11 min read
Harry Potter and the Angel Investment
Of course none of this would have been possible without a crucially-timed 1000 Galleon Angel round led by the Weasleys’ good friend Harry Potter. Though he was understandably eager to find a home for his tainted Triwizard Tournament winnings, it was an investment for which Harry was ill prepared, lacked basic due diligence, and as far as we know was conducted even without any paperwork! When Mr Potter looks to build his magical investment portfolio, we’d advise he consider a few things first.
Harry had at least seen the Weasleys’ early Minimum Viable Puking Pastilles, understood their Unique Selling Point (USP) and business positioning, and got to know the brothers well enough to have faith in the founding team, but at no point did he ask to see a business plan for Weasley’s Wizard Wheezes. For investments magical or otherwise, a backer should be able to understand what a team plans to do with the money, and the growth they can expect to see in certain time frames. An effective pitch deck can make all the difference to communicating plans and potential.
Get a second opinion
While Potter would have had a feel for the Alpha customer sentiment of the budding business, Weasley products having been trialed with his fellow Hogwarts students, it would have been prudent to talk to other investors about the details of the investment opportunity and the business prospects. Getting a second opinion might be able to surface concerns, unforeseen competitors or obstacles, but it might also provide an opportunity to invest collaboratively. Investing with others means that your money can be diversified at a lower threshold, and the business will benefit from the expertise and interest of multiple advisors. Going forward Harry might want to seek out an Angel Network of other high-net-worths active in similar sectors.
Due diligence when investing in early-stage startups need not be overly laborious, it basically just means checking the claims of the founder(s), and understanding whether the opportunity is at all likely to be fruitful. It can include understanding the expertise mix and experience of the team, their commitment, ambition and realism. What is the company’s USP, is there a market for the offering and business model, and what is the competitor landscape? What are the financial fundamentals, projections, burn rate, and time and cost to market? Has the company previously raised investment and what are their future funding plans? Are they eligible for EIS, SEIS or R&D tax relief? Do they really hold the patent to their Patented Daydream Charm, as claimed?
This is a big one, and something completely overlooked by Mr Potter. The term sheet is the agreement setting out the conditions of the investment deal. It will form a basis of what will be confirmed by a legally binding contract when the deal is completed. The term sheet details some or all of:
- Valuation – the value of the company and how much equity you’ll get for your investment
- Share type – whether your shares offer you voting rights as well as an economic position
- Board rights – whether you’re entitled to an investor spot on the Board of Directors
- Participation rights – the option to invest in future investment rounds
- Redemption rights – a time period after which the company is obliged to repurchase your shares
- Liquidation preferences – how the proceeds of a liquidation event are distributed, and who gets paid in what order
Without this you have no basis for your investment, and for all you know could end up being repaid with a handful of Decoy Detonators 🙄.
George Weasley: “Harry, you help yourself to anything you want, all right? No charge.”
Harry Potter: “I can’t do that!”
Fred Weasley: “You don’t pay here… you gave us our start-up loan, we haven’t forgotten. Take whatever you like, and just remember to tell people where you got it, if they ask.“
Investment Agreement and funds
The final steps are to make it official, and get some legal help drawing up the investment agreement. Last thing to do is decide how and when to deliver the funds, hopefully a little more gracefully (and securely) than sack of cash on a crowded train. Best to have a paper trail for receipt of funds, Harry.
Angel investing can be hugely rewarding, financially, professionally and personally. You can have a hand in supporting the next generation of companies changing the world around us, have a lot of fun, and make good returns at the same time. Solid research, due diligence, understanding the paperwork and learning from others are key to Angel success. For all the talk of ’rocket ships’, investing well in startups isn’t rocket science, or indeed wizardry.