angel_investing_oct2004

ANGEL INVESTINGAn Introduction to OUTLINE•Who are these Angels?•Entrepreneur-friendly Communities•Company Formation and Startup Funding•Portfolio Strategy for Angel Investors•Post-investment Relationship betweenEntrepreneurs and Angel Investors•Why Angels are Joining Groups•The Angel Investing Process•The Power of Angel Investing SeminarAngel Investors(vs. private investors)•Invest moneyin seed, startup and early stage companies•Invest timein entrepreneurs and their companies–Business acumen–Mentoring and coaching–Serve on boards–Make business introductionsWho are these Angel Investors•Often successful, exited entrepreneurs or retired business persons –active investors–Invest both time and money in companies•Accredited Investors -SEC definition•Angels invest their own money (not money managers)•Investing in local companies Motivation:Why Become an Angel Investor?•Helping entrepreneurs•Stay engaged –using skills andexperiences to help build a business•Giving back to community or university•An active form of investing –not just watching markets•Return on Investment is the metricHow do Angels fit into Entrepreneur-friendly CommunitiesEntrepreneur-friendlyCommunitiesServiceProvidersEntrepreneurshipCenterBus PlansEducationNetworkingFundingSourcesVCsAngelsGrantsBanksSBIRsMentorsCoachesRole modelsENTREPRENEURSSources ofTechnologyInnovationsProduct IdeasColleges & UniversitiesCompaniesLabsTalented PeopleNew Company Formation and Funding Sources for Startup CompaniesWho are Funding Startup Companies•Friends, Family (and Fools) –FFF•Angel Investors•Venture Capitalists•Other–Government grants (SBIRs, etc.)–State and local programs•Friends, family & fools•Angels•Venture Capital•Not accreditedUnsophisticatedInvesting in a friendPassive1-2 lifetime investments ($100 to $5,000 each)•AccreditedExpertise and personal moneyActiveInvesting in entrepreneurPortfolio of angel deals•Limited partnershipInstitutional moneyGeneral Partners activeInvest in companyLarge portfolioTypical round: $10,000Each investor: $ 2,000Source: estimateTypical round: $600,000Each investor: $ 40,000Source: Center for Venture ResearchTypical round: $7,000,000Each investor: $3,000,000Source: PWC MoneyTreeFunding Seed and Startup Entrepreneurs(typical year)•Startup companies•Funded by FF&F•Funded by Angels•Funded by VCs500,000200,000 (est.)35 -50,000< 500 Estimated that 90% of Outside Equity Capital in Seed/Startup Stage Companies is Sourced from AngelsAn Angel Portfolio StrategyAn Angel Investing Strategy:Portfolio Considerations•5-10% of net worth (asset allocation)•8-10 investments (risk diversification)•High tech, low tech, no tech (your choice)•Variety of involvements–Lead investor–Board, advisor–Passive•Most of ROI from 1 -2 of 10 companiesImplications of this Strategy•Net Worth Requirements(testing the SEC definition of an accredited investor)•Return on Investment implicationsDefinition:Accredited Investor•Financial position of investor:•Net worth:$1 million,or•Annual personal income:$200K,or•Family income:$300K•Assumption:•Knowledgeable–capable of due diligence•Canafford to loseinvested funds•Implications:•Giving upregulated disclosureImplications:Angel Investor Net Worth•Typical angel investment ~$25K•10 investments = $250,000 invested•100% reserves, another $250,000•10% of Net Worth ($500K/10% = $5 million)•Therefore:–Minimum net worth for angels = $5 million–SEC definition is 70 years oldAngel Expectations: 25%/yrSource: Venture Economics, HFRI Equity Hedge Index22.418.718.716.514.913.20510152025ReturnsSeed FundsAll VentureHedgeFundsBuyoutsS & P 500NASDAQHistorical 20 Year Returns for Alternative AssetsImplications:Size of Each Opportunity•1-2 in 10 investments will produce almost all of the ROI for the portfolio•These successes must yield 20-30X ROI(Nonbelievers: Do the calculations!)•And…we cannot pick the winners•Therefore, all portfolio companies must demonstrate the opportunityfor a 20-30X return on investment.Integrating Exits into Portfolio Strategy•VCs exit in 3-5 years (assume 5)•Angels invest earlier and expect to exit in 5-7 years (assume 7)•A balanced angel portfolio contains ten companies. •Consequently, angels should invest in 2-3 companies per year–Build to ten company portfolio gradually–A portfolio of companies in all stages of development–Good balance for investors time0200040006000800010000120001999200020012002IPOM&A2002 Software Industry Equity Update20X100XExit StrategiesEconomic Benefit from Angel Invested Entrepreneurs and their CompaniesWe have absolutely no data butConsider the following:•Angels invest in 7-10% of all startup companies•Angels only invest in companies that will scale–20 to 30 times growth in valuation in 5-7 years–Employment created by these companies is high•David Birch (MIT) and others have demonstrated that high growth companies create all net new jobs in America.•Angel-funded companies create lots of jobsWe have absolutely no data butConsider the following:•Anecdotal data suggests Angel Investors and the Entrepreneurs in whom they invest enjoy some very successful exits.•Exited entrepreneurs often become angels•Angels often reinvest portfolio returns•The wealth creation from angel investing is spawning an even greater number of companies.Post-Investment RelationshipAngels invest time in portfolio companies•Angels bring expertise to portfolio–Business acumen–Vertical expertise–Financial experience–Director service•Common roles–Advisor, Mentor, Coach, Director–Except in emergency, not paid consultantPortfolio Considerations•With many portfolio companies–Not active in all, pick roles suited to your skills–Let other angels serve remainder of companies•As contribution fades, exit in favor of new directors, advisors•Limit number of Boards to 3-5Why Angels Join GroupsGrowth in Angel Organizations02040608010012014016018020019961997199819992000200120022003Data provided by Professor J. Sohl, University of New HampshireSolo Angels•Process is time-consuming–Deal sourcing–Reading plans–Due diligence•Due diligence is difficult –Finding vertical experience –May require using outside experts•Legal support is expensiveInvesting through Angel Orgs•Dividing the work eases the pain•Variety of vertical experience available•Standardized processes and term sheets•Deal flow encouraged, entrepreneur-friendly•Pick and choose the deals you like•Great camaraderie among the like-mindedThe Angel Investing ProcessSummary:Angel Investing Process•Pre-screening•Screening•Due diligence•Investment presentation•Follow-up discussions and meetings•ClosingDeal Flow Statistics•Prescreening•Screening•Due Diligence•Investment•OVERALL1 in 4 to Screening1 in 3 to DD1 in 3 to Inv. Meeting1 in 2 raise money1 in 72 who apply receive investmentPower of Angel Investing•Developed by Kauffman•Delivered more than 30 times in the US•Trained over 500 angel investors•High ratings by participants–Knowledgeable speakers 4.64/5.00–Important topics & content 4.60/5.00–Relevant & beneficial information 4.60/5.00–Well presented information 4.54/5.00Seminar Content•Is angel investing right for you•Where to find good deals•Due diligence•Structuring the deal•Valuation•The post-investment relationshipSeminar Format & Delivery•All day experience•Networking opportunities•Designed for 20-25 accredited investors•Mix of learning methods–Lectures–Panel discussions–Case study exercise (valuation)SUMMARY•Angels are making a difference–In job creation–In wealth creationby providing equity capital and mentoring to entrepreneurs•Plan a portfolio strategy as you begin investing•Join an angel organization–Good deal flow–Robust processes–Great camaraderieThis 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.For more information on Kauffman’s Angel Initiative, the Angel Capital Association, or the Power of Angel Investing seminar for new angel investors, contact:Marianne Hudson(800) 489-1447mhudson@kauffman.org