Uploaded byMichael Burcham
Entrepreneurial ecosystem p5 angels
Angel investors provide the majority of early stage funding for startups. They are high net worth individuals who invest their own money in companies, often locally, and typically invest between $25,000-$500,000. Angels fill an important role by providing the earliest professional funding for startups between friends/family and venture capital. They invest at the seed and startup stages where 90% of outside equity comes from angels.
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Entrepreneurial ecosystem p5 angels
- 1. The Entrepreneurial Ecosystem Part 5: Dr. Michael R. Burcham Building an Angel e. michael@michaelburcham.com Community w. www.michaelburcham.com t. www.twitter.com/michaelrburcham f. www.facebook.com/michael.r.burcham l. www.linkedin/in/michaelburcham
- 2. Starting companies arelike having babies – fun to conceive but hell to deliver. And once their born, they’re yours to feed until they are self sustaining. - Anonymous
- 3. Who Are AngelInvestors?
- 4. Who Are AngelInvestors? • High Net Worth Individuals • Have an “Early Stage” Preference for Investing – Individuals - $25,000 - $50,000 – Organized Groups - $100,000 - $500,000 • Often successful, exited entrepreneurs or retired business persons – active investors • Tend to invest both time and money in companies • Angels invest their own money (not money managers) • They mostly invest in local companies and entrepreneurs
- 5. Definition: Accredited Investor • Financial position of investor: • Net worth: $1 million, or • Annual personal income: $200K, or • Family income: $300K • Assumption: • Knowledgeable – capable of due diligence • Can afford to lose invested funds • Implications: • Giving up regulated disclosure
- 6. Profile of Angels- Median • Years investing 9 • Number of investments 10 • Total exits/ closures 2 • Years as entrepreneur 14.5 • Number ventures founded 2.7 • Age 57 • % wealth in angel investing 10% • Level of Education Masters degree
- 7. Not all Angelsare Alike MORE Operational Guardian Expertise Angel Angel Relevant Industry Experience Financial Professional Return Angel Entrepreneur Angel LESS Relevant Entrepreneurial LESS Experience MORE
- 8. How are AngelInvestors Organized? • Individuals – Other Successful Entrepreneurs • Organized Groups – One signature for all dealings – Better preparation for institutional rounds
- 9. Pros/Cons of AngelInvestors PROS CONS • Terms offered • Follow-on investment • Speed • Less sophisticated on terms • Simpler investor relations and value – may create issues • Often have helpful, relevant for later stage investors experience to share: – Business acumen – Vertical expertise – Financial experience – Director Services • Common Roles: – Advisor, Mentor, Coach, Director – Rarely a Paid Consultant
- 10. General Differences inAngels & Venture Groups Angels VC’s Funding amounts $25K to $1.5M $500K and above Motivation to Invest Not just return driven Mostly return driven Strong emotional component But some adjustments for other VCs and Entrepreneurs Often likes to be a coach, Bragging rights Accessibility Prefer anonymity Highly visible Reachable via referrals or groups Prefer to only look at deals referred from their networks Geographical focus Regional, with in a 4hr drive Regional, National, International depending on firm Key reasons to invest Personal chemistry with Mgmt Nearly developed product Detail Plan with large markets Some operating history with a strong experienced team Sustainable competitive advantage Sustainable competitive advantage Investment vehicle Common or Preferred Stock Preferred Stock Occasionally convertible debt Long term value Operational experience Experience in managing growth added Common Sense advice Deep pockets Specific Industry expertise Networks for additional capital Experience in managing IPO or sale exits Reaction to bad news Roll up sleeves and help to solve the Intense communications and coaching problem, Open up rolodex Open up rolodex, Help structure new financing or mergers Fire management Target exit time 5 to 7 years 3 to 5 years Target Returns 15 to 25% IRR 20% to 40% IRR
- 11. How Do AngelInvestors Fit within the Entrepreneur Ecosystem?
- 12. Ecosystem Component forInvesting Non-Equity Financing Equity Financing Angel Financing Self Finance / Venture Capital Bootstrapping Debt / Private Equity Bank Finance Public Stock Markets
- 13. The Funding Continuum Discovery Proof-of Product Product Manufacturing/ Concept Design Development Delivery Pre-seed Idea Seed Start-up Expansion/Mezzanine Funding Funding Funding Source of Capital Founder Venture Seed Funds Funds Friendsan Institutional dFamily Equity Angels Loans Angel Groups
- 14. The Angel’s Process • Pre-screening • Screening • Due diligence • Investment presentation • Follow-up discussions and meetings • Closing
- 15. Estimated that 90%of Outside Equity Capital in Seed/Startup Stage Companies is Sourced from Angel Investors
- 16. Angels Invest inthe Majority of Startup & Early Stage Deals Number of Deals in 2010: Angel Investment and Venture Capital Source: “Jeffrey E. Sohl, Center for Venture Research” and 2010 NVCA Yearbook
- 17. Angels: Majority ofStartup Funding Funding by Source & Stage, 2010 Funding by Source and Stage- 2009 15,000 Venture Capital 12,500 Angels US$ Millions 4,672 10,000 7,500 1,596 Sources: 5,511 Center for 5,000 8,272 Venture 6,160 5,912 2,500 Research and 2,640 PwC 0 528 MoneyTree Seed Early Expansion Later Investment Stage Angel Investors 2010 Venture Capital 2010 • $17.60 billion • $17.69 billion • ~57,000 deals • ~2,800 deals • 35% seed/startup • 9% seed/startup • 47% early stage • 65% later/expansion capital • ~ 259,500 individuals • Total 794 firms (not all active)
- 18. The Life Cycleof The Investment Process They like the idea Term Sheet The 100 Negotiated Due Diligence Deal Ecstasy Rejections Interest 0 Shown Reformulate Last Minute Plan Business Demands/ Agony Plan Expectation All Reject Mismatch -100 9 to 12 months
- 19. What Behaviors Drive Investors? 1.Fear 2. Greed
- 20. How Do WeFind & Develop Angels within our Entrepreneurial Ecosystem?
- 21. Recommendation 1: Identify PotentialAngels in the Community Examples: • High Net Worth Individuals • Retired Business Executives • Active Serial Entrepreneurs • Known Angels Who are Relatively Inactive
- 22. Finding Angels • Friends and Family • Other Entrepreneurs who you worked with in the past • Services providers – Attorneys, Accounting firms, etc • Angel Groups • Investment Conferences Its all about Networking! There are no short-cuts!
- 23. Finding Angels… U.S. Millionaires Informal Investors Active 4,200,000 AngelsCent 3 study estimates er for Venture Research Investors 1,000,000 in Angel 225,000 Groups 12,000
- 24. Recommendation 2: Organize aMeet Up or Discussion • Angel investing works best when there is a sense of “community” within the group. As they get to know one another and discuss the idea, you’re likely to gain more traction. • Invite 3-4 active Angels from nearby cities if you don’t really have any active Angels – to share their story and discuss why they invest.
- 25. Motivation: Why Be anAngel Investor? • Helping entrepreneurs • Stay engaged – using skills and experiences to help build business • Giving back to community or university • An active form of investing – not just watching markets • Return on Investment is the metric
- 26. Recommendation 3: Provide FormalTraining • Process for Investing • Terms and Term Sheets • Valuation Models • Thinking “Portfolio” as an Approach • Risks • Expectations and Time Horizons • Board Roles, etc
- 27. Angel Investor Realities •Statistically Angel Investors reject 80% of the deals presented • Average outcomes of Investments made: – 45% fail – 40% are the “living dead” – 15% are winners • Since at the seed stage it is impossible to predict which ones will be winners ……………. • Therefore, all portfolio companies must demonstrate the opportunity for a 10-20X return on investment.
- 28. Recommendation 4: Establish aProcess for Angels • Timing for when the entrepreneur is introduced to or meets with the angel • Periodic “Pitch Days” for groups of angels to hear a concept (or several concepts) to be followed up with individual meetings • Ensure all legal and accounting issues are already addressed before angel meetings • Timing for the funding-raising process, expectations for closing a round, etc.
- 29. Do’s & Don’ts •Get deals done – angels need to invest in 2-4 deals per year or more to be proficient. • Investors choose people over ideas. • Don’t drag on decisions, be helpful. It’s “angel” investor not “devil” investor • Don’t ever charge the entrepreneur to present to the angels.
- 30. Recommendation 5: Deliver aGREAT Product to the Angels • Ensure the entrepreneur has had good mentoring and coaching before Angel meetings – including having a viable business model and a few early customers (or potential customers) • Insist the entrepreneur tell their story well and are well prepared for the meeting (materials, etc)
- 31. What Materials DoYou Need?
- 32. Recommendation 6: Periodic (Quarterly)Meet-ups for Angels • Continue to build a sense of “community” – makes it easy to invite new individual Angels into the group or discussion • Share best-practices, celebrate wins, learn from those investments that don’t go so well.
- 33.
- 34. Building an AngelCommunity 1 2 Produce 3 Identify Offer An Investable Potential Angels Training Workshops Product • Befriend Local • Invite an active • Connect Angels Angel Investor to entrepreneurs to share experiences Mentors and • Identify Successful Resources Entrepreneurs who • Train about the might consider Process, Term • Insist entrepreneurs becoming an Angel Sheets, Valuations tell story well and are prepared • Organize “Meet Ups” • Discuss issues of or info sessions to risks, time horizons • Develop a Process allow Angels to meet and expectations of introducing the and build community Entrepreneur to the Angel at the right time
- 35. Building an AngelCommunity 1 2 Produce 3 Identify Offer An Investable Potential Angels Training Workshops Product • Befriend Local • Invite an active • Connect Angels Angel Investor to entrepreneurs to share experiences Mentors and • Identify Successful Resources Entrepreneurs who • Train about the might consider Process, Term • Insist entrepreneurs becoming an Angel Sheets, Valuations tell story well and are prepared • Organize “Meet Ups” • Discuss issues of or info sessions to risks, time horizons • Develop a Process allow Angels to meet and expectations of introducing the and build community Entrepreneur to the Angel at the right time
- 36. Building an AngelCommunity 1 2 Produce 3 Identify Offer An Investable Potential Angels Training Workshops Product • Befriend Local • Invite an active • Connect Angels Angel Investor to entrepreneurs to share experiences Mentors and • Identify Successful Resources Entrepreneurs who • Train about the might consider Process, Term • Insist entrepreneurs becoming an Angel Sheets, Valuations tell story well and are prepared • Organize “Meet Ups” • Discuss issues of or info sessions to risks, time horizons • Develop a Process allow Angels to meet and expectations of introducing the and build community Entrepreneur to the Angel at the right time
- 37. Closing Thoughts • Byproviding equity capital and mentoring to entrepreneurs, Angels are making a difference – In job creation – In wealth creation • Encourage Angels to plan a portfolio strategy as they begin investing • Organize the Community – Develop a “Process” – Good deal flow – Robust processes – Great camaraderie
Editor's Notes
- #20 Good afternoon. Thank you to the Rotary Club for this opportunity.Your interests, hobbies, travel, a little of your personal story -- small town boy; find ways to be playful, funny, and make a personal connection.I am Michael BurchamI am a Serial EntrepreneurAnd I AM MUSIC CITY
- #30 You community needs to be known as a place that can complete the deal making cycle. With 24hrs in a day, entrepreneurs and investors will begin to shy away if you don’t close deals. Additionally, going back the education point earlier, investors HAVE to understand that large numbers dramatically increase their chances for success and good success at that.People drive the idea. Period.Again, be efficient in getting to “yes” and “no”It’s wrong. Period.