GEC 2017: Craig Mullett

2. The angel network in the funding spectrum 2 Friends & Family (“love money”) Personal Savings Business Angel Investors Private Equity Venture Capital IPO Business Type Funding Required Seed Early Stage Later Stage Growth <$100k $100k-$2m $2m-$25m >$25m ©2017

3. Why this matters … 3  Rapid growth start-ups generate the most new jobs in an economy and require the highest amount of equity risk capital.  A 2005 study of 37 countries found that of various sources of funding (debt, private equity, venture capital, angel investor capital), only angel investor capital significantly positively influenced the propensity to be entrepreneurs.  Successful entrepreneurial hubs (Silicon Valley, Boston, New York) all have developed angel investor networks  Incubated start-ups rely heavily on angel networks for financing, contacts and strategy advice Angel groups Fund new ventures Create ©2017

4. Angels are organizing globally in groups 4 First group (“Band of Angels”) started in Silicon Valley in 1994 Groups started in Canada and Europe in 1990’s Rapid growth in 2000’s lead to new groups in many countries USA Australia/ NZ Canada 30 300 350 20 25 Europe Asia/ M-East Latin America 5 ©2017 20 Africa

5. Why Angel Groups? 5  Provide economies of scale and other benefits to :  Angel investors  See more deal opportunities with less effort  More industry viewpoints to effectively screen deals  More resources for due diligence and deal negotiation  Post-investment support and monitoring enhances returns  Entrepreneurs  One application leveraged to multiple investors  Wider network of contacts can be provided by more investors, as well as coaching and advisory support  Structured process that is quicker turn-around with more follow-on funding potential ©2017

6. 6 Angel Groups Better deal flow and matching with start-ups Lessons from experienced investors Comraderie Efficient due diligence Pooled funds for larger investments Risk sharing Angel Group Benefits ©2017 Source InfoDev 1/2017

8. The structured activity spectrum of the network 8 Angel s Entrepreneurs Applications Online platform access Marketing/Outreach Screening deals Meetings Training Leading due diligence Deal structuring Applications Online platform access Marketing/Outreach Advisor introductions Business plan training Pitch Coaching Business plan creation Team development Passive ACTIVE ©2017

9. Key Success Factors for Business Angel Investing  Experienced former entrepreneurs as angel investors  Member of an organized angel group  Due diligence prior to investment  Investing in sectors in which the angel investor has experience and insight  Portfolio diversification investing  Training, mentoring, coaching for new angel investors  Well-functioning entrepreneurial ecosystem  Social capital and networks (local and, increasingly, international) Source : 2011 OECD Study/ACA 9 ©2017

10. Business Documents One Page Summary Pitch Agreements Understanding the Angel Investment Process 10 Sourcing/Networking Business Applications Initial Deal Screening Codified Business Plan Deal Review at Pitch Meeting Due Diligence Final Terms Agreed Closing Support/Advisory/Monitoring ©2017 Business Plan

11. Using Gust to Drive the Process  Applications online – efficient way to discriminate  Review and comment on likely deals  Screening committee  Ratings feature on Gust  Set interest level for investing  Due diligence  Closing process  Events/meetings  Resources/training 11 ©2017

12.  Product/Technology Concept  Barriers/Intellectual Property  Market Size/Growth  Competition  Team  Deal Terms/Valuation  Ensure a compelling valuation to allow for a return on investment after future funding dilution (Above ratings system same as on Gust) Screening Deals : Ranking the Chance of Success 12 ©2017

13. Angel Investor Valuation Models  Ballpark ranges  For Hyper-growth Global : Multiples of Revenue  For Usual-growth Local : Multiples of Profit  To get high-end of valuation range :  Large end-market (TAM), Patents, Customer orders, Proven profit model, Experienced Team 13 Stage Usual-growth Local Hyper-growth Global Developed concept $25k - $50k $100k - $500k Proven prototype $50k - $100k $500k - $2m Revenue (>$10k) $100k - $500k $1m - $3m Real revenue (>$250k) $500k - $2m $2m - $5m If exit, returns to angel Probable 10X Possible 100X ©2017

14.  Standard term sheet outlining key aspects  3 structures  Equity (usually preferred)  Debt (usually convertible into equity)  Simplified Agreement for Future Equity (SAFE)  Key terms  Valuation (dilution, pre vs post money)  Board oversight/advisory  Information rights  Salaries/bonus/dividends – cash stays in business  Exit vs non-exit (lifestyle limits/carrots and sticks)  Minimum raise/closing Deals Term Sheets & Agreements 14 ©2017

16.  Unique Selling Proposition (USP). Defined in a tweet - what is the need filled or problem solved? Any IP/know-how that cannot be duplicated?  Target market. Specific customer profile with payment options to buy the product/service.  Market size, growth, and share. Look for >$100m niches within markets with double-digit growth and double-digit penetration plan.  Competition. Current vs expected. Current customer alternatives.  Revenue model. Pricing model and revenue streams/waterfall/pipeline.  Sales/Marketing/Distribution. Online vs multi-level distributors, partners, or value-added resellers. International vs local?  Team. Experience, capabilities, location, x-factor.  Operations/Production. In-sourced vs Outsourced. Time to market vs cost.  Financial Model. Variable contribution margins, marketing and Due Diligence – what could go right? 16 ©2017

17. Founders spend frugally – couch surf Strategic acquirers have already talked to business Founders have deep experience of industry Reference customers have been signed up Free media coverage has commended business Patent firm has expressed confidence in IP Passive co-investment by suppliers/customers Founders respond well to advice, adjust plans Due Diligence – Green Flags 17 ©2017

18.  Conducting a pre-mortem (funeral avoidance)  If this business was bankrupt in a year, it most likely would have been caused by …  Risk removal = value creation  Deal structuring protection mechanisms  Preferred Equity/Debt/Asset claim  Management salaries/bonus/distributions  Board governance (low-water marks for cash)  Dilution/options risks  Non-compete contracts Due Diligence – what could go wrong? 18 ©2017

19. Founders have no ability to manage cash flow Too much of fundraising round going towards founder salaries Family members in the leadership team and business Questionable ethics of founder Lifestyle-business orientation of founder No company website or e-mail addresses Too many competitors crowding in on market Funding will not get business to break-even Due Diligence – Red Flags 19 ©2017

21. Roles for Business Angels in Investments Pre- close Human Capital (Experience) Social Capital (Relationship s) Sourcing & Screening Market insights Screening input Contacts Networking Improving Pitch Business basics Plan 4 Pitch Coaching 21 ©2017

22. Roles for Business Angels in Investments Post-close Human Capital (Experience) Social Capital (Relationship s) Business Growth Strategic insight Resources Contacts Governance/ Management Board member Monitoring Mentoring 22 ©2017

23. - 10 20 30 40 50 60 <1X 1X to 5X 5X to 10X 10X to 30X >30X Exit Multiple PercentofExits Distribution of Returns by Angel Investment UK: Overall Multiple: 2.2X Holding Period: 3.6 years US: Overall Multiple: 2.6X Holding Period: 3.5 years Approx 22% IRR Approx 27% IRR Hold: 3.0 yrs. Hold: 3.3 yrs. Hold: 4.6 yrs. Hold: 4.9 yrs. Hold: 6.0+ yrs. Source : Willamette University 2011 23 ©2017

24. Why be an Angel? In recruiting business angels, the Milan-based Italian Angels use the following mantra : “Financially attractive, professionally stimulating, personally fun” CAUTION HIGH RISK INVOLVED 24 ©2017

GEC 2017: Craig Mullett

GEC 2017: Craig Mullett

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