Introduction to Angel Investing and Harvard Business School Alumni Angels of Greater New York

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Introduction to Angel Investing and Harvard Business School Alumni Angels of Greater New York

Introduction to Angel Investing and Harvard Business School Alumni Angels of Greater New York

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  • 1. Angel Investing 101 http://www.flickr.com/photos/roblee/133498854/ David Teten, Partner, ff Venture Capital Founder and Chair, Harvard Business School Alumni Angels of New York ffvc.com // @ffvc teten.com // @dteten photo by Aaron Patterson, http://www.flickr.com/photos/40875537@N04/5659908590/
  • 2. Intro Overview Evaluate Originate Structure Add Value Next Steps Don’t Take Notes! Download detailed slides at: teten.com/angel © 2014 David Teten. More at ffvc.com and teten.com
  • 3. Intro Overview Evaluate Originate Structure Add Value Next Steps Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 4. Intro Overview Evaluate Originate Structure Add Value Next Steps Average Angel Returns • Angel mean IRR ranges from 18% to 54% across twelve large studies with differing timeframes 1 • 47% of angel investments exited at a loss, vs. 64% of VC investments2 • Angel and VC rates of “home run” investments (IRR over 100%) are roughly equal 2 © 2014 David Teten. More at ffvc.com and teten.com 1 Historical Returns in Angel Markets, Right Side Capital Management, and other sources listed at http://techcrunch.com/2012/11/17/how-institutional-limited-partners-can-avoid-limited-returns/ 2 Is It Worth It?, Journal of Business Venturing, http://www.crab.rutgers.edu/~richmich/NVF%20Spring%202013/ROR%20on%20VC.pdf
  • 5. Intro Overview Evaluate Originate Structure Add Value Next Steps HBS Alumni Angels Global (HBSAlumniAngels.com): Progress Since 2007 • 10 chapters globally • Over 800 members invested in over 100 companies © 2014 David Teten. More at ffvc.com and teten.com
  • 6. Intro Overview Evaluate Originate Structure Add Value Next Steps HBS Alumni Angels of Greater NY (HBSNYAngels.com): Progress Since December 2010 • 150 members, second largest angel group in NY tri-state area by number of paying members • Investments range from $15K - $500K; median $25K, mostly convertible notes • $4m in total investments in 30 companies, $5m including affiliates • Monthly pitch nights with typically 4 companies/night • Launched Venture Capital Access Program, helping women and minority entrepreneurs meet members of our network © 2014 David Teten. More at ffvc.com and teten.com
  • 7. Intro Overview Evaluate Originate Structure Add Value Next Steps About HBS Alumni Angels of NY Members Requirements: • Be accredited investors. For an individual investor, this means individual net worth, or joint net worth with spouse, exceeds $1m; or individual income in excess of $200,000 in each of the two most recent years; or joint income with spouse in excess of $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year. • Budget to invest at least $25,000 per year in early-stage companies. This is a directional commitment, not binding. • Sign our Membership Agreement and join the HBSAANY. • Be Harvard affiliates (not necessarily HBS). Our members include venture capitalists, entrepreneurs, investment bankers, and other experienced businesspeople. © 2014 David Teten. More at ffvc.com and teten.com
  • 8. Intro Overview Evaluate Originate Structure Add Value Next Steps America’s Population by Ethnic Background 65% 35% 60% © 2014 David Teten. More at ffvc.com and teten.com 40% 56% 45% America’s Growth 51% 49% 46% 54% 2010 2020 2030 2040 2050 White Non-Hispanic “Diverse” Population United States Department of Commerce
  • 9. Intro Overview Evaluate Originate Structure Add Value Next Steps Venture Capital Access Program • Program geared to help minority and women entrepreneurs meet potential investors in the HBSAANY network. © 2014 David Teten. More at ffvc.com and teten.com
  • 10. Intro Overview Evaluate Originate Structure Add Value Next Steps ff Venture Capital (ffvc.com) • Institutional angel-stage technology fund, based in NYC • Extensive resources to support portfolio companies’ growth, with 24 employees • Invested in 74 companies out of 4 funds since 2008 • First investments typically $100-$500K at valuations of <$5m pre-money • Prominent investments include: Cornerstone OnDemand (IPO); Quigo Technologies (sold to AOL for reported $340m); Indiegogo; Interaxon; Klout; 500px; Plated © 2014 David Teten. More at ffvc.com and teten.com
  • 11. Intro Overview Evaluate Originate Structure Add Value Next Steps Select Emerging Growth $50mm + Valuation Acquired/IPO © 2014 David Teten. More at ffvc.com and teten.com acquired by ffVC companies create new industries
  • 12. Intro Overview Evaluate Originate Structure Add Value Next Steps David Teten (teten.com) • Partner, ff Venture Capital, early-stage technology venture capital fund • Founder and Chairman, Harvard Business School Alumni Angels of New York • Lead author of first-ever research study on best practices in private equity/venture capital deal origination • Lead author of first-ever research study on best practices of venture capitalists in increasing portfolio company value through operational support • Lead author, The Virtual Handshake: Opening Doors and Closing Deals Online • Harvard MBA 1998, Yale BA, both with honors. • @dteten © 2014 David Teten. More at ffvc.com and teten.com
  • 13. Intro Originate Structure Overview Evaluate Add Value Next Steps Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 14. Intro Originate Structure Overview Evaluate Add Value Next Steps US Angels commit $20+ billion per year, over $6 billion at seed or start-up stage $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 2004 2005 2006 2007 2008 2009 2010 2011 © 2014 David Teten. More at ffvc.com and teten.com VC Angel National Venture Capital Assoc 2012 Annual Report; New Hampshire Center for Venture Research Annual Market Analysis reports 2004-2011
  • 15. Intro Originate Structure Overview Evaluate Add Value Next Steps US Angels invest in 60,000+ companies every year 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Angel VC © 2014 David Teten. More at ffvc.com and teten.com National Venture Capital Assoc 2012 Annual Report; New Hampshire Center for Venture Research Annual Market Analysis reports 2002-2011 - 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
  • 16. Intro Originate Structure Overview Evaluate Add Value Next Steps Notable Angel-backed Startups © 2014 David Teten. More at ffvc.com and teten.com
  • 17. Intro Originate Structure Overview Evaluate Add Value Next Steps Why Angel Investing? • Exceptional time for entrepreneurship – Low cost of starting – Exploit seismic changes in technology • High historic returns – Permanent institutional arbitrage increases likelihood of continued high returns • Portfolio diversification – Uncorrelated alpha • Education and Meeting People – Work with passionate entrepreneurs, like-minded high net worth individuals, and VCs – Understand the future • Opportunity to be a mentor – Become board member / advisor / interim executive • Altruism – Promote entrepreneurship to build and support thriving communities © 2014 David Teten. More at ffvc.com and teten.com
  • 18. Intro Originate Structure Overview Evaluate Add Value Next Steps Requirements to be a Successful Angel • Large bank account – Need to weather losses and reserve capital for later rounds. • High risk tolerance – Most investments will fail. Don’t invest money you can’t afford to lose. 2 • Patience – Assets are illiquid and average time to exit is ~6 years. • Rigorous due diligence – A minimum of 40 hours per investment correlates with best returns.2 • Value-add – Top angels have relevant industry experience and are active advisors.2 • Diversified portfolio – You should be willing to make a minimum of 10 investments—better 20. If you lack anything above, avoid angel investing. © 2014 David Teten. More at ffvc.com and teten.com 3 Is It Worth It?, Journal of Business Venturing 2 Returns to Angel Investors in Groups, Kauffman Foundation
  • 19. Intro Originate Structure Overview Evaluate Add Value Next Steps Why join an angel group? • Higher returns! • Scale – more investment dollars • Collaboration re: due diligence • Industry/topic experts • Broad domain knowledge • Broader network as a resource for portfolio companies • More and higher quality deal flow • Make new friends © 2014 David Teten. More at ffvc.com and teten.com Susan Balloch, Golden Seeds
  • 20. Intro Originate Structure Overview Evaluate Add Value Next Steps Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 21. Intro Originate Structure Overview Evaluate Add Value Next Steps ff Venture Capital Decision Criteria • Team. We want to know what qualifies you to execute your idea successfully and better than the five other companies in your space: work history, network, and skills are all key. • Demo. We almost always require a demo, or at least a mockup. • Market. What is the problem, why does it exist, and how big is the opportunity? • Solution. Your value proposition: how you solve this problem faster, cheaper, smarter. • Business Model. How do you make money? Who pays, how much, from where? • Customer/user. Who they are and how many? How will you reach/acquire them? • Competition. Know every competitor and what are the current solutions to this problem, and why they aren’t addressing your market adequately. List the major competitors, understand their processes and what your competitive advantage is. • Financial Overview. What are the expected revenues, expenses, and EBITDA three years out? How long will this round’s cash last you? • Funding. How much are you raising and how are you going to use the money? To grow a team, to support overhead, to expand? How much have you raised thus far and from whom? • Milestones. What is your vision for the future, measured in milestones for the next 3 years? Note that in our board meetings, we will evaluate your progress against these milestones. © 2014 David Teten. More at ffvc.com and teten.com http://ffvc.com/resources/pitch/
  • 22. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 23. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Proprietary deal origination is critical for angels © 2014 David Teten. More at ffvc.com and teten.com Lower costs of startup + Online markets trying to create liquidity (Proseeder, Gust, Angel List) + Venture capital competition More Auctions à Winner’s Curse à Competing for the Lowest Return
  • 24. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Private information is more valuable than public information because of the leverage that discretion gives to the buyer. Buyer Power vs. Public Awareness of Transaction Info is private Few buyers © 2014 David Teten. More at ffvc.com and teten.com based on Robert Bruner, Applied Mergers & Acquisitions, page 186 Ability of buyer to intervene to tailor pricing & terms Info is public Many buyers Sweet spot of highest returns Higher returns Lower returns
  • 25. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity You earn higher returns by investing in people you know well. Mutual Fund Managers’ Excess Returns in Companies Run by College/Graduate School Classmates vs. All Other Companies © 2014 David Teten. More at ffvc.com and teten.com Excess return=total gain minus the Treasury bill return Connected Holdings=Stocks for which managers had the strongest connection to senior officials (same school at same time with same degree) Source: The Small World of Investing: Board Connections and Mutual Fund Returns; Lauren Cohen, Andrea Frazzini, and Christopher Malloy, 2008 Study of 2,501 portfolio managers of 1,648 actively managed equity funds that specialized in aggressive growth, growth, or growth and income stocks between January 1990 and December 2006
  • 26. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Investment Search Process (# Companies) Angel groups using Gust (2010)[i] © 2014 David Teten. More at ffvc.com and teten.com ff Venture Capital (2014)[ii] Typical entrepreneur Profiled initially 20,850 NA ~3-6 Target Selected 1,315 ~2,000 ~3 Met 1,047 ~1,000 NA Due diligence 577 ~20 2 Invested/launched 541 ~12-15 1 Deals as % 33.5% 0.6% 33% targeted (2.1% of companies submissions) [i] Available at http://angelsoft.net/a/venture-valuation , as of twelve months ending March 17, 2010. [ii] David Teten.
  • 27. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Intermediaries refer deals to investors primarily in the hopes of future revenues. Top Reasons Intermediaries Refer Deals to Investors • Possibility of future revenue • Integrity • High certainty to close • Responsiveness • “Fair” treatment of sellers • Experience with the industry or owner type • Friendship • Candid feedback • Maintaining a single point of contact © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/extranoise/3382930813/ (descending order of importance)
  • 28. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Differentiation makes origination more efficient. Selected Highly Differentiated Investing Strategies Strategy Example Co-investments with corporates Blackstone Group, Castle Harlan, Clayton © 2014 David Teten. More at ffvc.com and teten.com Dubilier & Rice Executive-led transactions Frontenac Company, GTCR, Housatonic Partners Intellectual property Intellectual Ventures Spinning out processes from within Fortune 500 companies and setting Exigen Capital them up as independent ventures Deep focus from early to late stage in narrow vertical Andreessen Horowitz, Healthpoint Capital Minority-owned businesses AP Capital, ICV Capital Partners Women-owned businesses Hypatia Capital Family-owned businesses Heritage Partners Film financing Relativity Media Buying Western companies and outsourcing operations to China Crimson Ventures Distressed Searchlight Capital
  • 29. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social media technologies are pertinent throughout the investing cycle. How Investors Are Using Social Media Investing Cycle Use of Social Media Raise capital • Identify value-added potential investors & find a path to them • Solicit past investors in both your prior and comparable funds Originate investments • Identify and reach out to relevant people & companies • Become a magnet for investment opportunities Due diligence • Review professional and personal lives of management • Talk with firm’s network: customers, competitors, suppliers Negotiate Deal • Gain insight into counterparty’s negotiating style, motivations Improve • Recruit “A” performers operations • Accelerate sales and marketing Exit investment • Identify and more effectively negotiate with strategic acquirers © 2014 David Teten. More at ffvc.com and teten.com
  • 30. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Corporate Network Valuation Formula Ch = Character Co = Your Firm’s Competence R = Relevance of the contact S = Strength of your relationship I = Information N = Number of people D = Diversity = D * Σ (Chn*Con *Rn* Sn*In) © 2014 David Teten. More at ffvc.com and teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com) N n=1
  • 31. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Biography analysis software allows you to search by common affinity and more effective subsequent outreach. Leading Providers of Biography Analysis Data • Boardex • Identified* • Klout* • LinkedIn • Saleforce Data.com • Pipl • ZoomInfo © 2014 David Teten. More at ffvc.com and teten.com * ff Venture Capital portfolio company
  • 32. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Case study: A set of angel investors sourced a transaction and invested $8m via an alumni email list. • Daniel Zumino, founder of BCG Paris and angel investor, had made a small investment in a startup • November 1999: He sent email to Stanford GSB alumni list seeking capital for the startup • March 2000: Raised $8m through referral from alumni, via this list service © 2014 David Teten. More at ffvc.com and teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (TheVirtualHandshake.com)
  • 33. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity 10-15% of the active VC population of 1,000 blog and tweet. Top VC Blogs, Average Monthly Unique Views (4Q10) Paul Graham, YCombinator Essays Fred Wilson, Union Square Ventures Mark Suster, GRP Partners Brad Feld, Foundry Group Chris Dixon, Founder Collective David Skok, Matrix Partners Charlie O’Donnell, First Round Capital Larry Cheng, Volition Capital Dave McClure, Founders Fund Ben Horowitz, Andreesen Horowitz © 2014 David Teten. More at ffvc.com and teten.com 0 20,000 40,000 60,000 80,000 100,000 120,000 Jeff Bussgang, Flybridge Capital Partners . http://www.pehub.com/59953/why-do-vcs-blog-and-tweet/ . http://techcrunch.com/2011/01/19/top-20-vc-bloggers/ Jeremy Liew, Lightspeed Ventures Partners
  • 34. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Best Practices in VC Blogging (written humorously, but still good advice) Hi, I’m a tech VC on Twitter (by Rob Go, NextView Ventures) Hi, I’m a tech VC on Twitter. I’m @xyzvc My icon is cool. It’s a painting/cartoon/wacky photo. Shows that I’m hip and approachable. But when I meet with you, I’ll still crush your dreams. I tweet about technology, but occasionally post personal stuff. Important to show I have a sensitive side and care about more than just making tons of dough. I use # tags, sometimes as a funny form of emphasis. Kind of like a wink and a smile ;) #donttakethisposttooseriously I love Twitter because I can broadcast my blog posts. Otherwise, no one would read them! I blog at xyzvc.com! I tweet blog posts with advice on fundraising, customer acquisition, and company building. Usually, someone really smart has said it before and said it better. But I haven’t been in Hacker News for a while, so I figured there is no harm reinventing the wheel. Retweeting is fun. It’s like a virtual high-five. I retweet the posts of my partners, coinvestors, and entrepreneurs I’ve backed. Oh, I also retweet posts from guys whose butts I’m currently kissing so that they will like me. I really hope @fredwilson retweets this… I’d get so many new followers! My portfolio companies are the best. I will share so much of their good news with you it will make you want to unfollow me (unless you are a co-investor, in which case you will probably RT and add a #) If a portfolio company is doing bad, no Twitter love. It’s like going to Disneyworld and trying to find Hercules or Mulan. It’s like they never existed. I also tweet about the cool places I’ve been (via Foursquare and Gowalla), things I buy (via Swipely and Blippy), and the cool places I’m going to go (via Plancast). Wow, that’s a lot of tweeting! That’s why I also tweet about how busy I’ve been and how little I’ve slept. It’s a tough life. Full disclosure, I’ve been a tech VC and I’ve done most of these things. © 2014 David Teten. More at ffvc.com and teten.com http://www.robgo.org/post/890368565/hi-im-a-tech-vc-on-twitter
  • 35. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Search engine optimize yourself. • Scan targets’ sites to understand the language that they use when searching. • Use keywords inconsistently. • Name what you’re selling. • Optimize top of the page. • Use Google Adwords Keyword Tool © 2014 David Teten. More at ffvc.com and teten.com http://flickr.com/photos/neilt/2517652/sizes/o/ Search Engine Optimization 101
  • 36. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Using multiple media channels promotes stronger trust-building. • Phone • Email • Web conferencing • Instant messaging • Internet telephony (e.g., Skype) • SMS • Twitter © 2014 David Teten. More at ffvc.com and teten.com Caroline Haythornthwaite, “Strong, Weak, and Latent Ties and the Impact of New Media,” The Information Society, 18 ( 2002) 385–401. http://flickr.com/photos/re-ality/41676755/ Major Media Channels for Origination (descending order of importance)
  • 37. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Meetup creates opportunities to meet face-to-face. © 2014 David Teten. More at ffvc.com and teten.com
  • 38. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Effective originators are data hounds Tools for Assimilating Data into Your Contact Relationship Management (CRM) System Data source Selected technology for inserting data into CRM Business FullContact Cards Emails Evercontact, FullContact, RelateIQ Cloud LinkedIn, Plaxo CRM Act, Salesforce, RelateIQ © 2014 David Teten. More at ffvc.com and teten.com
  • 39. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Originators use blog and web readers to filter the data deluge, such as Bottlenose*. © 2014 David Teten. More at ffvc.com and teten.com * ff Venture Capital portfolio company
  • 40. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Use Copromote* to amplify your message via Facebook, Twitter, and Tumblr to millions of new people. © 2014 David Teten. More at ffvc.com and teten.com *ffVC portfolio company
  • 41. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Investors can connect with one another via online gated communities. Sample Gated Communities for Investors Angel Group Platforms Angel Communities Mid-Market Private Public Gust AngelList Assoc. for Corporate © 2014 David Teten. More at ffvc.com and teten.com Growth Albourne Village Proseeder CircleUp Axial FT Alphaville Long Room FundersClub Intralinks Deal Nexus Sum Zero OurCrowd MergerMarket Value Investors Club SeedInvest
  • 42. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Senior executives prefer to interact online behind barriers to more junior people, just as they do in traditional networks. Sample Gated Communities for Executives • IERG Online • Executive Forum • INMobile • Sermo • Some LinkedIn groups © 2014 David Teten. More at ffvc.com and teten.com
  • 43. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity And everyone else is online too. Online Community Platforms • Yahoo Groups • Google Groups • LinkedIn © 2014 David Teten. More at ffvc.com and teten.com • Ning • Xing
  • 44. Intro Originate Structure Overview Evaluate Add Value Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Take one step • By technology • By industry • By geography • By personal characteristics • By market © 2014 David Teten. More at ffvc.com and teten.com http://flickr.com/photos/extranoise/169187125/sizes/
  • 45. Intro Originate Structure Overview Evaluate Add Value Next Steps Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 46. Intro Originate Structure Overview Evaluate Add Value Next Steps How to Structure Your Portfolio • Compare vs. size of overall portfolio: typically cap at 20% • Target at least 10-12 investments. Assume: – 30-40% total loss – 30-40% breakeven and illiquid – 20-30% positive return • Diversify by industry, risk, and duration © 2014 David Teten. More at ffvc.com and teten.com Susan Balloch, Golden Seeds
  • 47. Intro Originate Structure Overview Evaluate Add Value Next Steps Shortcuts to Structuring a Deal • Do not lead your first few deals; join the syndicate of a more experienced investor • Read Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist, by Brad Feld and Jason Mendelson • Use a template term sheet, e.g., National Venture Capital Association Model Legal Documents and the Wilson Sonsini Term Sheet Generator • Build your own financial model of at least the cap table; see teten.com/finance for some templates . © 2014 David Teten. More at ffvc.com and teten.com
  • 48. Intro Originate Structure Overview Evaluate Add Value Next Steps Choose the right terms to optimize • Pre-money valuation is just one term of many, and probably not the most important. • Other key terms, in declining order of importance: – Vesting period for founders – Redemption option, typically after 5-7 years – Liquidity option, e.g., liquidation preference and a participating preferred structure – Investor protective provisions, e.g., and anti-dilution protection – Board seat © 2014 David Teten. More at ffvc.com and teten.com http://pasadenaangels.com/2011/02/the-truth-about-early-stage-pre-money-valuations/
  • 49. Intro Originate Structure Overview Evaluate Add Value Next Steps #1 area of concern: Founder(s) Incentives 1. Allocation of Equity 2. Stock Vesting 3. Power issues – Titles, etc. 4. IP issues – relationship with past employers? Ownership of outsourced work? 5. Board Seats 6. Employment Agreements © 2014 David Teten. More at ffvc.com and teten.com Tom Cervantez and Cecily Anne O’Regan, Business Counsel Law Group
  • 50. Intro Originate Structure Overview Evaluate Add Value Next Steps Review the Company’s IP (which is usually valueless at launch) Sui Generis © 2014 David Teten. More at ffvc.com and teten.com Patents The Enterprise Trade-marks Copy-rights Trade Secret Tom Cervantez and Cecily Anne O’Regan, Business Counsel Law Group
  • 51. Intro Originate Structure Overview Evaluate Add Value Next Steps How to value a startup: you can’t • Valuation is based on negotiation, not calculations. • Benchmark against companies at a similar stage of development. – Revenues? – # Employees – # Customers – Traffic © 2014 David Teten. More at ffvc.com and teten.com
  • 52. Intro Originate Structure Overview Evaluate Add Value Next Steps Checklist for discussing the next round • When? • How much? • Who should lead? • How can I help the entrepreneur? • Should I follow on? © 2014 David Teten. More at ffvc.com and teten.com Dan Rosen, Commerce Ventures
  • 53. Intro Originate Structure Overview Evaluate Add Value Next Steps Phase of Startup Development Needs FTE Management Milestones Early Development to Proto/Beta (12 months) - Tight linkage between development & business goals - Focus - Excellent people © 2014 David Teten. More at ffvc.com and teten.com 1 to 10 CTO and GM Working prototype, beta installations Early Customer Deployments (24 months) - 100% dedication to customer satisfaction - Cheerleading and endurance 5 to 20 CTO, VP Eng, Dir’s of Sales, Finance, Marketing GM/CEO Customer approval, some revenue Moderate Penetration (36 months) Savvy Management 20 to 50+ CTO, VP Sales, Marketing, Finance, Engineering, CEO Clear target market, Repeatability of business, real product, real customers Rapid Penetration (60 months) Excellent Management Growth to 100’s All VP’s, CFO, COO if necessary 1/3 to ½ of all new sales in target markets Dominance Greed and Ego Big Domestic and Worldwide Clear #1 player http://www.slideshare.net/Hukshorn/valuation-14854407
  • 54. Intro Originate Structure Overview Evaluate Add Value Next Steps Questions, Capital, Valuations Question to answer with © 2014 David Teten. More at ffvc.com and teten.com capital Capital needed Sources Pre- Money Seed: Early Development Proto/Beta Technology: does it work at all? Market: is there a market? Timing: if a market, when does it start? < $1M usually <$500K - Friends, Family, Fools - Angels - Seed Funds $100K to $1M 1st Round: Early Customer Deployment Technology: does it work in practice? Target market: is this the right first place? Timing: if a market, when does it start? $1M to $4M - Angels - Seed Funds - Early Stage Funds $2M to $5M 2nd and 3rd Round: Moderate Penetration Market timing: is the market happening fast enough (or too fast)? Execution: can we grow, develop, sell, manage, etc.? $5M to $15M - Early Stage Funds - Later Stage Funds - Corporate Investors - Venture Leasing $10M to $50M Mezzanine and IPO: Rapid Penetration Execution: can you grow fast enough without loosing control? $0 to $100M - Corporate Investors - Mezzanine Funds - iBanks - Leasing $40M to $100M+ Dominance Complacency: with so much success can you continue being paranoid? Corp. finance - iBanks - Commercial Banks - Et al. Public Market http://www.slideshare.net/Hukshorn/valuation-14854407
  • 55. Intro Originate Overview Evaluate Structure Add Value Next Steps Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 56. Intro Originate Overview Evaluate Structure Add Value Next Steps 7 levers of value creation (“TOPSCAN”) Team-Building Growing a startup’s human infrastructure Operations Enhancing admin, accounting, legal and © 2014 David Teten. More at ffvc.com and teten.com technological capabilities Perspective Strategy, competitive positioning, defining the target market, and scoping the product. Skill-Building Building the right skills and ensuring they develop with the company’s life cycle Customer Development Identifying the right customers and gaining access to them Analysis Helping entrepreneurs measure, understand and report the performance Network Providing access to the investor’s typically very large network
  • 57. Intro Originate Overview Evaluate Structure Add Value Next Steps Investor’s Demeanor Insecurity = Distraction I’m thinking of investing $X Unsaid: but I usually invest $X/2 I’ll ask my friends to try your product later © 2014 David Teten. More at ffvc.com and teten.com • Inflating $X motivates entrepreneurs to misallocate time • Due diligence is about an investor making an efficient decision, not about playing entrepreneur-lite • Someone has to be first. If you are hedging why did you invest? Confidence = Adding value I can invest $X. My decision criteria is Y I’ll email/ tweet / blog / re-tweet • $X is historically accurate and reflects real risk-appetites • I’m part of the team • Network effects almost always matter • I do what I reasonably can to help bootstrap Source: Michael Ibrahim, CEO, Whisk
  • 58. Intro Originate Overview Evaluate Structure Add Value Next Steps Investor’s Advice Actions = Adding value I’m a board member of public company Z – if you give me a 2 page proposal I’ll share with the board I have time, if helpful I can take a turn at your project/deck/article © 2014 David Teten. More at ffvc.com and teten.com Source: Michael Ibrahim, CEO, Whisk Ideas = Rarely adding real value • Wow! • Rarely do investors have this much time…but if you do, offer You should get an article in the NY Times You should raise more money You should have a deal with Google Your product should do Z • No sh*t – help make it happen please! • Maybe you have an “Aha!” so do share – but don’t presume you understand the 5k competing priorities in the roadmap
  • 59. Intro Originate Overview Evaluate Structure Add Value Next Steps Investor’s Connections © 2014 David Teten. More at ffvc.com and teten.com Source: Michael Ibrahim, CEO, Whisk Intros = The most effective way an investor can create value But even these can go slightly wrong Please send a deck to W, he might want to invest Unsaid: sorry I didn’t check with you first Please meet Mr. X, analyst at firm Q Unsaid: sorry I didn’t check with you first • Don’t promise company assets, it undermines our ability to qualify prospects • Whoops! I had an intro to a decision maker but just got tied up with a gate-keeper This person could fill a gap in your team Give me a blurb and I’ll intro you to these 3 Series A investors Would you like to talk to company Z? I know the CEO and could imagine a BD deal • Yes!
  • 60. Intro Originate Structure Overview Evaluate Add Value Next Steps Agenda: Introduction to Angel Investing • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps © 2014 David Teten. More at ffvc.com and teten.com http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  • 61. Intro Originate Structure Overview Evaluate Add Value Next Steps How You Can Get Involved with HBS Alumni Angels • Join! • Take a leadership volunteer role. We’re seeking leaders for marketing and in other capacities. • Promote membership in the HBS Alumni Angels to your friends and colleagues. • Recruit companies seeking funding to visit HBSAlumniAngels.com and apply to us for funding. • Provide analytic resources. If you have access to MBA-level research talent, we have a number of research projects in queue. • Introduce us to sponsors. We are particularly interested in service providers; corporate sponsors interested in attracting startups in their industry; and a sponsor to broadcast our events. • Promote us to the media. © 2014 David Teten. More at ffvc.com and teten.com
  • 62. Intro Originate Structure Overview Evaluate Add Value Next Steps © 2014 David Teten. More at ffvc.com and teten.com Any questions ? slides at teten.com/angel Sign up for our mailing lists at ffvc.com HBSNYAngels.com teten.com Twitter: @ffvc @HBSAngelsNY @dteten
  • 63. Intro Originate Structure Overview Evaluate Add Value Next Steps Disclaimer This Presentation is for the exclusive use of the recipients to whom it is addressed. References to the “Presentation” includes any information which has been or may be supplied in writing or orally in connection with the Presentation or in connection with any further inquiries in respect of the Presentation. This Presentation is not intended to serve as basis for any investment decision. While the information contained in this Presentation is believed to be accurate, the Preparers have not conducted any investigation with respect to such information. The Preparers expressly disclaim any and all liability for representations or warranties, expressed or implied, contained in, or for omissions from, this Presentation or any other written or oral communication transmitted to any interested party in connection with this Presentation so far as is permitted by law. In particular, but without limitation, no representation or warranty is given as to the achievement or reasonableness of, and no reliance should be placed on, any projections, estimates, forecasts, analyses or forward looking statements contained in this Presentation which involve by their nature a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied in this Presentation. By its acceptance hereof, each recipient agrees that none of the Preparers nor any of their respective Representatives shall be liable for any direct, indirect or consequential loss or damages suffered by any person as a result of relying on any statement in or omission from this Presentation, along with other information furnished in connection therewith, and any such liability is expressly disclaimed. Except to the extent otherwise indicated, this Presentation presents information as of the date hereof. The delivery of this Presentation shall not, under any circumstances, create any implication that there will be no change in the affairs of ff Venture Capital or HBS Alumni Angels after the date hereof. In furnishing this Presentation, the Preparers reserve the right to amend or replace this Presentation at any time and undertake no obligation to update any of the information contained in the Presentation or to correct any inaccuracies that may become apparent. This Presentation shall remain the property of ff Venture Capital and HBS Alumni Angels. This Presentation does not constitute a recommendation regarding the shares in ff Venture Capital or HBS Alumni Angels. No securities commission or regulatory authority in the United States or in any other country has in any way opined upon the accuracy or adequacy of this Presentation or the materials contained herein. This Presentation shall not form the basis of any contract. The distribution of this Presentation in certain jurisdictions may be restricted by law and, accordingly, recipients of this Presentation represent that they are able to receive this Presentation without contravention of any unfulfilled registration requirements or other legal restrictions in the jurisdiction in which they reside or conduct business. Date at your own risk. © 2014 David Teten. More at ffvc.com and teten.com
  • 64. Intro Originate Structure Overview Evaluate Add Value Next Steps Appendix © 2014 David Teten. More at ffvc.com and teten.com
  • 65. Intro Originate Structure Overview Evaluate Add Value Next Steps Geo Time Period Study © 2014 David Teten. More at ffvc.com and teten.com Total Investments Exited Investments IRR US 1994 - present Band of Angels Website FAQ 240+ 63 54.0% US 2010-11 Sohl: “The Angel Investor Market in 2011: The Recovery Continues” Unknown Unknown 18-28% US 2009-10 Sohl: “The Angel Investor Market in 2010: A Market on the Rebound” Unknown Unknown 24-36% US 2008-09 Sohl: “The Angel Investor Market in 2009: Holding Steady but Changes in Seed and Startup Investments” Unknown Unknown 23-38% US approx 2004-09 DeGennaro & Dwyer: "Expected Returns to Angel Investors" 603 434 33.0% UK 2000-08 Wiltbank: "Siding with the Angels: Business angel investing - promising outcomes and effective strategies" 1080 406 24.6% US 2007-08 Sohl: "The Angel Investor Market in 2008: A Down Year in Investment Dollars But Not in Deals" Unknown Unknown 22.0% US 2006-07 Sohl: "The Angel Investor Market in 2007: Mixed Signs of Growth" Unknown Unknown 27.7% US 1990-07 Wiltbank & Boeker: "Returns to Angel Investors in Groups" 3,097 1,137 31.4% US approx 1999-07 Villalobos & Payne: "Startup Pre-Money Valuation: The Keystone to Return on Investment" 117 117 24.3% UK 1961- 1996 Mason & Harrison: "Is it worth it? The rates of return from informal venture capital investments" 372 128 37.4% Average Angel Returns from Twelve Studies Historical Returns in Angel Markets, Right Side Capital Management, and other sources listed at http://techcrunch.com/2012/11/17/how-institutional-limited-partners-can-avoid-limited-returns/
  • 66. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels of Greater New York Mission • The mission of the HBS Alumni Angels of Greater New York is to accelerate the growth of the tristate early-stage company ecosystem, primarily by enabling Harvard alumni to invest in startup companies and earn healthy returns. We invest in companies regardless of whether or not they have any Harvard affiliation. • Our related goals: – Establish a financially sound, self-sustaining organization that will be a permanent contributor to angel investing, HBS, and entrepreneurship. – Provide on-going education opportunities to the HBS community on angel investing and entrepreneurship, including via seminars and events – Promote HBS as a leader in entrepreneurship. – Promote relationship building between HBS alumni, HBS faculty, and current HBS students with an interest in early stage ventures and angel investing. © 2014 David Teten. More at ffvc.com and teten.com
  • 67. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels Global Mission • The mission of HBS Alumni Angels Global is to provide an educational and networking forum for Harvard alumni who are interested in researching and investing in early stage companies on an individual basis. Other goals of the HBS Alumni Angels include: – Providing long lasting relationships between Harvard alumni and Harvard overall for fundraising, governance, and promotion of entrepreneurship and angel investing that is critical to establishment of Harvard as a leader in entrepreneurship – Providing on-going education opportunities via seminars and events relevant to Harvard alumni interested in angel investing – Providing relationship building between current Harvard students and Harvard alumni with an interest in early stage ventures and angel investing – Providing mentoring and judging for business plans in the student and alumni business plan competitions – Establishing HBS Angels as the leading point of contact for interaction with Harvard on matters relevant to angel investing and entrepreneurship – Establishing a financially sound, self-sustaining organization that will be a long-time contributor to Harvard, entrepreneurship, and angel investing © 2014 David Teten. More at ffvc.com and teten.com
  • 68. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels NY Process • HBSAANY promotes submission of business plans and chooses among submissions approximately 4-8 to present at each pitch night. • Alumni invest individually; HBS Angels NY helps to coordinate. • HBSAANY as a group makes no recommendations for investment and does not organize any group investments. • Recently launched Fast Track program for angel deals which are >50% closed and need some angels to fill out a round. © 2014 David Teten. More at ffvc.com and teten.com
  • 69. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels NY: Deals Completed through April 2013 • Kindara for iPhone: fertility charting. Simple data entry and an easy to understand graph make charting a woman’s cycle as easy as a tap of the screen. • Closed October 2012 • $15,000 invested in total (by HBSAANY member) • Recently passed the 65,000-download mark and are now routinely ranked in the top 30 Medical apps on the iOS App Store. • AxioMed: develop products with a goal of restoring spinal function to patients with degenerative spine disease; thus advancing the standard of care beyond fusion and first generation artificial discs • Closed January 2012 • $323,350 invested in total • $269,680 invested by HBSAANY members • Recently introduced its Freedom® Cervical Disc in Europe with a successful implantation in Switzerland. © 2014 David Teten. More at ffvc.com and teten.com
  • 70. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels NY: Deals Completed through April 2013 • Immunome: identifies immune therapies against cancer stem cells by studying the immune responses that cancer patients make against their own tumors. • Closed December 2011 • $25,000 invested in total (by HBSAANY member) • The company has raised $630,000 from a consortium of Angel Investors that included the Mid-Atlantic Angel group. • Mirror Digital is a technology-driven media and advertising company. • Closed March 2013 • $100,000 invested in total • $75,000 invested by HBSAANY members © 2014 David Teten. More at ffvc.com and teten.com
  • 71. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels NY: Deals Completed through April 2013 • Centzy simplifies your daily life by providing accurate prices, reviews, hours, and ratings all in one place so you can make smart decisions. • Closed March 2013 • $225,000 invested in total • $25,000 invested by HBSAANY member • RouteHappy helps flyers discover and share better ways to fly. Real flyers share ratings, tips, details and photos about their flight experiences on our website and iPhone app. • Closed March 2012 • $150,000 invested (by affiliate or referral) © 2014 David Teten. More at ffvc.com and teten.com
  • 72. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels NY: Deals Completed through April 2013 • Let’s Gift It is the leading platform for social gifting providing online retailers with the tools and services to optimize the group buy. • Closed December 2011 • $15,000 invested in total (by affiliate or referral) • Kogeto invented consumer panormamic capture with Lucy, the world's most advanced panoramic video camera, and put immersive media in your pocket with Dot, the world's smallest panoramic video lens for the iPhone 5/4/4S. • Closed September 2012 • $795,000 invested in total • $500,000 invested by HBSAANY members © 2014 David Teten. More at ffvc.com and teten.com
  • 73. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels NY: Deals Completed through April 2013 • Cytopherx is a venture-backed, clinical stage medical device company addressing inflammation-based diseases and conditions with a proprietary selective cytopheresis system. • Closed June 2011 • $798,493 invested in total (by HBSAANY members) • TigerTrade provides buyers, suppliers, and service providers around the world with the opportunity to explore new markets and build durable, trusted business relationships online. • Closed July 2012 • $25,000 invested in total (by HBSAANY member) © 2014 David Teten. More at ffvc.com and teten.com
  • 74. Intro Originate Structure Overview Evaluate Add Value Next Steps HBSAANY Deal Funnel Total # of Applications: 900 © 2014 David Teten. More at ffvc.com and teten.com Pitch Night: 56 6% Invested: 9 1% data from March ‘11 through March ‘13
  • 75. Intro Originate Structure Overview Evaluate Add Value Next Steps HBSAANY Applications by Industry Industry Applications Percentage # Internet/Web Services 217 24% 4 Consumer Products/Services 89 10% 2 Media & Entertainment 52 6% Financial Services 44 5% Mobile 43 5% Food/Drink 38 4% SoHware 38 4% Business Products & Services 36 4% Healthcare Services 34 4% Clean Technology 29 3% EducaPon 29 3% Fashion 22 2% Retailing/DistribuPon 22 2% Biotechnology 20 2% 1 Medical Devices 20 2% 2 MarkePng/AdverPsing 19 2% 1 All Other 146 16% © 2014 David Teten. More at ffvc.com and teten.com Funded data from March ‘11 through March ‘13
  • 76. Intro Originate Structure Overview Evaluate Add Value Next Steps HBSAANY Member Interest by Industry © 2014 David Teten. More at ffvc.com and teten.com data from March ‘11 through March ‘13
  • 77. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels Global Educational Curriculum • Webinars – Monthly live: $10 for members, $35 for non-members – Call recording & materials distributed to attendees • Other programs – Educational Content (Cases, Videos, etc…) – Local Sessions © 2014 David Teten. More at ffvc.com and teten.com
  • 78. Intro Originate Structure Overview Evaluate Add Value Next Steps HBSA Global Notable Speakers • Kirsten Green (Birchbox, Bonobos, Hotel Tonight, Serena & Lily, Warby Parker) • Thomas Korte (Crittercism, MoPub, Postmates) • Nihal Mehta (AdMob, GreyStripe, Thumb) • Matt Ocko (BranchOut, XenSource, Zynga) • Dave Samuel (About.me, Cardpool, Recurly) • Tom Cervantez (Friendster, GeoNet, OpenTable) • More to come… © 2014 David Teten. More at ffvc.com and teten.com
  • 79. Intro Originate Structure Overview Evaluate Add Value Next Steps HBS Alumni Angels Planned Educational Curriculum HOW TO: • Sourcing • Due Diligence • Evaluating Teams • Market Research • Value Add • Deal Terms • Exits © 2014 David Teten. More at ffvc.com and teten.com SECTOR REVIEWS: • E-Commerce • Mobile • Big Data • SaaS OTHER TOPICS • Angel Investing 101 • Incubators & Accelerators • “State of the Union”