Second Angel Summit Palo Alto, CA October 21 and 22, 2002
The Role of Angels in Accelerating Entrepreneurship in America: Review of Statistical Information In Angel Financing
Susan Preston, The Kauffman Foundation
A History Lesson (Or Why Angels Are Essential) • Climb to the stratosphere of investments dollars and deals • What did we lose? • What did we forget during the boom? • Where are we now? • What can we learn? • What are our responsibilities?
Venture Capital Investment in $Billions
$90.0 $80.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 1995 1996 1997 1998 1999 2000
Source: PricewaterhouseCoopers Money Tree Survey in partnership with VentureOne
The Frenzy
• During the expansion bubble, VC investments exceeded angels for the first time • Number of deals increased only by 1/3rd • Therefore, significant increase in valuations and size of deals • During bubble, angel investing rose to $40B in 50,000 ventures with over 400,000 active angel investors
The Frenzy
• We lost site of:
– The importance of due diligence, and dismissed traditional DD risk-warning signs – The necessity for a realistic business plan and experienced management – The value of angel investors as mentors and advisors to young entrepreneurs
• Too many inexperienced investors entered the market with unrealistic dreams
Venture Capital Investment Strength Today (in $Billions)
30.0 25.0 20.0 15.0 10.0 5.0 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 '00 '00 '00 '00 '01 '01 '01 '01 '02 '02
Source: PricewaterhouseCoopers Money Tree Survey in partnership with VentureOne
Current State of Investments
• Current market: back to fundamentals of investment and growth • Angel values: patient, value-added investing, on a regional basis, with 5 to 7 angels on average • Again, angels investments exceeds VC investment dollars • Today’s angel investment estimate: – $30Billion/year; 50,000 ventures with 300,000 to 350,000 angel investors
Sohl and Sommer 2002
Current State of Investments
• Approximately 175 angel organizations or portals in the United States today • Significant increase in membership over last 4 years • Estimated number of latent or potential angel investors exceeds active angels by 5 to 1 • Typical deal for individual angel is $100,000 to $2Million; syndication can allow larger investments ($2 to 5Million)
Sohl and Sommer 2002
Individual Investors Performance
1998 2000 $ 934,045 500,000
% Change
84% 85%
2001 $ 806,042 450,000
% Change
-16% -11%
Average Invested Per Deal
(Median)
$145,000 75,000
Minimum
Maximum
25,000
500,000
50,000
5,000,000
50%
90%
300,000
50,000,000
83%
90%
Equity Percent
21.00%
21.00%
0%
23.00%
Sohl and Sommer, "Angel Investment Activity: Bracing For The Downdraft" 2002 Babson Conference
Angel Investing Today
• Again, we are investing more than VC’s but in isolation, without of the benefit of shared experiences • Due diligence is again taking months, not days • First round financing is modest, with greater angel involvement and companies stretching the dollars
– Majority of entrepreneurs rate angel business experience contributions as important as capital – Lose angel influence with venture capital involvement; in boom, lost angel influence at time most critical
• In 2001, angels portals surveyed:
– 84% preferred syndication – 82% invested as syndication
The Funding Gap
• Angels invest at seed to start-up • VC’s have moved toward later stage investing, primarily due to necessary size of investment, reinvestment in portfolio and demand for greater maturity of business to guard against downside • Result: Funding Gap from market inefficiencies (lack of adequate $’s and information)
Efficient Market
• Requires:
– Way to identify and source quality deal flow – Open and timely flow of reliable information concerning financing sources and investment opportunities – Absence of funding gaps:
• First gap: $100,000 to $2M (beyond friends and families and in angel country) • Second gap: $2M to $5M (beyond individual angels to angel syndications) • Small percentage of VC deals in these gaps
• Second gap greater issue; requires co-investment
strategy
Angel Investor Responsibility
• Do we have a responsibility to critically assess and monitor angel investment methods and activities? • Since angel investing is again the leading and primary initial investment vehicle, do we have an obligation for setting standards, educating and collaboratively sharing information and experiences? • Do we, or can we act as a regulator of the investment process? Filling the funding gap and providing adequate patient and experienced money? • Do we need public policy initiatives directed at angel investors? (to spurn commercialization of innovation)
(Source: Sohl, Jeffrey, “The Private Equity market in the USA: Lessons From Volatility” Venture Capital: An International
Journal of International Finance, Volume 5, Number 1, January – March 2003)
Angel Investor Responsibility
• Will development of an angel industry communication network or process help bridge the second funding gap?
– Would this help angels clear the hurdle of fear of no follow on financing? And allow ventures to get past their initial stages of development?
• Would a network help in information sharing on deal opportunities, trends, deals values and industry expertise? • Individual angel want to stay close to home, but is it necessary for angel alliances to do the same? • Can access to information on government programs and funding further support and enhance angel investing? Are these downside risk protectors?
Meeting Goals and Objectives
• • • • • Opportunity to meet and get acquainted with other angel organization representatives Share best practices in areas of structure, member interaction, deal flow, etc. Discuss major issues facing angel organizations and how might we cooperatively support each other to promote successful venture financing Discuss value of cooperative activities and solutions to funding gaps Discuss and analyze common interests and mechanisms for cooperative efforts, including information and deal sharing