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  1. Wealth
November 11, 2009

Investment Outlook: Fair

By Spear's

Josh Spero ventures into a venture capital fair to see whether the recession is ruining chances or sparking up entreprises.

Josh Spero ventures into a venture capital fair to see whether the recession is ruining chances or sparking up entreprises.

11 November, 2009
still be engaged in recession – we have been Eased but we are not at ease – but a snapshot of the private investment scene shows that there is still money for young and innovative projects. Last week’s London Investment Fair threw up both businesses ready to make a strong impression in their sector and investors who wanted a return and/or involvement at the ground floor.

Mike Weaver, CEO of Beer & Partners, a venture capital and business angel network which organised the fair, conceded that there was less money on offer this year but said the opportunities were better: ‘Last year there was £4.2 billion to invest, this year it’s £3 billion. But every recession is the birthplace of a wave of new businesses in new areas – it’s a golden opportunity.’

Weaver added that young businesses could be ‘quick on their feet’, making them flexible and repsonsive to the current climate, and that there would be plenty of newly-redundant people who ‘have dreamed for years’ about starting their own businesses and have now finally done it. This was clearly true among the 31 businesses in Mark Masons’ Hall on St James’s in London, which were split between young sparks, old hands and the venturesome redundant.

One example Weaver cited as a business to watch at the fair was Elevar, a company which has developed wrapping for fruit crates which prolongs the life of the fruit. Elevar, which was founded at Georgia State University in America, has developed a paper impregnated with a substance derived from a commonly-found bacterium, which is crushed and put into cardboard fruit boxes. It passes the bottom-of-the-peach test, leaving them fresh after several days.

Julian Lee, CFO of Bloodstone Ventures, a company which invests in and provides support to life-science technology businesses, was representing Elevar at the fair and said that it was looking for £1.6 million for a 15-month development project to produce a commercial prototype. He said that he was finding 2009 better for getting investment than when he had been to the fair previously: ‘There are no time-wasters now. This year is a lot easier than last year because we’re off the bottom.’

The problem with the current investment situation was that people were tending their existing portfolios, Lee said, rather than striking out in new directions, but he had already had several positive approaches that day.
ACTING AS A BUSINESS angel has become a more attractive proposition for those with money to invest this year, as reflected in the number of people who had registered with Beer & Partners as potential investors: from 1,450 in 2008 to 1,600 this year. After the poor returns of large-scale private equity deals in 2009, it is perhaps unsurprising that investors are now looking at smaller venture capital investments.

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Daniel Birke and Yundan Gong, who had been angel investors in Ireland before moving to Britain, said that they ‘have done well through the recession’ and were looking to invest some of Yundan’s Chinese family’s wealth in young businesses (reflecting the growth in importance of BRIC money to the west). They had a maximum of £1 million per investment, and were considering Elevar and Rocketfish, a search enging marketing business looking for £500,000, but were largely ‘opporunity driven’.

The recession was also positive for investors, it seemed. Daniel said: ‘There are better opportunities now than before the recession – you can see the companies that managed to survive, which is clearly a very good sign.’ Yundan added that these would inherently be ‘more creative’ firms. The other advantage, she said, was that companies ‘were more realistic regarding valuations’, rather than expecting previously seemingly-unlimited investments.

The angel investing situation in China is quite different: investors loan money, rather than invest it, and banks only tend to fund government, not private, projects, Yundan said.

David Wood staged a management buy-in at a rubber manufacturer twelve years ago and had recently signed a three-year contract, whereupon the company encouraged him to take time to explore another venture. He said that the recession gave him interesting opportunities and that he was planning on seizing the moment because ‘once the banks get themselves sorted out, they’ll be more amenable to helping these businesses’. Thus a recession (where credit is tight almost by definition) doesn’t just create more innovative firms but positively incites private investment.

Rather than just making a financial investment, David believes he has more to offer: ‘I’m interested in being an active participant rather than just an investor. Most companies are definitely receptive to that – they need some of the management skills I have, and they realise it.’ The company which had caught David’s eye was Ezyboat, patent holders of a foldable boat with a built-in trailer, which was looking for £200,000.
EVEN IF, AS MIKE Weaver said, ‘It is becoming more accepted that something like five per cent of your net worth should be invested in early-stage companies,’ it is not at all clear when or what one should buy. Some firms offer incentives – at the fair, Spark Energy was offering a £5,000 convertible bond with a six per cent coupon and £1,000 of free power a year – whereas others offer (the promise of) returns or significant involvement in an embryonic firm.

What was quite clear was that the eternal lesson of recessions – whoever has cash is king – is especially applicable in angel investing, where wealthy individuals or networks may be firms’ only access to money. A ready supply of cash is also a powerful tool with regards to negotiating the size of the equity gained in return for the investment.

The key to assessing the success of the fair is not the prima facie number of attendees or the size of the wallets they are carrying: most of the deals are done in the two months after the fair, and these businesses will need to mature over months and years. Just as private equity managers now look back on 2006 and slap their heads in disbelief, perhaps only 2012 will reveal whether too much fun was had at the fair.

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