From Invention to Start-Up:
Money – Angel, Venture and
Strategic Partners
February 20, 2007
Mary Baker Anderson
Calipa Partners
and
Alliance of Angels
Financing Life Cycle
Proof-of Product Product Manufacturing/
Discovery Concept Design Development Delivery
Strategic Investment
Strategic Investment
Founder
Venture Funds
Friends and Family
Angels Institutional Equity
Loans / Bonds
Angel Groups
Government Grants/Loans Seed Funds
Professional Investors
Angels, venture capital, strategic investors
(corporations) typically receive:
Preferred stock
Convertible debt with warrants or additional stock
Provide more than money: Can be proactive in
developing business through (“win together”):
Company building experience
Company functionality experience
Industry experience
Contacts for partners, customers and follow-on financing
What Professional Investors Are
Looking for: Investable Companies
Clear path to profitability
Solid management
Realistic business concept and plan
Scalable business
Competitive edge/Technical superiority
Market acceptance
Realistic financial projections
Realistic valuation
Clear, well-articulated exit strategy
Bottom line: Opportunity for financial return
What Professional Investors Are
Looking for: Investable Companies
How does an investor make this determination?
Passion of entrepreneur (presentation)
Team track record – individually and together
Entrepreneur’s ability to succinctly articulate vision
and mission
Entrepreneur seeks advice of trusted, experienced,
honest advisors
Coachable entrepreneur
What Professional Investors Are
Looking for: Investable Companies
How does an investor make this determination?
Competitors researched and understood
Clear market differentiator
Value proposition for customer clearly evident
Market access strategy clear and realistic
Comprehensive summary of risks (and plans to
cope/address)
Profit potential – good margins
Marketability of company – M&A exit
Type, timing and realistic purchasers
Who Are Angels?
Angels are accredited investors who:
Expect a financial return
Believe in giving back to their communities
Invest locally and regionally
Participate in the investment process
Show interest in personal relationships with
companies and employees
Offer wisdom and guidance to entrepreneurs
Financial Attributes of Angels
Provide early-stage investment dollars
Invest smaller dollar amounts per investment
Partially fill funding gap left by venture
capitalists (VCs)
Invest individual wealth
Can tolerate loss of entire investment
Have diversified portfolios
Invest with “patient money”
Forms of Investment
Debt (note) Equity (stock)
Options Warrants
Debt: collateralized, non-collateralized, interest in cash
or stock (deferred?), convertible (at election or
automatic?), length of time, etc.
Equity: common vs. preferred, dividends, many other
terms discussed below
US Angel Investments
2005 – invested $23.1 billion (49,500 deals)
Increase of 2.7% in $’s over 2004
Increase of 3.1% in deals over 2004
2004 – invested $22.5 billion (48,000 deals)
2003 – invested $18.1 billion
227,000 active angels
20% Healthcare/medical devices and equipment
18% Software
55% in seed/start-up
43% in post-seed/start-up (10% increase over 2004)
Source: Center for Venture Research
Angel Investment Preference
Biotechnology
Business Products/ Services
Computers & Peripherals
Consumer Products/ Services
Electronics/ Instrumentation
Financial Services
Healthcare Services
Industrial/ Energy
IT Services
Media & Entertainment
Medical Devices & Equipment
Networking & Equipment
Other
Retail/ Distribution
Semiconductors
Software
Telecommunications
0 5 10 15 20 25 30 35
Finding Angel Investors
Angel Organizations:
Several in Puget Sound area including: AoA, PSVC, Seraph
Capital Forum, Zino Society, Keiretsu Forum, Tacoma Angel
Network, Bellingham Angel Network
Professional Service Providers
Investment Forums
Early Stage Investment Forum, Zino Zillionaire
Business Plan Competitions
Professionally-funded Start-ups
Venture Capitalists
Corporate Boards
Venture Capital Statistics:
Investments in US
2006 – invested $25.5 billion (3,416 deals)
2005 – invested $21.7 billion (2,939 deals)
2004 – invested $20.9 billion (2,876 deals)
2003 – invested $18.9 billion (2,893 deals)
Increase due largely to late stage
investments
Less than 2% in early/seed stage
Source: NVCA and Moneytree
Venture Investment by Deal Stage
($ millions)
12000
10000
8000
2003
6000 2004
2005
4000 2006
2000
0
Expansion Late Stage Early Stage Start-Up
Venture Capital Investment
$120.00 9,000
8,000
$100.00
7,000
$80.00 6,000
5,000
$60.00
4,000
$40.00 3,000
2,000
$20.00
1,000
$0.00 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
Dollars (in $B) No. of Deals Source: MoneyTree
Average Venture Deal Size ($Mil)
7.6 $7.5
$7.4
7.4
$7.25
7.2
7 $7.0
2002
6.8 $6.6 2003
6.6 2004
2005
6.4
2006
6.2
2002 2003 2004 2005 2006
Valuations Of Venture Capital
Seed/Startup Rounds ($ Millions)
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50 Startup/Seed
$2.00
$1.50
$1.00
$0.50
$0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
*2006 Estimated Value
Valuation: Expected ROIs
ROI Five Year ROI
Seed 60%+/year 10X+
Start-up 50% 8X
Early stage 40% 5X
2nd stage 30% 4X
Near exit 25%/year 3X
Angels and VCs – Similarities
Selective in investments
Requirements for an investable company
Expectation of return on investment -
scalable
Similar investment terms (though angels can
and often are – or must be – simpler)
Bring the attributes of a professional investor
Angels and VCs –Differences
Venture capitalists:
Invest on “home-run” theory
ROI is ultimate goal
Investing 3rd party money
Often more demanding and actively involved than angels:
Control often issue
Can requirement board and advisor approval and corporate
actions
Angels:
Invest for returns – may be more modest expectations
Social /community aspect to investments
Individuals investing their own wealth
Patient money
Strategic Investor Characteristics
Typically invest in complimentary technologies
Usually have an internal champion
Often will invest in competitive technologies
Unlike VC’s or angels who will place only one bet in a
market segment
Typically follow, don’t lead a round
Pros and Cons of Strategic
Investment
PROS CONS
Less price sensitive Erratic follow on
than other investors investment behavior
Can create instant Won’t always
credibility champion your
product internally
Can box you out of
competitor products
Summation
Angels usually invest initially in seed/start-up rounds
Angels represent (more) patient money
Angels are almost always sophisticated investors
Angels make excellent advisors and mentors
Strategic investment can be your best investment opportunity
or your worst nightmare
There is a place for angels, venture, and strategic investment,
depending on the stage and investment needs of the company
Many companies will need only angel investors
Not all companies make great angel investments
Be open, coachable and realistic
Show your commitment, passion and drive