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 Product Dev
Financing Life Cycle
Discovery Idea Proof-of Concept Pre-seed Funding Product Design Seed Funding Product Development Manufacturing/ Delivery
Start-up Funding
Expansion/Mezzanine Operating Cap. Venture Funds
Founder
Friends and Family Angels Angel Groups Government Grants/Loans Seed Funds
Institutional Equity Loans / Bonds
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 5000 0 2003 2004 2005
l ta To nd ra G ge ta S te La on si an xp ge
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S rt ta
E ly ar S / up S d ee
ta
Source: MoneyTree
Venture Capital Investment:
Historical and 2006 Projected
$120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* Dollars (in $B) No. of Deals
Source: MoneyTree
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Average VC Deal Size
Per Financing Round ($ Million)
$8 $ 7.1 $ 6.6 $6 $ 6.3 $ 6.3 $ 6.8 $ 7.3 $ 7.4 $ 7.4 $ 7.2 $ 7.2 $ 7.2 $ 7.1 $ 7.8 $ 7.4 $ 7.2 $ 7.6 $ 7.4
$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 $2.00 $1.50 $1.00 $0.50 $0.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* Startup/Seed
*2006 Estimated Value
Valuation: Expected ROIs
ROI Seed Start-up 60%+/year 50% Five Year ROI 10X+ 8X
Early stage
2nd stage Near exit
40%
30% 25%/year
5X
4X 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 Use of Proceeds Dividends Liquidation preference Anti-dilution provisions Redemption Protective provisions
Information requirements Registration rights Right of first refusal Co-sale rights Option pool Founder vesting Inventions agreements
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?