From Invention to Start-Up:
Money - Angels and Strategic
Partners
November 28, 2006
Susan Preston
Entrepreneur-in-Residence
Ewing Marion Kauffman Foundation
AND
Director of Attorney Training and Professional Development
Davis Wright Tremaine
Financing Life Cycle
Financing Product Dev
Proof-of Product Product Manufacturing/
Discovery Concept Design Development Delivery
Idea Pre-seed Seed Start-up Expansion/Mezzanine
Funding Funding Funding
Operating Cap.
Founder
Venture Funds
Friends and Family
Angels Institutional Equity
Angel Groups Loans / Bonds
Government Grants/Loans Seed Funds
Venture Capital Statistics:
Investments in US
2005 – invested $21.7 billion (2,939 deals)
2004 – invested $20.9 billion (2,876 deals)
2003 – invested $18.9 billion
Increase due largely to late stage investments:
$9.7 billion in 2005
$7.2 billion in 2004
$4.9 billion in 2003
Less than 2% in early/seed stage
Source: NVCA
Venture Capital Investments by Stage
of Development ($s in Millions)
25000
20000
15000
10000 2003
2004
5000
2005
0
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Source: MoneyTree
Venture Capital Investment:
Historical and 2006 Projected
$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 $B) No. of Deals Source: MoneyTree
Average VC Deal Size
Per Financing Round ($ Million)
$8 $ 7.8 $ 7.6
$ 7.4 $ 7.2 $ 7.4
$ 7.3 $ 7.4 $ 7.4 $ 7.2 $ 7.2 $ 7.2
$ 7.1 $ 7.1
$ 6.8
$ 6.6
$ 6.3 $ 6.3
$6
$4
$2
$0
2 Q0 2 3 Q0 2 4 Q0 2 1Q0 3 2 Q0 3 3 Q0 3 4 Q0 3 1Q0 4 2 Q0 4 3 Q0 4 4 Q0 4 1Q0 5 2 Q0 5 3 Q0 5 4 Q0 5 1Q0 6 2 Q0 6
Source: NVCA
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 $18.1 billion
227,000 active angels
20% Healthcare/medical devices and equipment
18% Software
55% in seed/start-up
43% in post-seed/start-up (10% increase over 2004)
Source: Center for Venture Research
Who Are Angels?
Angels are accredited investors who:
Expect a financial return
Believe in giving back to their communities
Invest locally and regionally
Participate in the investment process
Show interest in personal relationships with
companies and employees
Offer wisdom and guidance to entrepreneurs
Financial Attributes of Angels
Provide early-stage investment dollars
Invest smaller dollar amounts per investment
Partially fill funding gap left by venture
capitalists (VCs)
Invest individual wealth
Can tolerate loss of entire investment
Have diversified portfolios
Invest with “patient money”
Angels and VCs – Similarities
Selective in investments
Requirements for an investable company
Expectation of return on investment -
scalable
Similar investment terms (though angels can
and often are – or must be – simpler)
Bring the attributes of a professional investor
Angels and VCs –Differences
Venture capitalists:
Invest on “home-run” theory
ROI is ultimate goal
Investing 3rd party money
Often more demanding and actively involved than angels:
Control often issue
Can requirement board and advisor approval and corporate
actions
Angels:
Invest for returns – may be more modest expectations
Social /community aspect to investments
Individuals investing their own wealth
Patient money
Investment Preference
Biotechnology
Business Products/ Services
Computers & Peripherals
Consumer Products/ Services
Electronics/ Instrumentation
Financial Services
Healthcare Services
Industrial/ Energy
IT Services
Media & Entertainment
Medical Devices & Equipment
Networking & Equipment
Other
Retail/ Distribution
Semiconductors
Software
Telecommunications
0 5 10 15 20 25 30 35
39 groups reporting
Valuations Of Venture Capital
Seed/Startup Rounds ($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
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
Business Plan Competitions
Professionally-funded Start-ups
Venture Capitalists
Corporate Boards
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
Professional Investors
Angels, venture capital, 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
Term Sheets: Debentures
Convertible Debentures (Notes):
Automatic upon event or investor controls
conversion
Note term
Interest: cash or stock; payment schedule;
part of conversion
Security interest/collateralized?
Term Sheets: Preferred Stock
Rights, preferences and privileges of preferred stock
Price Information
Use of Proceeds requirements
Dividends Registration rights
Liquidation Right of first refusal
preference Co-sale rights
Anti-dilution Option pool
provisions Founder vesting
Redemption Inventions agreements
Protective provisions
Summation
Angels invest primarily in seed/start-up rounds
Angels represent patient money
Angels are becoming sophisticated investors
Angels make excellent advisors and mentors
Many companies will need only angel investors
Be open, coachable and realistic
Show your commitment, passion and drive
The essence of due diligence:
So what?
Who cares?
Why you?