Harry Potter and the angel investor

Scotsman Nelson Gray has invested in 79 companies, 26 personally. On a recent trip here, he told our angels they're doing a pretty good job.

So your first taste of angel investing didn’t put you off?
Fortunately during those first six  months I was also introduced to the guys setting up Optos [the Scottish eye scanning technology company, which successfully listed on the London Stock Exchange in 2006].

Their accountant had emigrated so because I was a trained accountant I stepped in to help. I ended up doing all the normal, boring accountant stuff, but I was surrounded by these brilliant physicists and optical engineers.

That’s where I got a taste for technology. I ended up investing in the company, so then one or two people mistakenly thought I knew about technology investment and it all went from there.

Of your own investments, how many have you exited?

Do you mean the ones that have had a profitable exit or the ones that have been a learning experience? Thirteen have crashed and burned and cost me about $900,000. I have seven active presently, so I’ve had six that I’ve had an exit from ranging from 1x to 13x.

The exit on TSL [life science company Tissue Science Laboratories, which floated on AIM in 2002] was a 13x return. Half of that paid for all my losses.

Why do you keep doing it?
Because I’m not clever enough to start my own business and I enjoy being involved. I enjoy helping investors and entrepreneurs. It’s a bit like the dementors in Harry Potter, who go around and suck the souls out of people.

This is the same kind of principle. You go in and meet all these entrepreneurs who are doing things that are frankly impossible, but they do them because they don’t realise that, and you suck all that energy back into yourself and you regenerate yourself. I’m really 103 years old.

Is angel investing about money?
I don’t know anybody who’s become rich being a business angel. I know people who have made a lot of money, but frankly they were comfortable beforehand. So it really isn’t about the money and I would be uncomfortable if people were selling the idea of becoming a business angel because of the return.

You want to do it, and it sounds a bit clichéd, because it’s the right thing to do. It’s the right thing to take some money that you can afford to lose, and put it in to helping other people.

There’s a whole bunch of other reasons why you do it: you get to a certain age and you want to help as many drug companies as possible, for example, because they are going to keep you alive the older you get.

But more seriously, do you trust the government to create the jobs your children and grandchildren are going to take up? If you do, well just go and play golf. But the reality is government isn’t.

It’s business angels who are going to create the society, the environment, the drugs and the technologies of the future that will make our lives better.

Is angel investment only for the rich?
If you are on minimum wage living in social housing, then anybody who can afford to do business angelling will be regarded as rich. But one of the problems with this area is people think to be a business angel you have to put hundreds of thousands of dollars into deals, but that’s completely untrue.

Our angel investors are putting $10,000, $15,000 or $20,000 into a deal, but there are 10, 15 or 20 of them doing it. You do have to say, ‘here’s $10,000 I don’t need and I’m willing to risk over the next 10 years and if I lose it, it doesn’t really matter to me’, but you certainly don’t have to be a multi-millionaire.

What’s the most important piece of advice you'd give a budding business angel?
Join with a group so you can make a lot of small investments. Also, people are fixated about returns on investment and shareholder value, but I don’t like those words.

I want to create entrepreneurial value because if the entrepreneur gets rich, I’ll get rich. We have to work hard in language terms to break down the idea there’s some sort of conflict between investors and entrepreneurs.

You both need to have a realistic understanding of how you can create real value right from the start and so how you can both walk away with a pile of cash in your pocket at the end.

What’s the worst thing a company looking for angel investment can do?
Email me a business plan when they’ve never even talked to me before in their life. That will just get deleted.

Entrepreneurs need to do some research on who they are sending their plan to and couch the pitch in terms interesting to me as an investor. I do a talk entitled, ‘Why I don’t care about your technology or what they say in Silicon Valley?’, because I have no interest at all in how your gizmo works. I want to know why customers will buy it.

Are all angel investments startups?
No. Female entrepreneurs [for example] tend to want to start slowly, so they will have a relatively small, personal business for one or two years, and then will go out and start raising capital.

The same is often true for family businesses: you have a generational change and for the first time ever the new family directors go, ‘you know what, if we get some new equity in, we can really go somewhere'.

So this question of when is a startup a startup? It’s when a company wants to step up … the fundamentals are the same: are you willing to take the extra equity in, are you willing to take our mentoring  — and frankly, are you willing to drive it for an exit?