"Angel Investing 101" John May


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"Angel Investing 101" John May

  1. 1. “ Angel Investing 101” John May Darden Progressive Incubator July 11, 2005
  2. 2. John May <ul><ul><li>Co-founder, New Vantage Group, Vienna, VA </li></ul></ul><ul><ul><li>Co-Manager, The Dinner Clubs (3), Active Angel Investors, and affiliated angel venture groups (2) </li></ul></ul><ul><ul><li>Advisor, Calvert Ventures, Solstice Capital, Women’s Growth Capital Fund & Conservation International’s Verde Ventures </li></ul></ul><ul><ul><li>Batten Fellow and Director, Northern Virginia Initiative, Darden Graduate School of Business Administration, University of Virginia </li></ul></ul><ul><ul><li>Co-Author, Every Business Needs an Angel (Crown Business: 2001) </li></ul></ul><ul><ul><li>Co-Editor, State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing (Darden Business Publishing: 2003) </li></ul></ul><ul><ul><li>Participant in international forums and lectures – Paris, Tokyo, Bangkok, Malta, Copenhagen, Mexico City, Helsinki, Santiago </li></ul></ul>
  3. 3. The World of Angel Investing <ul><li>Part mentoring </li></ul><ul><li>Part venture capital </li></ul><ul><li>Part psychic reward </li></ul><ul><li>Part adventure </li></ul>
  4. 4. But first, VC’s: Seeding or Fertilizing? <ul><li>Early-stage VC is broke </li></ul><ul><li>Indigestion in the food chain </li></ul><ul><li>Looking back instead of looking forward </li></ul>
  5. 5. The Field <ul><ul><li>Small private businesses in the US </li></ul></ul><ul><ul><li>Emerging growth opportunities for investors </li></ul></ul><ul><ul><li>High-tech start-ups </li></ul></ul><ul><ul><li>Job and innovative generation </li></ul></ul><ul><ul><li>“ Mentor” capital </li></ul></ul>
  6. 6. The Pain: A Chronic Problem <ul><ul><li>Becoming a successful big company takes a lot of hard work </li></ul></ul><ul><ul><li>Tapped out after FFF and own money </li></ul></ul><ul><ul><li>Capital gap is $250,000-$2.0M range </li></ul></ul><ul><ul><li>Pre-bankable companies need support of all kinds </li></ul></ul>
  7. 7. Is Institutional Venture Capital the Answer? <ul><ul><li>Uniquely American, only 50-year old experience </li></ul></ul><ul><ul><li>Managed for OPM – now $260B-plus cottage industry </li></ul></ul><ul><ul><li>Dominated by pension funds and $150M-+ pools and funds </li></ul></ul><ul><ul><li>Heavily high-tech and No. California and Massachusetts (55% of deals) </li></ul></ul><ul><ul><li>Doesn’t play at the seed-stage easily, very selective - less than 5% of venture capital into seed </li></ul></ul>
  8. 8. Venture Capital Disbursements to Portfolio Companies 2,750 $18.9 B 2003 2,600 $21.2 B 2002 3,767 $40.0 B 2001 5,458 $103.5B 2000 3,956 $59.4B 1999 3,155 $22.0B 1998 2,696 $17.2B 1997 # of Companies Annual Year 2,876 $20.9B 2004
  9. 9. … And It’s Gotten Worse Amount of Venture Capital Invested by Stage in the US (in millions) Sources: National Venture Capital Association Yearbook 2003 & Money Tree 2004 US Report 100.0% 22,940 100.0% 18,946 100.0% 21,224 TOTAL 40.1% 9,198 25.8% 4,879 16.7% 3,543 Later 41.5% 9,511 54.4% 10,304 62.7% 13,301 Expansion 16.9% 3,885 17.8% 3,378 19.2% 4,076 Early-stage 1.5% 346 2.0% 385 1.4% 304 Seed/Start-up 2004 2003 2002 Stage
  10. 10. But Healthcare % is Increasing <ul><ul><li>First quarter ’05 biotech and medical devices 2 nd and 3 rd largest VC investments </li></ul></ul><ul><ul><li>’ 04 biotech totaled $3.8 billion </li></ul></ul><ul><ul><li>’ 04 medical devices totaled $1.8 billion </li></ul></ul><ul><ul><li>Total is over $5.6 billion in 578 companies (largest in four years) </li></ul></ul>
  11. 11. How Individuals Have Played Throughout History <ul><ul><li>Wealthy families </li></ul></ul><ul><ul><li>Broadway angels </li></ul></ul><ul><ul><li>Professor Bill Wetzel and high-tech angels </li></ul></ul><ul><ul><li>90’s boom and growth of wealth and VC’s </li></ul></ul>
  12. 12. HNW Individuals and the Alternative Asset Class <ul><ul><li>Why should any investor participate in alternate assets? </li></ul></ul><ul><ul><li>Real estate, timber, oil, gas, private equity are core alternative assets </li></ul></ul><ul><ul><li>Allocation of 5-10% is appropriate as control more investible wealth </li></ul></ul><ul><ul><li>Use alternate assets to increase total return – offsets high risk inherent in inefficient markets </li></ul></ul><ul><ul><li>VC as part of mix may be appropriate </li></ul></ul>
  13. 13. A National Status Report 1994-2004 <ul><ul><li>Number of millionaires grew to over four million </li></ul></ul><ul><ul><li>Angels number around 250,000 – GEM says over one million informal investors in U.S. alone </li></ul></ul><ul><ul><li>Structured angel groups grew from 10/15 in ’94 to 175+ in 2004 </li></ul></ul><ul><ul><li>Center for Venture Research at UNH reports 48,000 transactions by angels in 2004 </li></ul></ul>
  14. 14. Seed and Early-Stage Investing by Type of Investor (2004) # of Transactions $100 B (GEM Report) $18.7 B (Sohl) $20.9B (NVCA) $384 M Investment $ Type of Investors 48,000 1, 000,000 2,876 193 Individuals Angels Institutional VC “ Real” VC Seed Invest
  15. 15. Potential Angels in the U.S. 4,200,000 GEM Report Informal Investors Members of ACA Professor Jeff Sohl’s Active Angels (est.) U.S. Millionaires 1,000,000 225,000 5,000
  16. 16. GEM Report <ul><li>The GEM Report found more than 50% invest </li></ul><ul><li>in relatives’ businesses </li></ul><ul><li>Investor’s Relationship to Investee </li></ul><ul><ul><li>Close Family 41.8% </li></ul></ul><ul><ul><li>Other Relative 10.5% </li></ul></ul><ul><ul><li>Work Colleague 6.1% </li></ul></ul><ul><ul><li>Friend/Neighbor 28.5% </li></ul></ul><ul><ul><li>Stranger 9.4% </li></ul></ul><ul><ul><li>Other 3.6% </li></ul></ul>
  17. 17. So What Is An Angel, Really? <ul><li>Our definition is – </li></ul><ul><ul><li>Accredited individual </li></ul></ul><ul><ul><li>$20,000 or more per deal </li></ul></ul><ul><ul><li>Has lost money in venture in past! </li></ul></ul><ul><ul><li>Patient capital - mentor </li></ul></ul>
  18. 18. Angels vs. VC’s <ul><li>“ Warm” money </li></ul><ul><li>Customized term sheets </li></ul><ul><li>Blend of psychic and financial reward </li></ul><ul><li>Due diligence still important </li></ul><ul><li>Pitching up the person as well as the pocketbook </li></ul>
  19. 19. Many Variations of Non-VC Group Investing <ul><ul><li>Ad hoc, one-time partnerships </li></ul></ul><ul><ul><li>Angel networks </li></ul></ul><ul><ul><li>Pledge funds </li></ul></ul><ul><ul><li>Angel Limited Partnerships </li></ul></ul><ul><ul><li>Member-led and manager-led LLC’s </li></ul></ul><ul><ul><li>Other (be creative) </li></ul></ul>
  20. 20. Angel Groups in Our Region <ul><ul><ul><li>Private Investors Network Women's Angel Network </li></ul></ul></ul><ul><ul><ul><li>Capital Investors Group Maryland Angel Council </li></ul></ul></ul><ul><ul><ul><li>The Dinner Club CEO Club </li></ul></ul></ul><ul><ul><ul><li>eMedia Club Active Angel Investors </li></ul></ul></ul><ul><ul><ul><li>Washington Dinner Club Ad-hoc groups everywhere </li></ul></ul></ul><ul><ul><ul><li>Capital Access Network </li></ul></ul></ul>
  21. 21. Full Member Provisional Member Angel Capital Association Members by Region
  22. 22. Are All Angels Alike? <ul><ul><li>Over-47 year old white male, $125K/year, cashed- out entrepreneur is historic prototype </li></ul></ul><ul><ul><li>Marriage partner </li></ul></ul><ul><ul><li>Networker </li></ul></ul><ul><ul><li>Executive recruiter </li></ul></ul><ul><ul><li>Therapist </li></ul></ul><ul><ul><li>Strategic Partner </li></ul></ul><ul><ul><li>General utility player </li></ul></ul><ul><ul><li>Fundraiser </li></ul></ul>
  23. 23. The Future: Issues and Innovations <ul><ul><li>HNW individuals will want more involvement in their wealth management </li></ul></ul><ul><ul><li>Entrepreneurs will continue to become investors – will become mentors </li></ul></ul><ul><ul><li>Structured angel groups will provide risk minimization </li></ul></ul><ul><ul><li>US will continue to be high tech, entrepreneurship leader </li></ul></ul>
  24. 24. Web-Based Resources <ul><ul><li>Angel Capital Association (for North America) </li></ul></ul><ul><ul><ul><li>(www.angelcapitalassociation.org) </li></ul></ul></ul><ul><ul><li>National Association of Seed and Venture Funds </li></ul></ul><ul><ul><ul><li>(www.nasvf.org) </li></ul></ul></ul><ul><ul><li>European Angel Network (Europe) </li></ul></ul><ul><ul><ul><li>(www.eban.org) </li></ul></ul></ul><ul><ul><li>National Venture Capital Association </li></ul></ul><ul><ul><ul><li>(www.nvca.org) </li></ul></ul></ul><ul><ul><li>Community Development Venture Capital Association </li></ul></ul><ul><ul><ul><li>(www.cdvca.org) </li></ul></ul></ul><ul><ul><li>Kauffman Foundation </li></ul></ul><ul><ul><ul><li>(www.emkf.org) </li></ul></ul></ul>
  25. 25. Books/Studies <ul><ul><li>Benjamin, Gerald A. and Margulis, Joel B., Angel Investing - How to Find and Invest in Private Equity , New York: John Wiley & Sons, 2000. </li></ul></ul><ul><ul><li>Benjamin, Gerald A. and Margulis, Joel B., The Angel Investor's Handbook: How to Profit from Early-Stage Investing , New York: Bloomberg, 2001. </li></ul></ul><ul><ul><li>Gompers, Paul and Lerner, Josh, The Venture Capital Cycle , Cambridge, MA, MIT Press, 1999. </li></ul></ul><ul><ul><li>Hill, Brian E. and Power, Dee, Attracting Capital From Angels: How Their Money and Their Experience Can Help You Build a Successful Company , New York, John Wiley & Sons, 2002. </li></ul></ul><ul><ul><li>Keeley, Robert H., Cooper, Jeffrey M. and Bloomer, Gary D., Business Angels: A Guide to Private Investing , available from the Kauffman Foundation, Kansas City, 1998 . </li></ul></ul>
  26. 26. Books/Studies (cont’d.) <ul><ul><li>May, John and O'Halloran, Elizabeth F., State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing , Charlottesville, VA: Darden Business Publishing, University of Virginia, 2003. </li></ul></ul><ul><ul><li>Osnabrugge, Mark Van and Robinson, Robert J., Angel Investing: Matching Start-up Funds with Start-up Companies - The Guide for Entrepreneurs, Individual Investors, and Venture Capitalists , San Francisco: Jossey-Bass, 2000. </li></ul></ul><ul><ul><li>Simmons, Cal and May, John, Every Business Needs an Angel: Getting the Money You Need to Make Your Company Grow , Washington DC: Crown Business, 2001. </li></ul></ul><ul><ul><li>Williams, Kelly, Working with Angel Investors for Community Development , New York: Community Development Venture Capital Alliance, 2003. </li></ul></ul>
  27. 27. <ul><li>Be half full, be patient, collaborate, and remember, </li></ul><ul><li>“ Every Business Needs an Angel” </li></ul>