angel investing

Wayne [email protected]

307-721-8875

“Fools rush in where angels fear to tread”

Angel Investing

Senator Enzi’s Inventors ConferenceSenator Enzi’s Inventors ConferenceApril 20, 2006April 20, 2006

Inventor’s Conference, 2006

Wayne Greenberg

What Are Angel Investors?

Term originated with funding of Broadway plays in the early 1900’s (getting productions “off the ground”)

Generally: High net worth individuals who invest in early stage entrepreneurial companies

Tend to be former entrepreneurs themselves Typically come in between 3F’s and VC’s Investments between $10k and $500k Tend to invest in business areas they know Invest mostly locally Some organized into groups (“networks”) but not

professional money managers


Wayne Greenberg

Angel Investor Prototype

47 years old, annual income around $100k Net worth of $750k, college educated Invests $37,000 per venture Is or has been self employed 7 of 10 investments w/in 50 miles of “home” 9 of 10 also provide loans or loan guarantees in

addition to equity investment 9 of 10 investments go to companies with <20

employees Bases many decisions on referrals and who else is

in


Wayne Greenberg

Angel Investing2004 Statistics

225,000 active angels in U.S.; over 200 angel groups active

$24B invested in 2004 (vs. $22B for VC’s) Average invested per company - $469,000 30x the number of companies than VC’s Angels fund 60% of all TECH companies

seeking < $1M 40-50% of investments result in losses

Source: Center for Venture Research


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What Motivates Angels

ROI Home Runs Grand Slam Home Run

$100k in Amazon = $26M at IPO Give back Stay involved Want to contribute their personal skills and

contacts Shopping for new gig


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Finding Angels

Degrees of separation Your school, church, neighborhood Other business owners Your banker, lawyer and accountant Your family and friends

Network, network and more networking Organized angel groups – ignore 50 mile rule Angels beget more angels


Wayne Greenberg

Angel Groups

Formed to share risk, information, leads, due diligence and contract negotiation

Most are very informal; some have actual “funds” managed by the group

About 1 in 5 deals that passes initial group screen gets funded

Mostly regional but some specialties like womenangels.net

CTEK Angels (www.ctek.biz) largest in front range


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What Should You Ask/Do What is their investing experience? Talk to one of their investment references. What do they know about your industry? What contacts do they have for:

Sales? Alliances? Channels?

Can they bring other investors in? Will they want to be involved? What relationship will they

want? Will they be TOO busy for you to touch when needed? How is the chemistry between you and the angel? Spend time getting to know the angel.


Wayne Greenberg

Angels vs. Venture Capitalists

Earlier stage companies Faster decision process More geographically diverse Less due diligence More likely to provide hands on expertise Prefer smaller investments

Less dilution Easier to stage phases and valuation increases

Far easier on terms Follow on investments may not be there


Wayne Greenberg

Angel Deals

Can be as sophisticated as VC’s Or not… Many do not want to be involved but all want to be

informed Since the bust many angels are gun shy and want

more complete legal documentation and protections Advent of Sarbanes and other rules also make for

more caution


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Pitfalls

Unaccredited investors Terms that inhibit subsequent fundings Devils

Shoppers Control freaks Panic’ers Invisible Men

Lack of follow on capability


Wayne Greenberg

For Angel Investors, It’s Primarily About Measuring and Managing Risk

All businesses share similar risk factors Minimizing each or identifying the one(s)

most problematic is key People Risk Market Risk Product Risk Capital Risk

What’s an Angel to Do?

DUE DILIGENCE


Wayne Greenberg

What is Due Diligence?

Generally: an investigation into the financial and commercial activities of a business in connection with a proposed acquisition or disposal of an interest in that business. The due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information.

Legally: a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depending on the relative facts of the special case. (Black’s Law Dictionary)


Wayne Greenberg

Why Due Diligence Is So Important

Refines the price/value Identify potential "deal killer" defects in the

target Mitigates legal (and other) risks Verification that the transaction complies with

investment criteria Identification of synergies w/in investor group Ensures that post-investment plans will have

best chance for success


Wayne Greenberg

“[A] lack of due diligence is by far the greatest regret

angel investors have.”

-Angel Investing: Matching Start-Up Funds With Start-Up Companies - The Guide For Entrepreneurs, Individual Investors, And Venture Capitalists


Wayne Greenberg

Trying to find the Gazelles…


Wayne Greenberg

Areas of Interest to Angel Investors


Wayne Greenberg

Categories for Due Diligence

Management

Product

Market

Competition

Capital

Relationships

Return

Legal


Wayne Greenberg

Management Is this management team able to grow their venture rapidly and successfully?

Have they done “it” before? Do they have industry knowledge and experience? Do they have the necessary key positions filled? Have they identified their own weaknesses and have a

plan to fill those voids? Are there sufficient incentives in place for key

employees? Are the principals trustworthy? Have they begun to build solid advisory/legal teams?


Wayne Greenberg

Product

Is the product/service unique and fully developed?

Does it create compelling benefits for the target customers?

Can the team articulate the value proposition clearly and consistently?

If it is not fully developed, does management understand the time and dollars required to complete development?

What intellectual property protection exists?


Wayne Greenberg

Market, Marketing (and Sales)

How large is the market? Is it large enough to support rapid growth and attractive

margins? Do they have credible and systematic market research? What is the basic value proposition and can it be easily and

consistently articulated? Does management's marketing plan make sense? How will the product reach the market? Via what channels?

What pipeline exists? Is there a sales culture in the company? Are there existing customers the investor can interview?


Wayne Greenberg

Competition

What are the barriers to entry by competitors? Who are the competitors and what strengths do

they possess? Are there major players who could become

competitors? Has the company effectively mapped their own

capabilities against those of their competitors? How will the venture gain and defend its target

market position?


Wayne Greenberg

Relationships

Who are the vendors and what are the risks associated with key supplies or raw materials? Have/can those risks be mitigated?

Are there strategic partnership agreements with other players that are beneficial/necessary to the venture? Are any in place? Have any been identified?

Can the vendors be contacted? Who are the company’s advisors and mentors?


Wayne Greenberg

Capital

How much investment capital is needed? In how many rounds? What does this round buy in terms of

increased value How will it be deployed? Does the cash flow analysis demonstrate

this need? Are there legitimate Plans B and C?


Wayne Greenberg

Return

Is the potential return on this investment sufficiently attractive in relation to the risk?

Is there a clear exit strategy for the investors/company?

Does the time horizon fit with the client’s needs/desires?

Does the management team clearly understand the key business elements that must be managed for the venture to be successful?


Wayne Greenberg

Legal

Review as much as possible: Contracts – contactors, vendors, suppliers, customers,

employees, SLA’s Capital Structure Corporate documents – articles, by laws, etc. IP – patents, copyrights, trademarks License agreements Leases Litigation or threats of litigation Employee policies Environmental review

Resources


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Books


Wayne Greenberg

Books AngelsRead


Wayne Greenberg

Internet Resources

List of Angel Networks – Inc Magazine

http://www.gsb.stanford.edu/ces/resources/angel_financing.html

Stanford Entrepreneurial Center

http://www.angelcapitalassociation.org/default.aspxThe Angel Capital Association

http://www.angel-investor-news.com/index.htm

Angel Investor News

http://www.keiretsuforum.com/

The Keiretsu Forum

http://www.inc.com/articles/2001/09/23461.html

Wayne [email protected]

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