Raising Money from Angel Investors Oregon Entrepreneurs Network Webinar - Jan 29, 2009 Dennis Powers 503-292-3513 [email_address]

Agenda Who is an Angel Investor - and what motivates them to invest. Understanding Angel Investor realities. Where to find Angels. Investor readiness and preparation. The Due Diligence process. Criteria of an ideal Angel Deal.

Who is an Angel Investor - and what motivates them to invest.

Understanding Angel Investor realities.

Where to find Angels.

Investor readiness and preparation.

The Due Diligence process.

Criteria of an ideal Angel Deal.

The Funding Continuum Discovery Proof-of Concept Product Design Product Development Manufacturing/ Delivery Idea Pre-seed Funding Expansion/Mezzanine Source of Capital Friends and Family Angels Seed Funds Venture Funds Founder Institutional Equity Loans / Bonds Angel Groups Seed Funding Start-up Funding

Attributes of Angel Investors Often successful entrepreneur “ Accredited Investor”–regulatory assumption of financial sophistication and risk tolerance Expectation of financial reward Role in entrepreneurial process Involvement in entrepreneurial company: wisdom and expertise Community involvement Social responsibility Local businesses; regional investment

Often successful entrepreneur

“ Accredited Investor”–regulatory assumption of financial sophistication and risk tolerance

Expectation of financial reward

Role in entrepreneurial process

Involvement in entrepreneurial company: wisdom and expertise

Community involvement

Social responsibility

Local businesses; regional investment

Angels vs VCs $500K and above $25K to $1.5M Funding amounts Intense communications and coaching Open up rolodex, Help structure new financing or mergers Fire management Roll up sleeves and help to solve the problem, Open up rolodex Reaction to bad news Experience in managing growth Deep pockets Networks for additional capital Experience in managing IPO or sale exits Operational experience Common Sense advice Specific Industry expertise Long term value added 20% to 40% IRR 15 to 25% IRR Target Returns 3 to 5 years 5 to 7 years Target exit time Preferred Stock Common or Preferred Stock Occasionally convertible debt Investment vehicle Nearly developed product Some operating history with a strong experienced team Sustainable competitive advantage Personal chemistry with Mgmt Detail Plan with large markets Sustainable competitive advantage Key reasons to invest Regional, National, International depending on firm Regional, with in a 4hr drive Geographical focus Highly visible Prefer to only look at deals referred from their networks Prefer anonymity Reachable via referrals or groups Accessibility Mostly return driven But some adjustments for other VCs and Entrepreneurs Not just return driven Strong emotional component Often likes to be a coach, Bragging rights Motivation to Invest VC’s Angels

Not all Angels are alike LESS MORE LESS MORE Relevant Industry Experience Relevant Entrepreneurial Experience Operational Expertise Angel Guardian Angel Financial Return Angel Professional Entrepreneur Angel

Angel Investor Realities Statistically Angel Investors reject 80% of the deals presented Average outcomes of Investments made: 45% fail 40% are the “living dead” 15% are winners Since at the seed stage it is impossible to predict which ones will be winners ……………. Therefore, all portfolio companies must demonstrate the opportunity for a 20-30X return on investment.

Statistically Angel Investors reject 80% of the deals presented

Average outcomes of Investments made:

45% fail

40% are the “living dead”

15% are winners

Since at the seed stage it is impossible to predict which ones will be winners …………….

Therefore, all portfolio companies must demonstrate the opportunity for a 20-30X return on investment.

Finding Angels Friends and Family Other Entrepreneurs who you worked with in the past Services providers – Attorneys, Accounting firms, etc Oregon Angels Online Angel Groups Investment Conferences Its all about Networking! There are no short-cuts !

Friends and Family

Other Entrepreneurs who you worked with in the past

Services providers – Attorneys, Accounting firms, etc

Oregon Angels Online

Angel Groups

Investment Conferences

Northwest Angel Groups http://www.eugenechamber.com/bus_info/entre_resources.htm Eugene Lane Venture Forum www.sustainabilityangels.org Portland Oregon Sustainability Angels www.nwetc.com/nweangels.php Seattle Northwest Energy Angels www. oef .org/programs/win/ Portland Women's Investment Network www.zinosociety.com/ Seattle The Zino Society www. tacomaangelnetwork .com Tacoma Tacoma Angel Network www. seraphcapital .com/ Seattle Seraph Capital Forum www. pugetsoundvc .com Seattle Puget Sound Venture Club [email_address] .com Portland Portland Venture Group www. oef .org/programs/pan/ Portland Portland Angel Network OREGON ANGEL FUND www.keiretsuforum.com Seattle,Kirkland, Boise, Portland Keiretsu Forum (Seattle chapter) www. allianceofangels .com Seattle Alliance of Angels URL Location Angel Group

NW Investment Conferences www.willametteconference.com May 14, 2009 Willamette Angel Conference Website Typical Timing Conference www.oen.org Sept - Jan Seed Oregon www. oen .org November Venture NW www.bendvc.com/ October The Bend Venture Conference www.gorgeangelconference.com www.zinosociety.com/ May 19, 2009 September The Gorge Angel Conference The Zino Society Conference www.nwen.org/esif/esif.htm April/May Early Stage Investment Forum www. oen .org March 12,2009 Angel Oregon

How to prepare for Angel Investors Same as for any other funding source Well prepared business plan and due diligence documents Know your market! Size, competition, distribution, verticals, etc. Solid management Know your limitations and needs Advisors and/or board of directors Professional advisement and support -legal, accounting, etc.

Same as for any other funding source

Well prepared business plan and due diligence documents

Know your market! Size, competition, distribution, verticals, etc.

Solid management

Know your limitations and needs

Advisors and/or board of directors

Professional advisement and support -legal, accounting, etc.

What angel Investors Want A solid management team- angel investor is investing in people Team Brings Sector, Startup Skills A solid business plan- convincing and complete Novel (new) or disruptive business concept (may be regional) Sound and compelling IP Clear understanding of Competition and how to win A business structured for investment- Delaware ‘C’ corp.; formal shareholder’s agreement Scalable business Financial Projections that make sense for investors Realistic valuation A viable exit strategy- ongoing concern, or M&A, IPO not usually an option The potential for a solid return- 10-25X in 5-7yr

A solid management team- angel investor is investing in people

Team Brings Sector, Startup Skills

A solid business plan- convincing and complete

Novel (new) or disruptive business concept (may be regional)

Sound and compelling IP

Clear understanding of Competition and how to win

A business structured for investment- Delaware ‘C’ corp.; formal shareholder’s agreement

Scalable business

Financial Projections that make sense for investors

Realistic valuation

A viable exit strategy- ongoing concern, or M&A, IPO not usually an option

The potential for a solid return- 10-25X in 5-7yr

Investor Readiness “ Readiness” is all about preparation There are no short cuts At the end of the day the preparation is all about mitigating the concerns investors have about risk Risk areas include: Management Product Market Financial Investor Communication/Sales Tools Executive Summary Business Plan Elevator Pitch Investor Presentation

“ Readiness” is all about preparation

There are no short cuts

At the end of the day the preparation is all about mitigating the concerns investors have about risk

Risk areas include:

Management

Product

Market

Financial

Investor Communication/Sales Tools

Executive Summary

Business Plan

Elevator Pitch

Investor Presentation

The Executive Summary Contact name, address, phone numbers, e-mail address Business idea in clear language - avoid excessive technical information Management team, including executive team's track record List your advisors, significant investors, and board of director Clear description of product or service, including competitive analysis Describe the market to be served, including current size and growth rate Describe your sales & marketing strategies for reaching customers Discuss your company's unfair advantage Provide a brief income statement of sales & net income for next 3-5 years Discuss your funding strategy and how much money you are seeking ----now and in later rounds List the estimated percentage of ownership investors will receive Discuss your exit strategy

Contact name, address, phone numbers, e-mail address

Business idea in clear language - avoid excessive technical information

Management team, including executive team's track record

List your advisors, significant investors, and board of director

Clear description of product or service, including competitive analysis

Describe the market to be served, including current size and growth rate

Describe your sales & marketing strategies for reaching customers

Discuss your company's unfair advantage

Provide a brief income statement of sales & net income for next 3-5 years

Discuss your funding strategy and how much money you are seeking ----now and in later rounds

List the estimated percentage of ownership investors will receive

Discuss your exit strategy

Business Plan Executive Summary Business objectives Principal products or services Technology and development program Market and customers Management team Financing requirements Company description History and status Background and industry Company's objectives & strategies (briefly) Company's strategies Market Market summary and industry overview Market analysis and forecasts Industry trends Target Customers

Executive Summary

Business objectives

Principal products or services

Technology and development program

Market and customers

Management team

Financing requirements

Company description

History and status

Background and industry

Company's objectives & strategies (briefly)

Company's strategies

Market

Market summary and industry overview

Market analysis and forecasts

Industry trends

Target Customers

Business Plan (continued) Products Product description and comparisons Innovative features (patent coverage) Applications Technology Product development and R&D effort Product introduction schedule and major milestones Future products (product evolution) Competition/Competitive Position Sales and Marketing Channel strategy Sales and distribution model Customer plan Manufacturing/Operations (if appropriate) Service and field engineering (if appropriate) Facilities (if appropriate)

Products

Product description and comparisons

Innovative features (patent coverage)

Applications

Technology

Product development and R&D effort

Product introduction schedule and major milestones

Future products (product evolution)

Competition/Competitive Position

Sales and Marketing

Channel strategy

Sales and distribution model

Customer plan

Manufacturing/Operations (if appropriate)

Service and field engineering (if appropriate)

Facilities (if appropriate)

Business Plan (continued) Management and ownership Founders and key employees Stock ownership Organization and personnel Future key employees and staffing Incentives (stock option and stock purchase plans) Financial data and financial forecasts Assumptions used 3-year plan 5-year plan Capital required and use of proceeds Appendices Detailed management profiles References Product descriptions, sketches, photos Recent literature on product, market,

Management and ownership

Founders and key employees

Stock ownership

Organization and personnel

Future key employees and staffing

Incentives (stock option and stock purchase plans)

Financial data and financial forecasts

Assumptions used

3-year plan

5-year plan

Capital required and use of proceeds

Appendices

Detailed management profiles

References

Product descriptions, sketches, photos

Recent literature on product, market,

Elevator Pitch It’s the last thing you prepare but often the first contact with a potential investor The essence of your company An opportunity tell just enough to get an investor interested (usually a minute) Sets the stage for follow-up opportunity

It’s the last thing you prepare but often the first contact with a potential investor

The essence of your company

An opportunity tell just enough to get an investor interested (usually a minute)

Sets the stage for follow-up opportunity

Introduction The Anatomy of the 10 Minute Pitch* The Problem The Solution Market Size Revenue Model Sales Cycle Customers Partners Traction Advisory Board Management Competition {00:30 seconds} {02:30 seconds} {06:30 seconds} {08:30 seconds} {10:00 min.} Financials The Offer * Source - Alliance of Angels

The Angel’s Process Pre-screening Screening Due diligence Investment presentation Follow-up discussions and meetings Closing

Pre-screening

Screening

Due diligence

Investment presentation

Follow-up discussions and meetings

Closing

Purpose of Due Diligence Establishes that obvious issues are non-issues or addressable Uncovers issues you not have considered Allows you to get to know the founders Identifies key drivers critical to success Provides enough data for personal ROI analysis

Establishes that obvious issues are non-issues or addressable

Uncovers issues you not have considered

Allows you to get to know the founders

Identifies key drivers critical to success

Provides enough data for personal ROI analysis

Due diligence review covers: Corporate/Structure Organization Funding/Ownership Proposed Deal Financial Structure/ Financial model/ projections/ best and worse case scenarios Product/Service Customers Suppliers Regulatory/ Reimbursement Marketing/ Customer validation/ supplier Business strategy/ over all market/ competition IP and freedom to operate Entrepreneur/ team background

Corporate/Structure Organization

Funding/Ownership

Proposed Deal

Financial Structure/ Financial model/ projections/ best and worse case scenarios

Product/Service

Customers

Suppliers

Regulatory/ Reimbursement

Marketing/ Customer validation/ supplier Business strategy/ over all market/ competition

IP and freedom to operate

Entrepreneur/ team background

Investor Evaluation Process Individual Angels or Investor Groups based use many different methods for evaluation and analysis. All come down to the Evaluation of Risk: Management Risk Market Risk Product Risk Financial Risk

Individual Angels or Investor Groups based use many different methods for evaluation and analysis.

All come down to the Evaluation of Risk:

Management Risk

Market Risk

Product Risk

Financial Risk

Evaluation Questions Management Risk Strong domain experience? Functional Expertise? Startup company experience? History of execution and success in previous roles? Planned Key employee additions? Timing Current Advisors or existing Board members? Do they have “skin in the game”?

Management Risk

Strong domain experience?

Functional Expertise?

Startup company experience?

History of execution and success in previous roles?

Planned Key employee additions? Timing

Current Advisors or existing Board members?

Do they have “skin in the game”?

Evaluation Questions (cont.) Market Risk Is it a must have or like to have? Is the market itself healthy Size, Expected Growth rates? How is the market segmented? What is the target market/customers? What is the competitive environment? What companies currently service this market? What motivates buying decisions? What is the company’s competitive advantage? Is it too early or too late? Is there a feasible sales strategy How will the product be sold Direct vs Indirect? Are there planned/existing strategic partnerships?

Market Risk

Is it a must have or like to have?

Is the market itself healthy

Size, Expected Growth rates?

How is the market segmented?

What is the target market/customers?

What is the competitive environment?

What companies currently service this market?

What motivates buying decisions?

What is the company’s competitive advantage?

Is it too early or too late?

Is there a feasible sales strategy

How will the product be sold

Direct vs Indirect?

Are there planned/existing strategic partnerships?

Evaluation Questions (cont.) Product /Technology Risk Is the product/service clear? Stage of development Proof of concept, working prototype, Alpha, Beta, Pilot, or product launched? Is there customer validation? How will it be produced? Where? Is there Intellectual Property? Patents? Does the product demonstrate competitive advantages? Are they sustainable? What does the product roadmap look like?

Product /Technology Risk

Is the product/service clear?

Stage of development

Proof of concept, working prototype, Alpha, Beta, Pilot, or product launched?

Is there customer validation?

How will it be produced? Where?

Is there Intellectual Property? Patents?

Does the product demonstrate competitive advantages? Are they sustainable?

What does the product roadmap look like?

Evaluation Questions (cont.) Financing Risk Terms of the Deal Debt vs Equity? Valuation? Amount to be raised? Are they raising enough? Is there a cushion in the budget? Are milestones realistic for the amount raised? Follow on rounds of financing planned? What is the exit strategy? Does it look plausible?

Financing Risk

Terms of the Deal

Debt vs Equity?

Valuation?

Amount to be raised?

Are they raising enough? Is there a cushion in the budget?

Are milestones realistic for the amount raised?

Follow on rounds of financing planned?

What is the exit strategy? Does it look plausible?

Criteria for an Ideal Angel Deal Management team with relevant domain or startup successes Large, rapidly growing markets Unique products with proprietary technology or service offerings that meet customers' important needs Credible and balanced business plans including key execution milestones Clearly articulated sustainable competitive strategies Patents or other intellectual property barriers to entry Realistic, achievable financial projections, high return on investment (ROI) potential and clear exit strategy Reasonable valuation and investment terms A willingness to accept advice and coaching

Management team with relevant domain or startup successes

Large, rapidly growing markets

Unique products with proprietary technology or service offerings that meet customers' important needs

Credible and balanced business plans including key execution milestones

Clearly articulated sustainable competitive strategies

Patents or other intellectual property barriers to entry

Realistic, achievable financial projections, high return on investment (ROI) potential and clear exit strategy

Reasonable valuation and investment terms

A willingness to accept advice and coaching