From Invention to Start-Up: Money – Angel, Venture and Strategic Partners
February 20, 2007
Mary Baker Anderson Calipa Partners and Alliance of Angels
Financing Life Cycle
Discovery
Proof-of Concept Product Design Product Development Manufacturing/ Delivery
Strategic Investment Strategic Investment Founder Friends and Family Angels
Angel Groups Government Grants/Loans Seed Funds
Venture Funds Institutional Equity Loans / Bonds
Professional Investors
Angels, venture capital, strategic investors (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
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”
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
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
Angel Investment Preference
Biote chnology Busine ss Products/ Se rvice s Com pute rs & Pe riphe ra ls Consum e r Products/ Se rvice s Ele ctronics/ Instrum e nta tion Fina ncia l Se rvice s He a lthca re Se rvice s Industria l/ Ene rgy IT Se rvice s Me dia & Ente rta inm e nt Me dica l De vice s & Equipm e nt Ne tw orking & Equipm e nt Othe r Re ta il/ Distribution Se m iconductors Softw a re Te le com m unica tions
0
5
10
15
20
25
30
35
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
Early Stage Investment Forum, Zino Zillionaire
Business Plan Competitions Professionally-funded Start-ups Venture Capitalists Corporate Boards
Venture Capital Statistics: Investments in US
2006 – invested $25.5 billion (3,416 deals) 2005 – invested $21.7 billion (2,939 deals) 2004 – invested $20.9 billion (2,876 deals) 2003 – invested $18.9 billion (2,893 deals) Increase due largely to late stage investments Less than 2% in early/seed stage
Source: NVCA and Moneytree
Venture Investment by Deal Stage
($ millions)
12000 10000 8000 6000 4000 2000 0 Expansion Late Stage Early Stage Start-Up 2003 2004 2005 2006
Venture Capital Investment
$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 Venture Deal Size
7.6 7.4 7.2 7 6.8 6.6 6.4 6.2 2002 2003 2004 2005 2006
$6.6
($Mil)
$7.5 $7.4
$7.25
$7.0
2002 2003 2004 2005 2006
Valuations Of Venture Capital Seed/Startup Rounds ($ 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 Seed Start-up Early stage 2nd stage Near exit 60%+/year 50% 40% 30% 25%/year Five Year ROI 10X+ 8X 5X 4X 3X
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:
Angels:
Control often issue Can requirement board and advisor approval and corporate actions
Invest for returns – may be more modest expectations Social /community aspect to investments Individuals investing their own wealth Patient money
Strategic Investor Characteristics
Typically invest in complimentary technologies
Usually have an internal champion Unlike VC’s or angels who will place only one bet in a market segment
Often will invest in competitive technologies
Typically follow, don’t lead a round
Pros and Cons of Strategic Investment
PROS Less price sensitive than other investors Can create instant credibility CONS Erratic follow on investment behavior Won’t always champion your product internally Can box you out of competitor products
Summation
Angels usually invest initially in seed/start-up rounds Angels represent (more) patient money Angels are almost always sophisticated investors Angels make excellent advisors and mentors Strategic investment can be your best investment opportunity or your worst nightmare There is a place for angels, venture, and strategic investment, depending on the stage and investment needs of the company Many companies will need only angel investors Not all companies make great angel investments Be open, coachable and realistic Show your commitment, passion and drive