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Building an Angel Investment Portfolio

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Talk given at the Angel Capital Expo presented by Coachella Valley Angel Network and Keiretsu Forum at UCR Palm Desert Graduate Center

Talk given at the Angel Capital Expo presented by Coachella Valley Angel Network and Keiretsu Forum at UCR Palm Desert Graduate Center

Published in: Economy & Finance, Business

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  • 1. Building An Angel Investment Portfolio David Hehman [email_address] February 26, 2009
  • 2. Who is the NBA and Who am I ?
    • North Bay Angels
      • Founded 11 years ago
      • Located in Sonoma County
      • 66 members
    • David Hehman
      • Lifetime entrepreneur
      • Angel investing for 12+ years
      • Focus is seed stage Internet businesses
      • Publish www.spartina.com for Internet entrepreneurs
  • 3. Why Build a Portfolio?
    • Risky business – high risk alternative investment
    • Lack of proper diversification could cause complete loss of capital
    • Hits driven business, but don’t know which ones!
    • How much diversification and how big a portfolio to build are individual decisions
  • 4. Start with Asset Allocation
    • Determine your own personal asset allocation to angel investing.
      • Meet with your financial advisor?
      • Can you afford to lose these funds?
      • Does your spouse/partner agree?
  • 5. Time
    • Need to be indifferent to timing of angel returns
      • Expect 3-7 year wait
      • Often additional investment required (hitting a wall) or desired (looks like a winner)
      • Lack of cash flow from these investments – need other income sources
      • Divide your $ allocation by time by deal size
  • 6. Example Angel
    • Individual (John Smith) has a net worth of $10 million
    • Decides to allocate 10% ($1 million) to an angel portfolio
    • Expects to make 20 investments to gain portfolio diversification, so average investment is $50,000 (initial + follow-on)
    • Plans to invest in 4 deals per year, so 5 years for investments plus 3-7 years for exits
  • 7. Hypothetical Returns for John
    • Results highly skewed toward winners
    • Strike outs likely to come early
    • Some deals remain “walking wounded”
    Outcome Percentage Deals $ Returned Home runs (10x+) 10% 2 $1,000,000 Triples/Doubles (3x) 20% 4 $1,200,00 Singles (2x) 30% 6 $600,000 Strike outs (0) 40% 8 $0 Total 100% 20 $2,800,000
  • 8. Returns of Angel Groups
    • Recent study of 539 angels with information on 1,137 exits
      • Average return was 2.6 times investment in 3.5 years – approx. 27% IRR
      • Distribution varied
        • 52% of all exits returned less than capital invested
        • 7% of exits achieved returns of more than 10x money invested, accounting for 75% of total investment dollar returns
  • 9. Great Deal Flow = Better Selection = Higher Returns?
    • Classmates
    • Entrepreneurs – they tend to know others
    • Lawyers – my favorite
    • Accountants
    • Other angels – find people you like to invest with
    • Angel clubs – many groups have formed throughout the country
  • 10. Use a Criteria to screen opportunities
    • PEOPLE, PEOPLE, PEOPLE
      • Integrity, trust, respect, commitment to the venture
      • Smart, energetic & passionate beyond a paycheck
      • Would I work for this person? Do I want to spend time with them?
    • Large and growing market opportunity with a high exit potential
    • Great/cool product with an opportunity for competitive differentiation/advantage
    • Business attributes : low capital requirements, few employees, digital business (high margins), recurring revenue, fair valuation
  • 11. Know Your Style
    • Stage of company development + range of industries
    • Active
      • Advisory board or Board member
        • Help build the business with cumulative knowledge, domain experience and network of relationships
        • Leverage your return with additional equity option grants
    • Passive
      • Investment only
      • Best when there is a strong Board or other sophisticated investors in the deal
      • More diversification
  • 12. Investment Size
    • Portfolio discipline example
      • $25,000 initial
      • $25,000 reserved for follow-on
    • Some investors prefer to lock and load on round one
    • Some investors like to go heavy on favorites
  • 13. Improve Your Exit
    • Deep diligence on the front end (form a team)
    • Get involved in budgets and forecasts
    • Measure metrics
    • Help companies build strong Boards
    • Mentor CEOs
    • Look for opportunities to buy out others if possible as company matures
  • 14. Have a Harvest Plan
    • Reallocate exits?
      • 1/3 Tax man
      • 1/3 Conservative savings
      • 1/3 New angel deals
  • 15. Have FUN!
    • You’ll meet some great people
    • You’ll experience some highs and lows
    • Sometimes you lose money, but one big winner makes up for all the losses
    • Enjoy the fun of helping an entrepreneur make a dream reality.