"Angel Investing 101" John May

“ Angel Investing 101” John May Darden Progressive Incubator July 11, 2005

John May
Co-founder, New Vantage Group, Vienna, VA
Co-Manager, The Dinner Clubs (3), Active Angel Investors, and affiliated angel venture groups (2)
Advisor, Calvert Ventures, Solstice Capital, Women’s Growth Capital Fund & Conservation International’s Verde Ventures
Batten Fellow and Director, Northern Virginia Initiative, Darden Graduate School of Business Administration, University of Virginia
Co-Author, Every Business Needs an Angel (Crown Business: 2001)
Co-Editor, State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing (Darden Business Publishing: 2003)
Participant in international forums and lectures – Paris, Tokyo, Bangkok, Malta, Copenhagen, Mexico City, Helsinki, Santiago

The World of Angel Investing
Part mentoring
Part venture capital
Part psychic reward
Part adventure

But first, VC’s: Seeding or Fertilizing?
Early-stage VC is broke
Indigestion in the food chain
Looking back instead of looking forward

The Field
Small private businesses in the US
Emerging growth opportunities for investors
High-tech start-ups
Job and innovative generation
“ Mentor” capital

The Pain: A Chronic Problem
Becoming a successful big company takes a lot of hard work
Tapped out after FFF and own money
Capital gap is $250,000-$2.0M range
Pre-bankable companies need support of all kinds

Is Institutional Venture Capital the Answer?
Uniquely American, only 50-year old experience
Managed for OPM – now $260B-plus cottage industry
Dominated by pension funds and $150M-+ pools and funds
Heavily high-tech and No. California and Massachusetts (55% of deals)
Doesn’t play at the seed-stage easily, very selective - less than 5% of venture capital into seed

Venture Capital Disbursements to Portfolio Companies 2,750 $18.9 B 2003 2,600 $21.2 B 2002 3,767 $40.0 B 2001 5,458 $103.5B 2000 3,956 $59.4B 1999 3,155 $22.0B 1998 2,696 $17.2B 1997 # of Companies Annual Year 2,876 $20.9B 2004

… And It’s Gotten Worse Amount of Venture Capital Invested by Stage in the US (in millions) Sources: National Venture Capital Association Yearbook 2003 & Money Tree 2004 US Report 100.0% 22,940 100.0% 18,946 100.0% 21,224 TOTAL 40.1% 9,198 25.8% 4,879 16.7% 3,543 Later 41.5% 9,511 54.4% 10,304 62.7% 13,301 Expansion 16.9% 3,885 17.8% 3,378 19.2% 4,076 Early-stage 1.5% 346 2.0% 385 1.4% 304 Seed/Start-up 2004 2003 2002 Stage

But Healthcare % is Increasing
First quarter ’05 biotech and medical devices 2 nd and 3 rd largest VC investments
’ 04 biotech totaled $3.8 billion
’ 04 medical devices totaled $1.8 billion
Total is over $5.6 billion in 578 companies (largest in four years)

How Individuals Have Played Throughout History
Wealthy families
Broadway angels
Professor Bill Wetzel and high-tech angels
90’s boom and growth of wealth and VC’s

HNW Individuals and the Alternative Asset Class
Why should any investor participate in alternate assets?
Real estate, timber, oil, gas, private equity are core alternative assets
Allocation of 5-10% is appropriate as control more investible wealth
Use alternate assets to increase total return – offsets high risk inherent in inefficient markets
VC as part of mix may be appropriate

A National Status Report 1994-2004
Number of millionaires grew to over four million
Angels number around 250,000 – GEM says over one million informal investors in U.S. alone
Structured angel groups grew from 10/15 in ’94 to 175+ in 2004
Center for Venture Research at UNH reports 48,000 transactions by angels in 2004

Seed and Early-Stage Investing by Type of Investor (2004) # of Transactions $100 B (GEM Report) $18.7 B (Sohl) $20.9B (NVCA) $384 M Investment $ Type of Investors 48,000 1, 000,000 2,876 193 Individuals Angels Institutional VC “ Real” VC Seed Invest

Potential Angels in the U.S. 4,200,000 GEM Report Informal Investors Members of ACA Professor Jeff Sohl’s Active Angels (est.) U.S. Millionaires 1,000,000 225,000 5,000

GEM Report
The GEM Report found more than 50% invest
in relatives’ businesses
Investor’s Relationship to Investee
Close Family 41.8%
Other Relative 10.5%
Work Colleague 6.1%
Friend/Neighbor 28.5%
Stranger 9.4%
Other 3.6%

So What Is An Angel, Really?
Our definition is –
Accredited individual
$20,000 or more per deal
Has lost money in venture in past!
Patient capital - mentor

Angels vs. VC’s
“ Warm” money
Customized term sheets
Blend of psychic and financial reward
Due diligence still important
Pitching up the person as well as the pocketbook

Many Variations of Non-VC Group Investing
Ad hoc, one-time partnerships
Angel networks
Pledge funds
Angel Limited Partnerships
Member-led and manager-led LLC’s
Other (be creative)

Angel Groups in Our Region
Private Investors Network Women's Angel Network
Capital Investors Group Maryland Angel Council
The Dinner Club CEO Club
eMedia Club Active Angel Investors
Washington Dinner Club Ad-hoc groups everywhere
Capital Access Network

Full Member Provisional Member Angel Capital Association Members by Region

Are All Angels Alike?
Over-47 year old white male, $125K/year, cashed- out entrepreneur is historic prototype
Marriage partner
Networker
Executive recruiter
Therapist
Strategic Partner
General utility player
Fundraiser

The Future: Issues and Innovations
HNW individuals will want more involvement in their wealth management
Entrepreneurs will continue to become investors – will become mentors
Structured angel groups will provide risk minimization
US will continue to be high tech, entrepreneurship leader

Web-Based Resources
Angel Capital Association (for North America)
(www.angelcapitalassociation.org)
National Association of Seed and Venture Funds
(www.nasvf.org)
European Angel Network (Europe)
(www.eban.org)
National Venture Capital Association
(www.nvca.org)
Community Development Venture Capital Association
(www.cdvca.org)
Kauffman Foundation
(www.emkf.org)

Books/Studies
Benjamin, Gerald A. and Margulis, Joel B., Angel Investing - How to Find and Invest in Private Equity , New York: John Wiley & Sons, 2000.
Benjamin, Gerald A. and Margulis, Joel B., The Angel Investor's Handbook: How to Profit from Early-Stage Investing , New York: Bloomberg, 2001.
Gompers, Paul and Lerner, Josh, The Venture Capital Cycle , Cambridge, MA, MIT Press, 1999.
Hill, Brian E. and Power, Dee, Attracting Capital From Angels: How Their Money and Their Experience Can Help You Build a Successful Company , New York, John Wiley & Sons, 2002.
Keeley, Robert H., Cooper, Jeffrey M. and Bloomer, Gary D., Business Angels: A Guide to Private Investing , available from the Kauffman Foundation, Kansas City, 1998 .

Books/Studies (cont’d.)
May, John and O'Halloran, Elizabeth F., State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing , Charlottesville, VA: Darden Business Publishing, University of Virginia, 2003.
Osnabrugge, Mark Van and Robinson, Robert J., Angel Investing: Matching Start-up Funds with Start-up Companies - The Guide for Entrepreneurs, Individual Investors, and Venture Capitalists , San Francisco: Jossey-Bass, 2000.
Simmons, Cal and May, John, Every Business Needs an Angel: Getting the Money You Need to Make Your Company Grow , Washington DC: Crown Business, 2001.
Williams, Kelly, Working with Angel Investors for Community Development , New York: Community Development Venture Capital Alliance, 2003.

Be half full, be patient, collaborate, and remember,
“ Every Business Needs an Angel”

"Angel Investing 101" John May

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