Stockholm svca 27okt2010

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Speech at Business Angel conference in Stockholm organized by Swedish Venture Capital Association (SVCA) on best co-investment practices between angel investors and VC's

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Stockholm svca 27okt2010

  1. 1. Early-stage financing! Opportunities & traps for angels co-investing with VC’s! Nicolas Berg, Redalpine Venture Partners! 7th EBAN Winter University ! Luxembourg – 31. October 2008! Affärsängeldagen 2010 Stockholm 27 okt 2010 Successful early-stage investing: Combine the best practices of business angels and VCs
  2. 2. • About me + Redalpine 01 • Early-stage venture zone 02 • Investment process 03 • Case studies: XING, others 04 • Learnings 05 • Q&A 06 00 Agenda
  3. 3. • Founder of 8 start-ups since 1984 Borsalino 1998; 64 angels + 1 VC; sold 2000 • Angel investor in 16 start-ups 2000-2006 e.g. XING Angel Investor 2004, IPO 2006 • Partner Redalpine venture fund 2007-2015 • XING CM CH; journalist; coach@venturelab • Swiss with norwegian roots, M.Sc. (BA) 01 About me Nicolas Berg, Redalpine Venture Partners
  4. 4. • Redalpine invests $200k-2m in 12-15 highly scalable European start-ups 2007-2015 • Track-record Partner: 5 trade-sales + 1 IPO 2006-2008 (multiples 7-35), 340 new jobs/$1m* 01 About Redalpine *) Initial investment (excl. co-investors & following rounds)
  5. 5. • Restorm.com – right clearing between musicians and creative producers • Veeseo.com – SEO for TV & video platforms by real-time speech to text indexing („google“ TV) • Poken.com – digital business card connecting people, objects and places at events • Biognosys.ch – next generation proteomics platform to enable personlized medicine • Redbiotec.ch – produces virus like particles to enable better and safer vaccines • Insphero.com – 3D tissue production for faster and safer drug development 01 Redalpine portfolio examples
  6. 6. • because start-ups difficult to evaluate (you must judge people rather than paper) • post-investment: high support need per $ • small transactions ($150k-2m) > small fund > small management fee • but: higher multiple if successful (>10, goal >30) • and: 340+ new jobs per $1m initial investment (2000-2006) 02 Early-stage financing gap Valley of death: financing need $500k-2m
  7. 7. • Top in EU25 innovation ranking: 1. Swi, 2. Swe (EIS 2009) • Among top 50 in world ranking of universities: Zurich ETH (18.), Karolingska, Uppsala • Quite good PISA results 2006 (2003): Swi (7. math), Swe (7. reading) • active start-up scene & top bluechips (Nestlé, Volvo, Ericsson, Astra, Roche, Novartis, UBS) • small home market > export oriented 02 Sweden and Switzerland Almost equal conditions
  8. 8. 02 Early-stage financing gap
  9. 9. 02 Angels invest more than VCʻs VC‘s Start-up investment iceberg • 90% from government grants, foundations, and – first of all – angel investors • 10% from VC funds, corporate funds or banks • Unexploited potential: only 1 out of 200‘000 Swiss millionaires are serial angels Start-up = (inter)national, highly scalable, innovative/high-tech company 90% from angel investors
  10. 10. • Virgin angel: low • Fulltime angel & ex serial entrepreneur: medium • Amateur angel, corporate manager: low • Managing angel, hands-on: low • Angel club without sidecar fund: low • Angel club with sidecar fund: low to medium • Angels co-investing with top VC fund: higher 02 Type of investors Success rates uneven
  11. 11. • Most angel networks show a negative performance: true for Switzerland 1999-2009 • Most angels are not successful: true • Angels may kill a good deal: true - if VC didn‘t enforce a proper shareholder agreement • Angels act more emotional: true – so what? • Avoid angels: wrong - good angels do much more good things for start-ups than most VC‘s 02 Why some VCʻs distrust angels Top 5 prejudices
  12. 12. • VC is rich & will say no (true - odds are 1 : 99) • Most VC‘s don‘t invest in early-stage (true) • A VC‘s will force you to sign his terms (true- if he recognizes that he is the only one) • Most start-ups will never get funded by a VC (true - but most start-ups would fail anyway) • A VC will not add value to our start-up (wrong - best 25% improve odds for top exit) 02 Why most people hate VCʻs Top 5 prejudices
  13. 13. • successful VC funds are • managed and financed by successful former angels/serial entrepreneurs • systematically invite super angels for co- investments or co-invest with them • successful angels • systematically co-invest with successful VC‘s or invite them to co-invest 02 Successful combinations VCʻs co-investing with top angels
  14. 14. • Investment Managers: Serial entrepreneurs • Stage: early • Business model: highly scalable • Capital need: $500k-2m, $500k-7m in total • Region: Zurich/Stockholm, Switzerland/ Sweden, Nordics/DACH, Europe, World • Sectors: ICT, Life Sciences, Greentec • Exit multiple goal: >20 bis >30 / deal (1:10) 02 Successful investment strategy Highly scalable & diversified
  15. 15. • Sourcing: get access to deal-flow 500-1000 • Selection: Pre-screened pitches only 1. top team. 2. unique & disruptive idea. 3. clear business model. 4. moderate valuation $1-3m. 5. multiple >30 in best-case exit scenario • Negotiating: 1. Professional lead, 2. VC terms, 3. Simple structure (board of 3, angels pooled) • Support: Active role of lead + 1 co-investor • Harvest: Plan, seek & go for top exit from start 03 Investment process Top 5 criteria of winning angels
  16. 16. • 500 times no within 5 min = $ 5‘000 • 450 times no within 30 min = $ 15‘000 • 50 times face-to-face (8h) = $ 30‘000 • 2-5 deals after due dilligence technology, market & team = $ 50‘000 • Total $100‘000 03 Sourcing and selection Deal-flow of 1000: Quantity provides quality Annahme von CHF 500/Manntag (CHF 10‘000/Monat)
  17. 17. 03 Negotiating Term sheet, due diligence, legal • 4 days term sheet negotiation $ 4000 • 1-2 days lawier $ 3200+ • 1 day legal/financial due diligence $ 2000 • expenses $ 1800 • Total $ 10-20k
  18. 18. 03 Post-investment support by lead investor till exit • 0.5 - 1 days / week per portfolio company • 5 investments = 50-100% job • 10 investments = 100-200% job • Total for 10 investments: $ 120-250‘000
  19. 19. 03 Total cost per portfolio of 10 annual cost of early stage investing • Sourcing & selection $100‘000 • Negotiating & legal $ 20‘000 • Post-investment support $ 200‘000 • Total annual cost: $ 320‘000
  20. 20. • since 2001 we were pro-actively searching for a social network (SN) investment opportunity with a good business model • After looking at 5 other SN, we met XING in 2004 and become lead angel (1st rd €500k) • we developped model for world-wide roll-out in Switzerland as XING Country Managers • 2005 XING accepts €5m from VC in a pre-IPO round – 2006 IPO at €200m valuation 04 Pro-active sourcing & support Case study 1: XING
  21. 21. • Lead investor was an unexperienced angel • Lawiers bill of >$ 50‘000 (!) • Big3 company (!) mandated for accounting • headhunter (!) mandated CMO & CFO search • later early-stage VC took lead, initiated more cost efficiency & tuned strategy, and syndi- cated 2nd rd (VC, super angel, corporate VC) 04 Challenging examples Case study 2: Project T
  22. 22. • 1st round by 2 angels (ex big pharma) introduced by VC, they convinced a difficult co-founder to leave and sell his shares • Then early-stage VC joined first round and added additional terms & shareholder agr‘t • 2nd round with foreign VC and super angel • after 3 years big pharma shows interest beyond joint research (exit signals) 04 Challenging examples Case study 3: Project Q
  23. 23. • Top angels and VC‘s hand in hand • Outsource sourcing & pre-screening • Check pre-selection, trust your intuition • Check terms • be active in post investment phase • diversify in 10+, sectors, time-wise 05 Learnings for angel investors Fulltime, quality, diversification
  24. 24. 05 Q&A Any questions? • Thanks for your attention
  25. 25. • follow serial entrepreneurs (ICT 25-50y, LS 35-70y) • 7 years for angel investment learning curve (faster in business angel network or with VC) • Diversify on >7 start-ups • keep 50% for next round • talk with VC‘s (some are human beings) • Read*, speak, publish *) Amis: Winning Angels; Guy Kawasaki: The Art of Start 06 Winning Angels Bonus tips
  26. 26. Instrument Return* Risk Liquidity Gold ?% quite high high Cash** 2% low high Real Estate 4% moderate moderate Bonds-CHF 3% moderate medium listed Equity 7% quite high moderate VC-early 20% high low PE-leverg 20% very high low 02 Risk and return *) in the long run **) your currency
  27. 27. • Team team team: Can it implement the vision? • Product/market: No-brainer? Disruptive? • Business model: Who pays whom how much? • Can I provide an added value for this deal? • When can I sell my shares to whom? (multiple high enough? Higher than 20?) 06 Investment criteria More bonus tips
  28. 28. • 50% eat too much and move to little • Organic Food that keeps you smart & slim • 50% of ads wasted – never again! • Media: We spend 5 out of 10h with new media • Multimedia- & Meta-Search (Mediaclipping, Swoodoo) • Vertical Social Networks (Quevita, Triphunter) • Connecting Devices & Toys (DoYouPoken) • 3D Virtual Apps (WoW, 2L, Starfruit, vMeet, vLearn, vShop) 08 Trends for pro-active sourcing

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