Transcript Angel Investing Gary Rowe Tech Coast Angels (TCA) • CA Non-Profit Founded in 1997 • The largest angel group in the US – investing.

Angel Investing
Gary Rowe
Tech Coast Angels (TCA)
• CA Non-Profit Founded in 1997
• The largest angel group in the US –
investing primarily in Southern
California
• Over 300 members organized in five
networks overseen by a Board of
Governors
Alliance of Angels
Golden Seeds
Sierra Angels
Life Science Angels
• Members are encouraged to
– collaborate within and across networks.
– attend any TCA meeting or activity.
– participate in any member-led
investment
– syndicate larger deals (new)
– provide mentoring and guidance as
well as capital
Central Coast
Desert Angels
Los Angeles
(22 members)
Orange County
(92 members)
Inland Empire
(16 members)
(70 members)
San Diego (102members)
Outline
• Funding Alternatives
• Angel Investing
• Angel Investing Decision Process
Starts with the Entrepreneur
• An idea for doing something better, faster,
cheaper
• You build on the idea and bring in others
• The frenzy starts…this will be great, we will be
rich…the euphoria peaks with the first Excel
spreadsheet…
• Revenue from nothing to $1 billion in 5
years…it must be true, it’s in Excel
Then Reality sets in
• I only have $5K in the
bank
• I have to cover my
monthly living expenses
• I’ll have to leave my
current job/salary
• I need outside funding or
my idea will never see
the light of day
Funding Alternatives
•
•
•
•
Self fund—may limit growth, but no dilution
Friends/Family—early stage funding
Angel Investments—$250K - $1.5 million
VC funding—$3million - $20+ million
Angel Investing
What Is Angel Investing?
Angel investors provide Seed Funds for
•
•
•
•
•
•
TCA
$
$
$
$$
$
proof of concept,
product development,
market research,
business plan development,
recruiting management and
early production.
Angel investors also provide Startup Capital
for early stage product development,
initial marketing, expansion and growth.
Who are Angel Investors ?
Accredited* investors who invest their own capital
They come from diverse operating
backgrounds
TCA
• C-Level Managers,
• Entrepreneurs,
• Senior Executives & Other Professionals
They can devote time and add substantial value
They mentor and coach entrepreneurs
• Serve as directors
• Provide industry contacts & advice
• Assist with team building, strategic planning
and subsequent fundraising
*Securities Act of 1933 - net worth > $1 M, income exceeding $200,000 in each of the two most recent
years or a trust with assets > $5 M
Spectrum of Start-Up Investments
% of All Start-Up Firms
< 10%
> 90%
< 1%
> 50%
High-Potential
Firms
Middle Market
Firms
20% to
50%
< 20%
Lifestyle Firms
Internal
ANGEL’S
INTEREST
Entrepreneurial Firms
Bootstrapping &
Angels
Primary Sources of Funding
Angels & VCs
$50+ M
$10 M to
$50 M
< $10 M
5-Yr Revenue Projection
Annual Growth Rate
Angel Investing, Osnabrugge & Brown
Investor Focus
Number of Investors
Power of Angel Investing, Payne
Seed Track
Funding
Angels
• Scarce capital – very few deals
• Wealthy, solo, private investors
• Strategic partners – corporate investors
• Boutique VCs
• Alliances between Angels and VCs
Gap
$2.5
VCs
$5.0
$7.5
Investment Per Round (Millions)
$10
STAGE
Late
Angel & VC Markets Are Large,
Complementary
Early
$19.2 B
55,480 Deals
Mostly Early Stage
Mostly Late Stage
3,808 Deals
$28.3 B
2008 Angel
Investments
2008 VC
Investments
UNH Center for Venture
Research
National Venture Capital
Association
Connect Framework Presentation - Jack Florio
WHAT DO ANGEL INVESTORS
EXPECT?
Investment Horizon 3 - 7 years
1
2
34
ROI = 30% - 40%
Revenue
Experienced management team
Ongoing relationship with management
7
6
5
How are Angels Currently Investing ?
Preferred Raise
< $150 K
$150 K - $250 K
$250 K - $500 K
Preferred Investment Stage
80%
$500 K - $750 K
40%
50%
60%
40%
20%
0
Later Stage
30%
Expansion
20%
Early Stage
0
Seed/Startup
60%
> $750 K
Source: 2009 Angel Capital Association - Angel Group Confidence Survey and 2008 Member Directory
Connect Framework Presentation - Jack Florio
What Do Angels Bring to a Start-Up ?
Funding
• Direct
• Venture Capital Affiliates
Guidance & Team Building
• Mentoring and Coaching
• Active on Board of Directors
• Advisory Board Participation
Business Contacts
•
•
•
•
•
•
Additional Management
Customers
Vendors
Strategic Partners
Service Providers
Follow-on Financing
Member Portfolio Considerations
•
•
•
•
5-10% of net worth (asset allocation)
8-10 investments (risk diversification)
High tech, low tech, no tech
Variety of involvements
– Lead investor
– Board, advisor
– Passive
• Most of ROI from 1 - 2 of 10 companies
Member Portfolio Strategy
• Expect to exit in 3-7 years (assume 7)
• You want a balanced portfolio
– Seek to build a portfolio of companies covering
all stages of development
– Perhaps in multiple business sectors
• Build to a 10 company portfolio gradually
– Invest in 2-3 companies per year
– Diversify (stage, sector, …)
Getting Funded by Angels
TCA Investing Process
Website
Universities
Word Of Mouth
PR
Members
VC Affiliates
Sponsors
Pre-Screen
40+ Applications/Month
20+ Companies Funded Each Year
Angel Investment Decision Process
• How TCA (and other investors) make decisions
• Investment is about maximizing returns while
minimizing risk—early stage companies are
higher risk which is why investors generally need
more equity to offset higher risk
• Understanding what investors look for is valuable
in helping entrepreneurs shape their business
plans and funding strategies
• Following slides are how TCA evaluates
invesments
Start With The Idea & Why Its Valuable?
What urgent problem does it solve?
Who is going to buy it?
What would they pay to get this value?
How is it better, faster, cheaper than alternatives?
Will they adopt your new technology before you run
out of money?
Good Ideas
The next Big Thing
A new Killer App
Disruptive Technology that can form the
core of a new business
A new application enabled by the Convergence of
New Technologies
A novel New Application of an
existing technology.
Then Determine if the Idea is
Fundable ?
A market opportunity sufficiently large to create a business
with at least $50 to $100 million in annual revenues.
Proprietary technology or other strong
barriers to entry.
A compelling, well articulated strategy for capturing
and defending a significant market share.
An exit strategy for the investors.
Strong management (not necessarily a complete
team) with relevant and successful experience.
Lastly, the company valuation must fit within TCA’s
risk/reward expectations for the investment.
A desire for advice and coaching
Will They Use the Funds Raised Effectively ?
Capital sought must take the
company to the next level and
materially increase its valuation.
Proof of Concept
Prototype
Patent Filing
Market Research
Product
Development
Management Team
Product Launch
Major Contract
Will They Need Follow-On Funding ?
Early money (Angel) must be used for growth
Later money (VC) is used to ready the company
for acquisition or IPO
$ $$
$ $$
The most desirable companies are those that don’t need
further funds or will quickly become attractive to VCs
HOWEVER
Early money is inferior to later money
Early
Later
SO
Early money investors will want a significant (30%-50%)
ownership stake in the company
Angels
Company
And
Early money investors need to see significant increase in value
Look for Deal Killers
Look For Deal Killers
We have no competition!
I must remain President - FOUNDERITIS
This is the Valuation. Take It or Leave It.
All I need is Your money
If we build it, they will come
I can’t explain the technology in simple terms
– It’s just too complicated
We don’t own the IP
We want to use your money to pay our salaries and
retire the company’s debt.
We’ve been too busy to put together a
business plan
We don’t have a shareholder/partner agreement
Question Exaggerated Claims
1.
Our projections are conservative.
2.
In 3 years our market will be $50B.
3.
Our key customer will sign our contract next week.
4.
Key employees will join us as soon as we’re funded.
5.
No one else is doing what we do.
6.
Several outside investors are doing due diligence.
7.
Our competitors are too slow to be a threat.
8.
Beta sites will pay to test our software.
9.
Our patents make our business defensible.
10. All we have to do is get 1% of business.
Examine Pro Forma
Consistent w/ #
of units sold &
sales cycle?
GPM ~ 50%
Does this match
business sector?
2010
2011
2012
2013
2014
2015
Revenues
0.27
1.00
2.50
5.33
10.31
22.17
COGS
Gross Profit
0.19
0.08
0.63
0.37
1.61
0.89
2.78
2.56
4.54
5.77
9.07
13.09
R&D Expense
0.30
0.77
0.39
0.50
0.54
0.64
Sales &
Business
Development
G&A (Include
Clinical &
Regulatory)
0.01
0.40
0.90
1.50
1.75
2.00
0.01
0.35
0.88
1.25
1.50
1.50
Profit (B/Tax)
Cash Flow
<0.05>
<0.05>
<1.35>
<1.40>
<1.58>
<2.98>
<1.84>
<4.82>
0.78
<4.04>
7.75
3.71
0.15
1.50
1.50
1.75
1.65
7
3.15
11
$4.90 M
19
% of Niche
Market?
Reasonable %
of Revenue?
Sales, R&D and
G&A
High/Low?
4 Yrs Negative
Profits
(Cumulative)
Financing
Cumulative 0.15
Headcount
Follow-On
Rounds
21
23
Agree on Terms
Typical Terms to Consider
Required Funds
Debt vs. Equity
Debt
Valuation
Shareholder Rights
Cap Table
Equity
Debt vs. Equity
Convertible Debt
• Convertible debt financing is an investor loan that has
a future conversion-to-equity feature.
• Convertible debt typically converts (often at a discount
& sometimes with a cap) to equity the next time capital
is raised
• Conversion to equity is based on the valuation set at
the time of “qualified financing.”
Equity
• Investor’s capital is exchanged for company equity
• The exchange rate is determined by the pre-money
valuation for the company
• Conversion to cash or to common stock is based on
the valuation set at the time of the next “qualified
financing” round.
$2,000,000
Valuation - Berkus Method (Early Stage Start-Up)
Add
Company Attribute
$500,000
Attractiveness of Core Idea Upon Which the
Company is Founded
$500,000
Good management is in place to execute to
the plan in the early stages of rapid growth
$500,000
The company has struck impressive strategic
alliances with either vendors or customers,
adding to barriers of entry for other businesses.
$500,000
The company has a completed product or
prototype and has demonstrated its
attractiveness before an appreciative customer
candidate. (Which further reduces the risk of
investment, adding to value.)
Summary
• Many entrepreneurs need outside funding
• Angel investors fill a valuable need for highpotential start-ups seeking $100K -$1.5 million
• Angel groups such as Tech Coast Angels bring
investors together to collaborate on deals, due
diligence and funding
• Understanding angel investor decision criteria
will help entrepreneurs get funding
Thank you
Entrepreneurial Playbook blog: http://garyjrowe.com