ANGEL INVESTINGAn Introduction to

 OUTLINE

• Who are these Angels?• Entrepreneur-friendly Communities• Company Formation and Startup Funding• Portfolio Strategy for Angel Investors• Post-investment Relationship between

Entrepreneurs and Angel Investors• Why Angels are Joining Groups• The Angel Investing Process• The Power of Angel Investing Seminar

 

Angel Investors (vs. private investors)

• Invest money in seed, startup

and early stage companies• Invest time in entrepreneurs

and their companies– Business acumen– Mentoring and coaching– Serve on boards– Make business introductions

 

Who are these Angel Investors

• Often successful, exited entrepreneurs or retired business persons – active investors– Invest both time and money in companies

• Accredited Investors - SEC definition• Angels invest their own money (not money managers)

• Investing in local companies

 

Motivation:

Why Become an Angel Investor?

• Helping entrepreneurs• Stay engaged – using skills and experiences to help build a business• Giving back to community or university• An active form of investing – not just watching markets• Return on Investment is the metric

 

How do Angels fit into Entrepreneur-friendly

Communities

 Entrepreneur-friendlyCommunities

ServiceProviders

EntrepreneurshipCenter

Bus PlansEducationNetworking

FundingSources

VCs

AngelsGrantsBanksSBIRs Mentors

CoachesRole models

ENTREPRENEURS

Sources ofTechnologyInnovations

Product Ideas

Colleges & Universities

Companies

Labs

Talented People

 

New Company Formation and Funding Sources for Startup

Companies

 

Who are Funding Startup Companies

• Friends, Family (and Fools) – FFF• Angel Investors• Venture Capitalists• Other

– Government grants (SBIRs, etc.)– State and local programs

 

• Friends, family & fools

• Angels

• Venture Capital

• Not accreditedUnsophisticatedInvesting in a friendPassive1-2 lifetime investments

($100 to $5,000 each)

• AccreditedExpertise and personal moneyActiveInvesting in entrepreneurPortfolio of angel deals

• Limited partnershipInstitutional moneyGeneral Partners activeInvest in companyLarge portfolio

Typical round: $10,000

Each investor: $ 2,000Source: estimate

Typical round: $600,000

Each investor: $ 40,000Source: Center for Venture Research

Typical round: $7,000,000

Each investor: $3,000,000Source: PWC MoneyTree

 

Funding Seed and Startup Entrepreneurs(typical year)

• Startup companies• Funded by FF&F• Funded by Angels• Funded by VCs

500,000 200,000 (est.) 35 - 50,000 < 500

 

Estimated that 90% of Outside Equity Capital in

Seed/Startup Stage Companies is Sourced from Angels

 

An Angel Portfolio Strategy

 

An Angel Investing Strategy:

Portfolio Considerations• 5-10% of net worth (asset allocation)• 8-10 investments (risk diversification)• High tech, low tech, no tech (your choice)

• Variety of involvements– Lead investor– Board, advisor– Passive

• Most of ROI from 1 - 2 of 10 companies

 

Implications of this Strategy

• Net Worth Requirements

(testing the SEC definition

of an accredited investor)

• Return on Investment implications

 

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

 

Implications:

Angel Investor Net Worth

• Typical angel investment ~$25K• 10 investments = $250,000 invested• 100% reserves, another $250,000• 10% of Net Worth ($500K/10% = $5 million)

• Therefore:– Minimum net worth for angels = $5 million– SEC definition is 70 years old

 

Angel Expectations: 25%/yr

Source: Venture Economics, HFRI Equity Hedge Index

22.4

18.7 18.7

16.5 14.913.2

0

5

10

15

20

25

Ret

urn

s

Seed Funds

All Ventu

re

HedgeFunds

Buyouts

S & P 500

NASDAQ

Historical 20 Year Returns for Alternative Assets

 

Implications: Size of Each Opportunity

• 1-2 in 10 investments will produce almost all of the ROI for the portfolio

• These successes must yield 20-30X ROI (Nonbelievers: Do the calculations!)

• And…we cannot pick the winners• Therefore, all portfolio companies must

demonstrate the opportunity for a 20-30X return on investment.

 

Integrating Exits into Portfolio Strategy

• VCs exit in 3-5 years (assume 5)• Angels invest earlier and expect to exit in 5-7 years

(assume 7)• A balanced angel portfolio contains ten companies. • Consequently, angels should invest in 2-3 companies

per year– Build to ten company portfolio gradually– A portfolio of companies in all stages of development– Good balance for investors time

 

0

2000

4000

6000

8000

10000

12000

1999 2000 2001 2002

IPOM&A

2002 Software Industry Equity Update

20X

100X

Exit Strategies

 

Economic Benefit from Angel Invested Entrepreneurs and their Companies

 

We have absolutely no data but Consider the following:

• Angels invest in 7-10% of all startup companies• Angels only invest in companies that will scale

– 20 to 30 times growth in valuation in 5-7 years– Employment created by these companies is high

• David Birch (MIT) and others have demonstrated that high growth companies create all net new jobs in America.

• Angel-funded companies create lots of jobs

 

We have absolutely no data but Consider the following:

• Anecdotal data suggests Angel Investors and the Entrepreneurs in whom they invest enjoy some very successful exits.

• Exited entrepreneurs often become angels• Angels often reinvest portfolio returns• The wealth creation from angel investing

is spawning an even greater number of companies.

 

Post-Investment Relationship

 

Angels invest time in portfolio companies

• Angels bring expertise to portfolio– Business acumen– Vertical expertise– Financial experience– Director service

• Common roles– Advisor, Mentor, Coach, Director– Except in emergency, not paid consultant

 

Portfolio Considerations

• With many portfolio companies– Not active in all, pick roles suited to your skills– Let other angels serve remainder of companies

• As contribution fades, exit in favor of

new directors, advisors• Limit number of Boards to 3-5

 

Why Angels Join Groups

 

Growth in Angel Organizations

020

406080

100120140

160180200

1996 1997 1998 1999 2000 2001 2002 2003

Data provided by Professor J. Sohl, University of New Hampshire

 

Solo Angels

• Process is time-consuming– Deal sourcing– Reading plans– Due diligence

• Due diligence is difficult – Finding vertical experience – May require using outside experts

• Legal support is expensive

 

Investing through Angel Orgs

• Dividing the work eases the pain• Variety of vertical experience available• Standardized processes and term sheets• Deal flow encouraged, entrepreneur-friendly• Pick and choose the deals you like• Great camaraderie among the like-minded

 

The Angel Investing Process

 

Summary:

Angel Investing Process

• Pre-screening• Screening• Due diligence• Investment presentation• Follow-up discussions and meetings• Closing

 

Deal Flow Statistics

• Prescreening• Screening• Due Diligence• Investment• OVERALL

1 in 4 to Screening 1 in 3 to DD 1 in 3 to Inv. Meeting 1 in 2 raise money 1 in 72 who apply receive

investment

 

 

Power of Angel Investing

• Developed by Kauffman• Delivered more than 30 times in the US• Trained over 500 angel investors• High ratings by participants

– Knowledgeable speakers 4.64/5.00

– Important topics & content 4.60/5.00

– Relevant & beneficial information 4.60/5.00

– Well presented information 4.54/5.00

 

Seminar Content

• Is angel investing right for you• Where to find good deals• Due diligence• Structuring the deal• Valuation• The post-investment relationship

 

Seminar Format & Delivery

• All day experience• Networking opportunities• Designed for 20-25 accredited investors• Mix of learning methods

– Lectures– Panel discussions– Case study exercise (valuation)

 

SUMMARY

• Angels are making a difference– In job creation– In wealth creationby providing equity capital and mentoring to entrepreneurs

• Plan a portfolio strategy as you begin investing• Join an angel organization

– Good deal flow– Robust processes– Great camaraderie

 

This introduction to angel investing was developed by the Kauffman Foundation for the Angel Capital Association. It is designed as a recruiting tool for angel organizations and to introduce interested groups to the subject.

For more information on Kauffman’s Angel Initiative, the Angel Capital Association, or the Power of Angel Investing seminar for new angel investors, contact:Marianne Hudson

(800) 489-1447mhudson@kauffman.org