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Investment and expertisefor promising, early stageScottish technology andlife science companies
www.archangelsonline.com
Directors:Geoff BallMike MacPheeMike RutterfordAlastair SalvesenEric M Young
9 January 2017
* (Source: Archangels: ImpactEvaluation of Activities 1992-2015, Hunter Centre forEnterpreneurship, University of Strathclyde)
2017 represents a significant landmark for Archangels, aswe celebrate 25 years of investment in early stagetechnology companies in Scotland. During that time wehave invested over £100m and have returned £125m to ourmembers, and we have an exciting portfolio of 22companies, for which we have high hopes.
We have given 81 companies and their founders andentrepreneurs a chance to make a difference and todevelop their ideas into real commercial successes,creating more than 3,000 high value jobs in the process.For every £1 we have invested, we have generated over£14 of turnover and up to £9 of economic impact.* Thatis indeed a record to be proud of.
Our success as a syndicate and the success of thecompanies in which we collectively invest is down tothe engagement, enthusiasm and support of you, ourmembers, as well as the breadth and knowledge of ourwider network and the hard work and dedication of ourteam.
As we embark upon a new year of investment and valuecreation, this members’ handbook is designed to giveyou greater transparency on our investment philosophyand approach, why we do things as we do andhopefully also to underline to you the benefits of ourunique approach to angel investing.
I would like to thank all of you for your support duringthe year and look forward to another strong year ofactivity ahead.
Yours sincerely
Eric YoungChairman
E: [email protected]: 0131 226 2641M: 07774 707 643
Welcome
Member Handbook 1
Archangels was established in 1992 by Barry Sealey and MikeRutterford. We are the oldestbusiness angel syndicate inScotland and, we believe, thelongest, continuously operatingsyndicate in the world.
Since it was established,Archangels has invested around£100 million of equity and loanfinance on behalf of over 200investors into 81 companies acrossScotland. We have already returnedaround £125 million of cash to ourinvestors through exit events andstill have an active portfolio of 22companies with significantadditional inherent value.
Our business ethos isunderpinned by fourfundamental pillars:
Historyand Background to Archangels
2 Member Handbook
To givesomething
back
To help youngScottish
companies
To generateattractive
investmentreturns
To have fun
1 2 3 4
Member Handbook 3
Archangels benefits from having a small, butactive and very engaged network. Our membersshare a common approach to angel investing:
> They choose which of our companies theyinvest in, but they recognise the benefits ofa portfolio approach to investment in termsof balancing and mitigating risk;
> Their objective is to build standalonebusinesses of scale, based in Scotland;
> They support our companies by offeringtheir expertise and access to their network,but they don’t get actively involved in therunning or governance of our companies(unless they are sector specialists, in whichcase it may be appropriate for them to be involved).
> They trust our office and independentinvestor directors to ensure that ourcompanies are on the right track but theyare genuinely interested in our companies;
> They understand that investing in an earlystage technology company can be a longjourney and that patience and the ability tooffer continued financial support isfundamental. On average, the journey frominitial investment to exit is over eight yearsand can typically involve six or sevenfunding rounds; and
> They have a genuine desire to givesomething back and develop the nextgeneration of entrepreneurs in Scotland.
Our Membership Philosophy
Our members investin and mentorpromising start-upand early stagecompanies fromScotland’s vibranttechnology and lifesciences sectors
4 Member Handbook
NCTech Limited
ZoneFox
Oldest continuouslyoperating syndicatein the world
Excellent track record in early stage investment
Archangels Investors (“Archangels”) wasestablished as an unincorporated association(“Club”) in late 2016, to replace ArchangelsInvestments LLP, which is being wound up. The Club is designed to engender a sense ofownership of the business amonst Archangelsinvestors.
We charge members an annual fee, to coversome of the cost of running the office. This iscurrently set at a modest £1,500.
Membership of Archangels confers a number of benefits:
> Access to the Archangels’ office to sourceand manage your direct investments in earlystage companies in Scotland. As the oldestcontinuously operating syndicate in theworld, we understand early stage investingand have an excellent track record;
> The right to participate in all newinvestment proposals in which Archangelsproposes an investment on the same basisas all other members;
> Access to our investor portal, which tracksall of your current and historic Archangels’investments, as well as details of newopportunities.
Benefits of Membership
Member Handbook 7
> The right to participate in follow on funding rounds for all of ourportfolio companies, subject to pre-emption rights and any scalingback required (see our policy on scaling back on page 15 of thishandbook);
> Regular updates on investee companies;
> Invitation to Archangels’ events during the year, including Chorus andMembers’ Convocation;
> Regular updates from the Archangels’ office on portfolio companyperformance and individual members’ transactions during the fiscalyear; and
> The ability to engage with a group of like-minded people whocollectively are motivated by giving something back and making areal economic impact in Scotland.
Benefits ofMembership(continued)
8 Member Handbook
Trig Avionics
Most of the companies in which Archangels invest benefit from eligibilityfor significant tax reliefs for investors who pay tax in the UK, in recognitionof the risks that angel investors take and in recognition by the governmentthat this is an important source of finance for small businesses.
The Enterprise Investment Scheme (EIS)
Under EIS investors can gain both income tax and capital gains tax reliefwhen subscribing for eligible shares in small unquoted companies thatqualify under the scheme.
> 30% income tax relief on up to £1,000,000 of investment per tax year(plus the possibility of carrying back income tax relief to the previoustax year);
> Exemption from capital gains tax on disposal of EIS shares after theend of the three year qualifying period;
> Allowing losses on the disposal of the EIS shares to be set off againsteither income or capital gains;
> Unlimited capital gains tax deferral in respect of the disposal of otherassets, on amounts reinvested in EIS shares; and
> Inheritance tax relief for EIS investments
The Tax Benefits
10 Member Handbook
What Companies qualify for EIS?
In order to access EIS relief, the business must:
> Not be listed on the stock exchange (except under AIM);
> Have a permanent establishment in the UK;
> Have gross assets of not more than £15m immediately pre-investmentand £16m immediately afterwards;
> Have fewer than 250 employees at the time of investment;
> Not be under the control of another company; and
> Carry on a qualifying trade as defined by the EIS
Whilst the majority of the companies we invest in will be qualifying for EISat the point of investment, the rules are complex and you should thereforeseek professional advice in relation to your individual tax position.
Member Handbook 11
Blackford Analysis
Since our establishment in 1992, we have developed a consistent andmethodical approach to sourcing opportunities on behalf of our members.Our investee companies:
> Must have high growth and international sales potential;
> Should have defensible technology, with clear intellectual property;
> Must be based in Scotland; and
> Should be in a sector which qualifies under the Enterprise InvestmentScheme.
Our clear preference is to invest in companies which are not capitalintensive and are capable of achieving scale and generating revenueswithout significant capex.
The vast majority of our investee companies will ultimately employ ahighly skilled workforce and will have large export sales markets.
The funding proposal may cover a range from ‘proof of concept’ throughexpansion capital and can include start-up or early stage. The range of ourinvestment is typically from £50k to £2m but can be out-with this rangefor the right opportunities.
We prefer to lead all of our investment rounds but may choose to partnerwith Scottish Enterprise, other business angel syndicates and occasionallyventure capital.
Our Investment Approach
Member Handbook 13
Our office facilitates and supports the investments by our members in thefollowing way:
> By undertaking a systematic search for new opportunities, building onour strong contacts with universities, incubators, accelerators andintermediaries;
> By screening business plans;
> By conducting thorough pre-investment due diligence;
> By negotiating pricing of fundraisings;
> By monitoring, supporting and, where necessary, intervening ininvestee companies;
> By ensuring the financial controls and reporting in each company isprofessional and timely;
> By arranging networking opportunities and group training forinvestee company executives and employees;
> By negotiating valuations and identifying and managing exits; and
> By creating a strong bond with founders and management.
New Deals
The Archangels Board of Directors are substantial investors across theportfolio and invest at least £100,000 in any new Archangels’ deal.
Therefore, prior to proposing any funding for a company, whether initial orfollow on, our members will know that the funding proposition has beencarefully due diligenced by our investment team and has the support ofour Board.
It is a fundamental principle that all members will have the opportunity toinvest on the same terms as the Archangels’ board in new opportunities.
TheBenefitsofanExperienced InvestmentTeam
14 Member Handbook
Rights Issues
Where a fundraising is proposed for an existing portfolio company inwhich some members may not already be invested, our approach is asfollows:
> Existing shareholders have pre-emption rights to ensure that they willnot be diluted by new investment if they choose to invest further.
> The Archangels’ team will ask existing shareholders to considerwhether or not they would like to take up a higher allocation thantheir rights, to cater for the situation where other shareholders elect not to take up their rights (eg, it is often the case thatfounder/manager shareholders are not in a position to take up their rights).
> In parallel, potential new investors from our member base will beinvited to give an indication of their level of interest.
When there is a modest oversubscription, it is generally speakingacceptable to all parties to close the round at a slightly higher level thanplanned. However, where there is a significant level of oversubscription, itmay be necessary to scale back potential new investors.
The Archangels’ approach is generally as follows:
> To achieve as broad a shareholder base as possible, which in the longrun we consider to be beneficial to all stakeholders, while maintainingan acceptable level of investment for each of the individual investors.
> Larger new investors may therefore occasionally be scaled backproportionately more than smaller new investors.
Member Handbook 15
Emergency funding/cash advances
Occasionally, companies may require funding at short notice. This mayhappen, for example, if a customer delays a significant payment or anunexpected payment becomes due. In these situations, the Archangels’team will:
> Firstly ascertain whether the cash flow position of the company canbe managed in such a way as to deal with the requirement.
> However, if the situation cannot be managed in that way, theArchangels team may request the Archangels’ Board and othershareholders within the company to provide a cash advance, usuallyahead of a wider funding round for all shareholders.
> Generally, emergency funding will be provided by way of equity, onpricing to be negotiated with the company.
Exits
Whilst we encourage our companies to identify and engage with potentialpurchasers at an early stage in their lifecycle, we usually let our companiesdrive the timing of the exit. Our members do not get involved in exitnegotiations - that is the role of our Investment Team. We always use ourexperience to ensure that our members get the best possible value,whether through managing a competitive process ourselves or appointingexperienced advisers, and will always seek to minimise warranty exposureand deferred considerations.
The Benefits of anExperienced Investment Team(continued)
16 Member Handbook
NetThings
The Archangels’ office benefits from a variety of sources of income:
Approximate Proportion Income Source of Total Income
Membership Fees 10%
Portfolio Company Monitoring Fees 25%
New Deal Research Fees 35%
Exit Warrants 10%
Exit Deal Management Fees 10%
Other 10%
The first three categories of revenue will generally cover Archangels’ staffcosts and other overheads.
Membership Fees
All investors pay a membership fee, which is currently set at £1,500 perannum.
Portfolio Company Monitoring Fees
Monitoring fees are payable by individual investee companies to defraysome of the costs incurred by Archangels in monitoring the investmentson behalf of the investors and for support provided by the Archangels’office to portfolio companies.
New Deal Research Fees
The Archangels’ investment team and board undertake significantscreening and due diligence of all investments on behalf of investors toensure that the company is investor ready and merits investment by ourmembers. Archangels charges the investee company 5% of total fundsraised in all new and follow on funding rounds.
How we Fund our Office
18 Member Handbook
Exit Warrants
Archangels usually takes a warrant over 1% of the equity value of theinvestee company, which is exercisable when the company is sold. The warrant, along with the exit deal management fees, makes acontribution to the costs which Archangels will incur throughout theperiod of investment and in managing the exit process.
Exit Deal Management Fees
Where our portfolio companies so request, Archangels will assist withadvisory services on an exit. The knowledge of the business, assistance inmeeting acquirers’ due diligence requests and negotiation of the dealtailored to the structure of the syndicate, can be done at significantlylower costs than third party advisers.
On joining the syndicate, members will be asked to sign a general powerof attorney in favour of the investment team to allow the team to signinvestment documents on each member’s behalf. This greatly increasesthe efficiency of the investment and exit processes. Management of exitsis a regulated activity and is dealt with through Archangels’ regulatedsubsidiary, Archangel Investors (Management) Limited.
Other
Where an Investee Company has been subject to a successful, profitable exit,a discretionary 5% charge will be made by Archangels to the profit on exit ofeach Member who has invested in such Investee Company, to incentivise themanagement team of Archangels who have been involved in identifying theInvestee Company and managing it through to exit. This is not a mandatorypayment, but will be deducted from the Member’s proceeds unless theMember notifies the Archangels’ office in writing otherwise.
Member Handbook 19
Archangels has a team of senior executives, all ofwhom have had many years of experience in funding high-growth companies.
David OvensChief Operating Officer
E: [email protected]: 0131 221 9876
David is an experienced corporatefinancier, having worked for SamuelMontagu & Company Limited,Noble Grossart Limited and Noble& Company Limited, before settingup Invercap, a corporate advisoryboutique based in Edinburgh. In recent years, he has advised,invested in and been involvedoperationally with a number of early stage companies.
David joined Archangels in 2014. He has responsibility for the management of theArchangels’ business and also hasdirect responsibility for a numberof the portfolio companies.
Sarah HardyChief Investment Officer
E: [email protected]: 0131 221 9876
Sarah obtained a BSc and then a PhDin Molecular Neuropharmacologyfrom the University of Aberdeen.Following a brief spell with Parke-Davis, she joined theWellcome Trust in 2001 and sincethen has moved through varioussenior life sciences roles, includinga secondment to Advent VenturePartners. She was a Senior Business Analyst, Innovations, with the Wellcome Trust, between2009 and 2016.
Sarah joined Archangels in March2016 as Chief Investment Officerand has direct responsibility for anumber of the portfolio companies.She also has responsibility forinvestment strategy.
Our TeamComplementary talents
20 Member Handbook
Niki McKenzieInvestment Director
E: [email protected]: 0131 221 9876
Niki is a Chartered Accountant with a strong background inCorporate Finance. Having trainedwith KPMG, she subsequently held various senior roles withinBank of Scotland InternationalDivision and Structured Finance as well as Lloyds Banking Group.
Niki joined Archangels in 2011 and has direct responsibility for anumber of the portfolio companies.She has responsibility for portfolioissues and has recently worked withthe management teams to deliverthe exits of CXR Biosciences, Bloxxand Touch Bionics.
Shaolei McKieInvestment Executive
E: [email protected]: 0131 221 9876
Shaolei is a Chartered Accountantwho specialised in leveragedfinance and fund investmentswithin the private equity division ofBank of Scotland Corporate.Latterly, she was the financialcontroller at Corran Properties,responsible for all financial andmanagement accounting functionsand development and propertyportfolio cashflows.
Shaolei joins Archangels in March2017 and will have responsibility forinvestment support, includingmanagement of share capitaltables, due diligence and theinvestor portal.
Lindsay MillerOffice Manager
E: [email protected]: 0131 221 9876
Lindsay is responsible for finance,company secretarial and eventmanagement activities as well asthe day to day running of the office.She holds an honours degree inImmunology and Microbiology from Strathclyde University.
Member Handbook 21
Our Board is fundamentallyimportant to the operation ofArchangels. Not only does itset the strategic direction ofthe business, it also acts as the investment committee,vetting new opportunities and challenging the duediligence undertaken by the team. It also commits at least the first £100,000 of investment in any newopportunity. All investmentopportunities presented tomembers will have alreadyobtained the unanimoussupport of our board.
Eric Young, Chairman
Eric is the current chair ofArchangels and has invested since1996. He joined the Board in 2000and has invested in every newinvestment and rights issue fromthat date. He is a director of OregonTimber Frame Limited. Eric is adirector of Rutterford HoldingsLimited and a partner in Eric Youngand Co, Chartered Surveyors. He alsomanages various property SPVs andinvestment vehicles and is activelyinvolved with several Scottish-basedcharities and Trusts.
Our Board
22 Member Handbook
Geoff Ball
Geoff was the Chief Executive ofCala from 1974 until his retirement in 2009. He led the Managementbuyout and subsequent sale of thebusiness. He was also Chairman of McCarthy & Stone and was formany years on the boards ofStandard Life and Scottish MortgageInvestment Trust. He is a pastpresident of the UK HomebuildersFederation. Geoff joined the boardof Archangels in 2011.
Mike MacPhee
Mike joined the board of Archangelsin 2015. Having been called to theEnglish Bar in 1987, Michael joinedBaillie Gifford & Co in 1989 andbecame a partner in 1998. Heinstigated investment in LatinAmerica during the 1990s, headedthe firm’s European Departmentfrom 2003 to 2008 and thereafterco-managed a global investmentstrategy. From 1998, until hisretirement from the firm in 2014, he was the manager of Mid WyndInternational Investment Trust PLC.
Mike Rutterford
Mike Rutterford is a serialentrepreneur with a 40-year careeras a business angel and in propertyinvestment. Educated in Edinburgh,in his 20s he launched Stuart WyseOgilivie and over a ten-year perioddeveloped the estate agency into thebiggest in Scotland – subsequentlyselling to General Accident in 1987.He co-founded Archangels withbusiness partner Barry Sealey in 1992. In June 2010, Mike received an Honorary Doctorate in BusinessAdministration from EdinburghNapier University.
Alastair Salvesen, CBE
Alastair is a Chartered Accountantand is Chairman at DawnfreshSeafoods Ltd and Dovecot StudiosLtd. He is Deputy Chairman of theFettes Trust, and a past presidentof the Royal Highland andAgricultural Society and the BritishFrozen Foods Federation. Alastairis also a Director of several othercompanies. Alastair joined theboard of Archangels in 2009.
Member Handbook 23
Our Portfolio
24 Member Handbook
SentientMedicalLimited
