apparent failings ofboth embryonic businesses, it prompted me to reflecton the gender issues surrounding start-up finance.

Female investors are desperately needed. Not in termsof the competitors (who can forget a somewhat bewil-

Why Do Our BusinessesNeed A Sugar Daddy?By Jude Cook, Sharein

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4) SolutionDescribe what the solution looks like. What features oraspects within your solution address the problem?

5) TractionCommunicate traction byrevenue, customer acquisi-tion and usage.6) TeamYou have to be able to sell your team. It doesn’t al-ways have to be on your educational pedigree but thathelps too. Talk about hustle, domain expertise, camara-derie and experience. Reiterate why you’re worthy ofbeing trusted.

7) Revenue ModelWhat’s your business model? Annual? SAAS? Month-ly? Licensing? Rev-share? You don’t need to includenumbers so much as the formula that shows howyou’re going to get to where you need to go.

8) FinancialsHow much money have you raised? How much areyou planning to raise?

9) AppendixHave additional slides within which could answerquestions that may come up but are not directly relatedto your pitch.

The 9 ‘Must Haves’ InAn Investor MeetingBy Aswin Natarajan, Techstars

We’re officially past the halfway mark at Tech-stars. With only 4 weeks to go until the end of theprogram, the teams are gearing up for the finalsprint towards Demo Day and securing investors.

Today, Luke Beatty gave a talk about how to make aninvestor pitch desk. It was loaded with tons of tacticaladvice and I think it covers some valuable basics.

‘Must Haves’ in an Investor Meeting

1) ProblemYou have to explain why your company needs to exist.You can do this in lots of different ways. But the prob-lem you describe needs to be as clear as possible.

2) Business Overview“We use X to solve Y by way of Z.” This may be simi-lar to what others do – for example both Zappos andNike are companies that sell shoes online – but they doso differently and offer different value propositions totheir customers.

3) InsightIs there anything that gives you unique authority, in-sight or access to information which others can’t easilyacquire themselves. Give them a reason to trust thatyou will know how will solve your problem.

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FUNDING

HEAT 100

Fortunately, our core team was capable of engineeringanything that we wanted to build, which allowed us todevelop unique technology without hiring any em-ployees, but our rate of development was what I’d call“slow and steady.”

This is not a rate that we were used to. Eric will killme for saying that, as he put up a herculean effort toget to where we are in the timeframe that we did, butobjectively, having built deep technology with a teamof 10 at Hyperpublic, as contrasted with a team of 3 atCoopkanics, as you might imagine, things movedslower…

It was fine, we weren’t burning any cash, and ourmarket is so far out that there is no saying that enter-ing it a few months later as opposed to earlier is goodor bad, but still…it took us longer to answer questionsand assumptions than it would have had we raised aseed round in January.

I expected that slower pace going in…well worth thetradeoff along this axis.

What I didn’t account forthat we are just brushingoff as a company, was theimpact that sustained boot-strapping has on the mind-set and culture of astartup…there is some-thing to being tough andhunkering down.The Spartan culture created an insanely effective warmachine after all…but being a Spartan probablywasn’t super enjoyable day to day…The week weclosed our round, we went out for a team lunch andfor the first time when that check came, it was “on thecompany.”

I know that sounds trivial, but the lightness of thatgesture in contrast to the Spartan battle we’d beenfighting, really highlighted some of the more intangi-ble implications of bootstrapping to an A round.

The heaviness of being cash constrained, of skimpingon office supplies, of going head down and sufferingfor the reward of a better round in some ways translat-ed into this culture of mental toughness…it was al-most as though in this period, we wouldn’t allowourselves to smile…this period was not a time forcomfort and joy, but rather a time to sweat it out…

There is a common adage amongst startup veteransthat goes something like “bootstrap as long as possi-ble before taking venture capital.”

The thinking behind this approach is that the early daysof developing a company are where you can build a tonof value, so that when you absolutely need the cash, itwill not be nearly as dilutive as if you had raised moneyearlier.

I think there’s a secondary current behind these wordsthat suggests that early stage execution in the absenceof investor meddling is somehow a recipe for greaterefficiency.

The first reason makes sense. The second I don’t per-sonally buy, but some founders have a chip on theirshoulder I guess…and to each their own.

Often bootstrapping is not an option…and for manyearly companies, a seed round or angel round is the on-ly way to make an idea into anything more than anidea…

Early in our development of Coopkanics we made thedecision that we would like to bootstrap until we hadmade enough progress to skip a seed round and go rightto raising a Series A.

We worked without pay or any resources for about 6months, and then closed a $3 Million Series A roundabout two weeks ago.

That financing, was, in fact more money at a higherprice than we would have been able to get had weraised shortly after coming together back inJanuary…the plan worked…BUT, it was not withoutsacrifice.

Bootstrapping YourBusiness to VentureCapitalBy Jordan Cooper

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I won’t say that bootstrap mode was debilitating, butsmiles started to spread out…

So anyway, I am proudthat we had the toughnessand discipline to executeon this Spartan strategy,but if I could do it again,I would go in knowingthat the corners you cutare felt, no matter howtough or capable youthink you are. It’s notabout dollars and cents,but about the mindset ofconscious deprivationand what that does tothe collective mindsetof a small founding team…Pretty happy to be out of bootstrap mode. Feels goodto let a smile slip here and there.

Leonidas might not approve, but I was always more ofan Achilles anyway.

Bootstrapping (cont..)and although not explicitly, and although completelyrational, this mindset wears on folks after awhile…how can we have fun in this Spartan stage?

The only thing that wasgoing to get us out of itwas hard work anddiscipline…and so weadopted a culture thatlacked the lightness youmight find in a more nor-mal startup environment.Luckily for us, we were able to rest on our extremelytight bond and past experience managing the “harddays” at Hyperpublic…but we are still undoing someof that Spartan influence weeks after capital breathednew oxygen into the company.

There is this feeling of “oh yea, I can go enjoy my soft-ball game without impacting our army’s integrity…ohyea, I can joke around and laugh while we’re doingthis…I can invest in culture without every minute go-ing toward production…I can smile.”

The other day after reading Andy Dunn’s essay on the“hard days” at Bonobos I thought to myself: “So muchof being a successful founder has to do with a person’sability to execute when the smiles are few and farbetween…there is something to how effective you canbe in your debilitated form…”

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FUNDING

PRACTICAL BUSINESS

5 BIG QUESTIONS FOR EVERY BUSINESS P.35PLAN - Megan Totka

STICKINESS - WHERE ENTREPRENEURS P.37MOST OFTEN FAIL - Ben Yoskovitz

DIATRIBE: BATISTA’S MISSION P.38$BILLIONS - Emerson

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HNW Magazine’s Practical Business sectionlooks at key areas of business needs across legal,accountancy, marketing, finance, leadership,strategy, research and other areas of support.

By making sure your business plan answers the rightquestions. Below are six crucial points that you shouldaddress with your business plan.

Business Plan Questions to Answer

Is Your Product or Service Innovative?

This does not mean the core offerings of your companyhave to be completely different from anything that’sout there on the market now. In fact, having whatamounts to an alien concept can be detrimental to abusiness pitch, because you’ll have no foundation tocompare your company with.

Instead, your business plan should highlight what isdifferent, exciting, or inspiring about your product orservice.

An element of innovation will underline the viabilityof your concept, and help to persuade investors thatyou can succeed.

5 Big Questions forEvery Business PlanBy Megan Totka

Every small business needs a business plan. It’s an es-sential document that’s not just for start-ups and ex-pansions – because a great business plan can serve as aroad map for your company and help you make theright adjustments when things go wrong. Your busi-ness plan should be a living, breathing portfolio thatevolves along with your company.

With that said, a business plan is still one of the mostvital tools for a start-up or expansion, because this iswhen your document will convey the viability and po-tential of your idea (or existing business) to other peo-ple – usually people you’re trying to convince to investtheir hard-earned cash in your company.

How can you do that?

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PRACTICAL BUSINESS

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What Have You Got That Your Competitors Don’t?

The competitive edge is more than just a corporate buzzword. A great business plan articu lates the differences between your products or services and similar offerings from your competitors.

You should be able to describe why people will choose your widget over the next one in line, and therefore why yourbusiness will be profitable once you’re established.

By taking the time to describe your competitive ad-vantage, you’re also giving yourself a foundation for asolid marketing plan.

What Are Your Staffing Plans?

Few companies can remain viable forever as sole en-trepreneur operations. Eventually, you’ll need to hirepeople as your company grows. Investors want toknow that you have smart, realistic staffing plans inplace for your start-up or expansion.

You might start with assigning multiple roles to your-self and/or your existing staff, and then outline themilestones that will necessitate hiring new people, andoffloading roles to them.

It’s important to have yourbusiness plan show thatyou understand the needfor management and col-laboration – and that youhave good timing.Are Your Goals Rooted in Reality?

You may be completely confident that your businessis going to make a million dollars by the end of thefirst year, but that’s not something you’ll want to sayto investors. Your business plan is a place for reasona-ble goals, with carefully considered, even conserva-tive projections.

One of the best rules for customer service is to under-promise and over-deliver, and your business planshould follow that rule. Use it to outline a businessforecast that you can reasonably expect to meet, andthen wow your investors when your (private) wildspeculations come to pass.

Will People Pay for What You’ve Got?

As a business owner, you can’t just put in your 40hours and cash a paycheck at the end of the week.

Your product or service needs the ability to earn itskeep, so that eventually it’s turning enough of a profitto cover the overhead costs of your business, the sala-ries of any employees you have or plan to hire, andyour own cost of living.

Your business plan shouldoutline the potential reve-nue for your company byshowing how much youplan to charge for yourproducts or services, andwhy people will pay thatamount for what you’reoffering.This piece of information shows investors that youknow the real worth of your company, and you’re pre-pared to avoid collapse and bankruptcy with realisticprojections.

Is Your Target Industry Growing?

Pitching a business that’s going to “revitalize” an in-dustry is a tough sell – mostly because it takes morethan one company to save a sinking ship.

Investors like to see new or expanding businesses inindustries that are either stable or growing because itpresents them with a better chance that their investmentwill pay off.

PRACTICAL BUSINESS

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you’re asking them to do something new with you,which is another reason to keep the ask small.People need to get hooked on the behavior, whichmeans getting hooked on the result.

The core value you provide has to be awesome. It canbe tiny, but it has to be awesome.

Instagram filters were awesome. (One might arguethey are less awesome now because they’ve been cop-ied, but they created an emotional response that drovepeople to post more photos, which is what Instagramneeded to succeed.) Tweeting and getting retweeted isawesome. Seeing a song identified in Shazam is awe-some.

You want to go after the most basic of emotions possi-ble. Dave McClure says it very well: people want to bemade, paid, laid or unafraid. You need to appeal topeople’s desire for reputation/popularity, money, sexor security.

You might want to take a look at the seven deadlysins too (just in case you forgot ‘em!) The tiny, addic-tive, new behavior doesn’t have to be negative, that’snot the point, but it has to speak to people, emotional-ly, at the most basic of levels.

This tiny, addictive, new behavior forms some kind ofloop.

User A does A then B then C and boom–they’re re-warded. And part of that reward drives them to start allover. It also builds value for you, and possibly for oth-er users as well. So User A does A then B then C, getsrewarded and sets User B in motion (possibly doingthe same loop, getting rewarded and engaging UserC…and so on…)

Getting retweeted is an example of one user’s tiny be-havior driving another user to take a tiny action, whichcreates value for everyone. User A tweets then User Bretweets. User A feels awesome, and so does User B.With Twitter there’s an even earlier example of thissort of thing happening around following and beingfollowed back. Simple, tiny and super addictive.

Remember: The tiny, addictive, new behavior createsamazing value (early on it’s only in short bursts, whichlike a drug, drives people to do it over and over ) andresults in creating value for you as well.

Eventually these tiny behaviors start to build uponthemselves creating more and more value for everyoneinvolved.

You have to find that one tiny, addictive, new behaviorand make that the core of your MVP.

Nothing else really matters. If you can’t find that tiny,addictive, new behavior that drives frequent usage (andin turn drives virality and easier user acquisition goingforward) you’re going to struggle mightily to succeed.

Stickiness - Where MostEntrepreneurs FailBy Ben Yoskovitz

Early on, once you’ve identified a problem genuinelyworth solving, you need to build a Minimum ViableProduct (MVP) and put it into the hands of early adop-ters.

In Lean Analytics, we call this the Stickiness Stage. Irecently wrote that most startups fail at this point–theysimply don’t get the traction they need (in terms of reg-ular usage, engagement and retention) to keep going.Sometimes they move ahead anyway and hope they canacquire (customers) their way out of the problem…itdoesn’t work.

Thinking about this further (and having been asked nu-merous times about what makes a good MVP and howdo you know if you’re ready to move forward), I said tosomeone recently:

“What you’re trying to do is create a tiny, new, addic-tive behavior. It’s something small and ‘simple’ thatyou want people to do, which they get value out of it(when they do it), and so do you.”

I put ‘simple’ in quotes, because doing this isn’t easy,but it’s helpful to think about the MVP and product de-velopment in this way.

Repetitive usage is key (at least for most startups /products).

That may be daily or weekly. If usage is spread outmuch more than that it’s going to be hard to keep peo-ple’s attention. To get someone to do something overand over, you want to keep the ask small; you don’twant to overburden or overwhelm them, because they’llgive up.

The behavior you’re trying to get people to do is new.They haven’t done it with you before, although theymay have done similar things in other products. If that’sthe case it may be easier to get them to do what youwant them to.

If it’s totally new, that’s a harder climb. No matter what

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The son of a former energy minister became a millionaire at a very young age buying Gold from suppliers in the Amazon and re selling to shopkeepers in Rio de Janeiro.

The move led to the creation of his EBX Group in 2001 through the amalgamation of six companies and the pursuit of gold mines in Brazil and Canada and a silver mine in Chile, and all the while an increasingly flam boyant lifestyle.

And therein lays the problem; the trappings of wealth, the speed-

boats and playboy modelwives, can quickly stripmere mortals of hu milityand convince them thatthey’ve transcended intoKing Midas.Not long after his bold pronouncement, Mr Batista’sEBX Group is now highly in debt, and the marketsseem to have turned on him.

Brazil’s economy has cooled in recent years and for-eign demand for commodities has dropped off. Inves-tors became particularly edgy last June when his oilcompany OGX announced lower than expected produc-tion levels.

And more recently, OGX indicated it may now stop itsactivities in the Tubarao Azul oil field by 2014.

The bottom line: EBX has lost 90% of its value in justover a year, alongside a $60bn share value slide sincepeaking last year, and the once uber-confident Batistahas announced he will step down as head of the boardof his energy company, MPX.

He even had to sell his plane, an Embraer Legacy, for$14m.

The lesson here? Whenyou play, play hard. Andwhen you’re working,don’t play!

Batista’s Missing $BillionsBy Emerson

Three years ago it was the equivalent of a Brazilian Tauruspistol duel at dawn between the vociferous billionaire EikeBatista and Mexican tycoon, and then richest man onearth, Carlos Slim.

It was Batista, whose fortune made him one of Brazil’shighest profile figures, who started the war of words bymaking the daring announcement that he intended to takeSlim’s title.

Speaking with the BBC at the time, he said: “I told CarlosSlim that he should clean both of his rear mirrors, becauseI would not warn him on which side I was going to over-take him.”

Once the eighth richest manin the world according toForbes, Batista’s fast grow-ing empire spanned energy,ports and mining, taking ad-vantage of the buoyancy ofthe Brazilian economy andbig demand for commoditiesfrom China.But times change, even for billionaires.

While Mr Batista’s dramatic drop in personal wealth, froman estimated $34bn to circa $2.9bn, has occurred withinthe space of 18 months, the reality is that he’s a long wayfrom the bread line.

DIATRIBE

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