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					An Introduction to

ANGEL INVESTING
                   OUTLINE

• Who are these Angels?
• Entrepreneur-friendly Communities
• Company Formation and Startup Funding
• Portfolio Strategy for Angel Investors
• Post-investment Relationship between
    Entrepreneurs and Angel Investors
• Why Angels are Joining Groups
• The Angel Investing Process
• The Power of Angel Investing Seminar
      Angel Investors
        (vs. private investors)

• Invest money in seed, startup
      and early stage companies
• Invest time in entrepreneurs
      and their companies
       – Business acumen
       – Mentoring and coaching
       – Serve on boards
       – Make business introductions
       Who are these Angel Investors

• Often successful, exited entrepreneurs or retired
  business persons – active investors
   – Invest both time and money in companies
• Accredited Investors - SEC definition
• Angels invest their own money (not money managers)
• Investing in local companies
    Motivation:
    Why Become an Angel Investor?
•    Helping entrepreneurs
•    Stay engaged – using skills and
       experiences to help build a business
•    Giving back to community or university
•    An active form of investing –
       not just watching markets
•    Return on Investment is the metric
How do Angels fit into
Entrepreneur-friendly
    Communities
                                      Entrepreneur-friendly
                                          Communities


               VCs                    Service
         Funding                     Providers
         Sources Grants
                    Banks
Angels              SBIRs                           Mentors
                                                     Coaches
                                                    Role models

          ENTREPRENEURS
                                                 Colleges &
 Entrepreneurship                                Universities
      Center
         Bus Plans                 Companies Sources of
         Education                            Technology
                                               Innovations
         Networking                          Product Ideas
                         Talented
                          People                    Labs
New Company Formation and
 Funding Sources for Startup
        Companies
    Who are Funding Startup Companies

•   Friends, Family (and Fools) – FFF
•   Angel Investors
•   Venture Capitalists
•   Other
     – Government grants (SBIRs, etc.)
     – State and local programs
• Friends, family & fools                 • Not accredited
                                            Unsophisticated
   Typical round: $10,000
                                            Investing in a friend
   Each investor: $ 2,000                   Passive
   Source: estimate                         1-2 lifetime investments
                                              ($100 to $5,000 each)

• Angels                                  • Accredited
                                            Expertise and personal money
    Typical round: $600,000                 Active
    Each investor: $ 40,000                 Investing in entrepreneur
    Source: Center for Venture Research     Portfolio of angel deals
• Venture Capital                         • Limited partnership
                                            Institutional money
    Typical round: $7,000,000               General Partners active
    Each investor: $3,000,000               Invest in company
    Source: PWC MoneyTree                   Large portfolio
Funding Seed and Startup Entrepreneurs
                  (typical year)


 •   Startup companies         500,000
 •   Funded by FF&F            200,000 (est.)
 •   Funded by Angels          35 - 50,000
 •   Funded by VCs             < 500
     Estimated that 90% of
   Outside Equity Capital in
Seed/Startup Stage Companies is
     Sourced from Angels
An Angel Portfolio Strategy
       An Angel Investing Strategy:

       Portfolio Considerations
•   5-10% of net worth (asset allocation)
•   8-10 investments (risk diversification)
•   High tech, low tech, no tech (your choice)
•   Variety of involvements
    – Lead investor
    – Board, advisor
    – Passive
• Most of ROI from 1 - 2 of 10 companies
Implications of this Strategy

• Net Worth Requirements
   (testing the SEC definition
   of an accredited investor)
• Return on Investment implications
      Definition:
      Accredited Investor
• Financial position of investor:
      • Net worth: $1 million, or
      • Annual personal income: $200K, or
      • Family income: $300K
• Assumption:
      • Knowledgeable – capable of due diligence
      • Can afford to lose invested funds
• Implications:
      • Giving up regulated disclosure
       Implications:
       Angel Investor Net Worth
•   Typical angel investment ~$25K
•   10 investments = $250,000 invested
•   100% reserves, another $250,000
•   10% of Net Worth ($500K/10% = $5 million)
•   Therefore:
    – Minimum net worth for angels = $5 million
    – SEC definition is 70 years old
                        Angel Expectations: 25%/yr
                                            Historical 20 Year Returns for Alternative Assets
                     22.4
             25
                                  18.7           18.7
             20                                              16.5        14.9
                                                                                    13.2
   Returns




             15

             10

             5

             0
                  Seed         All           Hedg       Buyout      S & P 500 NASDAQ
                  Funds      Venture         e          s
                                             Funds
Source: Venture Economics, HFRI Equity Hedge Index
   Implications:

   Size of Each Opportunity
• 1-2 in 10 investments will produce almost all of
  the ROI for the portfolio
• These successes must yield 20-30X ROI
   (Nonbelievers: Do the calculations!)
• And…we cannot pick the winners
• Therefore, all portfolio companies must
  demonstrate the opportunity for a 20-30X
  return on investment.
  Integrating Exits into Portfolio Strategy

• VCs exit in 3-5 years (assume 5)
• Angels invest earlier and expect to exit in 5-7 years
  (assume 7)
• A balanced angel portfolio contains ten companies.
• Consequently, angels should invest in 2-3 companies
  per year
   – Build to ten company portfolio gradually
   – A portfolio of companies in all stages of development
   – Good balance for investors time
                      Exit Strategies
12000
                  20X
10000
                                               100X
 8000
 6000                                                 IPO
                                                      M&A
 4000
 2000
        0
              1999          2000       2001   2002
2002 Software Industry Equity Update
Economic Benefit from Angel Invested
 Entrepreneurs and their Companies
           We have absolutely no data but
            Consider the following:
• Angels invest in 7-10% of all startup companies
• Angels only invest in companies that will scale
  – 20 to 30 times growth in valuation in 5-7 years
  – Employment created by these companies is high
• David Birch (MIT) and others have
  demonstrated that high growth companies
  create all net new jobs in America.
• Angel-funded companies create lots of jobs
         We have absolutely no data but
          Consider the following:
• Anecdotal data suggests Angel Investors and
  the Entrepreneurs in whom they invest enjoy
  some very successful exits.
• Exited entrepreneurs often become angels
• Angels often reinvest portfolio returns
• The wealth creation from angel investing
  is spawning an even greater number of
  companies.
Post-Investment Relationship
Angels invest time in portfolio companies

• Angels bring expertise to portfolio
   –   Business acumen
   –   Vertical expertise
   –   Financial experience
   –   Director service
• Common roles
   – Advisor, Mentor, Coach, Director
   – Except in emergency, not paid consultant
            Portfolio Considerations

• With many portfolio companies
   – Not active in all, pick roles suited to your skills
   – Let other angels serve remainder of companies
• As contribution fades, exit in favor of
     new directors, advisors
• Limit number of Boards to 3-5
Why Angels Join Groups
Growth in Angel Organizations
  200
  180
  160
  140
  120
  100
   80
   60
   40
   20
    0
        1996 1997 1998 1999 2000 2001 2002 2003
    Data provided by Professor J. Sohl, University of New Hampshire
             Solo Angels

• Process is time-consuming
   – Deal sourcing
   – Reading plans
   – Due diligence
• Due diligence is difficult
   – Finding vertical experience
   – May require using outside experts
• Legal support is expensive
       Investing through Angel Orgs

•   Dividing the work eases the pain
•   Variety of vertical experience available
•   Standardized processes and term sheets
•   Deal flow encouraged, entrepreneur-friendly
•   Pick and choose the deals you like
•   Great camaraderie among the like-minded
The Angel Investing Process
      Summary:
      Angel Investing Process
•   Pre-screening
•   Screening
•   Due diligence
•   Investment presentation
•   Follow-up discussions and meetings
•   Closing
          Deal Flow Statistics

•   Prescreening       1 in 4 to Screening
•   Screening          1 in 3 to DD
•   Due Diligence      1 in 3 to Inv. Meeting
•   Investment         1 in 2 raise money
•   OVERALL            1 in 72 who apply receive
                        investment
            Power of Angel Investing
•   Developed by Kauffman
•   Delivered more than 30 times in the US
•   Trained over 500 angel investors
•   High ratings by participants
    –   Knowledgeable speakers              4.64/5.00
    –   Important topics & content          4.60/5.00
    –   Relevant & beneficial information   4.60/5.00
    –   Well presented information          4.54/5.00
         Seminar Content

•   Is angel investing right for you
•   Where to find good deals
•   Due diligence
•   Structuring the deal
•   Valuation
•   The post-investment relationship
          Seminar Format & Delivery

•   All day experience
•   Networking opportunities
•   Designed for 20-25 accredited investors
•   Mix of learning methods
    – Lectures
    – Panel discussions
    – Case study exercise (valuation)
                      SUMMARY
• Angels are making a difference
  – In job creation
  – In wealth creation
  by providing equity capital and mentoring to entrepreneurs
• Plan a portfolio strategy as you begin investing
• Join an angel organization
  – Good deal flow
  – Robust processes
  – Great camaraderie
This introduction to angel investing was developed by the Kauffman
   Foundation for the Angel Capital Association. It is designed as a
   recruiting tool for angel organizations and to introduce interested
   groups to the subject.

For more information on Kauffman’s Angel Initiative, the Angel
   Capital Association, or the Power of Angel Investing seminar for
   new angel investors, contact:
   Marianne Hudson
   (800) 489-1447
   mhudson@kauffman.org

				
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posted:8/19/2011
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