Angel-LedTM Capital Fund
June 2005
Contact: Luis Villalobos 949.644.2388 LuVil@adelphia.net
Angel-Led Capital
1. Private equity overview 2. Professional angel groups 3. The “angel-ledTM” model
4. The Angel-Led Fund
5. Biographies 6. Investment process
Angel-led is a trademark of Angel-Led Capital
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Private Equity Overview
Early-stage VC funds consistently deliver higher returns than later-stage.
The data1 show that early-stage VC funds deliver 4% - 6% higher long-term IRRs; eg on 20-year horizon, 23% vs 19% for 1999 and 2001, and 20% vs 14% for 2004. The 3 selected years correspond to the peak before the bubble, the postbubble collapse, and the most current full year.
The LP demand for placing capital exceeds placement opportunities.
According to Mark Heesen, President of NVCA, current trend information shows that – “long time investors can’t get full allocation” * * * and “LP interest overwhelms placement opportunity”. 2
GPs continue migrating to later-stage funds.
The reasons for the migration to later-stage are primarily two: (1) the GP compensation can be 5x or more higher in laterstage (the base for their carry and management fees may be tenfold larger in later-stage, which offsets the lower IRR); and (2) early-stage investing takes a lot more GP effort in both the pre-funding and post-funding processes.
The VC capital deployed into early-stage continues to drop.
The GP migration to later-stage may be primarily responsible for the drop in early-stage funding. As a percent of the total VC capital deployed, there has been a steady drop in early-stage funding from nearly 40% in 1995 to below 20% in the first part of 2005. In 2004, $4.2 billion of VC capital was deployed into 1,012 early-stage ventures; with $346 million of that going into 171 seed and startup stage ventures.
Opportunity exists for “angel-led” fund to deploy early-stage capital more efficiently.
The “angel-led” model combined with strong ties to, and relationships with, the leading angels groups, enables creation of a fund that can deploy capital more effectively into early-stage, by addressing the labor intensity of pre- and post-funding activities.
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The VentureXpertTM database by VE & NVCA for year-ends 1999, 2001 and 2004 shows 1/5/20 year horizons returns to be materially better for “Early VC” than for “Later VC” in every one of the 9 horizon/year measures. Talk on Outlook for Venture Investing. Florida May 26, 2005
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Professional Angel Groups
Professional angel groups adapted the proven VC investment process; angels group have 10x-20x more members than VC funds have GPs, giving them broader networks.
Band of Angels – 12th (The Top 100 VC Firms For Entrepreneurs1)
In 1994, Hans Severiens founded the Band of Angels in Silicon Valley, and popularized the professional angel group – comprised of experienced operating execs, who as active investors drive the pre-funding process, make investment decisions, and provide post-funding support. Ian Sobieski (a Fund advisor) became Managing Director in early 2004, upon the death of Dr Severiens; in 1999, Ian raised a $50M VC fund from institutional investors.
Tech Coast Angels – 7th/1st (The Top 100 VC Firms For Entrepreneurs)
In 1997, Luis Villalobos (a Fund partner) started the Tech Coast Angels in Southern California, modeled after the Band of Angels, and based on an enhanced investing process, including workshops for members, normative forms, electronic support and portfolio tracking database and reports. Both the Band Of Angels and TCA are “member-managed” groups.
Dinner Clubs – popularized manager-led angel groups
In late 1997, John May (a Fund advisor) formed the New Vantage Group in the Virginia/DC area, and popularized the “manager-led” angel fund, where a managing partner oversees the investing angel group process – the angel members are active investors and make the funding decisions.
Angel Capital Association (ACA) – “The Professional Alliance of Angel Groups”
In January of 2004, with strong support from the Kauffman Foundation, nine angel group leaders (including Sobieski, Villalobos and May) founded ACA; which now has more than 80 member groups.
1. Entrepreneur magazine. Special MONEY Issue, July 2005, Cover story: 5th Annual VC 100. THE TOP VENTURE CAPITAL FIRMS FOR ENTREPRENEURS. PricewaterhousCoopers, Thomson Venture Economics, NVCA & Entrepreneur’s. Ranking of “First sequence financing in startup/seed or early-stage companies”. Band of Angels ranked 12th, tied with 6 other firms; TCA ranked 7th, tied with 4 other firms. While the article does not show regional rankings, PricewaterhouseCoopers has informed TCA that it ranked 1st in Southern California – the groups that ranked nationally above TCA did not finance as many ventures in Southern California as TCA.
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The “Angel-Led” Model
The “angel-led” model combines the strengths of VC funds and angel groups to offset their respective weaknesses – creating a more effective model for early-stage investing.
VC funds success factors.
A Federal Reserve study1 identified two factors as leading to the success of VC funds: (1) alignment – of GPs and LPs (by means of carried interest), and post-funding, of GPs and the ventures they fund (by the equity nature of the investment); and (2) the expertise of GPs in four stages of the investment process: selecting (screening and due diligence); contracting (valuation and preference terms); post-funding effort (monitoring venture, mentoring team); and harvesting (realizing investment exit).
Weakness of early-stage VC funds – the “eyedropper” funding problem.
The “eyedropper funding” problem is inherent in all early-stage VC funds – the cost of screening deal flow, performing due diligence and post-funding support is large, relative to the amount of capital that can be productively deployed into an early-stage venture, especially the initial round.
Angel group success factors.
Angel groups offer better alignment in that the angels invest their own capital, whereas GPs are aligned by virtue of the profit (carry) on the LP capital. Moreover, professional angel groups more than match the experience and expertise of early-stage VC fund GPs; and vastly outnumber a fund’s GPs in both numbers and their combined networks.
Weakness of angel groups – insufficient capital.
Irrespective of size, angel groups need a sophisticated source of additional capital, to close some deals, to avoid underfunding the ones they close, and to diversify member capital across more deals.
The “angel-led” model – applied.
The Angel-Led Fund brings external sophisticated capital to angel groups in exchange for preferred access to their deals. The Fund would participate in, but enter the funding process later (when an angel group commences due diligence), and leverage the pre- and post-funding efforts of the angel group.
1. The Economics of the Private Equity Market. Board of Governors of the Federal Reserve System. Washington DC. December 1995
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The Angel-Led Fund
$50 million dollar capital
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Carry: 20% Management fees: 2.5% Life: 10-years, with possible 2-year extension GPs will contribute 1% of capital
Co-invests with the leading angel groups
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Band of Angels Tech Coast Angels Selectively, with several other groups
Fund may accept some members of key angel groups as special LPs
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May waive some or all carry and management fees Especially for investments by Fund in given angel group
Proven management team
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Experienced early-stage investors Founders/leaders of the major angel groups
Fund provides access to a new asset class Key issue
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There are no meaningful return statistics for most angel groups – in large part because most of the groups have been around for only 5-7 years, and it takes an early-stage portfolio longer than that to be harvested. In addition, there are issues of how to measure returns; eg at the first point that any angel could sell or when each actually sells, and tracking sales by individual angels over years is very difficult.
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Biographies
Luis Villalobos, Managing Partner
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Investments: $3.3M in 52; TVPI 5x, 12 exits, including 4 IPOs, 23 remain active Mentored ~dozen CEOs; led 50+ workshops for angels and entrepreneurs Founder of TCA, and helped start two other angel groups; co-cofounder of ACA Founder & CEO of 2 ventures, sold to large companies Harvard Business School MBA, MIT SB in Math, National Merit Scholar (MIT)
Frank Martinez, Managing Partner
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Investments: $2.7M in 13; TVPI 4x Blue Titan Software – co-founder, Chairman, CTO InfoWorld IT Innovator 2004; named one of 25 leading innovators CRN 2003 Recognized expert in distributed, enterprise application and infrastructure platforms Left UCLA to start his first venture
Ian Sobieski, Advisor
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Managing Director & co-founder of Band of Angels Fund; ACA co-founder • Led $25M investments in 37 ventures Band of Angels IRR 57% (assuming IPOs sold in 6 months) Operating roles in various startups Stanford PhD, Aeronautics; Virginia Tech, BA Philosophy
John May, Advisor
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Founder & Managing Partner, 3 Dinner Clubs 210 angels, 31 ventures funded GP, investment committee or advisor: 5 funds totaling $141M in capital ACA Vice-Chairman & co-founder Lead instructor, Power of Angel Investing (Kauffman Foundation seminar series) Syracuse University, Master in Administration
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Investment Process
Fund investment process – primarily leverage the efforts of leading angel groups
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The Fund enters process when an angel group commences due diligence The Fund participates in the due diligence and in negotiating deal terms Except in unusual circumstances, the Fund will not lead a deal If the deal comes to the Fund or its partners, the Fund will normally pass it on to an angel group The Fund will occasionally take a board seat and often seek observer rights
Tech Coast Angels process – members often spend 300-500 hours pre-funding
TCA may have one of the more formal processes; but the other leading groups also have robust investment processes. The TCA process is summarized below: o Online application form – normative way to capture the core data of interest o Pre-screening – meeting with 4-6 members; or application review by small member group o Screening – venture makes 15-minute PPT presentation before 20-25 members, at each of the four networks o Due diligence – verification of markets, customers, references, technology, IP, etc o Plan reshaping – work with entrepreneurs to tear down and rebuild the plan o Dinner funding presentation – at all four networks o Funding – formal VC term sheet and closing documents o Post-funding monitoring venture and mentoring team – typically 1-2 board seats o Harvesting – planning with entrepreneurs, from before funding through exit; contacts for exit
Capital deployment plan: 25%-35% initial, 65%-75% follow-on
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Discretion to co-invest fixed amount if angel deal meets threshold Opportunity to take angel group follow-on round amounts
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