Angel Investing 101

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Angel Investing 101

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Angel Investing 101

  1. 1. http://www.flickr.com/photos/roblee/133498854/ David Teten teten.com // @dteten Angel Investing 101 photo by Aaron Patterson, http://www.flickr.com/photos/40875537@N04/5659908590/
  2. 2. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview Don’t Take Notes! Download detailed slides at: teten.com/angel
  3. 3. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview David Teten • Partner, ff Venture Capital, early-stage technology venture capital fund • Founder/Chair Emeritus, Harvard Business School Alumni Angels of Greater New York • Lead author of first-ever research study on best practices in private equity/venture capital deal origination • Lead author of first-ever research study on best practices of venture capitalists in increasing portfolio company value through operational support • Currently co-leading study on how to disrupt investing • Harvard MBA 1998, Yale BA, both with honors. • Teten.com // @dteten
  4. 4. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  5. 5. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview Average Angel Returns • Angel mean IRR ranges from 18% to 54% across twelve large studies with differing timeframes 1 • 47% of angel investments exited at a loss, vs. 64% of VC investments2 • Angel and VC rates of “home run” investments (IRR over 100%) are roughly equal 2 2 Is It Worth It?, Journal of Business Venturing, http://www.crab.rutgers.edu/~richmich/NVF%20Spring%202013/ROR%20on%20VC.pdf 1 Historical Returns in Angel Markets, Right Side Capital Management, and other sources listed at http://techcrunch.com/2012/11/17/how-institutional-limited-partners-can-avoid-limited-returns/
  6. 6. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview HBS Alumni Angels Global (HBSAlumniAngels.com): Progress Since 2007 • 11 chapters globally • Over 800 members invested in over 100 companies
  7. 7. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview • >250 members, largest angel group on East Coast by number of paying members • Investments range from $15K - $500K; median $25K, mostly convertible notes • >$4m in total investments in >30 companies, $5m including affiliates • Monthly pitch nights with typically 4 companies/night • Launched Venture Capital Access Program, helping women and minority entrepreneurs meet members of our network Progress Since December 2010
  8. 8. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview The Three Lies of Our Name • Membership open to all Harvard affiliates • We invest in graduates from any university • Members from across the US and invest across the US
  9. 9. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview We Want to Partner With More Players in the Harvard Ecosystem • HBS Healthcare Alumni Association • HBS Club of South Florida • HBS Club of Connecticut • HBS Alumni Angels of Northern California • HBS Women’s Association of Greater New York • HBS eClub • Harvard Club of NYC • Harvard Club of Princeton (NJ) • Harvard in Tech Harvard Alumni Association • Harvard Alumni Entrepreneurs • Harvard iLab • Harvard Law Entrepreneurs Network • Harvard Venture Partners • Harvard Social Innovation Collaborative • Harvard Aspiring Minority Business Leaders and Entrepreneurs • Harvard GSAS Business Club • Harvard Graduate Student Council
  10. 10. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview About Our Members Requirements: • Be accredited investors • Budget to invest at least $25,000 per year in early-stage companies. This is a directional commitment, not binding. • Sign our Membership Agreement and join the HBSAANY. • Be Harvard affiliates (not necessarily HBS). Our members include venture capitalists, entrepreneurs, investment bankers, and other experienced businesspeople.
  11. 11. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview 65% 35% 60% 40% 56% 45% 51% 49% 46% 54% 2010 2020 2030 2040 2050 White Non-Hispanic “Diverse” Population America’s Growth America’s Population by Ethnic Background United States Department of Commerce
  12. 12. Intro Originate Structure Add Value Next Steps © 2016 David Teten. More at teten.com EvaluateOverview Venture Capital Access Program • HBSAANY founded this program to help minority and women entrepreneurs meet potential investors in the HBSAANY network. • As part of this program, we have organized joint pitch nights with the HBS alumni associations for the African-American, Latino, Womens’, and LBGT communities.
  13. 13. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  14. 14. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Definition: Start-Up Steve Blank: “A startup is a [temporary] organization formed to search for a repeatable and scalable business model.” http://www.docstoc.com/docs/425051/Financing-Lifecycle-of-your-startup
  15. 15. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Notable Angel-backed Startups
  16. 16. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Why Angel Investing? • Exceptional time for entrepreneurship – Low cost of starting – Exploit seismic changes in technology • High historic returns – Permanent institutional arbitrage increases likelihood of continued high returns • Portfolio diversification – Uncorrelated alpha • Education and Meeting People – Work with passionate entrepreneurs, like-minded high net worth individuals, and VCs – Understand the future • Opportunity to be a mentor – Become board member / advisor / interim executive • Altruism – Promote entrepreneurship to build and support thriving communities
  17. 17. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Requirements to be a Successful Angel • Large bank account – Need to weather losses and reserve capital for later rounds. • High risk tolerance – Most investments will fail. Don’t invest money you can’t afford to lose.2 • Patience – Assets are illiquid and average time to exit is ~6 years. • Rigorous due diligence – A minimum of 40 hours per investment correlates with best returns.2 • Value-add – Top angels have relevant industry experience and are active advisors.2 • Diversified portfolio – You should be willing to make a minimum of 10 investments—better 20. 3 Is It Worth It?, Journal of Business Venturing 2 Returns to Angel Investors in Groups, Kauffman Foundation If you lack anything above, avoid angel investing.
  18. 18. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Why join an angel group? • Higher returns! • Scale – more investment dollars • Collaboration re: due diligence • Industry/topic experts • Broad domain knowledge • Broader network as a resource for portfolio companies • More and higher quality deal flow • Make new friends Susan Balloch, Golden Seeds
  19. 19. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  20. 20. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com HBS Alumni Angels NY Deal Criteria HBS Alumni Angels members invest as individuals, typically in aggregate up to $350,000 in any particular investment. Ideal candidates are companies seeking $100,000 to $750,000 We invest in capital efficient "for profit" businesses, and expect our portfolio companies to achieve a successful exit within five years. We do not invest in R&D intensive businesses or those with high capital requirements. We strongly encourage business plan submissions from Harvard Alumni, but consider all investments based on potential economic returns. We typically invest in companies with these characteristics: Premoney Valuation: $1,000,000 - $3,000,000 Capital Seeking: $100,000 - $750,000 Previously Raised: $50,000 - $500,000 Generally we expect the following performance from our portfolio companies: Expected Revenue By Year 5: $10,000,000 - $50,000,000 Expected Returns: 10x Investment - 50x Investment Expected Years to Exit: 3 Years - 5 Years Expected Years to Break Even: 2 Years - 3 Years
  21. 21. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  22. 22. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Info is private Few buyers based on Robert Bruner, Applied Mergers & Acquisitions, page 186 Ability of buyer to intervene to tailor pricing & terms Info is public Many buyers Sweet spot of highest returns Higher returns Lower returns Private information is more valuable than public information because of the leverage that discretion gives to the buyer. Buyer Power vs. Public Awareness of Transaction
  23. 23. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com You earn higher returns by investing in people you know well. Mutual Fund Managers’ Excess Returns in Companies Run by College/Graduate School Classmates vs. All Other Companies Study of 2,501 portfolio managers of 1,648 actively managed equity funds that specialized in aggressive growth, growth, or growth and income stocks between January 1990 and December 2006 Source: The Small World of Investing: Board Connections and Mutual Fund Returns; Lauren Cohen, Andrea Frazzini, and Christopher Malloy, 2008 Connected Holdings=Stocks for which managers had the strongest connection to senior officials (same school at same time with same degree) Excess return=total gain minus the Treasury bill return
  24. 24. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Investment Search Process (# Companies) Angel groups using Gust[i] Typical entrepreneur Profiled initially 20,850 ~3-6 Target Selected 1,315 ~3 Met 1,047 NA Due diligence 577 2 Invested/launched 541 1 Deals as % targeted companies 33.5% (2.1% of submissions) 33% [i] Available at http://angelsoft.net/a/venture-valuation , as of twelve months ending March 17, 2010.
  25. 25. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Intermediaries refer deals to investors primarily in the hopes of future revenues. • Possibility of future revenue • Integrity • High certainty to close • Responsiveness • “Fair” treatment of sellers • Experience with the industry or owner type • Friendship • Candid feedback • Maintaining a single point of contact http://www.flickr.com/photos/extranoise/3382930813/ Top Reasons Intermediaries Refer Deals to Investors (descending order of importance)
  26. 26. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Differentiation makes origination more efficient. Selected Highly Differentiated Investing Strategies Strategy Example Co-investments with corporates Blackstone Group, Castle Harlan, Clayton Dubilier & Rice Executive-led transactions Frontenac Company, GTCR, Housatonic Partners Intellectual property Intellectual Ventures Spinning out processes from within Fortune 500 companies and setting them up as independent ventures Exigen Capital Deep focus from early to late stage in narrow vertical Andreessen Horowitz, Healthpoint Capital Minority-owned businesses AP Capital, ICV Capital Partners Women-owned businesses Hypatia Capital Family-owned businesses Heritage Partners Film financing Relativity Media Buying Western companies and outsourcing operations to China Crimson Ventures Distressed Searchlight Capital
  27. 27. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Social media technologies are pertinent throughout the investing cycle. Investing Cycle Use of Social Media Raise capital • Identify value-added potential investors & find a path to them • Solicit past investors in both your prior and comparable funds Originate investments • Identify and reach out to relevant people & companies • Become a magnet for investment opportunities Due diligence • Review professional and personal lives of management • Talk with firm’s network: customers, competitors, suppliers Negotiate Deal • Gain insight into counterparty’s negotiating style, motivations Improve operations • Recruit “A” performers • Accelerate sales and marketing Exit investment • Identify and more effectively negotiate with strategic acquirers How Investors Are Using Social Media
  28. 28. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com) Ch = Character Co = Your Firm’s Competence R = Relevance of the contact S = Strength of your relationship I = Information N = Number of people D = Diversity = D * ∑ (Chn*Con *Rn* Sn*In) N n=1 Corporate Network Valuation Formula
  29. 29. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Biography analysis software allows you to search by common affinity and more effective subsequent outreach. Leading Providers of Biography Analysis Data * ff Venture Capital portfolio company • Boardex • Klout* • LinkedIn • Pipl • Relationship Science • ZoomInfo
  30. 30. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (TheVirtualHandshake.com) • Daniel Zumino, founder of BCG Paris and angel investor, had made a small investment in a startup • He sent email to Stanford GSB alumni list seeking capital for the startup • Raised $8m through referral from alumni, via this list service Case study: A set of angel investors sourced a transaction and invested $8m via an alumni email list.
  31. 31. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com 10-15% of the active VC population of 1,000 blog and tweet; some individual bloggers are as influential as entire media companies. * Individual VC blogs http://www.blogmetrics.org/venture_capital Jeff Bussgang, Flybridge Capital Partners http://techcrunch.com/2011/01/19/top-20-vc-bloggers/ Top VC Blogs (BlogRank), November 2014 Blog Title # Incoming Links (rank) Google PageRank VentureBeat 1 7 Paul Kedroskys Infectious Greed* 2 6 Redeye VC* 4 5 VC Café* 13 5 Xconomy Venture Capital Feed 1 6 India Business Blog 13 5 Web Strategy by Jeremiah 2 5 PEHub Blog 21 7 VC and Angel Investor Profiles 12 6 Union Square Ventures* 8 6
  32. 32. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Best Practices in VC Blogging (written humorously, but still good advice) Hi, I’m a tech VC on Twitter. I’m @xyzvc My icon is cool. It’s a painting/cartoon/wacky photo. Shows that I’m hip and approachable. But when I meet with you, I’ll still crush your dreams. I tweet about technology, but occasionally post personal stuff. Important to show I have a sensitive side and care about more than just making tons of dough. I use # tags, sometimes as a funny form of emphasis. Kind of like a wink and a smile ;) #donttakethisposttooseriously I love Twitter because I can broadcast my blog posts. Otherwise, no one would read them! I blog at xyzvc.com! I tweet blog posts with advice on fundraising, customer acquisition, and company building. Usually, someone really smart has said it before and said it better. But I haven’t been in Hacker News for a while, so I figured there is no harm reinventing the wheel. Retweeting is fun. It’s like a virtual high-five. I retweet the posts of my partners, coinvestors, and entrepreneurs I’ve backed. Oh, I also retweet posts from guys whose butts I’m currently kissing so that they will like me. I really hope @fredwilson retweets this… I’d get so many new followers! My portfolio companies are the best. I will share so much of their good news with you it will make you want to unfollow me (unless you are a co-investor, in which case you will probably RT and add a #) If a portfolio company is doing bad, no Twitter love. It’s like going to Disneyworld and trying to find Hercules or Mulan. It’s like they never existed. I also tweet about the cool places I’ve been (via Foursquare and Gowalla), things I buy (via Swipely and Blippy), and the cool places I’m going to go (via Plancast). Wow, that’s a lot of tweeting! That’s why I also tweet about how busy I’ve been and how little I’ve slept. It’s a tough life. Full disclosure, I’ve been a tech VC and I’ve done most of these things. Hi, I’m a tech VC on Twitter (by Rob Go, NextView Ventures) http://www.robgo.org/post/890368565/hi-im-a-tech-vc-on-twitter
  33. 33. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Search engine optimize yourself. • Scan targets’ sites to understand the language that they use when searching. • Use keywords inconsistently. • Name what you’re selling. • Optimize top of the page. • Use Google Adwords Keyword Tool http://flickr.com/photos/neilt/2517652/sizes/o/ Search Engine Optimization 101
  34. 34. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Phone • Email • Web conferencing • Instant messaging • Internet telephony (e.g., Skype) • SMS • Twitter Using multiple media channels promotes stronger trust- building. Caroline Haythornthwaite, “Strong, Weak, and Latent Ties and the Impact of New Media,” The Information Society, 18 ( 2002) 385–401 http://flickr.com/photos/re-ality/41676755 Major Media Channels for Origination (descending order of importance)
  35. 35. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Meetup creates opportunities to meet face-to-face.
  36. 36. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Effective originators are data hounds Tools for Assimilating Data into Your Contact Relationship Management (CRM) System Data source Selected technology for inserting data into CRM Cards FullContact Data Enrichment Avention, ClearBit, Cloze, Data.com, Discover.ly, Evercontact, Introhive, LeadIQ, Plaxo, Ringlead, Salestools.io, SalesOps, VibeApp, DiscoverOrg Other LinkedIn Full CRM Microsoft Dynamics, Salesforce, SalesforceIQ, Act, Base, many others
  37. 37. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Originators use blog and web readers to filter the data deluge, such as Bottlenose*. * ff Venture Capital portfolio company
  38. 38. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Investors can also connect with one another via online gated communities. Sample Gated Communities for Investors Angel Group Platforms Angel Communities Consumer Loans Private Equity Public Gust AngelList CircleBack Lending Assoc. for Corporate Growth Albourne Village Proseeder CircleUp LendingClub Axial FT Alphaville Long Room FundersClub Prosper Intralinks Deal Nexus Sum Zero OurCrowd MergerMarket Value Investors Club SeedInvest
  39. 39. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Senior executives prefer to interact online behind barriers to more junior people, just as they do in traditional networks. Sample Gated Communities for Executives • IERG Online • Executive Forum • Sermo • Some LinkedIn groups
  40. 40. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com And everyone else is online too. • Yahoo Groups • Google Groups • LinkedIn Online Community Platforms • Xing
  41. 41. Character – Competence – Relevance – Strength – Information – Number – Diversity Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Diversity your network by entering logically adjacent social networks. • By technology • By industry • By geography • By personal characteristics • By market http://flickr.com/photos/extranoise/169187125/sizes/
  42. 42. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  43. 43. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com How to Structure Your Portfolio • Compare vs. size of overall portfolio: typically cap at 20% • Target at least 10-12 investments. Assume: – 30-40% total loss – 30-40% breakeven and illiquid – 20-30% positive return • Diversify by industry, risk, and duration Susan Balloch, Golden Seeds
  44. 44. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Shortcuts to Structuring a Deal • Do not lead your first few deals; join the syndicate of a more experienced investor • Read Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist, by Brad Feld and Jason Mendelson • Use a template term sheet, e.g., National Venture Capital Association Model Legal Documents and the Wilson Sonsini Term Sheet Generator • Build your own financial model of at least the cap table; see teten.com/finance for some templates .
  45. 45. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Choose the right terms to optimize • Pre-money valuation is just one term of many, and probably not the most important. • Other key terms, in declining order of importance: – Vesting period for founders – Redemption option, typically after 5-7 years – Liquidity option, e.g., liquidation preference and a participating preferred structure – Investor protective provisions, e.g., and anti-dilution protection – Board seat http://pasadenaangels.com/2011/02/the-truth-about-early-stage-pre-money-valuations/
  46. 46. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com #1 area of concern: Founder(s) Incentives 1. Allocation of Equity 2. Stock Vesting 3. Power issues – Titles, etc. 4. IP issues – relationship with past employers? Ownership of outsourced work? 5. Board Seats 6. Employment Agreements Tom Cervantez and Cecily Anne O’Regan, Business Counsel Law Group
  47. 47. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Review the Company’s IP (which is usually valueless at launch) The Enterprise Patents Trade- marks Copy- rights Trade Secret Sui Generis Tom Cervantez and Cecily Anne O’Regan, Business Counsel Law Group
  48. 48. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com How to value a startup: you can’t • Valuation is based on negotiation, not calculations. • Benchmark against companies at a similar stage of development. – Revenues? – # Employees – # Customers – Traffic
  49. 49. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Checklist for discussing the next round • When? • How much? • Who should lead? • How can I help the entrepreneur? • Should I follow on? Dan Rosen, Commerce Ventures
  50. 50. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Phase of Startup Development Needs FTE Management Milestones Early Development to Proto/Beta (12 months) -Tight linkage between development & business goals - Focus - Excellent people 1 to 10 CTO and GM Working prototype, beta installations Early Customer Deployments (24 months) -100% dedication to customer satisfaction - Cheerleading and endurance 5 to 20 CTO, VP Eng, Dir’s of Sales, Finance, Ma rketing GM/CEO Customer approval, some revenue Moderate Penetration (36 months) Savvy Management 20 to 50+ CTO, VP Sales, Marketin g, Finance, Engine ering, CEO Clear target market, Repeatability of business, real product, real customers Rapid Penetration (60 months) Excellent Management Growth to 100’s All VP’s, CFO, COO if necessary 1/3 to ½ of all new sales in target markets Dominance Greed and Ego Big Domestic and Worl dwide Clear #1 player http://www.slideshare.net/Hukshorn/valuation-14854407
  51. 51. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Questions, Capital, Valuations Question to answer with capital Capital needed Sources Pre- Money Seed: Early Developme nt Proto/Beta Technology: does it work at all? Market: is there a market? Timing: if a market, when does it start? < $1M usually <$500K - Friends, Family, Fools - Angels - Seed Funds $100K to $1M 1st Round: Early Customer Deploy ment Technology: does it work in practice? Target market: is this the right first place? Timing: if a market, when does it start? $1M to $4M - Angels - Seed Funds - Early Stage Funds $2M to $5M 2nd and 3rd Round: Moderate Penetra tion Market timing: is the market happening fast enough (or too fast)? Execution: can we grow, develop, sell, manage, etc.? $5M to $15M - Early Stage Funds - Later Stage Funds - Corporate Investors - Venture Leasing $10M to $50M Mezzanine and IPO: Rapid Penetration Execution: can you grow fast enough without loosing control? $0 to $100M - Corporate Investors - Mezzanine Funds - iBanks - Leasing $40M to $100M+ Dominance Complacency: with so much success can you continue being paranoid? Corp. finance - iBanks - Commercial Banks - Et al. Public Markethttp://www.slideshare.net/Hukshorn/valuation-14854407
  52. 52. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  53. 53. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com 7 levers of value creation (“TOPSCAN”) Team-Building Growing a startup’s human infrastructure Operations Enhancing admin, accounting, legal and technological capabilities Perspective Strategy, competitive positioning, defining the target market, and scoping the product. Skill-Building Building the right skills and ensuring they develop with the company’s life cycle Customer Development Identifying the right customers and gaining access to them Analysis Helping entrepreneurs measure, understand and report the performance Network Providing access to the investor’s typically very large network
  54. 54. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Investor’s Demeanor Insecurity = Distraction I’m thinking of investing $X Unsaid: but I usually invest $X/2 I’ll ask my friends to try your product later • Inflating $X motivates entrepreneurs to misallocate time • Due diligence is about an investor making an efficient decision, not about playing entrepreneur-lite • Someone has to be first. If you are hedging why did you invest? Confidence = Adding value I can invest $X. My decision criteria is Y I’ll email/ tweet / blog / re-tweet • $X is historically accurate and reflects real risk-appetites • I’m part of the team • Network effects almost always matter • I do what I reasonably can to help bootstrap Source: Michael Ibrahim, CEO, Whisk
  55. 55. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Investor’s Advice Source: Michael Ibrahim, CEO, Whisk Ideas = Rarely adding real value Actions = Adding value I’m a board member of public company Z – if you give me a 2 page proposal I’ll share with the board I have time, if helpful I can take a turn at your project/deck/article • Wow! • Rarely do investors have this much time…but if you do, offer You should get an article in the NY Times You should raise more money You should have a deal with Google Your product should do Z • No sh*t – help make it happen please! • Maybe you have an “Aha!” so do share – but don’t presume you understand the 5k competing priorities in the roadmap
  56. 56. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Investor’s Connections Michael Ibrahim, CEO, Whisk Intros = The most effective way an investor can create value But even these can go slightly wrong Please send a deck to W, he might want to invest Unsaid: sorry I didn’t check with you first Please meet Mr. X, analyst at firm Q Unsaid: sorry I didn’t check with you first • Don’t promise company assets, it undermines our ability to qualify prospects • Whoops! I had an intro to a decision maker but just got tied up with a gate- keeper This person could fill a gap in your team Give me a blurb and I’ll intro you to these 3 Series A investors Would you like to talk to company Z? I know the CEO and could imagine a BD deal • Yes!
  57. 57. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Things Investors Say But Shouldn’t Craig Kanarick, CEO, Mouth
  58. 58. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com What CEOs Need Craig Kanarick, CEO, Mouth • Money + more money • Team members • Clients • Partnerships • Access to other entrepreneurs • A listening ear • Support and praise • Expertise (actually do work)
  59. 59. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com • Introduction • Overview • Evaluate • Originate • Structure • Add Value • Next Steps Agenda: Introduction to Angel Investing http://www.flickr.com/photos/alancleaver/4375850315/sizes/m/in/photostream/
  60. 60. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com How You Can Get Involved with HBS Alumni Angels • Join! • Take a leadership volunteer role. • Promote membership in the HBS Alumni Angels. • Recruit companies seeking funding to visit HBSAlumniAngels.com. • Provide analytic resources. If you have access to MBA-level research talent, we have a number of research projects in queue. • Introduce us to potential sponsors, including both service providers and large corporations looking to invest in innovation. • Organize joint events. • Promote us to the media.
  61. 61. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Any questions ? slides at teten.com/angel Sign up for updates at teten.com @dteten
  62. 62. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com A representative of ff Asset Management, LLC d/b/a ff Venture Capital and its affiliated funds (collectively, “ffVC”) is providing this presentation for informational purposes to the intended audience. Nothing in this presentation shall constitute an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction nor should anything in this presentation form the basis of, or be relied upon for, making any investment decision. Nothing in this presentation constitutes professional and/or financial advice of any kind (including business, employment, investment advisory, accounting, tax, and/or legal advice), nor does any information in this presentation constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. This presentation and the information contained herein are provided “AS IS”. Neither ffVC nor the presenter makes any representation or warranty (express or implied) with respect to the information contained herein (including, without limitation, information obtained from third parties). ffVC and the presenter expressly disclaim any liability based on or relating to the information contained in, or errors or omissions from, these materials; or based on or relating to the recipient’s use (or the use by any of its affiliates or representatives or any other person) of these materials; or based on any other written or oral communications transmitted to the recipient or any of its affiliates or representatives. Neither ffVC nor the presenter undertakes any duty or obligation to update or revise the information contained in this presentation. Disclaimer
  63. 63. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Appendix
  64. 64. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com Geo Time Period Study Total Investments Exited Investments IRR US 1994 - present Band of Angels Website FAQ 240+ 63 54.0% US 2010-11 Sohl: “The Angel Investor Market in 2011: The Recovery Continues” Unknown Unknown 18-28% US 2009-10 Sohl: “The Angel Investor Market in 2010: A Market on the Rebound” Unknown Unknown 24-36% US 2008-09 Sohl: “The Angel Investor Market in 2009: Holding Steady but Changes in Seed and Startup Investments” Unknown Unknown 23-38% US approx 2004- 09 DeGennaro & Dwyer: "Expected Returns to Angel Investors" 603 434 33.0% UK 2000-08 Wiltbank: "Siding with the Angels: Business angel investing - promising outcomes and effective strategies" 1080 406 24.6% US 2007-08 Sohl: "The Angel Investor Market in 2008: A Down Year in Investment Dollars But Not in Deals" Unknown Unknown 22.0% US 2006-07 Sohl: "The Angel Investor Market in 2007: Mixed Signs of Growth" Unknown Unknown 27.7% US 1990-07 Wiltbank & Boeker: "Returns to Angel Investors in Groups" 3,097 1,137 31.4% US approx 1999- 07 Villalobos & Payne: "Startup Pre-Money Valuation: The Keystone to Return on Investment" 117 117 24.3% UK 1961- 1996 Mason & Harrison: "Is it worth it? The rates of return from informal venture capital investments" 372 128 37.4% Average Angel Returns from Twelve Studies Historical Returns in Angel Markets, Right Side Capital Management, and other sources listed at http://techcrunch.com/2012/11/17/how-institutional-limited-partners-can-avoid-limited-returns/
  65. 65. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com HBS Alumni Angels of Greater New York Mission • The mission of the HBS Alumni Angels of Greater New York is to accelerate the growth of the tristate early-stage company ecosystem, primarily by enabling Harvard alumni to invest in startup companies and earn healthy returns. We invest in companies regardless of whether or not they have any Harvard affiliation. • Our related goals: – Establish a financially sound, self-sustaining organization that will be a permanent contributor to angel investing, HBS, and entrepreneurship. – Provide on-going education opportunities to the HBS community on angel investing and entrepreneurship, including via seminars and events – Promote HBS as a leader in entrepreneurship. – Promote relationship building between HBS alumni, HBS faculty, and current HBS students with an interest in early stage ventures and angel investing.
  66. 66. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com HBS Alumni Angels Global Mission • The mission of HBS Alumni Angels Global is to provide an educational and networking forum for Harvard alumni who are interested in researching and investing in early stage companies on an individual basis. Other goals of the HBS Alumni Angels include: – Providing long lasting relationships between Harvard alumni and Harvard overall for fundraising, governance, and promotion of entrepreneurship and angel investing that is critical to establishment of Harvard as a leader in entrepreneurship – Providing on-going education opportunities via seminars and events relevant to Harvard alumni interested in angel investing – Providing relationship building between current Harvard students and Harvard alumni with an interest in early stage ventures and angel investing – Providing mentoring and judging for business plans in the student and alumni business plan competitions – Establishing HBS Angels as the leading point of contact for interaction with Harvard on matters relevant to angel investing and entrepreneurship – Establishing a financially sound, self-sustaining organization that will be a long-time contributor to Harvard, entrepreneurship, and angel investing
  67. 67. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com HBS Alumni Angels NY Process • HBSAANY promotes submission of business plans and chooses among submissions approximately 4-8 to present at each pitch night. • Alumni invest individually; HBS Angels NY helps to coordinate. • HBSAANY as a group makes no recommendations for investment and does not organize any group investments. • Recently launched Fast Track program for angel deals which are >50% closed and need some angels to fill out a round.
  68. 68. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com HBSAANY Deal Funnel Total # of Applications: 900 Pitch Night: 56 6% Invested: 9 1% data from March ‘11 through March ‘13
  69. 69. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com HBSAANY Member Interest by Industry data from March ‘11 through March ‘13
  70. 70. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com $0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 2004 2005 2006 2007 2008 2009 2010 2011 VC Angel National Venture Capital Assoc 2012 Annual Report; New Hampshire Center for Venture Research Annual Market Analysis reports 2004-2011 US Angels commit $20+ billion per year, over $6 billion at seed or start-up stage
  71. 71. Intro Originate Structure Add Value Next StepsEvaluateOverview © 2016 David Teten. More at teten.com US Angels invest in 60,000+ companies every year National Venture Capital Assoc 2012 Annual Report; New Hampshire Center for Venture Research Annual Market Analysis reports 2002-2011 - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ang el

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