RISK, RETURN AND ACCESS TO ANGEL

INVESTINGCAIA ASSOCIATION EDUCATIONAL EVENT

Hosted by:

Refreshments

courtesy of:

THE GLOBAL BENCHMARK IN ALTERNATIVE

INVESTMENT EDUCATION

The CAIA Charter

Geir Watland

CAIA ASSOCIATION

Founded in 2002, the Chartered Alternative Investment Analyst (CAIA) Association is the global authority in alternative investment education.

Vision & Mission

Establish the CAIA designation as the benchmark for alternative investment education worldwide.

Promote professional development through continuing education, innovative research, and thought leadership.

Advocate the highest standards of professional ethics.

Provide a network for industry professionals to connect globally as well as a member career center

GLOBAL PRESENCE

MEMBER ASSET CLASS FOCUS AND REGIONAL

DISTRIBUTION

Data: Member Survey, December, 2015

Hedge Funds 65%

Fixed Income Alternatives 50%

Private Equity 45%

Real Estate 41%

Commodities 39%

Managed Futures 32%

Real Assets Infrastructure, Farmland,

Timberland 30%

Structured Products 29%

Venture Capital 18%

0 18 35 53 70

55%

13%

32%Americas

Asia-Pacific

Europe, Middle-East, Africa

CAIA Members work across a variety of asset classes globally.

MEMBERSHIP GROWTH

561

3,265

5,700

8,400

0

2,000

4,000

6,000

8,000

10,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

*2016 Data through May 31, 2016

SEATTLE

Membership

88 Active Members

Candidate Growth

9+ Level 1 Candidates for fall 2016

11+ Level 2 Candidates for fall 2016

Easy, quick and fun! Only two exams!! Sign up NOW!!!

Goals

Continue to organize educational events

Promote the CAIA designation and support candidates

Establish a full Seattle Chapter by H1 2017

Please check out website: www.caia.org

Seattle Angel Fund

Susan Preston

Risk, Return and Access

to Angel Investing

Make equity investments – generally not loans

Invest in early-stage companies

Often successful entrepreneurs or retired business persons

Active investors = invest both time and money in companies

Accredited investors - SEC definition

Invest their own money

Generally invest in local companies

Give back and support of economic growth

Part time investors

WHO ARE ANGEL INVESTORS?

COMPANIES BACKED BY AMERICAN ANGELS

FINANCING LIFE CYCLE

Discovery

Proof-of

Concept

Product

Design

Product

Development

Manufacturing/

Delivery

Fin

an

cin

g Idea Pre-seed

Funding

Seed Funding Expansion/Mezzanine

Operating Cap.

Friends and Family

Angels

Seed Funds

Venture FundsFounder

Institutional Equity

Loans / Bonds

Pro

du

ct

De

v

Angel Groups

Start-up

Funding

Government Grants

Crowdfunding

Business Growth Fund

Government Loans

TOTAL CAPITAL: ANGELS AND VCS (US)

2013: 72,000 deals

$24.8B

2014: 73,400 deals

$24.1B

2015: 71,110 deals

$24.6B

Angel Investments

2013: 9,291 deals

$45B

2014: 10,501deals

$69B

2015: 10,293 deals

$79B

VC Investments

Sources: Venture for Venture Research, UNH &

Pitchbook/NVCA

2016 TRENDS

2016 TRENDS

2015 ANNUAL REPORTPresents the

2015 Annual Report

$500k $500k $510k

$850k

$833k $829k $835k

$1,164k

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

2012 2013 2014 2015

Median Round Size Mean Round Size Mean Ownership Percentage

Median and Mean Round Sizes – Angels Only2015 Shows Round Sizes Increasing, Mean Ownership of Angel round is Relatively Stable 20-25%

Median and Mean Round Sizes – Angel Co-InvestmentsRound Sizes Trending Up When Angel Groups Co-Invest With Non-Angels

$1.21M

$1.45M $1.50M$1.60M

$1.70M$1.83M

$1.91M$2.00M

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2012 2013 2014 2015

Mill

ion

s U

SD

Median Round Size Mean Round Size

ANGEL INVESTOR PROFILE

Data Source: Angel Capital Association

Individual Angels invest

$10,000 to $250,000

Angel Groups invest between

$100,000 to $1,000,000

Investments surprisingly broad

Angels are sheep, we follow the most

recent trends

Syndication allowing average deal

size to increase

Angel Investment Size

MOST ACTIVE ANGEL GROUPS 2015 – TOTAL DEALS

TRACKING ANGEL RETURNS 2016

2016

2007

2009

% o

f To

tal

Exit multiple

IRRMultiple <1X10% of

exits to $

22%

2016

70% 85%

27%

2007

52% 90%

22%2009

56% 80%

2.5X

2.6

2.2

Hold

4.5yrs

3.5

3.6

TRACKING ANGEL RETURNS 2016

Tracking Angel Returns

Risk & Return of Angel Investing:

Practical Strategies for Diversifying

Matthew Le Merle

TOPICS WE’LL EXPLORE TODAY

1. Angel Returns, Best Practices & Case for Diversification

2. Observed Angel Behaviors/Practical Constraints Faced

3. Practical Strategies for Diversification – Pros and Cons

4. Conclusion

IRRMultiple <1X10% of exits

to $

22%

2016

70% 85%

27%

2007

52% 90%

22%

2009

56% 80%

2.5X

2.6

2.2

Hold

4.5yrs

3.5

3.6

Early stage VC ’05-’1129%2.1

Gross TVPI & includes carried value

1A. ANGEL RETURNS ATTRACTIVE

* Source: Kauffman Foundation, Professor Wiltbank of University of Willamette, Keiretsu Capital

Driver Comment

Proprietary deal flow Sourced through relationships – less bad actors/behaviors

Up to 70% for established angel groups

Strong angel led due

diligence culture

Angels that spend more than 40 hours achieve a 5.9x return

compared to low diligence investors who achieve a 1.1x

return*

Active participation in

portfolio companies

Angels who interact 2 times a month or more with portfolio

companies achieve a 3.7x return compared to passive

investors who achieve a 1.3x return*

Deep expertise in

investment areas

Angels investing in areas of direct industry experience achieve

multiples twice as high as those invested outside their

expertise*

Tight relationships

with follow on

investors

Leading angel groups partner with venture capital and

strategic investors to enable follow on rounds and exits

1B. BEST PRACTICES DRIVING RETURNS

Given skew of returns and reliance on 10x exits…

…approximately 40% of investors will return no capital

As angels we focus on return – but can manage risk too

Diversification does not increase return, but does raise probability of achieving the expected population return

Larger portfolio of investments improves risk profile:

12 Investments = 75%

24 investments = 90%

48 investments = 95%

* Source: Professor Wiltbank of University of Willamette

1C. CASE FOR DIVERSIFICATION

Sources: Fifth Era survey of 250 Keiretsu Forum members

1

81

42

17

57

2

Diversified: Expectation Actual Portfolio Size

>30

15 to 30

<15

0

45

55

Expected Returns

>20%

10 to 20%

<10%

IRR in %

Number of

Companies99

%

19%

SURVEY OF 250 KEIRETSU FORUM MEMBERS, 2016

2A. OBSERVED BEHAVIORS

Reasons given for insufficient diversification

Allocation (say 10%) given net worth limits investment #

Minimum investment sizes limit portfolio size

Requires too much time to be active across large portfolio

Don’t have enough time to attend enough meetings

Uncomfortable investing outside own area of expertise

Don’t see enough in home geography

SURVEY OF 250 KEIRETSU FORUM MEMBERS, 2016

Sources: Fifth Era survey of 250 Keiretsu Forum members

2B. PRACTICAL CONSTRAINTS

If the intent is to “play the same game” and not invest in some other game (e.g. Spray and pray)

Guiding Principles:

Investments must be “Angel Investments” or some other asset return is being captured. E.g.:

Not other asset classes (Public markets, Real estate, Series B/later VC/PE etc.)

Made by angels investing in groups

US, North America, International geographical sector focus needs consideration

Best practices of Angels investing in groups must be ensured

No or low cost is best (to capture largest return)

3A. PRACTICAL STRATEGIES FOR

ANGEL PORTFOLIO DIVERSIFICATION

3B. STRATEGY DISCUSSION

Guiding Principles

Less in more

(Syndicate)

Angel Co-

Investment

Funds as LP

Equity

Crowd-

funding

(Direct

/syndicates

/funds)

Incubator/A

ccelerator

Funds as LP

VC Micro

Funds as LP

Investments are Angel

Investments

Yes Yes Can be ? Can be

Proprietary Deal flow Yes Can be ? Yes ?

Strong angel led DD

culture

Yes Can be ? Can be ?

Active participation in

portfolio companies

Yes Can be ? Yes Can be

Deep expertise in

investment areas

Yes Can be ? Can be Can be

Tight relationships with

follow on investors

Yes Can be Can be Can be Can be

No/Low costs Yes ? ? ? ?16

4. CONCLUSION

Angel returns attractive – in mid 20’s IRR’s

Angels demonstrating best practices benefit most

Given skewed returns, diversification needed

24 (to 48) or more investments likely required

Angels rarely meet this diversification threshold

Practical constraints intervene – most have < 15

Five key strategies exist but all but one raise issues

Recommend more smaller investments, syndication and exploring strategies/vehicles that maintain best practices

TODAY’S SPEAKER

Matthew Le Merle

Managing Partner, Keiretsu Capital & Fifth Era

matthew@keiretsucapital.com

http://www.angelresourceinstitute.org/

www.keiretsucapital.com/angel-returns/

RISK, RETURN AND ACCESS TO ANGEL

INVESTINGOCTOBER 12, 2016

Moderator

• Frank Paganelli, Chair of the Startups & Emerging

Companies Practice Group, Lane Powell

Panelists

• Susan Preston, Managing Member, Seattle Angel Fund

• Matthew Le Merle, Managing Partner, Fifth Era and

Keiretsu Capital