Sophistry was a term first coined in ancient Greece for those who were skilful debaters regardless of the merit of their position.  Today we tag this type of issue with phrases like spin doctor or sometimes “playing the man not the ball”.

The power of presentation has been demonstrated in the various European elections over the past year or so where those who want to “go for growth” have largely ousted those who were “advocating austerity”.  Not a difficult choice when presented as slogans but in reality the policy differences are marginal – markets decide how much borrowing they are prepared to live with and the politicians will, by and large, have to accept that.

A similar issue raises its head in the financing of early stage businesses.

Typically business angel investors can be exposed to a large number of business plans and pitches for funds.  It is impossible, unless it becomes a fulltime activity, for investors to examine all these opportunities in detail.  I’ve often tried to convince entrepreneurs on this point especially when I’m presented with 51 powerpoint slides all crammed with colour and varying font sizes: a beautiful work of art but a hopeless way to pitch for funds.

Entrepreneurs need to master the art of communication: in truth no business however complex needs more than 2 minutes to explain itself to investors in sufficient detail to capture their interest and persuade them to investigate the business further.

I’ve seen great businesses fail to get funding and marginal ones succeed because of the power of the “pitch”.  Communication skills are difficult to tie down: a combination of technique but also a real test of character.

I firmly believe that when an entrepreneur is standing alone pitching to a room of investors you really get to see the person’s character and form a judgement on their ability to deliver and stay the course.

Everybody wants to back the person with character and not the sophist – but can you spot the difference?

I am featuring our group buying service and innovative spending card business again this week.  Set up by an experienced entrepreneur who has already created one card based business this company has a highly focused plan and a number of investor backers already.  We have now secured the services of an investing chairman who has a track record of generating wealth for private investors.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

This issue is tied up with a perennial dilemma: we know early stage businesses create jobs and are necessary for a growing economy but how do we get more investment into these companies?

Governments of both Labour and Conservative persuasions have looked at this.  It is a real dilemma and nobody has ever found a satisfactory answer.  Maybe the solution lies in investment expectations?

In my experience most people think of their wealth, however modest, as being in separate “pots” of money or assets.  The ultra-safe pot; the rainy day pot; the medium risk pot and for some (including business angels): the high risk pot.

Most investable wealth is in the ultra-safe pot and is typically invested disproportionately in property backed assets, relegating shares and particularly shares in early stage businesses to the medium and high risk pots.  Over the last 40 years or so this has been a sound strategy, particularly for individuals owning their own homes, but what of the future?

Governments could change the returns on property radically putting much more of the tax burden on this asset class: stick VAT on property (as in many countries in the EU); remove the capital gains tax exemption on a principal private residence, increase stamp duty, have a property wealth tax; increase taxes on rental income etc.  In short dramatically reduce the returns to property.

This would be a very unpopular move without doubt and maybe electoral suicide?

Unless ……..  What if unemployment remains very high and it proves impossible to generate sufficient growth to reduce the current deficit, let alone to meet the growing liabilities of an ageing population.

Then maybe, politically, it becomes the lesser of two evils?

Today’s business is a group buying service and innovative spending card.  Set up by an experienced entrepreneur who has already created on card based business this company has a highly focused plan and a number of investor backers already.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

Over the last 15 years or so the UK enjoyed an economic boom which generated a whole set of expectations.

This boom is now seen, with the benefit of hindsight, as unsustainable.  There is a broad acceptance that government spending on the welfare system has to reduce and tax has to increase – some differences exist on timing and detail but overall there is a broad agreement between the political parties.

But what about the rest of us?

Expectations in education, retirement and healthcare are entrenched for example:

“I must go to university to be successful” despite the fact that the number of jobs for graduates has not really increased yet the number of people going to university has almost doubled.

“I’m going to retire at 65” yet there is no prospect of most people being able to save enough money over a working life of 40 years to fund a 30 year retirement.

“I am entitled to the best healthcare whenever I need it” regardless of the cost or the new developments in medicine?

I suspect politicians are now in the process of changing these expectations while trying to remain popular and electable!

Another embedded assumption concerns the performance of property as an investment: both commercial property and residential property.  Many have come to expectations like “my house is my pension and my financial security” or even worse “property will always increase in value”.

I have never been a fan of property investment, although like most people of my age I have done well (especially having just downsized significantly) from owning my home.  The future of residential property looks very different now but what are investor expectations for the next few years? More on this next time.

Our featured opportunity this week is a social media website targeting the over 60’s, who are one of the fastest growing internet users.  The real value in this business will be the data: our entrepreneur has 30 years’ experience of turning data into value.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

We do however face a strike by petrol tanker drivers. Rumours abound that something similar is planned by the London Underground drivers as the Olympics loom.

Small groups of individuals, in key positions in the economy, who many would see as already being relatively well paid, are threatening industrial action (a bizarre term as it really means industrial inaction) with attendant costs to the economy.  This looks like a problem particularly if it spreads to key public sector workers (sections of the police have called for the right to strike).

How do we respond?

The “Ronald Reagan” solution to this situation is well known.  He simply fired all the strikers (air traffic controllers), put in place contingency plans, and held the line.  Not sure I see any of today’s political leaders working in that way?

Maybe there is no “problem”.

Entrepreneurs often claim to have market power because of their product or service.  Indeed many business angels and other investors look for investments with some sort of pricing power.  Apple commands a premium price for its products as do many “branded” goods so maybe this is just an example of an advantaged market position in a capitalist system?

Or is it more akin to a monopoly situation and hence commercially “illegal”?  Maybe the situation is exacerbated by union leaders with political as well as commercial agenda?

Whatever you think, we need political leadership to resolve this before all our efforts at economic renewal are jeopardised.

We have an opportunity (not yet logged on the website) for a £500k (in three tranches) fund raiser for a computer games company.  The management have a successful track record and products with fabulous brand names.  Existing products are selling well and new ones have been specked out.  I’m looking to put together a syndicate of investors with a minimum of £10k investment each. The money will be used for marketing existing products via Facebook and developing new ones.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

The UK is still borrowing money to fund government spending and hopes that current policies can lead to the conditions for export led growth and economic rebalancing look unrealistic.

Let us look at both the income and cost side of the budget.

On the government income side, those who are wealthy, both individuals and companies, seem reluctant to pay much more in tax.  They are helped by an army of tax avoidance specialists and ultimately the option to move abroad.  The UK is already heavily taxed and the evidence is that higher tax usually means lower growth.

On the expenditure side, there is evidence of a culture of dependency in the UK and thus expectations of financial support from the state remain high. Politicians seem scared to remove benefits from those who are using them to boost a standard of living rather than as a safety net. Moral issues also impact here: is it really appropriate for somebody to be living on benefits in Chelsea?

If we are to get growth how are we to compete with the likes of China, Brazil, India et al were people are prepared to work harder for much less than people with comparable skills in the UK? The current answer being touted by politicians is by using our innovation and creative skills: rather unconvincing?

Difficult as it is to believe, the most convincing argument I have heard is that the UK and most of the EU will have to lower the price of labour and land plus really deregulate their economies.

In short we have to recast the fundamental promises of our current welfare state to reflect our ability to pay. Is any politician brave (?) or foolish (?) enough to embark on this?

We are looking for the final £5k for our client who has created a new product for the leisure sector and more specifically for swimmers.  Customer trials have produced super results and sales are now starting to roll in.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

As you can imagine there are a host of anti-avoidance rules, which I can’t cover in detail in this note, but the schemes are still very generous. Some of the key requirements to qualify for the relief are:

The investment must be in ordinary shares and cannot exceed 30%.

Relief can be claimed up to a maximum of £500,000 (£100,000 for seis) invested in such shares, providing you have sufficient income tax liability to cover it. (Note that this relief cannot be set off against dividend income).

The company (or parent if a group) is also subject to a number of rules:  gross assets cannot exceed £7 million (£200,000 for seis); fewer than 50 full-time employees (25 for seis) and a “qualifying trade” which is very broad.

In addition to the income tax relief the shares are exempt from Inheritance tax and capital gains tax when sold.

These tax reliefs are administered by a special unit within HM Revenue and Customs that is helpful and seems to be actually trying to give the relief rather than restrict it.

It is easy to forget that these tax reliefs will not turn a poor investment into a good one but they will reduce investor risk. Investments that are “winners” are free of tax, and in addition, investors can claim tax relief under a separate set of rules on their “losers” thus favouring multiple investments.

We have an opportunity at the moment: our client has created a new product for the leisure sector and more specifically for swimmers.  First round funding was completed in 2010 enabling product development to be completed and customer trials to be launched.  Results are very encouraging and the company has just had a small rights issue to fund the launch of nationwide marketing.  All investors followed their money except for one individual who has retired from investing and hence a small (£10k) amount is available.

We are looking for a couple of investors to come in at £5k each ideally with contacts or expertise in the leisure sector.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

This week I want to look at shares, particularly shares in early stage unquoted companies.

Over the last decade quoted shares have failed to generate significant capital gains but investors have been rewarded with dividends and hence returns have been somewhat disappointing for most.

Smaller companies have offered the best opportunity for substantial capital gains but at significant risk.

How then can an investor mitigate that risk?   There is compelling evidence that early stage investee companies are more successful when guided by an experienced, successful entrepreneur turned investor (i.e. a business angel).

There are three different ways to invest in early stage companies: via a professional fund manager, as an individual or in a syndicate.

There are a number of professional fund managers who operate in the early stage market. A Venture Capital Trust is one of the most popular structures.  VCT’s are quoted entities but have to invest in early stage businesses.  The professionals can structure individual deals and chose which companies to invest in.

In theory professionals should do well but no real superstar fund managers have emerged in fact a quick glance down the table of returns shows many VCT in the red.

Many investors prefer to invest as an individual.  Often they will have a network of contacts who bring them deals or perhaps an angel network like us.  Individuals do deals in a particular sector that suits their expertise and using a structure to suit their own tax position and risk appetite.

There is little objective evidence on the success or failure of this approach.  Certainly there is probably a maximum number of deals that one individual could run with?

Investor Syndicates, which my business specialises in, operate on an informal basis where each member makes their own investment decisions but has the benefit of working with like-minded individuals.  A group often makes better decisions than an individual, certainly working as part of a syndicate an investor can spread their funds over a number of companies thus lowering risk.  Perhaps the biggest benefit is post investment monitoring and support.

Working as part of a group enables the post investment effort of to be spread and a pool of expertise and contacts to be called on when needed.  Syndicates are the norm in USA the most successful economy at early stage investing.

Nest week I want to look at the latest changes in tax relief: investors can get tax free capital gains or if a deal goes wrong, a tax subsidy up to 78% of their investment!

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

2012 has arrived, and I want to look back some 12 years to 31 December 1999:

• FTSE 100 was at an all-time high of 6,930 nearly 25% higher than today’s level of 5,626.
• Government bonds with a 10 year maturity were yielding 5.5% compared to 2% today
• UK residential house prices have more than doubled over this period.

Put these in the context of inflation (as measured by CPI) which averaged less than 1.5% per annum during the years 2000 to 2004, then around 2.5% per annum until 2008 and recently has increased to say 5% per annum: how have your investments performed?

If you use ISA’s (or some other scheme) to remove the liability to tax then the dividend income from FTSE 100 investments has more than offset the fall in capital value.  Similarly the relatively low inflation has probably resulted in your cash savings suffering only a modest decline in purchasing power.  Only government bonds will be showing a reasonable capital gain.

But what is the outlook now and who should be considering the implications for investment?

There is some debate over the number of households in the UK but let us say 25m? Excluding housing wealth, fewer than 10% of these households have liquid savings of £60,000 or more and these figures were before the impact of the financial crash.  Thus over 90% of people should probably pay off their mortgage or other debts and then stick with a simple cash savings account.

Those with say £100k or more; and those who are managing their own pension (maybe with the help of an advisor) need to have an investment strategy.  Any well thought through strategy should be a consideration of the risks and rewards of all types of investment: bonds, cash, shares (unquoted shares as well as quoted) and “alternative” (wine, antiques etc.) investments.

Don’t forget one other recent relevant change: capital gains tax rates.  For capital gains up to and including 23 June 2010 a flat rate of 18% was payable.  Now gains may be taxed at up to 28% (much closer to the rates paid on dividends and other income) but to offset this there are a number of substantial tax reliefs for investors in unquoted shares.

My crystal ball is no better than anybody else’s but the credit crunch in the UK and EU (our main trading partner) looks to be here for a few years and in that environment: credit is restricted, interest rates are low and wage inflation is low.

It is very difficult to see any growth potential in government bonds.

Residential house prices look to be static at best? My guess is they will fall as there is no improvement in affordability for first time buyers.

In the next few blogs I want to take a look at the opportunities for other investments, especially shares, and how they are impacted by the new capital gains tax rules.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

I’d like to think that we have hit bottom and that next year will see the start of the return of some confidence and the beginnings of a sustainable recovery.  According to the theory the best time to invest is at the point when all hope seems lost for that is when recovery is due to start.

The deal in Europe has failed to solve the immediate problems of the Euro and yet it seems to have done enough to show how a lasting deal might arise.

The financially challenged euro economies of southern Europe look to be sufficiently scared maybe to actually begin the process of cultural change: it might take decades but conditions look good for a start to be made.

I heard a senior German finance man, interviewed on the radio, talk about the possibility of further support for these troubled economies once a process of budgetary discipline had been established.  At that point, he felt that support would then be an investment in the future.

The UK is a net importer of EU goods and services.  We are a substantial net financial contributor to the EU so maybe worries over our isolation may have been a bit overdone?  Maybe the veto will turn out to have been a demonstration of our real power to influence the direction of the EU as other countries also start to question the detail of the “treaty”?

The battle to persuade the public sector unions to confront the financial realities of a world were economic power and wealth are shifting from the western economies to the developing world (except Africa), seems to be gaining momentum.  No deal has yet been announced but it has gone quiet?

There is a growing consensus that inflation has peaked and will now decline maybe even be back below 3% before the end of 2012.

If banks accept the new Basle III rules and if regulators (and politicians) stop them using soft credit as a competitive option then change will flow.  Prudent housing finance will prevent house prices running out of control and the difference between CPI and RPI will be negligible.  Banking bonuses will be paid in shares and will be only for real long term growth in shareholder value.

There is even some positive news in the unemployment figures; self-employment is up – even if many are reluctant to go down the entrepreneurial route.  If we continue to reform our precious welfare safety net to prevent it destroying the work ethic then this revitalised work ethic will help get youth unemployment down from its current dreadful levels.

Could it even be possible that the European Commission, in Brussels or on the train to Strasbourg, might start to focus on freeing up markets rather than producing more job destroying legislation – maybe that is a bit too optimistic!

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.

The small business owner had committed himself to the business in full and had no “safe pension” at all.  He was working every day of the week to keep his business alive yet earning significantly less than the head teacher.

The head teacher displayed zero understanding of business and the nature of a competitive market.  How can an educated person expect to enjoy their safe pension for many more years and yet not expect to pay more? The comment I found really disturbing, and one which the union leaders use,   was “we are striking to get decent pensions for all” – a childlike refusal to confront the problem of “who pays?”.

Worse still the head teacher holds the leadership position in educating our children and creating their understanding and attitude towards business and competition.

I have always tried to keep this column politically neutral but I have to ask is it really credible to suggest we can borrow our way out of these economic problems?

The latest article by Samuel Brittan (an economic commentator who I really admire and respect) is still claiming that lack of demand is the core problem and that we need more government spending to create more demand and drive growth.

How can that be right?

We are already borrowing huge amounts of money to prevent a collapse in demand.  If you add together: government, household and company borrowing the UK has some £6trillion, (436% of GDP) of foreign debts.

Only the USA has more foreign debt: £9.5trillion but it is only 101% of their GDP.  The comparable figure for Germany is 176%; France 235%; Italy 163%; Ireland 1,093% and Spain 284%.

Our economy has become too focused on financial services and property. The only solution is change:  adapting our economy to the new realities of global markets. A long term process with short term declines in living standards.

Two things will help this change: lower interest rates plus honesty and leadership from all our politicians.

Please do have a look at the Opportunities section of our website to see investment opportunities and at the Portfolio section to see how our business angel backed investee companies are performing.