Planting Seed Capital in Your Economic Garden

Planting Seed Capital in Your Economic Garden Community Survivors Anacortes, WA April 1, 2004 Angels and VCs Funding Rounds Round Age Seed Early Mid Late Investor Equity Multiple 20-35% 5-10x 20-30% 8-10x 3-12 mo Angels <2 yrs 3-5 yrs 5+ yrs Angels, VCs VCs, Corporate <25% Institutions <10% 5-8x 2-4x Varies by investor, perceived risk, time horizon, industry, etc. Financing Product Dev Financing Life Cycle Discovery Basic Research Proof-of Concept Product Design Product Development Manufacturing/ Delivery Pre-seed Seed Funding Funding Venture Funding University Res. SBIR / ATP WA State R&TD Private Res. Individuals (FFF) Angels Seed funds Loans / Bonds Venture funds Institutional Equity Expansion/Mezzanine Operating Cap. Role of Angels in U.S. • 200,000 angels invested $15.7 billion in 36,000 ventures in 20021 • Meanwhile, VCs invested $303 million in 148 seed and early stage deals2 • In 1999, only 4,000 out of 700,000 business starts (0.57%) were venture-backed Bottom Line: Angels help more start ups than the more widely known VCs 1 2 Center for Venture Capital Research – University of New Hampshire National Venture Capital Association 3 National Commission on Entrepreneurship What are Angel Investors? Accredited Investors • Defined term under the Securities Act of 1933 “Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;” and “Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.” With regard to organizations, an accredited investor is: “a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.” Who are Angels? • Wealthy individual investors who invest directly in a start-up company in return for an equity position • Variety of backgrounds – – – – Corporate executives Entrepreneurs Venture capitalists Family wealth Angels • Invest close to home • Mostly cashed-out entrepreneurs • Value-added (may get actively involved with company) • Patient Capital • Invest in groups • Must be willing to lose entire investment Center for Venture Capital Research – University of New Hampshire Profile of an Angel • • • • • • Prefers to invest within one day of travel In Seattle, often has industry experience Tends to invest in a group Range of investment: $10,000- $1,000,000 Average Investment: $50,000- $500,000 Makes one investment every two years BusinessFinance.com, 2002 Profile of an Angel (cont.) • Individuals with industry experience looking to invest in a good idea • Retired entrepreneurs who like start ups, but not 24 hour stress • “Angels” who want to see others succeed as they did • Invest in what they know … and people they trust Types of Angel Investors Guardian Angels - experience in the industry; invest significant time and some money Operational Angels - provide executive experience and management advice Professional Angels – invest for profit, often in areas outside their expertise Financial Angels - invest for profit, in larger amounts Types of Angel Investors High Relevant Industry Experience Low Operational Angel Financial Angel Guardian Angel Professional Angel Low High Relevant Entrepreneurial Experience The Ideal Angel Provides… • Capital • Expertise • Key contacts and relationships to expand the company – Management team – Partners – Customers • Patience Angels’ Screening Criteria Angel investors look for … • • • • • Geography (nearby) Industry (high growth and/or expertise) Growth potential (large market) Personal attributes of management team Track record of management team Where to Find Angels • • • • • Family, friends and neighbors On the street Industry events Referrals from service providers Angel organizations Angel Alliances Year 1996 1999 2000 2001 2002 # 10 98 138 126 170 35% facilitators, 40% angel groups Most investments outside of angel groups Center for Venture Capital Research – University of New Hampshire Benefits to Investors Angel groups provide: • • • • • • A structure for prescreening deals Exposure to more deals Sharing of information and insight Share time and expense for due diligence Deal syndication Camaraderie More, better, easier, smarter investments The WTC Angel Network • Help facilitate new local angel groups • Create a statewide network Bellingham Colville Olympic Pen Seattle Tacoma Olympia Wenatchee Spokane Kitsap Yakima Tri-Cities Vancouver Walla Walla The WTC Angel Network • Will enable local investor groups to: – – – – – Share pre-qualified deal flow Fill investment rounds Attend and share cost for high-value training Reach additional contacts for local events Share information and experiences with other investor groups • Will enable entrepreneurs to: – Access more investors, dollars and resources Why? • WTC: Round out portfolio of offerings for companies – – – – – Technical services Research and technology development support SBIR grant preparation Community debt funds Now private equity and business services • Economic Development – Fishing, Forestry and Farming are in decline – Small businesses offer most new jobs – Start-ups need capital and advice • Personal Investment Returns – Equity investing is not easy – Groups can help increase personal ROI Starting an Angel Group 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Identify Champion Gather Steering Committee Form group (legally or practically) Recruit members Solicit sponsors Recruit staff Call for business plans Screen companies Hold regular membership meetings Participate in on-going educational events Chair Executive Board Members, Partners1, Exec. Director/Fund Manager Membership Committee Marketing Committee Meetings Committee Finance Committee Companies Screening Committee Members, Experts2, ED/Manager Membership Accredited Investors •Diverse backgrounds •Pay annual dues •Make own investment decisions Monthly Invest Attend to learn about Meetings in some companies companies based on events and invest occurring following meetings in some Due Diligence 1 Investment Fund Partners: EDCs, WTC, Universities, etc. $$ $$ 2 Experts: Sponsors, WTC, Specialists, etc. Thank You For more information: Washington Technology Center www.watechcenter.org John M. Fluke Sr. Hall