Building an Angel Investment Portfolio


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Talk given at the Angel Capital Expo presented by Coachella Valley Angel Network and Keiretsu Forum at UCR Palm Desert Graduate Center

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Building an Angel Investment Portfolio

  1. 1. Building An Angel Investment Portfolio David Hehman [email_address] February 26, 2009
  2. 2. Who is the NBA and Who am I ? <ul><li>North Bay Angels </li></ul><ul><ul><li>Founded 11 years ago </li></ul></ul><ul><ul><li>Located in Sonoma County </li></ul></ul><ul><ul><li>66 members </li></ul></ul><ul><li>David Hehman </li></ul><ul><ul><li>Lifetime entrepreneur </li></ul></ul><ul><ul><li>Angel investing for 12+ years </li></ul></ul><ul><ul><li>Focus is seed stage Internet businesses </li></ul></ul><ul><ul><li>Publish for Internet entrepreneurs </li></ul></ul>
  3. 3. Why Build a Portfolio? <ul><li>Risky business – high risk alternative investment </li></ul><ul><li>Lack of proper diversification could cause complete loss of capital </li></ul><ul><li>Hits driven business, but don’t know which ones! </li></ul><ul><li>How much diversification and how big a portfolio to build are individual decisions </li></ul>
  4. 4. Start with Asset Allocation <ul><li>Determine your own personal asset allocation to angel investing. </li></ul><ul><ul><li>Meet with your financial advisor? </li></ul></ul><ul><ul><li>Can you afford to lose these funds? </li></ul></ul><ul><ul><li>Does your spouse/partner agree? </li></ul></ul>
  5. 5. Time <ul><li>Need to be indifferent to timing of angel returns </li></ul><ul><ul><li>Expect 3-7 year wait </li></ul></ul><ul><ul><li>Often additional investment required (hitting a wall) or desired (looks like a winner) </li></ul></ul><ul><ul><li>Lack of cash flow from these investments – need other income sources </li></ul></ul><ul><ul><li>Divide your $ allocation by time by deal size </li></ul></ul>
  6. 6. Example Angel <ul><li>Individual (John Smith) has a net worth of $10 million </li></ul><ul><li>Decides to allocate 10% ($1 million) to an angel portfolio </li></ul><ul><li>Expects to make 20 investments to gain portfolio diversification, so average investment is $50,000 (initial + follow-on) </li></ul><ul><li>Plans to invest in 4 deals per year, so 5 years for investments plus 3-7 years for exits </li></ul>
  7. 7. Hypothetical Returns for John <ul><li>Results highly skewed toward winners </li></ul><ul><li>Strike outs likely to come early </li></ul><ul><li>Some deals remain “walking wounded” </li></ul>Outcome Percentage Deals $ Returned Home runs (10x+) 10% 2 $1,000,000 Triples/Doubles (3x) 20% 4 $1,200,00 Singles (2x) 30% 6 $600,000 Strike outs (0) 40% 8 $0 Total 100% 20 $2,800,000
  8. 8. Returns of Angel Groups <ul><li>Recent study of 539 angels with information on 1,137 exits </li></ul><ul><ul><li>Average return was 2.6 times investment in 3.5 years – approx. 27% IRR </li></ul></ul><ul><ul><li>Distribution varied </li></ul></ul><ul><ul><ul><li>52% of all exits returned less than capital invested </li></ul></ul></ul><ul><ul><ul><li>7% of exits achieved returns of more than 10x money invested, accounting for 75% of total investment dollar returns </li></ul></ul></ul>
  9. 9. Great Deal Flow = Better Selection = Higher Returns? <ul><li>Classmates </li></ul><ul><li>Entrepreneurs – they tend to know others </li></ul><ul><li>Lawyers – my favorite </li></ul><ul><li>Accountants </li></ul><ul><li>Other angels – find people you like to invest with </li></ul><ul><li>Angel clubs – many groups have formed throughout the country </li></ul>
  10. 10. Use a Criteria to screen opportunities <ul><li>PEOPLE, PEOPLE, PEOPLE </li></ul><ul><ul><li>Integrity, trust, respect, commitment to the venture </li></ul></ul><ul><ul><li>Smart, energetic & passionate beyond a paycheck </li></ul></ul><ul><ul><li>Would I work for this person? Do I want to spend time with them? </li></ul></ul><ul><li>Large and growing market opportunity with a high exit potential </li></ul><ul><li>Great/cool product with an opportunity for competitive differentiation/advantage </li></ul><ul><li>Business attributes : low capital requirements, few employees, digital business (high margins), recurring revenue, fair valuation </li></ul>
  11. 11. Know Your Style <ul><li>Stage of company development + range of industries </li></ul><ul><li>Active </li></ul><ul><ul><li>Advisory board or Board member </li></ul></ul><ul><ul><ul><li>Help build the business with cumulative knowledge, domain experience and network of relationships </li></ul></ul></ul><ul><ul><ul><li>Leverage your return with additional equity option grants </li></ul></ul></ul><ul><li>Passive </li></ul><ul><ul><li>Investment only </li></ul></ul><ul><ul><li>Best when there is a strong Board or other sophisticated investors in the deal </li></ul></ul><ul><ul><li>More diversification </li></ul></ul>
  12. 12. Investment Size <ul><li>Portfolio discipline example </li></ul><ul><ul><li>$25,000 initial </li></ul></ul><ul><ul><li>$25,000 reserved for follow-on </li></ul></ul><ul><li>Some investors prefer to lock and load on round one </li></ul><ul><li>Some investors like to go heavy on favorites </li></ul>
  13. 13. Improve Your Exit <ul><li>Deep diligence on the front end (form a team) </li></ul><ul><li>Get involved in budgets and forecasts </li></ul><ul><li>Measure metrics </li></ul><ul><li>Help companies build strong Boards </li></ul><ul><li>Mentor CEOs </li></ul><ul><li>Look for opportunities to buy out others if possible as company matures </li></ul>
  14. 14. Have a Harvest Plan <ul><li>Reallocate exits? </li></ul><ul><ul><li>1/3 Tax man </li></ul></ul><ul><ul><li>1/3 Conservative savings </li></ul></ul><ul><ul><li>1/3 New angel deals </li></ul></ul>
  15. 15. Have FUN! <ul><li>You’ll meet some great people </li></ul><ul><li>You’ll experience some highs and lows </li></ul><ul><li>Sometimes you lose money, but one big winner makes up for all the losses </li></ul><ul><li>Enjoy the fun of helping an entrepreneur make a dream reality. </li></ul>