Business Angel Investing & Role of BANSEA
Assoc. Prof. Wong Poh Kam Chairman, Business Angel Network Southeast Asia Ltd (BANSEA) & Director, NUS Entrepreneurship Centre
Financing Mechanisms at different stages of the Start-Up process
High Founder, Friends, and Family Business Angels Level of Investment Risk Assumed By Investor
Venture Capitalists Non-financial Corporations Equity Markets Commercial Banks
Low Seed Start-up Early growth
Established
Stage of Development of Entrepreneurial Firm
Source: Onasbrugge et. al. (2000)
Role of Business Angel Investors
• Although much attention has been paid to the role of professionally managed VC funds, the potential contribution of the informal angel investment sector has been under-recognized in most countries. Even in the US, where the formal VC industry is the most advanced, angel investors play critical role in the development of high tech start-ups in the Silicon Valley • The role of informal angel investment is more than just money at the critical early stage; it provides the mentoring, coaching to guide the start-up to reach the next stage for funding by the formal VC firms
Rate of Informal Investing in Singapore 2000-05
Year Informal Investment Rate (% of Adult Population) 1.3 2.0 3.6 1.6 2.7 3.5 Total Entrepreneurial Activity (TEA) Rate (% of Adult Population) 4.2 6.6 5.9 5.0 5.7 7.2
2000 2001 2002 2003 2004 2005
Source: Wong et. al., GEM Singapore Reports, 2000-05
GEM 2005 – Informal Investing Prevalence Rate & Rank among OECD countries
Country Rate (%) Rank Country Rate (%) Rank
Ireland
6.5
1
Greece Spain
Ireland Denmark
2.6 2.5
2.5 2.4
13 14
15 16
Norway New Zealand
Canada Switzerland
6.0 5.1
4.2 4.1
2 3
4 5
Sweden Italy
Germany Hungary
2.3 2.3
2.1 2.1
17 18
19 20
United States Mexico
France Singapore
4.0 4.0
3.6 3.5
6 7
8 9
Netherlands Austria
United Kingdom Japan
2.0 1.8
1.7 0.8
21 22
23 24
Australia Finland
Belgium
3.5 3.5
3.1
10 11
12
Singapore’s 95% confidence interval is 2.9 to 4.1, hence countries ranked from Belgium to Switzerland are within the same band as Singapore Source: Wong et. al., GEM Singapore 2005 Report
Mean
3.2
Relationship of informal investor to investee, Singapore 2000-05
2000-04 % Related (Family Investors) Close Immediate Family Other Relative Non Related (Business Angels) Work Colleague Friend/ Neighbour Stranger/Other Total 41.7 31.0 10.7 2005 % 35.9 22.9 13.0
58.3 5.2 49.6 3.6 100.0
64.1 6.1 52.7 5.3 100.0
Profile of informal investors in Singapore, 2000-04
GEM Singapore 2000-2004 Family Overall Business angels investors 36 38 35 69% 57% 78% 29% 28% 30%
Median Age % Male % Managing own business % with postsecondary/tertiary education % investing > S$100K Average Investment
55.1% 7.6% $15.7K
51.6% 4.4% $14.8K
57.6% 9.8% $16.7K
Importance of Business Angel Networks
• Many Angel Investors Participate in Formal or Informal Networks
– Information exchange/knowledge & practice sharing – Exchange of deal flows – Joint Investment/Pooling of risks – Forum for networking & professional development
Examples from North America
• Informal Business Angel Network
– Silicon Valley Band of Angels, California – Angel Forum-Vancouver, Canada
• Investment Clubs
– The Angels’ Forum (TAF), Silicon Valley – CommonAngels, Boston
• Formal Private Equity Fund • Investment Advisory Services/brokerage & Incubation Services • Online Investor-Entrepreneur Matching & Networking Services (e.g. angeldeals.com) • Association of angel networks (e.g. Angel Capital Association North America, EBAN)
Business Angel Network (Southeast Asia) (BANSEA) • Established in 2001 in Singapore as a Public Company limited by guarantee by a group of Singapore-based angel investors, with network connections to angel groups in Thailand and Malaysia • Membership is open to bona-fide angel investors, recommendation by an existing member; one-time joining fee
Business Angel Network (Southeast Asia) (BANSEA)
• Website www.bansea.org • Receive and circulate business proposals to members; A sub-committee vets submitted plans for presentation at networking lunch • Regular networking lunch, usually with a guest speaker and invitation of 3 start-ups to make business plan pitches & network; Members can invite 1-2 guests to attend • Mentoring service • Participate in various activities (e.g. serving as judges in business plan competition, providing inputs to government policy making etc) • Angel investment forums and workshops
EDB SEEDS Scheme
• Incentive scheme for angel investing • Co-invest with third party investor(s) unrelated to investee company on 1:1 basis up to a maximum of S$300K, on same term as investor(s) • On exit, EDB will first recover its orignial investment, then give 1/3 of its gain to the investor • Investee company must be Singapore-based, must not have received prior investment, and should be knowledge-based. A similar scheme administered by SPRING is applicable for non-technology based ventures.
Angel Investing Process
• Establishing investment goals/risk preferences
– Appetite for risk: what can you afford to lose? – Time horizon for return: angel investing as long-term investing vs. short/medium term exit; Early seed vs. later stages – Time involvement: Active “smart money” role vs. passive financier • Thrill of the chase? Mentoring skills and Importance of “chemistry” – Solo vs. Group approach • formal vs. informal
• Deal prospecting, evaluating, negotiating, postinvestment monitoring, coaching, exit planning
Deal Prospecting & Evaluation
• Networking: Getting into “circulation” for deal flows
– Leveraging old connections – Plugging into the venture ecosystems
• Hunting in pack vs. solo
– Informal network vs. formal private equity fund
• Art & science of reading business plan, due diligence • Checking out investee’s background, track records, motivation, skin at risk, establish “chemistry” • Valuation: second opinions, dilution, exit options • What can go wrong with the plan?
Negotiation Strategies and Tactics
• Lead vs. tag-on role • Focus on the essentials of the deal, but get legal advice on technicalities of the final term sheet • Valuation • Structuring of deals: stocks, stock options, milestone/ performance clauses, board seat, veto rights, antidilution, exit options
Key Issues in Investment Term Sheet
• No. of share issued, price per share • Conversion price (preferred to common) • Anti-dilution clauses (weighted average vs. “full ratchet” protection, pre-emptive rights and rights of first refusal) • Registration rights (mandatory, piggyback) • Right to elect board members, attend board meetings • “Protective rights”: Veto rights over next financing, acquisition, mergers, sales and disposition of assets, dividends, borrowing and easing,compensation of executive employees, ownership and sales of proprietary IP, etc. • “Lock-up” conditions on key employees and their vesting rights • “Information rights” (inspection, financial statements,etc.)
Issues in more complex term sheets
• Options, convertible loans vs. upfront shares • Liquidity preferences for preferred shares: cumulative dividend, participating preferred stocks, • Redemption rights • Milestone clauses • Co-sale rights
Preferred term sheets of angel investors
• Usually try to keep things simple • Sliding convertible loan to avoid haggling over valuation at the early seed stage • Commitment of founders to key employee share allocation to attract good people • Board seat • Key protective rights, especially veto rights over compensation of key management team members and use of funds • Anti-dilution clauses
Exit Mechanisms for Investors
• IPO (typically after a lock up period) – Organic growth – Roll-up • Mergers & Acquisition by a Corporate Group – For Cash – Share Swap • Trade Sales • Hold for Dividend Yield …try to avoid • Living Dead