Building An Angel Investment Portfolio David Hehman [email_address] February 26, 2009

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

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

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

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

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?

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?

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

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

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

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

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

Results highly skewed toward winners

Strike outs likely to come early

Some deals remain “walking wounded”

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

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

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

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

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

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

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

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

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

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

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

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

Have a Harvest Plan Reallocate exits? 1/3 Tax man 1/3 Conservative savings 1/3 New angel deals

Reallocate exits?

1/3 Tax man

1/3 Conservative savings

1/3 New angel deals

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.

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.