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									 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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