Transcript Angel Organizations and Angel Investing: Best Practices

From Invention to Start-Up:
Money - Angels and Strategic
Partners
November 28, 2006
Susan Preston
Entrepreneur-in-Residence
Ewing Marion Kauffman Foundation
AND
Director of Attorney Training and Professional Development
Davis Wright Tremaine
Financing Product Dev
Financing Life Cycle
Discovery
Idea
Proof-of
Concept
Pre-seed
Funding
Product
Design
Seed
Funding
Product
Development
Start-up
Funding
Manufacturing/
Delivery
Expansion/Mezzanine
Operating Cap.
Founder
Venture Funds
Friends and Family
Institutional Equity
Angels
Angel Groups
Government Grants/Loans
Seed Funds
Loans / Bonds
Venture Capital Statistics:
Investments in US
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2005 – invested $21.7 billion (2,939 deals)
2004 – invested $20.9 billion (2,876 deals)
2003 – invested $18.9 billion
Increase due largely to late stage investments:
 $9.7 billion in 2005
 $7.2 billion in 2004
 $4.9 billion in 2003
Less than 2% in early/seed stage
Source: NVCA
Venture Capital Investments by Stage
of Development ($s in Millions)
25000
20000
15000
2003
2004
2005
10000
5000
0
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Source: MoneyTree
Venture Capital Investment:
Historical and 2006 Projected
$120.00
9,000
8,000
$100.00
7,000
$80.00
6,000
5,000
$60.00
4,000
$40.00
3,000
2,000
$20.00
1,000
$0.00
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
Dollars (in $B)
No. of Deals
Source: MoneyTree
Average VC Deal Size
Per Financing Round ($ Million)
$8
$ 7.1
$ 6.6
$ 6.8
$ 7.3 $ 7.4 $ 7.4 $ 7.2 $ 7.2 $ 7.2
$ 7.1
$ 7.8
$ 7.4 $ 7.2
$ 7.6
$ 7.4
$ 6.3 $ 6.3
$6
$4
$2
$0
2 Q0 2 3 Q0 2 4 Q0 2
1Q0 3 2 Q0 3 3 Q0 3 4 Q0 3
1Q0 4 2 Q0 4 3 Q0 4 4 Q0 4
1Q0 5 2 Q0 5 3 Q0 5 4 Q0 5
1Q0 6 2 Q0 6
Source: NVCA
US Angel Investments
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2005 – invested $23.1 billion (49,500 deals)
 Increase of 2.7% in $’s over 2004
 Increase of 3.1% in deals over 2004
2004 – invested $22.5 billion (48,000 deals)
2003 – invested $18.1 billion
227,000 active angels
 20% Healthcare/medical devices and equipment
 18% Software
55% in seed/start-up
43% in post-seed/start-up (10% increase over 2004)
Source: Center for Venture Research
Who Are Angels?
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Angels are accredited investors who:
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Expect a financial return
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Believe in giving back to their communities
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Invest locally and regionally
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Participate in the investment process
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Show interest in personal relationships with
companies and employees
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Offer wisdom and guidance to entrepreneurs
Financial Attributes of Angels
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Provide early-stage investment dollars
Invest smaller dollar amounts per investment
Partially fill funding gap left by venture
capitalists (VCs)
Invest individual wealth
Can tolerate loss of entire investment
Have diversified portfolios
Invest with “patient money”
Angels and VCs – Similarities
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Selective in investments
Requirements for an investable company
Expectation of return on investment scalable
Similar investment terms (though angels can
and often are – or must be – simpler)
Bring the attributes of a professional investor
Angels and VCs –Differences
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Venture capitalists:
 Invest on “home-run” theory
 ROI is ultimate goal
 Investing 3rd party money
 Often more demanding and actively involved than angels:
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Control often issue
Can requirement board and advisor approval and corporate
actions
Angels:
 Invest for returns – may be more modest expectations
 Social /community aspect to investments
 Individuals investing their own wealth
 Patient money
Investment Preference
Biotechnology
Business Products/ Services
Computers & Peripherals
Consumer Products/ Services
Electronics/ Instrumentation
Financial Services
Healthcare Services
Industrial/ Energy
IT Services
Media & Entertainment
Medical Devices & Equipment
Networking & Equipment
Other
Retail/ Distribution
Semiconductors
Software
Telecommunications
0
39 groups reporting
5
10
15
20
25
30
35
Valuations Of Venture Capital
Seed/Startup Rounds ($Millions)
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
Startup/Seed
$2.00
$1.50
$1.00
$0.50
$0.00
1995
1996
1997
1998
1999
2000
2001
*2006 Estimated Value
2002
2003
2004
2005
2006*
Valuation: Expected ROIs
ROI
Five Year ROI
Seed
60%+/year
10X+
Start-up
50%
8X
Early stage
40%
5X
2nd stage
30%
4X
Near exit
25%/year
3X
Finding Angel Investors
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Angel Organizations:
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Several in Puget Sound area including: AoA, PSVC,
Seraph Capital Forum, Zino Society, Keiretsu Forum,
Tacoma Angel Network, Bellingham Angel Network
Professional Service Providers
Investment Forums
Business Plan Competitions
Professionally-funded Start-ups
Venture Capitalists
Corporate Boards
Forms of Investment
Debt (note)
Equity (stock)
Options
Warrants
Debt: collateralized, non-collateralized, interest in cash
or stock (deferred?), convertible (at election or
automatic?), length of time, etc.
Equity: common vs. preferred, dividends, many other
terms discussed below
Professional Investors
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Angels, venture capital, corporations typically receive:
 Preferred stock
 Convertible debt with warrants or additional stock
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Provide more than money: Can be proactive in
developing business through (“win together”):
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Company building experience
Company functionality experience
Industry experience
Contacts for partners, customers and follow-on financing
What Professional Investors Are
Looking for: Investable Companies
Clear path to profitability
 Solid management
 Realistic business concept and plan
 Scalable business
 Competitive edge/Technical superiority
 Market acceptance
 Realistic financial projections
 Realistic valuation
 Clear, well-articulated exit strategy
Bottom line: Opportunity for financial return
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What Professional Investors Are
Looking for: Investable Companies
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How does an investor make this determination?
 Passion of entrepreneur (presentation)
 Team track record – individually and together
Entrepreneur’s ability to succinctly articulate vision
and mission
 Entrepreneur seeks advice of trusted, experienced,
honest advisors
 Coachable entrepreneur
What Professional Investors Are
Looking for: Investable Companies
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How does an investor make this determination?
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Competitors researched and understood
Clear market differentiator
Value proposition for customer clearly evident
Market access strategy clear and realistic
Comprehensive summary of risks (and plans to
cope/address)
 Profit potential – good margins
 Marketability of company – M&A exit
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Type, timing and realistic purchasers
Term Sheets: Debentures
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Convertible Debentures (Notes):
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Automatic upon event or investor controls
conversion
Note term
Interest: cash or stock; payment schedule;
part of conversion
Security interest/collateralized?
Term Sheets: Preferred Stock
Rights, preferences and privileges of preferred stock
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Price
Use of Proceeds
Dividends
Liquidation
preference
Anti-dilution
provisions
Redemption
Protective provisions
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Information
requirements
Registration rights
Right of first refusal
Co-sale rights
Option pool
Founder vesting
Inventions agreements
Summation
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Angels invest primarily in seed/start-up rounds
Angels represent patient money
Angels are becoming sophisticated investors
Angels make excellent advisors and mentors
Many companies will need only angel investors
Be open, coachable and realistic
Show your commitment, passion and drive
The essence of due diligence:
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So what?
Who cares?
Why you?