Angel & Venture Capital Finance: Where is the Money Moving?

Angel & Venture Capital Finance: Where is the Money Moving? James Geshwiler Managing Director, CommonAngels Web Innovators Group 9 December 2008

Where’s the Money?!
Public Market Crash Hits Everybody
“Venture Capital Hits a Cash-Call Crunch,” WSJ , 12/8
“High-tech Wrestles with credit crisis,” Boston Globe 10/8
“A lot of [VCs] could be on the sidelines for four or five years." –Boston-based general partner
Most angels net worth down 30-50%

Risk Isn’t Up that Much; Just Changed
Financial risk—very high
Can’t count on follow-on investment
Syndication gone from tough to nearly impossible
Competitive Risk—way down!
Little threat from existing companies
Fewer VC-backed chasers
Market Risk—mixed, depends on sector, company
People Risk—down; great teams, attrition down
Product Risk—unchanged

Working with Investors Today
Target Investors who Succeed on Lower M&A
High M&A, IPO closed for big exits
Very hard to move the needle on a big fund
Shouldn’t be Focused on Today’s Market
Companies backed today targeting 5-7 years for exit
Cash is King of Kings
Cash-flow break even on 1 round if at all possible

Working with Angels, VCs, Both?
Individual “Angel” or “Private” Investor
Invests own money, gets full return
Typically industry veterans
Venture Capitalists
Compensated on fees, profit share
Dedicated, institutional investor
Angel Groups
Large networks of industry experts
Usually 2-3 with greatest skills lead + “bench”
Organized, institutional structure

Who are the Top Investors? Source: MIT Entrepreneurship Center & HBS Study on Angel Investing, Feb 2000 Founder, Chairman Former CEO Successful company in your or complementary sector Professional Entrepreneur Angel Financial Return Angel Low Guardian Angels Operational expertise angel High Industry Experience High Low Entrepreneurial Experience

Angel Groups Addressing Void Left by VC Stage Pre-Seed Seed/Start-Up Funding Gap between $500,000 and $5,000,000, targeting average M&A and up Early Later Source Founders, Friends and Family Individual Angels Venture Funds Investment $25,000 to $100,000 $100,000 to $500,000 $5,000,000 and up (initial capital may be smaller, but exit targets higher)

Median Fund Remains ~$200M! Source: DowJones/VentureOne Median VC Fund Size (for funds greater than $20M)

Funds < $100M Disappearing Allocation of Fund Size by Number of Funds Raised per Vintage Year Source: DowJones/VentureOne

Angels Institutionalizing
ACA Formed 2004
46 Groups Charter Members
As of 2008:
142 Groups
18 Affiliate Organizations
>6,500 Investors
43 States & Provinces
Member Locations Full Member Provisional Member

CommonAngels Target Investments
Series A Financing of $500K - $5M
Total Capital Less than $20M
New Areas of Information Technology
Current Expertise within the Membership
Passionate with CEO Capabilities
Within the Geographic Area – 1 Hour Travel
Possibility of Liquidity Event in 5 years

Typical Deal Process Submissions (~30 Plans Per Month) Managing Director pre-screens emailed submissions. Screening Team Review (5 – 10 Plans Per Month) Screening team votes on which companies to invite to general meeting. General Meeting Presentations (1 – 3 Plans Per Month) Managing Director polls members for level of investment interest in deals, recruits diligence team, and facilitates selection of deal lead to begin term sheet negotiations. Manage Investment Board member represents member interests and seeks an attractive exit. Deal lead closes transaction and the sidecar fund invests in companies that attract at least $250K in investment from at least 5 members. Diligence & Term Sheet Negotiations (Coordinated by Managing Director & Deal Lead) ENTER EXIT

Who Matters More than What
“ The most important item on a term sheet is the name of the investor at the top” —Mark Gorenberg, Hummer Winblad Venture Partners
View Investors like any other Strategic Relationship
Cash is a commodity, firms and people aren’t
Long-term partners
Influence of style, expertise
Big Investor vs. Small Investor Incentives
“ Instant Company” vs. Organic Approach
1 st round dilution matters much less than later rounds

Big Investor Incentives
>$250M in Fund
>$40M/Partner
>$10M/Investment
>$50M Liquidity/Deal, Exits >$500M
Institutional LPs
Meticulously measure IRR
Next fund depends on top quartile performance
From Company’s Perspective
Pro/con: 800lb Gorilla as your friend
Technical risk OK ($ can fix that); Can’t Bring Market Risk (exit too small)
Return needs to justify $30-40M+ from syndication, multiple rounds
“ We Fund BIG Ideas….”

Small Investor Incentives
<$100M in Fund/Network
$10M/Partner or less
$500K-$3M Investment
$5M-20M Liquidity/Deal, Exits $50M-100M
Institutional LPs, SBIC, Individuals
Maybe more flexibility in performance (non-ERISA $)
Maybe less, eg., SBIC program….
From Company’s Perspective
Pro/con: good returns on average M&A transaction
Market risk OK; technical risk bad (can be bottomless pit)
Shallower pockets may be disincentive to pile on risk
“ Who is going to buy you?...”

Big vs Small Investor Incentives $ Exit Probability Big Investor (>$500M) : Has capital, incentive to push for big outcome, but can drive failure seeking bigger exit Small Investor (<$200M) : Has capital to avoid failure, incentive to sell earlier for similar IRR Courtesy Dharmesh Shah, founder Hubspot

Textbook Case Studies of Incentives SOFTWARE (Web 2.0) Medical Devices (Orthopedics, Non-invasive) Likely Clash: Small return for opportunity cost, incentives to dream big, assume more risk Low Likely Clash: Run out of money, cramdown, premature sale BIOTECH (drug discovery) CLASSIC TELECOM (routers, CLECs) High Company Capital Requirements Small Large Fund Size

“Instant Company” vs. Organic Approach
Timelines, Competition Also Key Variables
Some Opportunities Require Big Money Up Front
Taking on public company
Making a market
Need critical mass for audience
Large capital requirement to finish R&D, prove concept, build infrastructure
Analogy: launching a rocket…you get there fast! But aim correctly!
Others Are Better Done in Stages
Greenfield opportunity with barriers to entry
Multiple market opportunities that need exploration
Multiple exit opportunities, friendly acquirers
Analogy: flying an airplane….slower than a rocket, easier to change course

Example Investment: Carbonite
Long-time friends of CEO
All-star team, 5 th company
Operational breakthrough on consumer backup
Rapid initial adoption
$2.6M 1 st Round, Oct ‘05
$3.5M 2 nd Round, Aug ’06
$15M 3 rd Round, Apr ‘07

Case Study:
Sloan MBA & Co-Founder
First-time CEO
Closely ties to market
Rapid initial adoption
$1.1M 1 st Round, All Angels, June ‘06
$6.0M 2 nd Round, 2 VCs + Angels, June ’07

http://www.webinnovatorsgroup.com	132
http://webinnovatorsgroup.com	27
http://www.slideshare.net	16
http://chrisarsenault.blogspot.com	2
http://static.slideshare.net	1
http://bootstrapping.ning.com	1

Angel & Venture Capital Finance: Where is the Money Moving?

by dbeisel

Accessibility

Categories

Upload Details

Usage Rights

6 Embeds 179

Statistics

Angel & Venture Capital Finance: Where is the Money Moving? Presentation Transcript