angel investing oct2004
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ANGEL INVESTINGAn Introduction to
OUTLINE
• Who are these Angels?• Entrepreneur-friendly Communities• Company Formation and Startup Funding• Portfolio Strategy for Angel Investors• Post-investment Relationship between
Entrepreneurs and Angel Investors• Why Angels are Joining Groups• The Angel Investing Process• The Power of Angel Investing Seminar
Angel Investors (vs. private investors)
• Invest money in seed, startup
and early stage companies• Invest time in entrepreneurs
and their companies– Business acumen– Mentoring and coaching– Serve on boards– Make business introductions
Who are these Angel Investors
• Often successful, exited entrepreneurs or retired business persons – active investors– Invest both time and money in companies
• Accredited Investors - SEC definition• Angels invest their own money (not money managers)
• Investing in local companies
Motivation:
Why Become an Angel Investor?
• Helping entrepreneurs• Stay engaged – using skills and experiences to help build a business• Giving back to community or university• An active form of investing – not just watching markets• Return on Investment is the metric
How do Angels fit into Entrepreneur-friendly
Communities
Entrepreneur-friendlyCommunities
ServiceProviders
EntrepreneurshipCenter
Bus PlansEducationNetworking
FundingSources
VCs
AngelsGrantsBanksSBIRs Mentors
CoachesRole models
ENTREPRENEURS
Sources ofTechnologyInnovations
Product Ideas
Colleges & Universities
Companies
Labs
Talented People
New Company Formation and Funding Sources for Startup
Companies
Who are Funding Startup Companies
• Friends, Family (and Fools) – FFF• Angel Investors• Venture Capitalists• Other
– Government grants (SBIRs, etc.)– State and local programs
• Friends, family & fools
• Angels
• Venture Capital
• Not accreditedUnsophisticatedInvesting in a friendPassive1-2 lifetime investments
($100 to $5,000 each)
• AccreditedExpertise and personal moneyActiveInvesting in entrepreneurPortfolio of angel deals
• Limited partnershipInstitutional moneyGeneral Partners activeInvest in companyLarge portfolio
Typical round: $10,000
Each investor: $ 2,000Source: estimate
Typical round: $600,000
Each investor: $ 40,000Source: Center for Venture Research
Typical round: $7,000,000
Each investor: $3,000,000Source: PWC MoneyTree
Funding Seed and Startup Entrepreneurs(typical year)
• Startup companies• Funded by FF&F• Funded by Angels• Funded by VCs
500,000 200,000 (est.) 35 - 50,000 < 500
Estimated that 90% of Outside Equity Capital in
Seed/Startup Stage Companies is Sourced from Angels
An Angel Portfolio Strategy
An Angel Investing Strategy:
Portfolio Considerations• 5-10% of net worth (asset allocation)• 8-10 investments (risk diversification)• High tech, low tech, no tech (your choice)
• Variety of involvements– Lead investor– Board, advisor– Passive
• Most of ROI from 1 - 2 of 10 companies
Implications of this Strategy
• Net Worth Requirements
(testing the SEC definition
of an accredited investor)
• Return on Investment implications
Definition:
Accredited Investor• Financial position of investor:
• Net worth: $1 million, or• Annual personal income: $200K, or• Family income: $300K
• Assumption:• Knowledgeable – capable of due diligence• Can afford to lose invested funds
• Implications:• Giving up regulated disclosure
Implications:
Angel Investor Net Worth
• Typical angel investment ~$25K• 10 investments = $250,000 invested• 100% reserves, another $250,000• 10% of Net Worth ($500K/10% = $5 million)
• Therefore:– Minimum net worth for angels = $5 million– SEC definition is 70 years old
Angel Expectations: 25%/yr
Source: Venture Economics, HFRI Equity Hedge Index
22.4
18.7 18.7
16.5 14.913.2
0
5
10
15
20
25
Ret
urn
s
Seed Funds
All Ventu
re
HedgeFunds
Buyouts
S & P 500
NASDAQ
Historical 20 Year Returns for Alternative Assets
Implications: Size of Each Opportunity
• 1-2 in 10 investments will produce almost all of the ROI for the portfolio
• These successes must yield 20-30X ROI (Nonbelievers: Do the calculations!)
• And…we cannot pick the winners• Therefore, all portfolio companies must
demonstrate the opportunity for a 20-30X return on investment.
Integrating Exits into Portfolio Strategy
• VCs exit in 3-5 years (assume 5)• Angels invest earlier and expect to exit in 5-7 years
(assume 7)• A balanced angel portfolio contains ten companies. • Consequently, angels should invest in 2-3 companies
per year– Build to ten company portfolio gradually– A portfolio of companies in all stages of development– Good balance for investors time
0
2000
4000
6000
8000
10000
12000
1999 2000 2001 2002
IPOM&A
2002 Software Industry Equity Update
20X
100X
Exit Strategies
Economic Benefit from Angel Invested Entrepreneurs and their Companies
We have absolutely no data but Consider the following:
• Angels invest in 7-10% of all startup companies• Angels only invest in companies that will scale
– 20 to 30 times growth in valuation in 5-7 years– Employment created by these companies is high
• David Birch (MIT) and others have demonstrated that high growth companies create all net new jobs in America.
• Angel-funded companies create lots of jobs
We have absolutely no data but Consider the following:
• Anecdotal data suggests Angel Investors and the Entrepreneurs in whom they invest enjoy some very successful exits.
• Exited entrepreneurs often become angels• Angels often reinvest portfolio returns• The wealth creation from angel investing
is spawning an even greater number of companies.
Post-Investment Relationship
Angels invest time in portfolio companies
• Angels bring expertise to portfolio– Business acumen– Vertical expertise– Financial experience– Director service
• Common roles– Advisor, Mentor, Coach, Director– Except in emergency, not paid consultant
Portfolio Considerations
• With many portfolio companies– Not active in all, pick roles suited to your skills– Let other angels serve remainder of companies
• As contribution fades, exit in favor of
new directors, advisors• Limit number of Boards to 3-5
Why Angels Join Groups
Growth in Angel Organizations
020
406080
100120140
160180200
1996 1997 1998 1999 2000 2001 2002 2003
Data provided by Professor J. Sohl, University of New Hampshire
Solo Angels
• Process is time-consuming– Deal sourcing– Reading plans– Due diligence
• Due diligence is difficult – Finding vertical experience – May require using outside experts
• Legal support is expensive
Investing through Angel Orgs
• Dividing the work eases the pain• Variety of vertical experience available• Standardized processes and term sheets• Deal flow encouraged, entrepreneur-friendly• Pick and choose the deals you like• Great camaraderie among the like-minded
The Angel Investing Process
Summary:
Angel Investing Process
• Pre-screening• Screening• Due diligence• Investment presentation• Follow-up discussions and meetings• Closing
Deal Flow Statistics
• Prescreening• Screening• Due Diligence• Investment• OVERALL
1 in 4 to Screening 1 in 3 to DD 1 in 3 to Inv. Meeting 1 in 2 raise money 1 in 72 who apply receive
investment
Power of Angel Investing
• Developed by Kauffman• Delivered more than 30 times in the US• Trained over 500 angel investors• High ratings by participants
– Knowledgeable speakers 4.64/5.00
– Important topics & content 4.60/5.00
– Relevant & beneficial information 4.60/5.00
– Well presented information 4.54/5.00
Seminar Content
• Is angel investing right for you• Where to find good deals• Due diligence• Structuring the deal• Valuation• The post-investment relationship
Seminar Format & Delivery
• All day experience• Networking opportunities• Designed for 20-25 accredited investors• Mix of learning methods
– Lectures– Panel discussions– Case study exercise (valuation)
SUMMARY
• Angels are making a difference– In job creation– In wealth creationby providing equity capital and mentoring to entrepreneurs
• Plan a portfolio strategy as you begin investing• Join an angel organization
– Good deal flow– Robust processes– Great camaraderie
This introduction to angel investing was developed by the Kauffman Foundation for the Angel Capital Association. It is designed as a recruiting tool for angel organizations and to introduce interested groups to the subject.
For more information on Kauffman’s Angel Initiative, the Angel Capital Association, or the Power of Angel Investing seminar for new angel investors, contact:Marianne Hudson
(800) 489-1447mhudson@kauffman.org
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