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An Introduction to Angel Investing

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An Introduction to Angel Investing

  1. 1. ANGEL INVESTING An Introduction to
  2. 2. OUTLINE <ul><li>Who are these Angels? </li></ul><ul><li>Entrepreneur-friendly Communities </li></ul><ul><li>Company Formation and Startup Funding </li></ul><ul><li>Portfolio Strategy for Angel Investors </li></ul><ul><li>Post-investment Relationship between </li></ul><ul><li>Entrepreneurs and Angel Investors </li></ul><ul><li>Why Angels are Joining Groups </li></ul><ul><li>The Angel Investing Process </li></ul><ul><li>The Power of Angel Investing Seminar </li></ul>
  3. 3. Angel Investors (vs. private investors) <ul><li>Invest money in seed, startup </li></ul><ul><li>and early stage companies </li></ul><ul><li>Invest time in entrepreneurs </li></ul><ul><li>and their companies </li></ul><ul><ul><ul><ul><li>Business acumen </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Mentoring and coaching </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Serve on boards </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Make business introductions </li></ul></ul></ul></ul>
  4. 4. Who are these Angel Investors <ul><li>Often successful, exited entrepreneurs or retired business persons – active investors </li></ul><ul><ul><li>Invest both time and money in companies </li></ul></ul><ul><li>Accredited Investors - SEC definition </li></ul><ul><li>Angels invest their own money (not money managers) </li></ul><ul><li>Investing in local companies </li></ul>
  5. 5. Motivation: Why Become an Angel Investor? <ul><li>Helping entrepreneurs </li></ul><ul><li>Stay engaged – using skills and </li></ul><ul><li>experiences to help build a business </li></ul><ul><li>Giving back to community or university </li></ul><ul><li>An active form of investing – </li></ul><ul><li>not just watching markets </li></ul><ul><li>Return on Investment is the metric </li></ul>
  6. 6. How do Angels fit into Entrepreneur-friendly Communities
  7. 7. Entrepreneur-friendly Communities Service Providers Mentors Coaches Role models ENTREPRENEURS Talented People Entrepreneurship Center <ul><li>Bus Plans </li></ul><ul><li>Education </li></ul><ul><li>Networking </li></ul>Funding Sources VCs Angels <ul><li>Grants </li></ul><ul><li>Banks </li></ul><ul><li>SBIRs </li></ul><ul><li>Sources of </li></ul><ul><li>Technology </li></ul><ul><li>Innovations </li></ul><ul><li>Product Ideas </li></ul>Colleges & Universities Companies Labs
  8. 8. New Company Formation and Funding Sources for Startup Companies
  9. 9. Who are Funding Startup Companies <ul><li>Friends, Family (and Fools) – FFF </li></ul><ul><li>Angel Investors </li></ul><ul><li>Venture Capitalists </li></ul><ul><li>Other </li></ul><ul><ul><li>Government grants (SBIRs, etc.) </li></ul></ul><ul><ul><li>State and local programs </li></ul></ul>
  10. 10. <ul><li>Friends, family & fools </li></ul><ul><li>Angels </li></ul><ul><li>Venture Capital </li></ul><ul><li>Not accredited </li></ul><ul><li>Unsophisticated </li></ul><ul><li>Investing in a friend </li></ul><ul><li>Passive </li></ul><ul><li>1-2 lifetime investments </li></ul><ul><li>($100 to $5,000 each) </li></ul><ul><li>Accredited </li></ul><ul><li>Expertise and personal money </li></ul><ul><li>Active </li></ul><ul><li>Investing in entrepreneur </li></ul><ul><li>Portfolio of angel deals </li></ul><ul><li>Limited partnership </li></ul><ul><li>Institutional money </li></ul><ul><li>General Partners active </li></ul><ul><li>Invest in company </li></ul><ul><li>Large portfolio </li></ul>Typical round: $10,000 Each investor: $ 2,000 Source: estimate Typical round: $600,000 Each investor: $ 40,000 Source: Center for Venture Research Typical round: $7,000,000 Each investor: $3,000,000 Source: PWC MoneyTree
  11. 11. Funding Seed and Startup Entrepreneurs (typical year) <ul><li>Startup companies </li></ul><ul><li>Funded by FF&F </li></ul><ul><li>Funded by Angels </li></ul><ul><li>Funded by VCs </li></ul><ul><li>500,000 </li></ul><ul><li>200,000 (est.) </li></ul><ul><li>35 - 50,000 </li></ul><ul><li>< 500 </li></ul>
  12. 12. Estimated that 90% of Outside Equity Capital in Seed/Startup Stage Companies is Sourced from Angels
  13. 13. An Angel Portfolio Strategy
  14. 14. An Angel Investing Strategy: Portfolio Considerations <ul><li>5-10% of net worth (asset allocation) </li></ul><ul><li>8-10 investments (risk diversification) </li></ul><ul><li>High tech, low tech, no tech (your choice) </li></ul><ul><li>Variety of involvements </li></ul><ul><ul><li>Lead investor </li></ul></ul><ul><ul><li>Board, advisor </li></ul></ul><ul><ul><li>Passive </li></ul></ul><ul><li>Most of ROI from 1 - 2 of 10 companies </li></ul>
  15. 15. Implications of this Strategy <ul><li>Net Worth Requirements </li></ul><ul><li>(testing the SEC definition </li></ul><ul><li>of an accredited investor) </li></ul><ul><li>Return on Investment implications </li></ul>
  16. 16. Definition: Accredited Investor <ul><li>Financial position of investor: </li></ul><ul><ul><ul><li>Net worth: $1 million, or </li></ul></ul></ul><ul><ul><ul><li>Annual personal income: $200K, or </li></ul></ul></ul><ul><ul><ul><li>Family income: $300K </li></ul></ul></ul><ul><li>Assumption: </li></ul><ul><ul><ul><li>Knowledgeable – capable of due diligence </li></ul></ul></ul><ul><ul><ul><li>Can afford to lose invested funds </li></ul></ul></ul><ul><li>Implications: </li></ul><ul><ul><ul><li>Giving up regulated disclosure </li></ul></ul></ul>
  17. 17. Implications: Angel Investor Net Worth <ul><li>Typical angel investment ~$25K </li></ul><ul><li>10 investments = $250,000 invested </li></ul><ul><li>100% reserves, another $250,000 </li></ul><ul><li>10% of Net Worth ($500K/10% = $5 million) </li></ul><ul><li>Therefore: </li></ul><ul><ul><li>Minimum net worth for angels = $5 million </li></ul></ul><ul><ul><li>SEC definition is 70 years old </li></ul></ul>
  18. 18. Angel Expectations: 25%/yr Source: Venture Economics, HFRI Equity Hedge Index 22.4 18.7 18.7 16.5 14.9 13.2 0 5 10 15 20 25 Returns Seed Funds All Venture Hedge Funds Buyouts S & P 500 NASDAQ Historical 20 Year Returns for Alternative Assets
  19. 19. Implications: Size of Each Opportunity <ul><li>1-2 in 10 investments will produce almost all of the ROI for the portfolio </li></ul><ul><li>These successes must yield 20-30X ROI </li></ul><ul><li>( Nonbelievers: Do the calculations!) </li></ul><ul><li>And…we cannot pick the winners </li></ul><ul><li>Therefore, all portfolio companies must demonstrate the opportunity for a 20-30X return on investment. </li></ul>
  20. 20. Integrating Exits into Portfolio Strategy <ul><li>VCs exit in 3-5 years (assume 5) </li></ul><ul><li>Angels invest earlier and expect to exit in 5-7 years (assume 7) </li></ul><ul><li>A balanced angel portfolio contains ten companies. </li></ul><ul><li>Consequently, angels should invest in 2-3 companies per year </li></ul><ul><ul><li>Build to ten company portfolio gradually </li></ul></ul><ul><ul><li>A portfolio of companies in all stages of development </li></ul></ul><ul><ul><li>Good balance for investors time </li></ul></ul>
  21. 21. Exit Strategies 0 2000 4000 6000 8000 10000 12000 1999 2000 2001 2002 IPO M&A 2002 Software Industry Equity Update 20X 100X
  22. 22. Economic Benefit from Angel Invested Entrepreneurs and their Companies
  23. 23. We have absolutely no data but Consider the following: <ul><li>Angels invest in 7-10% of all startup companies </li></ul><ul><li>Angels only invest in companies that will scale </li></ul><ul><ul><li>20 to 30 times growth in valuation in 5-7 years </li></ul></ul><ul><ul><li>Employment created by these companies is high </li></ul></ul><ul><li>David Birch (MIT) and others have demonstrated that high growth companies create all net new jobs in America. </li></ul><ul><li>Angel-funded companies create lots of jobs </li></ul>
  24. 24. We have absolutely no data but Consider the following: <ul><li>Anecdotal data suggests Angel Investors and the Entrepreneurs in whom they invest enjoy some very successful exits. </li></ul><ul><li>Exited entrepreneurs often become angels </li></ul><ul><li>Angels often reinvest portfolio returns </li></ul><ul><li>The wealth creation from angel investing is spawning an even greater number of companies. </li></ul>
  25. 25. Post-Investment Relationship
  26. 26. Angels invest time in portfolio companies <ul><li>Angels bring expertise to portfolio </li></ul><ul><ul><li>Business acumen </li></ul></ul><ul><ul><li>Vertical expertise </li></ul></ul><ul><ul><li>Financial experience </li></ul></ul><ul><ul><li>Director service </li></ul></ul><ul><li>Common roles </li></ul><ul><ul><li>Advisor, Mentor, Coach, Director </li></ul></ul><ul><ul><li>Except in emergency, not paid consultant </li></ul></ul>
  27. 27. Portfolio Considerations <ul><li>With many portfolio companies </li></ul><ul><ul><li>Not active in all, pick roles suited to your skills </li></ul></ul><ul><ul><li>Let other angels serve remainder of companies </li></ul></ul><ul><li>As contribution fades, exit in favor of </li></ul><ul><li>new directors, advisors </li></ul><ul><li>Limit number of Boards to 3-5 </li></ul>
  28. 28. Why Angels Join Groups
  29. 29. Growth in Angel Organizations Data provided by Professor J. Sohl, University of New Hampshire
  30. 30. Solo Angels <ul><li>Process is time-consuming </li></ul><ul><ul><li>Deal sourcing </li></ul></ul><ul><ul><li>Reading plans </li></ul></ul><ul><ul><li>Due diligence </li></ul></ul><ul><li>Due diligence is difficult </li></ul><ul><ul><li>Finding vertical experience </li></ul></ul><ul><ul><li>May require using outside experts </li></ul></ul><ul><li>Legal support is expensive </li></ul>
  31. 31. Investing through Angel Orgs <ul><li>Dividing the work eases the pain </li></ul><ul><li>Variety of vertical experience available </li></ul><ul><li>Standardized processes and term sheets </li></ul><ul><li>Deal flow encouraged, entrepreneur-friendly </li></ul><ul><li>Pick and choose the deals you like </li></ul><ul><li>Great camaraderie among the like-minded </li></ul>
  32. 32. The Angel Investing Process
  33. 33. Summary: Angel Investing Process <ul><li>Pre-screening </li></ul><ul><li>Screening </li></ul><ul><li>Due diligence </li></ul><ul><li>Investment presentation </li></ul><ul><li>Follow-up discussions and meetings </li></ul><ul><li>Closing </li></ul>
  34. 34. Deal Flow Statistics <ul><li>Prescreening </li></ul><ul><li>Screening </li></ul><ul><li>Due Diligence </li></ul><ul><li>Investment </li></ul><ul><li>OVERALL </li></ul><ul><li>1 in 4 to Screening </li></ul><ul><li>1 in 3 to DD </li></ul><ul><li>1 in 3 to Inv. Meeting </li></ul><ul><li>1 in 2 raise money </li></ul><ul><li>1 in 72 who apply receive investment </li></ul>
  35. 36. Power of Angel Investing <ul><li>Developed by Kauffman </li></ul><ul><li>Delivered more than 30 times in the US </li></ul><ul><li>Trained over 500 angel investors </li></ul><ul><li>High ratings by participants </li></ul><ul><ul><li>Knowledgeable speakers 4.64/5.00 </li></ul></ul><ul><ul><li>Important topics & content 4.60/5.00 </li></ul></ul><ul><ul><li>Relevant & beneficial information 4.60/5.00 </li></ul></ul><ul><ul><li>Well presented information 4.54/5.00 </li></ul></ul>
  36. 37. Seminar Content <ul><li>Is angel investing right for you </li></ul><ul><li>Where to find good deals </li></ul><ul><li>Due diligence </li></ul><ul><li>Structuring the deal </li></ul><ul><li>Valuation </li></ul><ul><li>The post-investment relationship </li></ul>
  37. 38. Seminar Format & Delivery <ul><li>All day experience </li></ul><ul><li>Networking opportunities </li></ul><ul><li>Designed for 20-25 accredited investors </li></ul><ul><li>Mix of learning methods </li></ul><ul><ul><li>Lectures </li></ul></ul><ul><ul><li>Panel discussions </li></ul></ul><ul><ul><li>Case study exercise (valuation) </li></ul></ul>
  38. 39. SUMMARY <ul><li>Angels are making a difference </li></ul><ul><ul><li>In job creation </li></ul></ul><ul><ul><li>In wealth creation </li></ul></ul><ul><ul><li>by providing equity capital and mentoring to entrepreneurs </li></ul></ul><ul><li>Plan a portfolio strategy as you begin investing </li></ul><ul><li>Join an angel organization </li></ul><ul><ul><li>Good deal flow </li></ul></ul><ul><ul><li>Robust processes </li></ul></ul><ul><ul><li>Great camaraderie </li></ul></ul>
  39. 40. <ul><li>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. </li></ul><ul><li>For more information on Kauffman’s Angel Initiative, the Angel Capital Association, or the Power of Angel Investing seminar for new angel investors, contact: </li></ul><ul><li>Marianne Hudson </li></ul><ul><li>(800) 489-1447 </li></ul><ul><li>[email_address] </li></ul>