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 Life Cycle Financing Product Dev Proof-of Product Product Manufacturing/ Discovery Concept Design Development Delivery Idea Pre-seed Seed Start-up Expansion/Mezzanine Funding Funding Funding Operating Cap. Founder Venture Funds Friends and Family Angels Institutional Equity Loans / Bonds Angel Groups Government Grants/Loans Seed Funds 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) Source: MoneyTree Venture Capital Investment: Historical and 2006 Projected Source: MoneyTree Average VC Deal Size Per Financing Round ($ Million) 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 $18.1 billion 227,000 active angels 20% Healthcare/medical devices and equipment 18% Software 55% in seed/start-up 43% in post-seed/start-up (10% increase over 2004) Source: Center for Venture Research Who Are Angels? Angels are accredited investors who: Expect a financial return Believe in giving back to their communities Invest locally and regionally Participate in the investment process Show interest in personal relationships with companies and employees Offer wisdom and guidance to entrepreneurs Financial Attributes of Angels Provide early-stage investment dollars Invest smaller dollar amounts per investment Partially fill funding gap left by venture capitalists (VCs) Invest individual wealth Can tolerate loss of entire investment Have diversified portfolios Invest with “patient money” Angels and VCs – Similarities Selective in investments Requirements for an investable company Expectation of return on investment - scalable Similar investment terms (though angels can and often are – or must be – simpler) Bring the attributes of a professional investor Angels and VCs –Differences Venture capitalists: Invest on “home-run” theory ROI is ultimate goal Investing 3rd party money Often more demanding and actively involved than angels: Control often issue Can requirement board and advisor approval and corporate actions Angels: Invest for returns – may be more modest expectations Social /community aspect to investments Individuals investing their own wealth Patient money Investment Preference 39 groups reporting Valuations Of Venture Capital Seed/Startup Rounds ($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 Five Year ROI Seed 60%+/year 10X+ Start-up 50% 8X Early stage 40% 5X 2nd stage 30% 4X Near exit 25%/year 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 Information Use of Proceeds requirements Dividends Registration rights Liquidation Right of first refusal preference Co-sale rights Anti-dilution Option pool provisions Founder vesting Redemption Inventions agreements Protective provisions 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?
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