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Sunday, 4 February 2018

9 Reasons Founders & Angels (sometimes) thank VCs

Although there are sometimes reasons (documented in Part One) why early stage investors may feel they haven't been properly compensated for taking the majority of the early risk in a business in return for early capital, VCs and Angels often complement one another to take firms through to their later stages ahead of an IPO or, more frequently, a trade sale form of exit.


VC groups can find angel syndicates or individuals valuable in telegraphing interesting propositions for them as those businesses acquire a longer history, larger staffs and demonstrable earnings and profits growth as they expand rapidly. 

Equally, an equitably structured exit for series of later finding rounds can juice the angles own early contributions and deliver double-digit multiples on those riskier early investments and occasionally volatile and stressful histories during the early few bootstrapping years, with skeleton staffs and sometimes strong vector shifts in strategy or markets. 
Its a people business, founded on friendships, networks and knowledge of every type across all sectors of the early stage business ecosphere. 




















Here are just 9 reasons founders & angels may have good reason to thank Venture Capital firms:
  1. They prod the business into a whole new ballgame and scale. Angels like VCs do not commit even patient capital to enable a founder to run a 'lifestyle' business with a gentle upward or flat growth curve. It is risk capital, with other potential homes after a 5-7 year exit horizon. With only a distant chance of dividends, funds were not usually committed for the purposes of an evergreen, low growth 'zombie' company
  2. They sharpen a founders focus on a deliverable exit. Its fair to say that VCs, who need to satisfy demanding mandates on behalf of their liquidity providers will ensure that founders examine their exit options as efficiently and in as timely a manner consistent with the max possible exit multiple
  3. They kill a zombie company so all can move on
  4. They have 10 times the exit experience of most angels or founders, bringing definitive expertise to that area.
  5. They have 10 times the financial firepower of most angels or syndicates. This , despite their own sometimes long due diligence or legal process can cut through delays created elsewhere when angle syndicates have to be grouped to achieve critical funding mass
  6. They have focused and deep sectoral experience
  7. Their DD is exhaustive and searching in parallel co-funding. This may add time, but ensures strong process over Shareholder Agreements.
  8. They compete with each other to force the best deal for earlier stage holders -  this is not frequently highlighted but valuable nevertheless
  9. They clean up a messy cap table or sloppy Shareholder Agreements. When agreements may sometimes be quickly put together with Angels and amid inconsistent diligence, the involvement of dedicated external resources can add value and represent an exit for Angels ahead of a period when few would be able to avoid dilution anyway, so they can get on and re-assign capital to newer businesses.

Copyright AskAnAngel Ltd 2017-2018 All Rights Reserved
Twitter: @ask1angel or Facebook 'Ask An Angel'

Saturday, 9 December 2017

9 Reasons Founders & Angels (sometimes) are wary of VCs

Fair to say you don’t need to be involved in early stage investing too long to pick up that there’s a perceived divide between Angel Investors and VCs. That also means that Founders and Angels are somewhat aligned in terms of their positioning in early cap tables as they begin to encounter early VC interest, assuming all is moving in the right direction, business-wise.. 

While we may sense that as both Angels and VCs are providers of risk capital to early-stage businesses, therefore there should be a degree of complementary function, as VCs are now perhaps seeking even earlier stage involvement, to get a piece of some rapidly accelerating tech businesses especially, that can have an inflationary spiral in valuations. 

In turn that impacts risk vs. reward for angels who are contributing genuine risk capital, albeit in a tax-advantaged environment, at least in the UK. (This is from a UK, not US perspective - any potential guest post or feedback re that scenario very welcome…)

So, here are askanangel’s quick 9 differentiating points between the two camps, VC first. 

  • It’s impatient capital not patient capital
  • VCs march to their LPs drum and timeframe (That is their job/mandate)
  • It’s not a VCs own money
  • Beware the 100%+ preference exit clause
  • Beware the stacked preferences in multiple funding rounds - it's not unknown for founders to be very seriously diluted, even all the way!
  • Valuation growth can be at founder and angels cost
  • Angels may lose a cap driven board seat and the consequent information flow
  • Beware the embedded dividend eating into OpEx
  • By coming to earlier stage companies they promote “bubble” valuations 
There is another side to the argument, keep an eye out for the potential riposte soon…

© Ask An Angel Ltd 2017 All Rights Reserved

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Friday, 24 November 2017

Not Just Red Carpets & A-listers Part II - Ask An Angel interviews Susan Simnett, Movie Producer & Founder, Over The Fence Films

Part Two: Film and Start Ups: Lessons in finance & end-customer fit


 AAA: In terms of selling a film Susan, you mentioned that you can pre-sell. So how does one package this up? As a finance person how does one go about financing this? I suppose one thinks sometimes about other types of projects or other types of business; how is the money moved, how is a film actually financed? In my ignorance I just thought there would be a budget for it from some kind of commercial source, but not sort of layered this way. So what are the different layers ... How would you describe the different proportions that one might see in a, let's call it a 50 million dollar, or a 30 million dollar production? How much of that would be pre sold? How much of that comes from a single big studio, or backer?

Susan: Well again you know it does vary a lot, but in the UK the film tax relief would account for about 20 per cent of the budget. You would maybe pre sell or could pre sell another fifth of the budget, which is basically a sales agent would go to a market at one of the festivals with maybe some promotional footage, cast attached to a project. The basic pitch on the story line, who the director is, and there would be certain geographical territories, or distributors that would then basically give you a minimum guarantee for the purchase of that film once it's made.

AAA: Right.

Susan: With that, that then becomes collateral, which you can cash flow against when you go into production. Similarly with the tax relief, that is paid after you've filmed, so you cash flow that. Gap finances basically using the unsold territories as collateral, it's higher risk so you pay more of a premium.

AAA: It's a bit like bridging finance isn't it, I suppose?

Susan: It is. Most of that is senior debt. The soft money is often not directly recoupable but you have to give back in other ways. Then the hard core equity investors take more of the risk but more of the upside too.

AAA: Yeah, okay, so I suppose it's a bit like a round that's left open quite a long time, and there's this interesting interaction between how much money is needed and how much is already soft circled. I think people must kind of get a sense, if a production is starting to look very interesting, you've got almost the opposite problem, you've got lots of people who probably want to get involved at that point and you get to the point where you begin to fill your allocation quite quickly. Or in the alternative it's kind of an article of faith, where you haven't got such a high proportion and you're going to have to work very hard for the last tranches. So they're like real analogies I think from what my experience in terms of other businesses, although it's unique, there are some commonalities with other sort of start ups, to use a phrase really.

Susan: Yes, but I think the initial money is the hardest, rather than the closing money, because once you're quite far down the line and you have cast committed and people ... It feels more tangible.

AAA: ..and that initial money is from the equity backers?

Susan: The real money yes. I mean so you can have two fifths of the budget in place in theory, as long as you've got someone to cash flow it. The hard core equity money is the most difficult.

AAA:When you say cash flow, do you mean in the sense of there's enough coming in to match production costs that are ticking over in the interim?

Susan: No, it's basically borrowing against the tax credit that will come in at the end.

AAA:Oh okay, so it's a kind of forwards tranche of money that is not there yet, but will be. It's committed kind of but not there yet.

Susan: Yeah.

AAA:OK, so what do you think other early stage businesses can learn from the film industry and are there any aspects of your other experience, particularly in EIS investments, that have helped you find solutions in the film side? So I guess I'm kind of looking at bridge solutions that one sees from the other worlds.

Susan: It's hard, I mean I think with film you're working to a master plan from the get go, that's executed in one fell swoop. Whereas in early stage businesses there's more of a slow burn, and an evolution as the business grows you get a different kind of investment coming in, and that allows you to go onto the next stage. With film, it's a kind of all or nothing, and that requires a lot of determination, focus and flexibility. But those things apply to early stage start-ups too.

AAA: Right, I see.

Susan: I think the one thing that they all have in common, and is my big bug bear, no matter how good your product you have to know your audience. I think that's a common mistake made across many, many businesses and innovations.

AAA:I could not agree more strongly, that's absolutely right. There's a lot of cases where people seem to have a business or product and think: now who do we sell it to?

Susan: Yes, and a lot of people makes films because they're passionate and creative, and then they're surprised that no one wants to buy them.

AAA:Yeah, I'm reading a fascinating book at the moment by a Hollywood script and plot consultant: Michael Hauge. It's interesting how common some of the themes might be. They sound like a similar structure, but I realised that so many of the films that I've seen have those same elements, and of course the key thing is that they evoke emotion and they engage an audience, whatever area they're looking at. So that's the key thing I think. In terms of other early stage businesses, I think are there any other solutions that you can think, that you'd seen on, in the EIS area, or in tech start ups that enabled you to try those or use those on film?

Susan: I think the language of tech start ups and investors, using some of those concepts and applying them to film has stood me in good stead. Treating the creative ideas as piece of IP, thinking about exit strategies, you know, marketing plans. Those kind of things are very practical and a good guide.

AAA:Okay, so ... this is going to sound like a really direct question but how does a producer get paid? Do they get a proportion of royalties from the eventual revenue?

Susan: There's a producer’s fee in the budget plan, just as there's a directors fee. More often than not a producer defers their fee because the project needs the money. But we won't encourage that. Then as a production company, you have a share of the net profits.

AAA: ..and so how does one get into this in the first case? Or is that almost an accident? I think you found when you started that as you began to get more experience, the offers were coming from elsewhere, you were obviously doing a great job and there was a kind of momentum effect. Is it just a sort of chance contact one happens to have? If you wanted to be a film producer how do you start?

Susan: If you're young and starting from scratch then you need to get some hands-on experience and go and work in a production company, and then feel your way as to what aspects of the business appeal to you most. What kind of producer you'd want to be, whether it's a sort of hands on line producer, or creative development, or more on the finance side. It's hard, there are a lot of people who want to do it, and it's about knocking on doors and like most businesses.

AAA: I suppose you know it's going to be inevitably, it's whatever the producer version of you as a personality is. There's not a sort of standard cookie cutter that one does. There are certain functions but after that it's down to your personality and your experience, and that's what people will ... That's what you want to be in demand for.

Susan: Absolutely and whilst I started off wanting to make a film, my skills have found a more natural home in particular facets of that whole process. That's come from my background, and as you say my personality.

AAA: Very last question Susan: if you met a new producer, what would be one or just two pieces of advice you'd give them, as they were just starting out - that you perhaps might wish that perhaps someone had said to you, something you discovered the hard way. But if you could give them one or just one or two quick bits of advice, what would be the central kind of tenet for them to bear in mind in the early stages?

Susan: It's a hard one, because if I knew then what I know now, I probably wouldn't have started! But I don't regret it for one minute, so best not to know too much, and follow your heart. If that's really, really what you want to do you've just got to have grit and determination, and a thick skin.
AAA:    Okay, well that's wonderful. I want to thank you very much indeed for your time this morning. I think a simply fascinating glimpse into the world of film production - huge thanks to Susan Simnett from Over the Fence Films.

Susan: Thank you.


AAA: This is Mike Davis, signing off for today. Please sign up at www.AskAnAngel.com for more content like this direct to your inbox, direct from early stage business and from the world of angel investing


© Ask An Angel Ltd 2017 All Rights Reserved

Monday, 20 November 2017

Not Just Red Carpets & A-listers - Ask An Angel interviews Susan Simnett, Movie Producer & Founder, Over The Fence Films

Part One: Movies and Start-Ups: Departures & Parallels

Ask An Angel: Thanks very much for joining us today Susan, I want to start by giving readers an elevator pitch description of your film production company, called ‘Over the Fence’ and also try to define your role as a film producer.

I think a lot of people might think they know what ‘Film Producer’ means, but aren't necessarily aware of all that goes on behind film production and distribution. When we’ve spoken before, I personally found it fascinating to hear about all the layers and just what a sophisticated process it is. So I'd love to be able to share that if you can explain really more about how you can describe Over the Fence, and what you do as a film producer.

Susan: Sure, I mean it is a very complex and layered process, and different people take different positions on it, as to where their strengths lie. But Over the Fence films is, from where I stand, the marriage of a financial interest with creative ideas, ones that connect with a commercial audience. In terms of the nature of what I do, it's very much a world of freelancers and what's interesting to me is how you basically curate your own team for the perfect storm that becomes each production. Then onto the next production, where you create another team, often with different skill sets or different people, but  some of them are continuous throughout.

AAA:   Okay, so it sounds like there's quite an interesting segue and some comparisons, but also some important differences from your experience as an angel. I should point out to listeners as well, that we're both part of Angel Academe, which is a syndicate dedicated to bringing on more female investors and more female founders in business. So how did your journey into this film area start? Did you always have contacts here and you just moved into it from being an angel? How did you get into this?

Susan: Not at all, my background is in advertising, which I didn't realise at the time actually developed a very useful skill set for film production. But I've always had an eye on business opportunities and I find it very hard to resist something that's an attractive proposition. That's taken me through the world of investments, property, classic cars and finally, and irresistibly into the world of film.

AAA:   Well you sound like, I think the phrase that people use is, a serial entrepreneur really. I often tell people there's quite a lot of crossover between Angel Investing and  entrepreneurship . So you sound like you're a classic example, maybe more of an entrepreneur even than an investor, but certainly combining both of those roles.

Susan: I think also just having a foot in both worlds is that meeting other entrepreneurs who are ambitious, driven, positive, creates a really strong backdrop for doing your own thing as well. You know, whether you're on the investment side or on the entrepreneur side. It's a very healthy environment to be in.

AAA:    Yeah, I would echo that. I find the exposure to both investors and entrepreneurs absolutely fascinating; intellectually and creatively it's a really phenomenal package of things going on. I find it really fascinating as well, even beyond the financial payoffs and so on. The networking and the.. just the social fun of the groups is just tremendous, I think.

Susan: Well you know the film industry can be very, very slow on a project by project basis, and sometimes people who've been doing it for many, many years can get quite jaded or cynical. So having a foot in a few other camps helps keep it fresh.

AAA:   Yeah, that sounds very sensible. So could you give us; this might be a big ask, but could you give a sense of how any one film might be financed and packaged? I mean if there's any kind of template, one of the sort of slightly simpler models? I'm sure these can go as complex as one likes. Could you just give us an example of some of the layers that are involved?


 Susan: Sure, I mean no two film stories are the same, because each has a different backdrop. But in the UK there are some key elements that come into play in terms of finance. One is the film tax relief, then there's obviously an equity investment, there's soft money, which basically often comes from lottery funding and the BFI or other regional funds. Another source is pre-sales, where the film is actually sold in advance of it being made, and you can cash flow that. Then there's an element of gap finance too.

AAA: Okay.

Susan: What would happen is basically in its simplest form, a sales agent would be working with you and provide a guidance to the potential value in the market place of the project. Based on storyline, cast and director. Then, really it's a balancing act to create the optimum value across all the elements and generate the best return for investors.

AAA:    Okay, and I suppose one could draw at least some superficial analogies to other start ups really, although I suppose in a sense it's a wasting package because you're there to create a lasting thing, which is ultimately the actual production or the film. But in a sense up to that point it's a series of ideas in motion, and finance packages. Is the producer sort of the orchestra leader of all this? I mean how does a producer become attached to a production? How do these groups get built together?

Susan: I like the idea of being a conductor in an orchestra. Yes, I mean there are ... I hear the cry from many writer/directors saying, "I'm a writer director and a reluctant producer." Because at the end of the day a producer tends to be the person that brings it all together, that does literally orchestrate all the elements and has a vision of where and what they want to produce at the end of the day.


 AAA: So it sounds a bit like a classic marriage that one sees in many areas, between the idea generators or 'creatives'; I don't really like that term, because I think finance and marketing, well not just marketing, can be just as creative as the so called ‘creative’ process. As someone who used to be on the other side as it were. But it's in a sense it's a classic marriage between the kind of 'creative' and the 'commercial', so you could perhaps use that as a segue to compare the two. Do you see a lot of comparison between that UK model and the US? I think we see crossovers in terms of actors working in the US and working in Hollywood, and US celebrities and so on in the UK. Or are the models a little bit different? Or is it a sense of scale?

Susan: It's a very global business in the sense that you talk about, but there are one of the key differences is In the US you don't get the kind of soft money that you get here with the sort of BFI involvement. It's much, much harder on equity, and also obviously they don't have the EIS scheme that drives a lot of business here in the UK.

AAA:    So does that mean that there's some parallels if you like between ... In the US I tend to think of sort of a lot of the money around start ups as being VC's and that's not necessarily private money. Although there are Angel Investors in the US as well, but it's kind of pooled 'other peoples money' in the US quite frequently. Whereas the UK has this, does have, this culture of Angel Investing and it sounds a little bit like that might be the way that at least a proportion of film funding comes from. You have this soft money, this grant money, and what sounds like kind of angel money as well in the UK, and in the US it's a little bit more corporate. A little bit more analogical to kind of VC's, is that fair? Or have I kind of got that wrong?

Susan: No, I think that is fair, the Angel Investment avenues in the UK are hard for film, but they are there.

AAA: Yeah, I mean like I said that brings to mind two things really. I think do you find as a producer your sort of seeing a lot of pitches from writer producers? Or are you ending up doing loads and loads of pitches yourself for the films that you're involved in?

Susan: As a producer you're always pitching, and you're always being pitched to because any writer is consistently hoping for people to option their script, or bring it to life. Whether that's by attaching a director or finding a producer who can raise the money.

AAA: Yeah, and I guess those pitches are as pivotal as they can be for many start ups. If you get good at that, and if you're successful it can be literally the difference between success and failure,  good pitches to someone significant can completely change the whole trajectory of a production I guess.

Susan: Oh totally, but it's like most things, it's pitching the right people at the right time.
If you go in too early, particularly because raising finance for a film is just one big series of plate spinning. If you don't have enough plates spinning when you're pitching to certain people then they're not interested. So you kind of have to have some key elements in place to talk to certain levels.

AAA: Yeah, okay, that's very, very interesting. So in terms of your role in US based or UK based production, are productions getting cheaper? Or is the range of costs around any individual production kind of extending downwards as well as presumably in theory upwards? Is there a kind of base price of a production with technology changing much at the moment?

Susan: You can make a film for 20,000 pounds; you can make a film for 200 million. I think the biggest change obviously is the availability of digital. In 35 mm, the initial investment cost was huge, whereas now you can make a film on your iPhone, there's Sean Baker who's just released 'The Florida Project'. He shot an earlier film called 'Tangerine' on his iPhone, and that became a break out film from Sundance.

AAA: Yeah, it's extraordinary, I guess with the newer phones the technical quality of them is growing, improving all the time. Even the sound quality with certain plug-ins begins to approach the lower levels of professional equipment, which is extraordinary for a phone that can be sub 500 dollars, sub 1000 dollars really. There can be a pay off for that kind of immediacy of an iPhone, we've seen that in other media as well. In stills photography where there was a trend towards reportage, and it's almost the slight imperfections that can be attractive in a world where everything is kind of CGI'd and hugely produced I suppose, in a creative sense.

Susan: Yes and at the end of the day it all comes down to the story, and if the story you're telling is relevant and you're doing it in an innovative and creative way that engages with your audience, then it doesn't matter so much whether it cost 100 million or one million. I think though in terms of cost, the big issue now is making sure that what you spend on the film allows it to be saleable and recoupable.


© Ask An Angel Ltd 2017 All Rights Reserved