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Angel Investing


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Angel Investing

  1. 1. Wayne Greenberg [email_address] 307-721-8875 Angel Investing “ Fools rush in where angels fear to tread” Senator Enzi’s Inventors Conference April 20, 2006
  2. 2. What Are Angel Investors? <ul><li>Term originated with funding of Broadway plays in the early 1900’s (getting productions “off the ground”) </li></ul><ul><li>Generally: High net worth individuals who invest in early stage entrepreneurial companies </li></ul><ul><li>Tend to be former entrepreneurs themselves </li></ul><ul><li>Typically come in between 3F’s and VC’s </li></ul><ul><li>Investments between $10k and $500k </li></ul><ul><li>Tend to invest in business areas they know </li></ul><ul><li>Invest mostly locally </li></ul><ul><li>Some organized into groups (“networks”) but not professional money managers </li></ul>
  3. 3. Angel Investor Prototype <ul><li>47 years old, annual income around $100k </li></ul><ul><li>Net worth of $750k, college educated </li></ul><ul><li>Invests $37,000 per venture </li></ul><ul><li>Is or has been self employed </li></ul><ul><li>7 of 10 investments w/in 50 miles of “home” </li></ul><ul><li>9 of 10 also provide loans or loan guarantees in addition to equity investment </li></ul><ul><li>9 of 10 investments go to companies with <20 employees </li></ul><ul><li>Bases many decisions on referrals and who else is in </li></ul>
  4. 4. Angel Investing 2004 Statistics <ul><li>225,000 active angels in U.S.; over 200 angel groups active </li></ul><ul><li>$24B invested in 2004 (vs. $22B for VC’s) </li></ul><ul><li>Average invested per company - $469,000 </li></ul><ul><li>30x the number of companies than VC’s </li></ul><ul><li>Angels fund 60% of all TECH companies seeking < $1M </li></ul><ul><li>40-50% of investments result in losses </li></ul>Source: Center for Venture Research
  5. 5. What Motivates Angels <ul><li>ROI </li></ul><ul><li>Home Runs </li></ul><ul><li>Grand Slam Home Run </li></ul><ul><ul><li>$100k in Amazon = $26M at IPO </li></ul></ul><ul><li>Give back </li></ul><ul><li>Stay involved </li></ul><ul><li>Want to contribute their personal skills and contacts </li></ul><ul><li>Shopping for new gig </li></ul>
  6. 6. Finding Angels <ul><li>Degrees of separation </li></ul><ul><ul><li>Your school, church, neighborhood </li></ul></ul><ul><ul><li>Other business owners </li></ul></ul><ul><ul><li>Your banker, lawyer and accountant </li></ul></ul><ul><ul><li>Your family and friends </li></ul></ul><ul><li>Network, network and more networking </li></ul><ul><li>Organized angel groups – ignore 50 mile rule </li></ul><ul><li>Angels beget more angels </li></ul>
  7. 7. Angel Groups <ul><li>Formed to share risk, information, leads, due diligence and contract negotiation </li></ul><ul><li>Most are very informal; some have actual “funds” managed by the group </li></ul><ul><li>About 1 in 5 deals that passes initial group screen gets funded </li></ul><ul><li>Mostly regional but some specialties like </li></ul><ul><li>CTEK Angels ( ) largest in front range </li></ul>
  8. 8. What Should You Ask/Do <ul><li>What is their investing experience? </li></ul><ul><li>Talk to one of their investment references. </li></ul><ul><li>What do they know about your industry? </li></ul><ul><li>What contacts do they have for: </li></ul><ul><ul><li>Sales? </li></ul></ul><ul><ul><li>Alliances? </li></ul></ul><ul><ul><li>Channels? </li></ul></ul><ul><li>Can they bring other investors in? </li></ul><ul><li>Will they want to be involved? What relationship will they want? Will they be TOO busy for you to touch when needed? </li></ul><ul><li>How is the chemistry between you and the angel? </li></ul><ul><li>Spend time getting to know the angel. </li></ul>
  9. 9. Angels vs. Venture Capitalists <ul><li>Earlier stage companies </li></ul><ul><li>Faster decision process </li></ul><ul><li>More geographically diverse </li></ul><ul><li>Less due diligence </li></ul><ul><li>More likely to provide hands on expertise </li></ul><ul><li>Prefer smaller investments </li></ul><ul><ul><li>Less dilution </li></ul></ul><ul><ul><li>Easier to stage phases and valuation increases </li></ul></ul><ul><li>Far easier on terms </li></ul><ul><li>Follow on investments may not be there </li></ul>
  10. 10. Angel Deals <ul><li>Can be as sophisticated as VC’s </li></ul><ul><li>Or not… </li></ul><ul><li>Many do not want to be involved but all want to be informed </li></ul><ul><li>Since the bust many angels are gun shy and want more complete legal documentation and protections </li></ul><ul><li>Advent of Sarbanes and other rules also make for more caution </li></ul>
  11. 11. Pitfalls <ul><li>Unaccredited investors </li></ul><ul><li>Terms that inhibit subsequent fundings </li></ul><ul><li>Devils </li></ul><ul><ul><li>Shoppers </li></ul></ul><ul><ul><li>Control freaks </li></ul></ul><ul><ul><li>Panic’ers </li></ul></ul><ul><ul><li>Invisible Men </li></ul></ul><ul><li>Lack of follow on capability </li></ul>
  12. 12. For Angel Investors, It’s Primarily About Measuring and Managing Risk <ul><li>All businesses share similar risk factors </li></ul><ul><li>Minimizing each or identifying the one(s) most problematic is key </li></ul><ul><ul><li>People Risk </li></ul></ul><ul><ul><li>Market Risk </li></ul></ul><ul><ul><li>Product Risk </li></ul></ul><ul><ul><li>Capital Risk </li></ul></ul>
  13. 13. What’s an Angel to Do? DUE DILIGENCE
  14. 14. What is Due Diligence? <ul><li>Generally: an investigation into the financial and commercial activities of a business in connection with a proposed acquisition or disposal of an interest in that business. The due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information. </li></ul><ul><li>Legally: a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depending on the relative facts of the special case. ( Black’s Law Dictionary ) </li></ul>
  15. 15. Why Due Diligence Is So Important <ul><li>Refines the price/value </li></ul><ul><li>Identify potential &quot;deal killer&quot; defects in the target </li></ul><ul><li>Mitigates legal (and other) risks </li></ul><ul><li>Verification that the transaction complies with investment criteria </li></ul><ul><li>Identification of synergies w/in investor group </li></ul><ul><li>Ensures that post-investment plans will have best chance for success </li></ul>
  16. 16. <ul><li>“ [A] lack of due diligence is </li></ul><ul><li>by far the greatest regret </li></ul><ul><li>angel investors have.” </li></ul><ul><li>  </li></ul><ul><li>-Angel Investing: Matching Start-Up Funds With Start-Up </li></ul><ul><li>Companies - The Guide For Entrepreneurs, </li></ul><ul><li>Individual Investors, And Venture Capitalists </li></ul>
  17. 17. Trying to find the Gazelles…
  18. 18. Areas of Interest to Angel Investors
  19. 19. Categories for Due Diligence <ul><li>Management </li></ul><ul><li>Product </li></ul><ul><li>Market </li></ul><ul><li>Competition </li></ul><ul><li>Capital </li></ul><ul><li>Relationships </li></ul><ul><li>Return </li></ul><ul><li>Legal </li></ul>
  20. 20. Management Is this management team able to grow their venture rapidly and successfully? <ul><li>Have they done “it” before? </li></ul><ul><li>Do they have industry knowledge and experience? </li></ul><ul><li>Do they have the necessary key positions filled? </li></ul><ul><li>Have they identified their own weaknesses and have a plan to fill those voids? </li></ul><ul><li>Are there sufficient incentives in place for key employees? </li></ul><ul><li>Are the principals trustworthy? </li></ul><ul><li>Have they begun to build solid advisory/legal teams? </li></ul>
  21. 21. Product <ul><li>Is the product/service unique and fully developed? </li></ul><ul><li>Does it create compelling benefits for the target customers? </li></ul><ul><li>Can the team articulate the value proposition clearly and consistently? </li></ul><ul><li>If it is not fully developed, does management understand the time and dollars required to complete development? </li></ul><ul><li>What intellectual property protection exists? </li></ul>
  22. 22. Market, Marketing (and Sales) <ul><li>How large is the market? </li></ul><ul><li>Is it large enough to support rapid growth and attractive margins? </li></ul><ul><li>Do they have credible and systematic market research? </li></ul><ul><li>What is the basic value proposition and can it be easily and consistently articulated? </li></ul><ul><li>Does management's marketing plan make sense? </li></ul><ul><li>How will the product reach the market? Via what channels? What pipeline exists? </li></ul><ul><li>Is there a sales culture in the company? </li></ul><ul><li>Are there existing customers the investor can interview? </li></ul>
  23. 23. Competition <ul><li>What are the barriers to entry by competitors? </li></ul><ul><li>Who are the competitors and what strengths do they possess? </li></ul><ul><li>Are there major players who could become competitors? </li></ul><ul><li>Has the company effectively mapped their own capabilities against those of their competitors? </li></ul><ul><li>How will the venture gain and defend its target market position? </li></ul>
  24. 24. Relationships <ul><li>Who are the vendors and what are the risks associated with key supplies or raw materials? </li></ul><ul><ul><li>Have/can those risks be mitigated? </li></ul></ul><ul><li>Are there strategic partnership agreements with other players that are beneficial/necessary to the venture? </li></ul><ul><ul><li>Are any in place? </li></ul></ul><ul><ul><li>Have any been identified? </li></ul></ul><ul><li>Can the vendors be contacted? </li></ul><ul><li>Who are the company’s advisors and mentors? </li></ul>
  25. 25. Capital <ul><li>How much investment capital is needed? </li></ul><ul><li>In how many rounds? </li></ul><ul><li>What does this round buy in terms of increased value </li></ul><ul><li>How will it be deployed? </li></ul><ul><li>Does the cash flow analysis demonstrate this need? </li></ul><ul><li>Are there legitimate Plans B and C? </li></ul>
  26. 26. Return <ul><li>Is the potential return on this investment sufficiently attractive in relation to the risk? </li></ul><ul><li>Is there a clear exit strategy for the investors/company? </li></ul><ul><li>Does the time horizon fit with the client’s needs/desires? </li></ul><ul><li>Does the management team clearly understand the key business elements that must be managed for the venture to be successful? </li></ul>
  27. 27. Legal <ul><li>Review as much as possible: </li></ul><ul><ul><li>Contracts – contactors, vendors, suppliers, customers, employees, SLA’s </li></ul></ul><ul><ul><li>Capital Structure </li></ul></ul><ul><ul><li>Corporate documents – articles, by laws, etc. </li></ul></ul><ul><ul><li>IP – patents, copyrights, trademarks </li></ul></ul><ul><ul><li>License agreements </li></ul></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>Litigation or threats of litigation </li></ul></ul><ul><ul><li>Employee policies </li></ul></ul><ul><ul><li>Environmental review </li></ul></ul>
  28. 28. Resources
  29. 29. Books
  30. 30. Books Angels Read
  31. 31. Internet Resources List of Angel Networks – Inc Magazine Stanford Entrepreneurial Center The Angel Capital Association Angel Investor News The Keiretsu Forum
  32. 32. Wayne Greenberg [email_address]