angel investing lessons

Angel Investing Lessons from the Trenches

Ed Chalfin CEO/Founder – MIE Labs, Inc.

9250 Bendix Road North Columbia, MD 21042

410-440-2860 [email protected]

[email protected]

mailto:[email protected]

mailto:[email protected]

Background

• BSEE - Penn State University 1981

• MAS-Management – Johns Hopkins Univ 1990

• Analog IC Design Engineer >30 years

• Founded Integrated Circuit Designs (ICD) 1995

• ICD acquired by Texas Instruments 2007

• Joined Baltimore Angels 2010

• Left TI to found MIE Labs 2012

• Affiliate of MCE and volunteer mentor

11/12/2012 Ed Chalfin - [email protected]

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Highlights

• What is Angel Investing? • My Experiences with Angel Investing • Why aren’t Angels investing in my startup? • What do you Need to Know About Angels? • What are Angels Looking for in a Pitch? • Some Mistakes Entrepreneurs Make • Who are the Angels and Where do you Find

Them? • Pitching the Baltimore Angels – How Does it

Work?


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And Now for Something Completely

Different… • Unlike others who have presented in the Speaker

Series, I am NOT a true ‘expert’ on my topic

• I am a novice – Angel investor only since 2010

• What I have learned I have learned mostly the hard way ($$) by doing

• Hope that others can gain from my experience

• This is an open discussion - please feel free to interrupt at any time


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What is Angel Investing?

• “An angel investor or angel is an affluent individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity” - Wikipedia

• Angels generally concentrate on early stage (seed stage) investments

• Unlike VC’s, Angels invest their own money

• ‘Smart money’ vs. ‘Dumb money’


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Why Did I Get Into Angel Investing?

• Working at large company made me miss the entrepreneurial world

• Have sufficient discretionary funds and prerequisite ‘Accredited Investor’ status

• Diversify my investments • Looking for a way to leverage my experience/mentor

others • Wanted to get more involved with and support the

local tech/entrepreneurial community • Interested in learning something new (3 years ago I

knew literally nothing on this subject)


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Lessons Learned – Some Reasons Why

Not To Get Into Angel Investing • Get rich quick – IRR of 25-30% are possible but

take time and effort

• Be intimately involved in day-to-day operation of a startup (without all the hours of course)

• Have a low risk tolerance

• Want to sell services to startups

• Not really serious about it (unless you have tons of cash and are simply doing it for fun)


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Some Things Haven’t Gone the Way I

Expected • Level of involvement – reporting

• Investment group dynamics (‘herding cats’)

• Emergence of Angel List as a platform

• 500 Startups/Super Angels

• Unrealistic expectations of startups/culture

• Need for an investor to have a focus/brand

• Need to think outside the box of my own perceptions

• BA group slowdown in 2011


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You Shouldn’t Seek Angel Investment

Because… • You think it’s the only way to finance your

startup

• You want to pay yourself a huge salary while starting your own company

• You need working capital for a stable business

• Everyone is doing it (I didn’t)


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Why Aren’t Angels Lining Up to Invest

in my Startup? • Not all startups/businesses are suitable

candidates for angel funding

▫ By its nature, angel investing is a homerun hitters game, so only capital efficient, scalable startups with a clear path to exit will be interesting to an angel

▫ May be too early or too late

• Not being a candidate for angel funding does not mean you don’t have a good business


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The Reality – What is the Angel

Investor Faces


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Source: Jeff Miller

Monte Carlo Simulation of Angel

Returns


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Source: Jeff Miller

Angel Investing vs. Crowdfunding

• Currently you need to be an ‘Accredited Investor’ to be an angel >$1M net worth or >$200K/($300K with spouse) annual income

• Purpose is to validate that the investor ‘knows what they are doing’ and can afford to lose their investment

• My concerns with crowdfunding: ▫ Risk tolerance of ‘non-accredited’ investors ▫ Logistics of having huge number of small investors

on the cap table


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So What Do You Need to Know About

Angels? • They see literally hundreds of pitches • They bet on the jockey (team) more than the horse

(idea) • They want to see good ‘coachability’ • They want to see ‘skin in the game’ • Traction (users and/or revenues) is critical • Generally focus on startups in verticals in which

they have significant knowledge/experience • Herd mentality (another form of traction) • You will need to pitch many investors/groups • They look for scalability and viable EXIT strategy


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Exits are the Key

“Until you have an exit, Angel investing is really just a charitable contribution” – JH

• There is generally no real ROI without an exit

• Possible exits:

▫ Acquisition/acqui-hire

▫ Cash out on subsequent VC round

▫ IPO

▫ Business failure


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What are Angels Looking For in a Pitch?

In a Nutshell… @davemcclure pro tip: first 30 seconds --

CUSTOMERS HAVE PROBLEM X, WHICH WE SOLVE BY DOING Y AND WE MAKE $Z. please practice. #w2pitch


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https://twitter.com/davemcclure



https://twitter.com/search?q=$Z&src=ctag

https://twitter.com/search?q=$Z&src=ctag

https://twitter.com/search?q=

https://twitter.com/search?q=

Paul Singh’s 500 Startups Checklist


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Some Mistakes Entrepreneurs Make

• Pitch too soon - little traction, team incomplete

• Pitch too late – company in trouble

• Not enough skin in the game

• Not being coachable

• Valuation too high/one sided terms

• Don’t get to know investors before pitching

• Don’t explain what they will use the money for

• Don’t fully explore other financing options

• Not scalable, i.e. ‘lifestyle business’


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You Must Understand Angel Investing is

a Homerun Hitters Game • Because no one is “Ted Williams” in this game • Majority of investments fail to return • The few winners must be 10-20X to make up for

all the losers • No one knows which ones will win and lose, so

they all MUST look like winners • Investors need to have ‘dry powder’ available for

follow-on investment in the winners • Startup must be SCALABLE and have a clear

EXIT strategy to be attractive to Angels


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Who are the Angel Investors?

• Cashed-out entrepreneurs

• Wealthy individuals looking for diversification

• VC (Super Angels)

• Individuals and groups

• No matter how much money an individual has, if they are too (i.e. normally) risk averse they will not be an Angel


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Where do you Find Angels?

• Network, network, network

• Local Angel groups

• Pitch events such as Distilled Intelligence

• Demo days

• Meetups like Baltimore Tech Breakfast

• AngelList


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Some Angel Groups in the Local Area

• Baltimore Angels

• Dingman Angels

• Blu Ventures

• Active Angels

• NextGen Angels

• K Street Capital


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Do Your Research

• Angels/groups tend to specialize in certain sectors

▫ IT, Biotech, Mobile, etc.

▫ B2B, B2C

• Research and get to know members of the group

• Look at deals that they have invested in to get a sense of their comfort zone

• Use LinkedIn, AngelList, etc.

• Most Angels I know are active in the community


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About the Baltimore Angels

• Founded in 2009 by Dave Troy and a few others • Became somewhat dormant by mid-2011 as Dave

was heads down on 410 Labs • Dave assigned Greg Cangialosi as Managing

Director at end of 2011 • Dealflow, discipline and professionalism all have

improved in 2012 • Currently 45 members • 13 deals closed for $1.145M, 8 deals for $780K in

2012 alone • All portfolio companies are still alive, no exits as yet


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Introduce Yourself!

• Don’t wait until you are ready to pitch to approach investors

• Most if not all angels are mentors as well

• Angels want to improve their dealflow and so will be happy to have a strong ‘bench’

• It is a huge advantage to pitch to a group where you already have had significant exposure and feedback


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Pitching the Baltimore Angels

• Network with BA members and seek their advice as to when the timing is right

• In BA case, early (seed) stage tech startups with a launched product and some demonstrated traction are in the ‘sweet spot’

• Submit profile through BA website or Gust page

• Best results if a member is listed as referrer


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Going Through the Process

• The BA Prescreen Committee reviews and rates submitted deals

• Each month the top 3 deals are invited to a pitch meeting, which occurs the 3rd Tuesday of the month

• Companies that are not deemed a good fit for the group are notified

• Some may be held over to a subsequent meeting


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The Pitch Meeting

• Pitch meeting starts with networking, followed by private members-only meeting, followed by pitches

• Following pitches, a short members-only review session is held

• Deals with interest from the group are assigned a Deal Lead – no Deal Lead, no deal

• Feedback/networking continues • Valuable mentoring is often offered to startups

that are declined investment


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Follow Up – Behind the Scenes

• Subsequent to the pitch meeting due diligence takes place if sufficient interest by the group

• Deal Lead interfaces with company

• Demos/additional pitches may be set up

• Meetings set up for due diligence

• Deal terms negotiated

• Investment closing organized

• Note: Baltimore Angels generally invest as individuals, not as a group


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Important Investment Terms

• Early stage angel investments are trending towards Convertible Notes

• Important terms include:

▫ Interest rate

▫ Discount

▫ Valuation Cap

▫ Change of Control Preference (acqui-hire)

▫ Information Rights

▫ Pro-rata Rights


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What Happens After the Investment?

• Regular updates/reports to the investors are encouraged (information rights)

• Good communication with investors should include requests for assistance as well as status updates – investors are a valuable resource

• Worst case is ‘radio silence’ followed by the ‘we’re running out of money’ call

• My experience has been mixed on this front


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Baltimore Angels FAQ

• What percentage of pitching companies get funding from BA? ▫ Roughly 8/27 (~200 applicants in 2012)

• What is the typical level of funding per deal? ▫ Average ~$85K, min $30K, max $350K

• What is the form of investment? ▫ Convertible notes or Preferred equity

• Do the investors invest individually or as a group? ▫ Members invest individually, there are exceptions

• At what point in the company’s development are you ready to pitch? ▫ MVP demonstrated, revenue traction and/or user traction


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For Further Research

• Winning Presentations for Raising Capital – Valerie Gaydos

• Moneyball – Paul Singh http://www.slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investing-dc-sept-2012

• Takeaways from Three Years of Angel Investing – Gabriel Weinberg http://www.gabrielweinberg.com/blog/2012/08/takeaways-from-three-years-of-angel-investing.html


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http://www.slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investing-dc-sept-2012



















http://www.gabrielweinberg.com/blog/2012/08/takeaways-from-three-years-of-angel-investing.html














Questions?


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