Craig Mullett, president at Branison Group, on Angel Investing: An Overview. Presentation delivered at the Global Entrepreneurship Congress in Johannesburg, South Africa (March 2017).

1. Angel Investing
An
Overview
©2017
2017

2. The angel network in the funding spectrum
2
Friends & Family (“love money”)
Personal Savings
Business Angel Investors
Private Equity
Venture Capital
IPO
Business Type Funding Required
Seed
Early Stage
Later Stage
Growth
<$100k
$100k-$2m
$2m-$25m
>$25m
©2017

3. Why this matters …
3
 Rapid growth start-ups generate the most new jobs in
an economy and require the highest amount of equity
risk capital.
 A 2005 study of 37 countries found that of various
sources of funding (debt, private equity, venture capital,
angel investor capital), only angel investor capital
significantly positively influenced the propensity to be
entrepreneurs.
 Successful entrepreneurial hubs (Silicon Valley, Boston,
New York) all have developed angel investor networks
 Incubated start-ups rely heavily on angel networks for
financing, contacts and strategy advice
Angel groups Fund new ventures Create
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4. Angels are organizing globally in groups
4
First group (“Band of Angels”) started in Silicon Valley in 1994
Groups started in Canada and Europe in 1990’s
Rapid growth in 2000’s lead to new groups in many countries
USA Australia/
NZ
Canada
30 300 350 20 25
Europe Asia/
M-East
Latin
America
5
©2017
20
Africa

5. Why Angel Groups?
5
 Provide economies of scale and other benefits to :
 Angel investors
 See more deal opportunities with less effort
 More industry viewpoints to effectively screen
deals
 More resources for due diligence and deal
negotiation
 Post-investment support and monitoring enhances
returns
 Entrepreneurs
 One application leveraged to multiple investors
 Wider network of contacts can be provided by
more investors, as well as coaching and advisory
support
 Structured process that is quicker turn-around with
more follow-on funding potential
©2017

6. 6
Angel Groups
Better deal
flow and
matching
with start-ups
Lessons from
experienced
investors
Comraderie
Efficient due
diligence
Pooled funds
for larger
investments
Risk sharing
Angel Group Benefits
©2017
Source InfoDev 1/2017

7. Angel Group Ecosystem
7 ©2017

8. The structured activity spectrum of the
network
8
Angel
s
Entrepreneurs
Applications
Online platform
access
Marketing/Outreach
Screening deals
Meetings
Training
Leading due
diligence
Deal structuring
Applications
Online platform
access
Marketing/Outreach
Advisor introductions
Business plan
training
Pitch Coaching
Business plan
creation
Team development
Passive
ACTIVE
©2017

9. Key Success Factors for Business Angel
Investing
 Experienced former entrepreneurs as angel investors
 Member of an organized angel group
 Due diligence prior to investment
 Investing in sectors in which the angel investor has
experience and insight
 Portfolio diversification investing
 Training, mentoring, coaching for new angel investors
 Well-functioning entrepreneurial ecosystem
 Social capital and networks (local and, increasingly,
international)
Source : 2011 OECD Study/ACA
9 ©2017

10. Business
Documents
One Page
Summary
Pitch
Agreements
Understanding the Angel Investment
Process
10
Sourcing/Networking
Business Applications
Initial Deal Screening
Codified Business Plan
Deal Review at Pitch Meeting
Due Diligence
Final Terms Agreed
Closing
Support/Advisory/Monitoring
©2017
Business
Plan

11. Using Gust to Drive the Process
 Applications online – efficient way to
discriminate
 Review and comment on likely deals
 Screening committee
 Ratings feature on Gust
 Set interest level for investing
 Due diligence
 Closing process
 Events/meetings
 Resources/training
11 ©2017

12.  Product/Technology Concept
 Barriers/Intellectual Property
 Market Size/Growth
 Competition
 Team
 Deal Terms/Valuation
 Ensure a compelling valuation to allow for a
return on investment after future funding dilution
(Above ratings system same as on Gust)
Screening Deals : Ranking the Chance of
Success
12 ©2017

13. Angel Investor Valuation Models
 Ballpark ranges
 For Hyper-growth Global : Multiples of Revenue
 For Usual-growth Local : Multiples of Profit
 To get high-end of valuation range :
 Large end-market (TAM), Patents, Customer orders,
Proven profit model, Experienced Team
13
Stage Usual-growth
Local
Hyper-growth
Global
Developed concept $25k - $50k $100k - $500k
Proven prototype $50k - $100k $500k - $2m
Revenue (>$10k) $100k - $500k $1m - $3m
Real revenue
(>$250k)
$500k - $2m $2m - $5m
If exit, returns to
angel
Probable 10X Possible 100X
©2017

14.  Standard term sheet outlining key aspects
 3 structures
 Equity (usually preferred)
 Debt (usually convertible into equity)
 Simplified Agreement for Future Equity (SAFE)
 Key terms
 Valuation (dilution, pre vs post money)
 Board oversight/advisory
 Information rights
 Salaries/bonus/dividends – cash stays in business
 Exit vs non-exit (lifestyle limits/carrots and sticks)
 Minimum raise/closing
Deals Term Sheets & Agreements
14 ©2017

15. Where start-ups will go if you don’t invest …
15 ©2017

16.  Unique Selling Proposition (USP). Defined in a tweet - what is
the need filled or problem solved? Any IP/know-how that cannot be
duplicated?
 Target market. Specific customer profile with payment options to
buy the product/service.
 Market size, growth, and share. Look for >$100m niches within
markets with double-digit growth and double-digit penetration plan.
 Competition. Current vs expected. Current customer alternatives.
 Revenue model. Pricing model and revenue
streams/waterfall/pipeline.
 Sales/Marketing/Distribution. Online vs multi-level distributors,
partners, or value-added resellers. International vs local?
 Team. Experience, capabilities, location, x-factor.
 Operations/Production. In-sourced vs Outsourced. Time to
market vs cost.
 Financial Model. Variable contribution margins, marketing and
Due Diligence – what could go right?
16 ©2017

17. Founders spend frugally – couch surf
Strategic acquirers have already talked to
business
Founders have deep experience of industry
Reference customers have been signed up
Free media coverage has commended
business
Patent firm has expressed confidence in IP
Passive co-investment by suppliers/customers
Founders respond well to advice, adjust plans
Due Diligence – Green Flags
17 ©2017

18.  Conducting a pre-mortem (funeral avoidance)
 If this business was bankrupt in a year, it most
likely would have been caused by …
 Risk removal = value creation
 Deal structuring protection mechanisms
 Preferred Equity/Debt/Asset claim
 Management salaries/bonus/distributions
 Board governance (low-water marks for cash)
 Dilution/options risks
 Non-compete contracts
Due Diligence – what could go wrong?
18 ©2017

19. Founders have no ability to manage cash flow
Too much of fundraising round going towards
founder salaries
Family members in the leadership team and
business
Questionable ethics of founder
Lifestyle-business orientation of founder
No company website or e-mail addresses
Too many competitors crowding in on market
Funding will not get business to break-even
Due Diligence – Red Flags
19 ©2017

20. Avoiding the paralysis of analysis …
20 ©2017

21. Roles for Business Angels in Investments Pre-
close
Human
Capital
(Experience)
Social Capital
(Relationship
s)
Sourcing &
Screening
Market
insights
Screening
input
Contacts
Networking
Improving
Pitch
Business
basics
Plan 4 Pitch
Coaching
21 ©2017

22. Roles for Business Angels in Investments
Post-close
Human
Capital
(Experience)
Social Capital
(Relationship
s)
Business
Growth
Strategic
insight
Resources
Contacts
Governance/
Management
Board
member
Monitoring
Mentoring
22 ©2017

23. -
10
20
30
40
50
60
<1X 1X to 5X 5X to 10X 10X to 30X >30X
Exit Multiple
PercentofExits Distribution of Returns by Angel
Investment
UK: Overall Multiple: 2.2X
Holding Period: 3.6 years
US: Overall Multiple: 2.6X
Holding Period: 3.5 years
Approx 22% IRR
Approx 27% IRR
Hold: 3.0 yrs.
Hold: 3.3 yrs.
Hold: 4.6 yrs. Hold: 4.9 yrs. Hold: 6.0+ yrs.
Source : Willamette University 2011
23 ©2017

24. Why be an Angel?
In recruiting business angels, the Milan-based
Italian Angels use the following mantra :
“Financially attractive,
professionally stimulating,
personally
fun”
CAUTION
HIGH RISK
INVOLVED
24 ©2017

25. Energy + Optimism + Capacity + Execution
25 ©2017
“Never doubt that a small group of
thoughtful, committed citizens can
change the world; indeed, it's the
only thing that ever has.”
Margaret Mead