Screen shot 2014-05-24 at 14.02.42Hannah O’Shaughnessy gave the “inspirational angel” talk at our recent event at Thomson Reuters. Thanks to Hannah for allowing us to publish her talk here.

Tell us a bit about yourself

I’ve been investing for two years and have made 7 investments: my first was in a renewable energy company called Sustainable Marine Energy and the most recent in social media engagement platform, BuddyBounce where I led the round for Angel Academe.

I spend 2 days a week in my in my “old” corporate world of investment banking and the other 3 days working with a range of startups. Some of these are companies where I’ve invested, others are on a consultancy basis. I normally help them with finance, cash flow, operations and strategy. A lot of the value I hope to bring is an external view of their business, taking them through the stages of fundraising and the different developments of the business and also just helping them work out what focus on – helping them see the wood from the trees. Other partners are often far too close to the daily operation of the business.

Why do you invest?

Stimulation

The business has to be doing something I’m interested in. It’s far too risky and far too difficult to make a return if it isn’t enjoyable. I spent a lot of time when I first started investing figuring out what this enjoyment looked like to me. I found that it had to be interesting and make me want to find out more.

Involvement

I like to be actively involved so I look for founders I will enjoy working with. I’m looking for entrepreneurs who are great dreamers and inspiring, dedicated people. I like to find a business that’s at a stage where my skill set and my involvement will definitely benefit them. I don’t want to do this and not help the business; I am doing this for the sense that I’m doing a good job.

Financial return

The potential returns also have to be substantial. I need something that is looking to exit at a very decent multiple, not just be profitable and pay dividends.

You have to be very clear about why you’re investing. For me, angel investing is about the return, not about the social impact. Social impact for me is about charity donations and something outside my angel world. It works in different ways for different people.

What are some of the challenges you’ve faced?

Anyone new to angel investing will find themselves outside their comfort zone regularly. There’s a lot of networking; there’s lots of talking to people that whose background you don’t know; you don’t want to put a foot wrong; you need to prove to them that you are there for the right reasons. And so on. I often found myself in rooms full of old men who were playing with their pension pots; they spray everywhere, put a few investments in here and there, and don’t even read the business plan before investing – and I stood out like a sore thumb. But for all that, it was interesting to work with them and you get a lot of useful information from this kind of group.

Have you encountered any sexism?

Another story springs to mind. I spoke to a well-known male angel investor a while back. I told him I was new and looking at doing some angel investing, that I’d done 1 or 2 investments that were really interesting and exciting. His response was “you know you could lose all your money, it’s very risky, are you sure you want to be doing this?” When I said that I understood the risks, that I knew what was involved and was keen to continue, his response was “well how about I put you in touch with some creative businesses where even if you don’t make any money, you still get some free handbags and shoes?” Of course I responded in a professional way, but that was rude! But you have to pick yourself up and get on with it and focus on what you want to do.

What are the main risks?

It’s absolutely essential to be realistic and manage risk. Realistically, many of your investments will not give you a return; that’s a genuine risk and you need to go into a deal with your eyes wide open. The other thing is that this will be a long-term investment; for you to get your money out of an investment, you need to have a liquidation event. This could come in several forms: a company acquires the business you’ve invested in, the company may list on a public market, or it could be that investors in a later round want to buy out the earlier investors, so they make an offer. These liquidation events are rare; you have very little control over them, even the company itself has very little control over them. So your money, in effect, is locked in – you need to bear in mind that you’re not going to get access to that money as and when you want it.

How do you manage risk?

Tax breaks

I’ve tried a lot of things here. The tax incentives are great, so use them; they allow you to manage the downside then minimise the tax paid on the upside.

Spread the risk – portfolio

Also, something I do is look at it from a portfolio perspective. Among my 7 investments I have some that are short term, some that are early stage and some that are later stage. The early stage ones are higher risk and might not exit for 7 years. The later stage ones are slightly more de-risked and I might get an exit in 1-2 years.

Mix it up

I also have a mix of equity and debt; a lot of my deals are angel equity deals, but I also have some debt, so there are different payout profiles and different risk perspectives. I also invest across a range of sectors, so again I diversify my risk by having exposure in different areas. It protects you a bit.

Get involved

The other thing I do to manage risk is get actively involved and hands-on. As I’ve mentioned, this one of my fulfillment criteria, but in addition to that I believe that if I get involved and draw on my own skill set, I can help a company move in the right direction, push them along, hopefully encouraging these businesses to be more successful.

This is why I have a relatively small portfolio. Some investors will put money into a hundred different investments and then sit back and cross their fingers; potentially 10 might do quite well. The decision I made early on is to only do about 10 from which I’m looking for 8 successes.

Be aligned

The last point is that for you as an angel to succeed the entrepreneur has to succeed. Angels and entrepreneurs can have very difficult relationships but I’m known for being a very friendly, nice angel. My view is that entrepreneurs have a tough, tough job and you should want to make it easier. You should be clear about what you’re expecting, what you want them to achieve, show them how it benefits them and how it benefits you.

My boyfriend is an entrepreneur who started his own company 3 years ago and has helped me see the world from an entrepreneur’s perspective as well as an investor’s. He’s had angel investment through a number of stages and we talk a lot about whether I’m pushing too hard, what I should be expecting at a given stage, how would they would view this and so on.

In one of my early stage investments the founder actually ended up resigning having put a lot of blood, sweat and tears into the company for 3 years. He got to the point where he couldn’t take it anymore so just walked away. He wrote a really open and honest letter about what he thought went wrong, what was failing and what he’d do differently next time. I want to share some of what he wrote as I think it really makes it clear how difficult being a entrepreneur is and how potentially angels can, if not necessarily make it easier, at least be more understanding.

So here’s part of the email he sent: “From a business perspective I felt increasingly isolated. I had not recruited sufficient quality nor did I manage to hide my increasing despair when unrealistic deadlines were missed. Morale in the office was utterly terrible – a big failing of mine.” He then also talked through 3 shortcomings that I imagine are pretty common in any early stage company or for any early stage entrepreneur. One: not being sufficiently analytical. Two: taking it too personally. Three: “I gave myself too much to do”.

I think that being aware of the world entrepreneurs operate in, and the mentality and the drive it takes to be one, really helps angels to identify the good ones and see problems more quickly. The relationship an angel builds with the entrepreneur is key.

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