Susan Preston - Angel Investing Essentials - TacomaAngel Network

Tacoma Angel Network Angel Investing Essentials October 10, 2006 Susan Preston Entrepreneur-in-Residence Ewing Marion Kauffman Foundation AND Director of Attorney Training and Professional Development Davis Wright Tremaine

Financing Life Cycle Financing Idea Pre-seed Funding Seed Funding Expansion/Mezzanine Operating Cap. Friends and Family Angels Seed Funds Venture Funds Founder Institutional Equity Loans / Bonds Product Dev Angel Groups Start-up Funding Government Grants/Loans Discovery Proof-of Concept Product Design Product Development Manufacturing/ Delivery

Venture Capital Statistics: Investments in US
2005 – invested $21.7 billion (2,939 deals)
2003 – invested $18.9 billion
Increase due largely to late stage investments:
$9.7 billion in 2005
Less than 2% in early/seed stage
Source: NVCA

Venture Capital Investments by Stage of Development ($s in Millions) Source: MoneyTree

Venture Capital Investment: Historical and 2006 Projected Source: MoneyTree

Average VC Deal Size Per Financing Round ($ Million) Source: NVCA

US Angel Investments
Increase of 2.7% in $’s over 2004
Increase of 3.1% in deals over 2004
2003 – invested $18.1 billion
227,000 active angels
20% Healthcare/medical devices and equipment
18% Software
55% in seed/start-up
43% in post-seed/start-up (10% increase over 2004)
Source: Center for Venture Research

Who Are Angels?
Angels are accredited investors who:
Expect a financial return
Believe in giving back to their communities
Invest locally and regionally
Participate in the investment process
Show interest in personal relationships with companies and employees
Offer wisdom and guidance to entrepreneurs

Financial Attributes of Angels
Provide early-stage investment dollars
Invest smaller dollar amounts per investment
Partially fill funding gap left by venture capitalists (VCs)
Invest individual wealth
Can tolerate loss of entire investment
Have diversified portfolios
Invest with “patient money”

Support for Angel Organizations
Angel Capital Education Foundation
501c3 public charity
Education:
Summits & meetings
Workshops & webinars
Research:
Group investment data
Research reports that benefit general public
Public awareness
Angel Capital Association
501c6 trade association
Membership organization
Professional standards
Members’ only Web site
Member networking
Industry tools
Awareness campaigns
Advocacy

Member Locations Full Member Provisional Member

August 2005 Does not include 18 Provisional Members Angel Networks Networks w/Sidecar Funds Angel Funds ACA Membership (81): Networks and Funds 60 9 12

Years in Operation 68 groups reporting Groups Average = 4.23 Median = 3

Average Group Investment Per Deal 45 groups reporting (Caution: source data is incomplete & unverified) Groups Average = $351,050 Median = $300,000 In $1,000s

39 groups reporting (Caution: source data is incomplete & unverified)

Investment Preference 39 groups reporting

Forms of Investment
Debt (note) Equity (stock)
Options Warrants
Debt: collateralized, non-collateralized, interest in cash or stock (deferred?), convertible (at election or automatic?), length of time, etc.
Equity: common vs. preferred, dividends, many other terms discussed below

Professional Investors
Angels, venture capital, corporations typically receive:
Preferred stock
Convertible debt with warrants or additional stock
Provide more than money: Can be proactive in developing business through (“win together”):
Company building experience
Company functionality experience
Industry experience
Contacts for partners, customers and follow-on financing

Investment Terms
Agree on essential terms prior to due diligence:
Valuation
Post investment role:
Active vs. passive
Board, advisor, consultant
Debt vs. equity
If convertible debt – general discount; triggers
Warrants – general %
Milestone investing?
Post-investment communication

Angel Organizations: Investment Evaluation and Process
Investment Terms and Negotiations (not absolute rules) :
Keep the terms simple if follow-on funding necessary
Reserve an investment amount
Use professional service providers
Double-check due diligence
Be realistic
Diversify

Expected Rates of Return 3X 25%/year Near exit 4X 30% 2 nd stage 5X 40% Early stage 8X 50% Start-up 10X+ 60%+/year Seed Five Year ROI ROI

Valuations Of Venture Capital Seed/Startup Rounds ($Millions) $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* *2006 Estimated Value Startup/Seed

Term Sheets: Debentures
Convertible Debentures (Notes):
Automatic upon event or investor controls conversion
Note term
Interest: cash or stock; payment schedule; part of conversion
Security interest/collateralized?

Term Sheets: Preferred Stock Rights, preferences and privileges of preferred stock
Price
Use of Proceeds
Dividends
Liquidation preference
Anti-dilution provisions
Redemption
Protective provisions
Information requirements
Registration rights
Right of first refusal
Co-sale rights
Option pool
Founder vesting
Inventions agreements

Summation
Angels invest primarily in seed/start-up rounds
Angels represent patient money
Angels are becoming sophisticated investors
Angels make excellent advisors and mentors
Many companies will need only angel investors
Be open, coachable and realistic
Show your commitment, passion and drive
Answer the questions:
So what?
Who cares?
Why you?

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Susan Preston - Angel Investing Essentials - TacomaAngel Network

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