OEN Webinar - Raising Money from Angel Investors, with Dennis Powers - Fall 2009

Raising Money from Angel Investors Oregon Entrepreneurs Network Webinar - Nov 4, 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.

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

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.

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 !

Northwest Angel Groups www.nwetc.com/nweangels.php $100 to apply $0 to present Seattle Northwest Energy Angels www. oef .org/programs/win/ $50 to apply $0 to present Portland Women's Investment Network www.zinosociety.com/ $0 to apply $6000 to present Seattle and Portland The Zino Society www.tacomaangelnetwork.com $0 to apply $250 to present Tacoma Tacoma Angel Network www.seraphcapital.com / $0 to apply $150 to present Seattle Seraph Capital Forum www. pugetsoundvc .com $0 to apply $150 to present Seattle Puget Sound Venture Club [email_address] $0 to apply $250 to present Portland Portland Venture Group www. oef .org/programs/pan/ $250 to apply $0 to present Portland Portland Angel Network And the OREGON ANGEL FUND www.keiretsuforum.com $0 to apply $6000 to present Seattle, Kirkland, Portland Keiretsu Forum (Seattle chapter) www. allianceofangels .com $45 to apply $30/Attendee Seattle Alliance of Angels URL Costs Location Angel Group

NW Investment Conferences www.oen.org Sept - Jan Seed Oregon www. oen .org November Venture NW www.bendvc.com October The Bend Venture Conference www.zinosociety.com September The Zino Society Conference www.willametteconference.com May Willamette Angel Conference www.gorgeangelconference.com May Gorge Angel Conference www.nwen.org/esif/esif.htm April Early Stage Investment Forum www. oen .org March 5, 2010 Angel Oregon Website Typical Timing Conference

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.

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

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

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

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

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)

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,

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

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

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

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

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

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”?

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?

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?

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

OEN Webinar - Raising Money from Angel Investors, with Dennis Powers - Fall 2009

by Oregon Entrepreneurs Network on Nov 09, 2009

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