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  1. 1. From Invention to Start-Up: Money – Angel, Venture and Strategic Partners February 20, 2007 Mary Baker Anderson Calipa Partners and Alliance of Angels
  2. 2. Financing Life Cycle Friends and Family Angels Seed Funds Venture Funds Founder Institutional Equity Loans / Bonds Angel Groups Government Grants/Loans Strategic Investment Strategic Investment Discovery Proof-of Concept Product Design Product Development Manufacturing/ Delivery
  3. 3. Professional Investors <ul><li>Angels, venture capital, strategic investors (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>
  4. 4. What Professional Investors Are Looking for: Investable Companies <ul><li>Clear path to profitability </li></ul><ul><li>Solid management </li></ul><ul><li>Realistic business concept and plan </li></ul><ul><li>Scalable business </li></ul><ul><li>Competitive edge/Technical superiority </li></ul><ul><li>Market acceptance </li></ul><ul><li>Realistic financial projections </li></ul><ul><li>Realistic valuation </li></ul><ul><li>Clear, well-articulated exit strategy </li></ul><ul><li>Bottom line: Opportunity for financial return </li></ul>
  5. 5. What Professional Investors Are Looking for: Investable Companies <ul><li>How does an investor make this determination? </li></ul><ul><ul><li>Passion of entrepreneur (presentation) </li></ul></ul><ul><ul><li>Team track record – individually and together Entrepreneur’s ability to succinctly articulate vision and mission </li></ul></ul><ul><ul><li>Entrepreneur seeks advice of trusted, experienced, honest advisors </li></ul></ul><ul><ul><li>Coachable entrepreneur </li></ul></ul>
  6. 6. What Professional Investors Are Looking for: Investable Companies <ul><li>How does an investor make this determination? </li></ul><ul><ul><li>Competitors researched and understood </li></ul></ul><ul><ul><li>Clear market differentiator </li></ul></ul><ul><ul><li>Value proposition for customer clearly evident </li></ul></ul><ul><ul><li>Market access strategy clear and realistic </li></ul></ul><ul><ul><li>Comprehensive summary of risks (and plans to cope/address) </li></ul></ul><ul><ul><li>Profit potential – good margins </li></ul></ul><ul><ul><li>Marketability of company – M&A exit </li></ul></ul><ul><ul><ul><li>Type, timing and realistic purchasers </li></ul></ul></ul>
  7. 7. 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>
  8. 8. 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>
  9. 9. 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>
  10. 10. 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
  11. 11. Angel Investment Preference
  12. 12. Finding Angel Investors <ul><li>Angel Organizations: </li></ul><ul><ul><li>Several in Puget Sound area including: AoA, PSVC, Seraph Capital Forum, Zino Society, Keiretsu Forum, Tacoma Angel Network, Bellingham Angel Network </li></ul></ul><ul><li>Professional Service Providers </li></ul><ul><li>Investment Forums </li></ul><ul><ul><li>Early Stage Investment Forum, Zino Zillionaire </li></ul></ul><ul><li>Business Plan Competitions </li></ul><ul><li>Professionally-funded Start-ups </li></ul><ul><li>Venture Capitalists </li></ul><ul><li>Corporate Boards </li></ul>
  13. 13. Venture Capital Statistics: Investments in US <ul><li>2006 – invested $25.5 billion (3,416 deals) </li></ul><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 $18.9 billion (2,893 deals) </li></ul><ul><li>Increase due largely to late stage investments </li></ul><ul><li>Less than 2% in early/seed stage </li></ul><ul><ul><li>Source: NVCA and Moneytree </li></ul></ul>
  14. 14. Venture Investment by Deal Stage ($ millions)
  15. 15. Venture Capital Investment Source: MoneyTree
  16. 16. Average Venture Deal Size ($Mil) $6.6 $7.0 $7.25 $7.4 $7.5
  17. 17. Valuations Of Venture Capital Seed/Startup Rounds ($ 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
  18. 18. Valuation: Expected ROIs 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
  19. 19. Angels and VCs – Similarities <ul><li>Selective in investments </li></ul><ul><li>Requirements for an investable company </li></ul><ul><li>Expectation of return on investment - scalable </li></ul><ul><li>Similar investment terms (though angels can and often are – or must be – simpler) </li></ul><ul><li>Bring the attributes of a professional investor </li></ul>
  20. 20. Angels and VCs –Differences <ul><li>Venture capitalists: </li></ul><ul><ul><ul><li>Invest on “home-run” theory </li></ul></ul></ul><ul><ul><ul><li>ROI is ultimate goal </li></ul></ul></ul><ul><ul><ul><li>Investing 3 rd party money </li></ul></ul></ul><ul><ul><ul><li>Often more demanding and actively involved than angels: </li></ul></ul></ul><ul><ul><ul><ul><li>Control often issue </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Can requirement board and advisor approval and corporate actions </li></ul></ul></ul></ul><ul><li>Angels: </li></ul><ul><ul><ul><li>Invest for returns – may be more modest expectations </li></ul></ul></ul><ul><ul><ul><li>Social /community aspect to investments </li></ul></ul></ul><ul><ul><ul><li>Individuals investing their own wealth </li></ul></ul></ul><ul><ul><ul><li>Patient money </li></ul></ul></ul>
  21. 21. Strategic Investor Characteristics <ul><li>Typically invest in complimentary technologies </li></ul><ul><ul><li>Usually have an internal champion </li></ul></ul><ul><li>Often will invest in competitive technologies </li></ul><ul><ul><li>Unlike VC’s or angels who will place only one bet in a market segment </li></ul></ul><ul><li>Typically follow, don’t lead a round </li></ul>
  22. 22. Pros and Cons of Strategic Investment <ul><li>PROS </li></ul><ul><li>Less price sensitive than other investors </li></ul><ul><li>Can create instant credibility </li></ul><ul><li>CONS </li></ul><ul><li>Erratic follow on investment behavior </li></ul><ul><li>Won’t always champion your product internally </li></ul><ul><li>Can box you out of competitor products </li></ul>
  23. 23. Summation <ul><li>Angels usually invest initially in seed/start-up rounds </li></ul><ul><li>Angels represent (more) patient money </li></ul><ul><li>Angels are almost always sophisticated investors </li></ul><ul><li>Angels make excellent advisors and mentors </li></ul><ul><li>Strategic investment can be your best investment opportunity or your worst nightmare </li></ul><ul><li>There is a place for angels, venture, and strategic investment, depending on the stage and investment needs of the company </li></ul><ul><li>Many companies will need only angel investors </li></ul><ul><li>Not all companies make great angel investments </li></ul><ul><li>Be open, coachable and realistic </li></ul><ul><li>Show your commitment, passion and drive </li></ul>