Susan Preston - Angel Investing Essentials - TacomaAngel Network


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Presentation given October 10, 2006 to the TacomaAngel Network's members. Susan has not only been a start-up CEO, the former founder of an angel organization and author of several books on Angel Investing, she is also Entrepreneur in Residence at the Ewing Marion Kaufman Foundation, which sponsors the Angel Capital Association with membership throughout the US and Canada. She is additionally counsel with Davis, Wright, Tremaine to numerous early stage companies and investors.

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Susan Preston - Angel Investing Essentials - TacomaAngel Network

  1. 1. 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
  2. 2. 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
  3. 3. Venture Capital Statistics: Investments in US <ul><li>2005 – invested $21.7 billion (2,939 deals) </li></ul><ul><li>2004 – invested $20.9 billion (2,876 deals) </li></ul><ul><li>2003 – invested $18.9 billion </li></ul><ul><li>Increase due largely to late stage investments: </li></ul><ul><ul><li>$9.7 billion in 2005 </li></ul></ul><ul><ul><li>$7.2 billion in 2004 </li></ul></ul><ul><ul><li>$4.9 billion in 2003 </li></ul></ul><ul><li>Less than 2% in early/seed stage </li></ul><ul><ul><li>Source: NVCA </li></ul></ul>
  4. 4. Venture Capital Investments by Stage of Development ($s in Millions) Source: MoneyTree
  5. 5. Venture Capital Investment: Historical and 2006 Projected Source: MoneyTree
  6. 6. Average VC Deal Size Per Financing Round ($ Million) Source: NVCA
  7. 7. US Angel Investments <ul><li>2005 – invested $23.1 billion (49,500 deals) </li></ul><ul><ul><li>Increase of 2.7% in $’s over 2004 </li></ul></ul><ul><ul><li>Increase of 3.1% in deals over 2004 </li></ul></ul><ul><li>2004 – invested $22.5 billion (48,000 deals) </li></ul><ul><li>2003 – invested $18.1 billion </li></ul><ul><li>227,000 active angels </li></ul><ul><ul><li>20% Healthcare/medical devices and equipment </li></ul></ul><ul><ul><li>18% Software </li></ul></ul><ul><li>55% in seed/start-up </li></ul><ul><li>43% in post-seed/start-up (10% increase over 2004) </li></ul>Source: Center for Venture Research
  8. 8. Who Are Angels? <ul><li>Angels are accredited investors who: </li></ul><ul><ul><li>Expect a financial return </li></ul></ul><ul><ul><li>Believe in giving back to their communities </li></ul></ul><ul><ul><li>Invest locally and regionally </li></ul></ul><ul><ul><li>Participate in the investment process </li></ul></ul><ul><ul><li>Show interest in personal relationships with companies and employees </li></ul></ul><ul><ul><li>Offer wisdom and guidance to entrepreneurs </li></ul></ul>
  9. 9. Financial Attributes of Angels <ul><li>Provide early-stage investment dollars </li></ul><ul><li>Invest smaller dollar amounts per investment </li></ul><ul><li>Partially fill funding gap left by venture capitalists (VCs) </li></ul><ul><li>Invest individual wealth </li></ul><ul><li>Can tolerate loss of entire investment </li></ul><ul><li>Have diversified portfolios </li></ul><ul><li>Invest with “patient money” </li></ul>
  10. 10. Support for Angel Organizations <ul><li>Angel Capital Education Foundation </li></ul><ul><li>501c3 public charity </li></ul><ul><li>Education: </li></ul><ul><li>Summits & meetings </li></ul><ul><li>Workshops & webinars </li></ul><ul><li>Research: </li></ul><ul><li>Group investment data </li></ul><ul><li>Research reports that benefit general public </li></ul><ul><li>Public awareness </li></ul><ul><li>Angel Capital Association </li></ul><ul><li>501c6 trade association </li></ul><ul><li>Membership organization </li></ul><ul><li>Professional standards </li></ul><ul><li>Members’ only Web site </li></ul><ul><li>Member networking </li></ul><ul><li>Industry tools </li></ul><ul><li>Awareness campaigns </li></ul><ul><li>Advocacy </li></ul>
  11. 11. Member Locations Full Member Provisional Member
  12. 12. 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
  13. 13. Years in Operation 68 groups reporting Groups Average = 4.23 Median = 3
  14. 14. Average Group Investment Per Deal 45 groups reporting (Caution: source data is incomplete & unverified) Groups Average = $351,050 Median = $300,000 In $1,000s
  15. 15. 39 groups reporting (Caution: source data is incomplete & unverified)
  16. 16. Investment Preference 39 groups reporting
  17. 17. Forms of Investment <ul><li>Debt (note) Equity (stock) </li></ul><ul><li>Options Warrants </li></ul><ul><li>Debt: collateralized, non-collateralized, interest in cash or stock (deferred?), convertible (at election or automatic?), length of time, etc. </li></ul><ul><li>Equity: common vs. preferred, dividends, many other terms discussed below </li></ul>
  18. 18. Professional Investors <ul><li>Angels, venture capital, corporations typically receive: </li></ul><ul><ul><li>Preferred stock </li></ul></ul><ul><ul><li>Convertible debt with warrants or additional stock </li></ul></ul><ul><li>Provide more than money: Can be proactive in developing business through (“win together”): </li></ul><ul><ul><li>Company building experience </li></ul></ul><ul><ul><li>Company functionality experience </li></ul></ul><ul><ul><li>Industry experience </li></ul></ul><ul><ul><li>Contacts for partners, customers and follow-on financing </li></ul></ul>
  19. 19. Investment Terms <ul><li>Agree on essential terms prior to due diligence: </li></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Post investment role: </li></ul></ul><ul><ul><ul><li>Active vs. passive </li></ul></ul></ul><ul><ul><ul><li>Board, advisor, consultant </li></ul></ul></ul><ul><ul><li>Debt vs. equity </li></ul></ul><ul><ul><ul><li>If convertible debt – general discount; triggers </li></ul></ul></ul><ul><ul><li>Warrants – general % </li></ul></ul><ul><ul><li>Milestone investing? </li></ul></ul><ul><ul><li>Post-investment communication </li></ul></ul>
  20. 20. Angel Organizations: Investment Evaluation and Process <ul><li>Investment Terms and Negotiations (not absolute rules) : </li></ul><ul><ul><li>Keep the terms simple if follow-on funding necessary </li></ul></ul><ul><ul><li>Reserve an investment amount </li></ul></ul><ul><ul><li>Use professional service providers </li></ul></ul><ul><ul><li>Double-check due diligence </li></ul></ul><ul><ul><li>Be realistic </li></ul></ul><ul><ul><li>Diversify </li></ul></ul>
  21. 21. 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
  22. 22. 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
  23. 23. Term Sheets: Debentures <ul><li>Convertible Debentures (Notes): </li></ul><ul><ul><li>Automatic upon event or investor controls conversion </li></ul></ul><ul><ul><li>Note term </li></ul></ul><ul><ul><li>Interest: cash or stock; payment schedule; part of conversion </li></ul></ul><ul><ul><li>Security interest/collateralized? </li></ul></ul>
  24. 24. Term Sheets: Preferred Stock Rights, preferences and privileges of preferred stock <ul><li>Price </li></ul><ul><li>Use of Proceeds </li></ul><ul><li>Dividends </li></ul><ul><li>Liquidation preference </li></ul><ul><li>Anti-dilution provisions </li></ul><ul><li>Redemption </li></ul><ul><li>Protective provisions </li></ul><ul><li>Information requirements </li></ul><ul><li>Registration rights </li></ul><ul><li>Right of first refusal </li></ul><ul><li>Co-sale rights </li></ul><ul><li>Option pool </li></ul><ul><li>Founder vesting </li></ul><ul><li>Inventions agreements </li></ul>
  25. 25. Summation <ul><li>Angels invest primarily in seed/start-up rounds </li></ul><ul><li>Angels represent patient money </li></ul><ul><li>Angels are becoming sophisticated investors </li></ul><ul><li>Angels make excellent advisors and mentors </li></ul><ul><li>Many companies will need only angel investors </li></ul><ul><li>Be open, coachable and realistic </li></ul><ul><li>Show your commitment, passion and drive </li></ul><ul><li>Answer the questions: </li></ul><ul><ul><li>So what? </li></ul></ul><ul><ul><li>Who cares? </li></ul></ul><ul><ul><li>Why you? </li></ul></ul>