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  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • (This is about the half-way point in this presentation.) Angels: Are “been there, done that” entrepreneurs investing their “mad money” (<10% of net worth – their “go to Vegas” money). Generally have 8-12 investments of $25-250K, 95% between $25 and $100K, average $40K (for TCA). Play a variety of roles in these companies (can’t be chairman of each), from chairman to passive.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.
  • Here is the first of three myths related to early stage investing that I plan to address:
  • I like to use a mutual fund analogy to describe VCs. General partners are very bright investor/managers who have minimal “skin in the game” who are motivated by a huge upside, 20-30% of the gains on investments. Limited partners are totally passive: pension plans, insurance companies, financial institutions, endowments, foundations, corporations and wealthy individuals. There are currently about 700 VCs in the US but the number is currently decreasing. Their size ranges from $20 million to $5 billion and above.
  • As was mentioned earlier, there are many sources of funds for venture capitalists. All these are limited partners. Other countries are not so fortunate. Pension plans in Canada, for example, are prohibited from investing in venture capital firms.
  • Here is the first of three myths related to early stage investing that I plan to address:
  • As you can see, venture capitalists are abandoning seed and early stage companies.
  • The popular press would lead you to believe that entrepreneurs start companies with money from friends and family, and then: get more money from angels secure a VC round of investment and, then go public I would like to provide you with enough facts so we can all dispel this misleading myth.
  • Lead Instructor: Pick a couple that interest you and let the audience read the rest. My favorites are: Less than 1 in 10 companies obtain angel funds Less than 1 in 10 companies angel deals are funded by VCs Less than 1 in 100 angel-funded companies go public via IPOs
  • VCs invest in a tiny number of startup companies. VCs are really later stage investors. State Funds are small in comparison and are also really focused on later stage companies.
  • This slides shows all the M&A activity and all the public offerings in this country in the past four years. This data is not limited to venture-backed companies and includes some data for the spin-off of divisions of larger companies. Nonetheless, the data is clear. Even during the hottest years for IPOs of venture-backed companies, the ratio of M&A exits to IPOs was 20x. Now the ratio is at least 100:1.
  • Angel investors represent over 90% of the equity investments in early stage ventures and bring equal value in advisory and mentoring roles.
  • (self explanatory)
  • Because seed investments are inherently very risky, over time, the ROI of seed investments exceeds all other equity investments.
  • Important: VCs invest in companies. ROI is their only concern. Angels invest in entrepreneurs and have many motivations. ROI is an important metric.
  • This is the good news. Valuations are down…back to pre-bubble ranges. It seems to me that valuations in 2003 have dropped even further and a little below those of 2001. This is good news for angel investors.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • You have seen this, of course. In 2003, many of us expected the level of funding to resume the growth curve extrapolated between 1992 and 1996, however, VC funding has dipped below that line and continues to decrease into the first quarter of 2003. While we suspect the bottom will be found this year, we have no evidence yet of this. Frankly, the VC industry is in trouble and there are no signs of improvement on the horizon. VCs have lots of money on the sidelines and are making later and later stage investments. Consequently, VCs are making fewer and fewer early stage investments. Frankly, most of their investments are in portfolio companies, that is, companies in which they have made earlier investments.
  • Since seed investments are invariably smaller than later stage investments, VCs gravitated away from seed investments.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • There are a few players in the “gap,” funding deals between $2 and $5 million rounds. These are: wealthy solo investors strategic partners boutique VCs (often wise, senior VCs who saw this opportunity early) and have founded smaller seed funds. new alliances between angels and VCs VCs, for years, ignored angel investors. But, these new smaller boutique seed VCs are partnering with angels. Angels provide these angels leverage, by serving on Boards or in mentoring roles before these companies are large enough to benefit from the VCs attention. These VCs usually have great connections to deeper pockets, for later rounds.
  • When entrepreneurs show me with plans calling for $3 million in seed funding, I explain that $3 million is the wrong number….and they need to go back to the drawing board. Why? Because the number of investors currently doing $3 million rounds is tiny. But the number of investors doing $500,000 rounds or even $7 million rounds is much, much larger. I suggest they redesign their funding schemes to raise less than $1 million in their first round. If they can meet the milestones attached to the first round of funding, perhaps they will be able to raise additional money. The funding gap described in the slide is of serious concern to angel investors. With VCs on the sidelines for early stage investors, we angels must do substantial due diligence to assure deeper pockets are available to fund larger deals, which need several rounds of funding.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.
  • The average investment made by VCs increased dramatically, creating a huge gap between the average VC investment size and the average angel investment size.

grants.nih.gov grants.nih.gov Presentation Transcript

  • PRIVATE EQUITY INVESTING AN OVERVIEW OF THE FIELD PRESENTATION FOR NIH CONFERENCE Bethesda, MD
  • LET’S START WITH THE TWO MOST PROMINENT CATAGORIES: 1. ANGELS 2. VENTURE CAPITALISTS
  • WHO ARE THESE ANGELS? FIRST AND FOREMOST, THEY ARE ACCREDITED INVESTORS…..
  • AN ACCREDITED INVESTOR IS A PERSON WHO HAS A NET WORTH OF $1M AND OR AN ANNUAL INCOME IN EXCESS OF $200K FOR THE PREVIOUS 2 YEARS AND THE EXPECTATION OF THE SAME FOR THE NEXT YEAR.
  • WHO SAYS SO ?…. THE FEDERAL GOVERNMENT: SECURITIES AND EXCHANGE COMMISSION
  • Who Are These Angels?
    • Wealthy individuals – “accredited investors”
    • “ Been there and done that” entrepreneurs
    • Have made several angel investments
    • Investing “Mad money”
    • $25K to $250K per investment per angel
    • More than 400,000 active angels
    • Potential 5 million angels
  • THERE ARE A VARIETY OF WAYS ANGELS CAN AND DO MAKE THEIR INVESTMENTS…..
  • THE INDIVIDUAL OR …. “LONE WOLF INVESTOR”
  • ADVANTAGES FOR THE LONE WOLF 1. NIMBLE AND QUICK 2. INDEPENDENT DECISION 3. BIG REWARD…(MAYBE)
  • HOWEVER, THERE ARE A FEW DISADVANTAGES: 1. SOLE RESOURCE 2. SOLE RISK 3. LACK OF TIME 4. DUE DILIGENCE EFFORT 5. TOO QUICK TO WRITE CHECK
  • ANGEL FORUMS….. THE NEXT LEVEL OF INVOLVEMENT
  • AN ANGEL FORUM IS A LOOSE CONFEDERATION OF INDIVIDUAL ANGEL INVESTORS WHO MAY COME TOGETHER ON A DEAL.
  • A FORUM MAY OFFER SOME ADVANTAGES….
  • THE COMMITTED FUND…. ANGELS PUT THEIR MONEY ON THE TABLE...
  • WHY COMMIT ?
  • A COMMITTED FUND OFFERS SOME DISTINCT ADVANTAGES: 1. MORE PORTFOLIO DIVERSITY 2. MORE RESOURCES TO USE 3. BETTER DUE DILIGENCE 4. SPREAD THE RISK !
  • NOW THAT WE ARE AUTHORITIES ON ANGELS… WHO OR WHAT IS A VENTURE CAPITALIST ?
  • Venture Capitalists
    • General partners
        • Salaried managers
        • Minimal investment
        • Huge upside
      • FUNDED by Limited partners
        • Corporations, pension funds,
        • wealthy individuals
        • Totally passive involvement
    • Over 700 venture capital funds
    • Size: $20 million to $5 billion
  • Sources of Venture Funds Source: 2001 data from 2002 NVCA Yearbook, prepared by Venture Economics
  • A misconception… Venture Capitalists are engaged in starting companies
  • 441 166 VCs Are Moving Away From Seed/Startup % of All VC Funds Source: PWC-MoneyTree
  • Entrepreneurs are usually funded from: - Friends and family ( maybe fools) then - Angel investors, then - Venture capitalists, then…….?
  • HERE ARE SOME QUICK FACTS:
    • <1 in 10 Start-ups obtain angel financing
    • <1 in 1000 Start-ups are VC financed
    • <1 in 10,000 new companies go public
    • <1 in 100 angel-funded companies
    • go public via IPOs
  • Annual Sources of Startup Funding
    • VCs (NASVF data)
    • Angel investors
    • (Center for Venture Research)
    • < $3 billion
    • (<500 companies)
    • ~$30 billion
  • 0 2000 4000 6000 8000 10000 12000 1999 2000 2001 2002 IPO M&A Transactions 2002 Software Industry Equity Update
  • Conclusion: Angel investors provide about 90% of the seed and early stage outside equity capital for start up entrepreneurs. This is a combination of “lone wolves”, forums and committed funds.
  • Why do angel investors make such risky investments? Here is one reason
  • Seed vs Alternative Investments Source: Venture Economics, HFRI Equity Hedge Index 22.4 18.7 18.7 16.5 14.9 13.2 0 5 10 15 20 25 Returns Seed Funds All Venture Hedge Funds Buyouts S & P 500 NASDAQ Historical 20 Year Returns for Alternative Assets
  • Motivation
    • Venture Capitalists: make money
    • Angels
    • Staying involved into “codgerhood”
    • (sense of usefulness)
    • Give-back
    • Affection for Entrepreneurs
    • Investment of “mad money”
    • Return on Investment
  • Median Pre-Money by Stage-FACTOID $101 $29 $30 $44 $15 $21 $7 $8 $14 $2 $2 $6 $0 $20 $40 $60 $80 $100 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 Later Rounds Second Round First Round Seed Round Source: PWC MoneyTree
  • SO WE HAVE A BASIS IN KNOWLEDGE OF ANGELS AND VENTURE CAPITALISTS… YOU HAVE A FUNDING NEED….. NOW WHAT???????
  • KNOW WHERE TO GO….. ANGEL OR VC ?
  • THE KEY IS TO DO YOUR HOMEWORK !
  • Trends in Venture Investment 100 80 60 40 20 $ Billions
  • 441 166 VCs Are Moving Away From Seed/Startup… REMEMBER THIS SLIDE? % of All VC Funds
  • Conclusion: VCs have too much money on the sidelines, which must be put to work. They cannot afford to spend their time on seed and early stage deals.
  • Capital Availability Gap: $1-5 million
    • Scarce capital – very few deals
    • Wealthy, solo, private investors
    • Boutique VCs - many new, small VCs
    • Unique alliances between angels and VCs
  • Entrepreneurs: Go Where the Investors Are! Investment (one round) Number of Investors $5 million $10 million Angels VCs GAP
  • SO IT’S GOING TO BE THE ANGELS IN THE EARLY ROUND WHAT ARE YOU GOING TO ASK FOR?
  • MOST IMPORTANTLY…. HOW ARE YOU GOING TO ASK FOR IT ?
  • THE BASIS WILL BE YOUR BUSINESS PLAN….. MOST IMPORTANTLY - THE SUMMARY AND PITCH !
  • YOU HAVE AN IDEA….. NOW WHAT DO YOU DO?
  • What constitutes a good business plan ? a. Is the Executive Summary clear and concise ? b. If an outsider read the summary, would they understand exactly what your business is all about ? c. Does the summary create a high level of interest ? d. Think about being at a cocktail party and having someone ask you “what does your business do?” Could you answer concisely in 2 minutes or less?
  • Summarize the plan : like the jacket cover on a novel, tell the reader in a CLEAR, CONCISE and COMPELLING way, enough about the contents to convince them to read on. Show the need : Explain the problem in search of a solution, the extent of the problem, and the desire in the marketplace for the solution. Describe your solution: Provide a description of your offering, explaining how it meets the market need in a better manner than any of the possible alternatives.
  • Establish credibility : describe your enterprise, key personnel, history of success and measurable objectives. Explain your delivery methods : keep in mind that a better mousetrap doesn't guarantee success. Be prepared to describe planned promotions, sales techniques, channels of distribution and post sales support. Acknowledge barriers to success : Explain the how you will deal with expected or potential market resistance, difficulties of access to the market and competitive reactions to your offering.
  • State requirements for long term success : assuming initial market acceptance of your offering, describe your need to handle growth, improving the initial offering and developing new offerings Provide financial projections: Show expected revenues, expenses, capital requirements, cash flows and balance sheets. Explained financial returns: Explain when and how investors will experience a return on their investment. LIQUIDITY EVENT !
  • If you are going to cite reports, studies, statistics, etc for business verification…..cite authoritative studies or market surveys that are directly applicable to the point you are making.
  • SO YOU MADE THE PITCH AND SET THE HOOK….. WHAT NOW ?
  • FOLLOW UP WITH THE INVESTOR BE PREPARED FOR DUE DILIGENCE VALUATION TERM SHEET DONE!
  • THE REAL DEFINITION OF THE VALUE OF AN EARLY STAGE COMPANY IS: “That point at which an investor’s fear is in equilibrium with his greed.”
  • THE TERM SHEET IS NOTHING MORE THAN A CLEAR AGREEMENT IN WRITING DEFINING ALL THE TERMS AND RIGHTS OF THE INVESTOR AND THE COMPANY.
  • A TERM SHEET WILL NORMALLY HAVE ANYWHERE FROM 10 TO 21 SECTIONS. EACH SECTION CAN BE WRITTEN IN A WIDE RANGE OF FAVORABILITY TO EITHER THE INVESTOR OR ENTREPRENEUR.
  • REVIEW: WE HAVE COMPARED AND CONTRASTED ANGELS AND VCs.
  • WE HAVE LOOKED AT WHERE EACH GROUP INVESTS AND HOW THEY CAN BE ORGANIZED
  • WE HAVE TAKEN YOU THROUGH THE SCENARIO OF A START UP LOOKING FOR MONEY….WHERE AND HOW.
  • WE HAD A CRASH COURSE IN WHAT A BUSINESS PLAN SHOULD LOOK LIKE AND DO AS IT RELATES TO ASKING FOR FUNDING.
  • ANY QUESTIONS ?
  • SOME RESOURCES: 1. THE ANGEL INVESTOR’S HANDBOOK BY GERALD A. BENJAMIN & JOEL MARGULIS 2. TERM SHEETS AND VALUATIONS BY ALEX WILMERDING 3. WWW.ASPATORE.COM 4. WWW.INCEPTIONMICROANGELFUND.COM