Knauss Angel Investing

Seed and Early Stage

Angel Investing: A Case Study

Troy Knauss , Fund Executive

Piedmont Angel Network

Adjunct Professor, Wake Forest University

[email_address]

Presentation

Investing Structures

Individual Angels

Angel Networks

Angel Funds

Venture Capital Funds

ANGELS MUST BE ACCREDITED INVESTORS UNDER ALL STRUCTURES

Idea Start up Intro Rollout Growth Expansion Maturity ANGEL GROUPS $100,000 – $1MM+ INDIVIDUAL ANGELS $10k – $100k GRANTS UP TO $1MM SYNDICATION UP TO $2.5MM Seed Capital / Grants Individual Angels / Groups / Boutique VCs Venture Banks / Venture Capital Funds Traditional Banks Acquisition Stage / IPO / Mergers Funding Size Revenue / EBITDA

Source: University of New Hampshire Center for Venture Research, Price Waterhouse Coopers Source of Funding 2007 Angel Investments 2007 VC Investments $25+ Billion 51,000 Deals Average Deal Size : $500,000 $25+ Billion 3,416 Deals Average Deal Size : $7,500,000 Early Stage to Late Stage

The Entrepreneur’s Fund sm All individuals are Accredited Investors $1 Million Net Worth or $200,000 in salary for past two years PAN has over 150 investors in 2 funds. Limit to 99 investors per fund (SEC) Each investor commits a minimum $50,000 The funds have $10 million under management Important : The funds are member-managed

Submit Executive Summary Structured Process

Funding Statistics

Funds invest in 6% of all companies screened and less than 1% of all deals seen

Individuals invest in 30% of companies seen

Sources of Deal Flow

Other Angel Groups

Venture Capital Firms

Individual Angels

Professional Services Lawyers, Accountants, Incubators

More than 20 Angel Groups in the Southeast U.S.

Geographic Limitations Investments are restricted to an approximate three-hour drive of the Piedmont Triad region to provide better access to portfolio companies for improved monitoring and assistance. PAN will review investments throughout North Carolina, as far north as Charlottesville, Virginia, and as far south as Columbia, South Carolina. Investment Region

Percent of Groups Source: 2008 ACA Angel Group Confidence Survey Where do groups invest?

Portfolio Companies Virginia Winston-Salem Greensboro Triangle Charlotte 16 Total Investments 7 Life Science Investments + 2 to be announced soon 6.2% Education 12.5% Services 37.5% Technology / Software 43.8% Life Science Portfolio % Industry

What Angels are Investing in?

University of New Hampshire Research for Q1/Q2 2008:

This is the first time in many, many years that Life Science investments are not in the top 3

Expect exit in 5 – 7 years

10X to 30X multiples

Will not look at valuations above $5MM

Initial investments expected to yield min.10% equity

Dry powder (very important to ultimate returns)

Board Governance / Monitoring critical to returns

Expectations / Conditions

Distribution of Returns by Venture Investment Average Returns

High = 1 or 2 times per month Low = 1 or 2 times per year High 3.7X (4.0 years) Low 1.3X (3.6 years) Impact of Participation Mentoring, Board, Financial Monitoring Returns with Monitoring

FINANCIAL RETURNS / VALUATION

Sample Portfolio Returns Source: Becoming an Investor-Ready Entrepreneur (sbtdc.org) 10 5 9 4 8 0% 0.0 3 7 0% 0.0 2 6 0% 0.0 1 5-Year IRR Multiple Portfolio Co. 5-Year IRR Multiple Portfolio Co.

Sample Portfolio Returns 10 5% 1.3 5 9 5% 1.3 4 8 0% 0.0 3 7 0% 0.0 2 6 0% 0.0 1 5-Year IRR Multiple Portfolio Co. 5-Year IRR Multiple Portfolio Co.

Sample Portfolio Returns 10 5% 1.3 5 9 5% 1.3 4 8 0% 0.0 3 10% 1.6 7 0% 0.0 2 10% 1.6 6 0% 0.0 1 5-Year IRR Multiple Portfolio Co. 5-Year IRR Multiple Portfolio Co.

Sample Portfolio Returns 10 5% 1.3 5 9 5% 1.3 4 50% 7.6 8 0% 0.0 3 10% 1.6 7 0% 0.0 2 10% 1.6 6 0% 0.0 1 5-Year IRR Multiple Portfolio Co. 5-Year IRR Multiple Portfolio Co.

Sample Portfolio Returns 10 5% 1.3 5 82% 20.0 9 5% 1.3 4 50% 7.6 8 0% 0.0 3 10% 1.6 7 0% 0.0 2 10% 1.6 6 0% 0.0 1 5-Year IRR Multiple Portfolio Co. 5-Year IRR Multiple Portfolio Co.

Sample Portfolio Returns Return on Portfolio Investments (1-9) is 3.7X (26% IRR over 5 Years) Unknown Unknown 10 5% 1.3 5 82% 20.0 9 5% 1.3 4 50% 7.6 8 0% 0.0 3 10% 1.6 7 0% 0.0 2 10% 1.6 6 0% 0.0 1 5-Year IRR Multiple Portfolio Co. 5-Year IRR Multiple Portfolio Co.

Start-up technology using recycled plastic for composite wood decks Start-up plastic toy company in Pennsylvania In 1990, I had the option to put $100,000 in one of the following deals: Why invest as a fund?

In 1990, I had the option to put $100,000 in one of the following deals: Why invest as a fund?

$10,000,000 $17,000 In 1990, I had the option to put $100,000 in one of the following deals: Why invest as a fund? LOST $83,000 DIDN’T MAKE $9,900,000 RETURN RETURN

In 1990, I had the option to put $100,000 in one of the following deals: Why invest as a fund? IF YOU INVESTED AS A FUND AND PUT $50,000 IN EACH DEAL, YOU WOULD HAVE MADE $4,908,500

Deals Missed “ If you are in this business long enough, you'll see some great deals walk through your door . If you are in this business long enough, you’ll show some great deals the door .” – OVP Venture Part. Quote “ A guy walks into your office in the late 1980’s and says he wants to open a chain of retail shops selling a commodity product you can get anywhere for 25 cents, but he will charge 2 dollars. Of course, you listen politely, and then fall off your chair laughing when he leaves. Howard Shultz didn’t see this as humorous. And we didn’t make 500 times our money. To get even (wasn’t our not making money enough?) years later, Howard opened his own venture capital firm right down the street.” “ The Internet boom was just beginning. Amazon had sales of $4M a year. We had a handshake on a term sheet with the CEO to put $2M into Amazon for 20% of the company (a $10M post money value). At the eleventh hour, some guy named John Doerr flew up and offered $8M going in for 20% of the company (a $40M post money value). Handshake? What handshake? To get even, we buy all our books at Barnes & Noble. We don’t think Amazon has noticed.”

Contact Information : Troy Knauss Piedmont Angel Network [email_address] (336) 235-0941