exit strategies for angel investors 20090415 part 1
TRANSCRIPT
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Exit Strategies for Angel Investors
An el Ca ital AssociationAnnual Summit Workshop
April 15, 2009Basil Peters
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Schedule for the Worksho
Welcome (1:35)
Exit Strategies for Angel Investors (2:20)
Questions on Part 1 (2:35)
(2:45)
Maximizing Exit Value (3:35)
Questions on Part 2 (3:45)
Workshop on Valuation and Discussion (4:15)
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Outline of Part 1
The Current Exit Environment
Most Exits are Under $20 million
M&A Exits are Happening Earlier
Differences Between Angels and VCs
Optimum Strategies for Angels
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Toda s Econom
Recentl , several thin s have chan ed in
the economy,
The bi investment banks are one
In Q2 2008, for the first time in history, there
Many writers are saying the venture capital
model is broken perhaps permanently
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Entre reneurs and An els
Where I live in the Northwest entre reneur
and angel activity is high
record numbers of companies present And record angel attendance
decided to limit the number of members
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Well Need More Data To Be Sure
We ust dont have enou h data to know
whether this activity is a response to job lossin lar e com anies, or somethin else
But one theory is that it is a structural
Large doesnt seem to work anymore whether its companies or venture funds
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Investment Re uires Exits
Investin onl works if the investors can et
their money back even if it takes a while
work anymore because the type of exits the
arent happening anymore, and havent
But its still quite a good time for
entrepreneurs and angel investors
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Lots of Doom and Gloom in Exits
Lots written recentl in the mainstream
press about the bad news in exits
Total M&A transaction dollar volume hasfallen by at least a third
,
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We Alwa s Hear About The Bi Exits
The media alwa s re orts the reall bi exits
From my neighborhood, its exits like
or Biowares $800 million sale to EA Those exits arent happening very often now
smaller exits
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Small M&A Transactions
From: Current Environment for Exits by Brent Holliday, Capital West Partners
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Most Exits Are Under 20 Million
Mer erstat database shows the median
price of private company acquisitions isunder $25 million, when rice is disclosed
But the price is not disclosed in most smaller
I estimate the median price to be wellunder $20 million
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Exam les of Under 30 Million
Google bought Adscape for $23 million (now Adsense)
Google bought Blogger for 20 million (rumored)
Google bought Picasa for $5 million
Ask Jeeves bought LiveJournal for $25 million
Yahoo bought Flickr for $30 million (rumored)
AOL bought Weblogs Inc for $25 million (rumored)
Yahoo bought del.icio.us for $30 35 million (rumored)
Google bought MeasureMap for less than $5 million
Yahoo bou ht WebJa for around $1 million rumored
Yahoo bought Jumpcut for $15 million (rumored)
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Wh This Is Ha enin Now
One of m friends from a Fortune 500
company explained it this way:
at new ideas or startups
from zero to $20 million in value
u w u v ygrowing values from $20 million to $200
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Under 20 Million Is Eas
A com an riced at $100 million is
already out of our sweet spot
But at $20 million, its really easy for me to
Many big companies are spending more onM&A than internal R&D
,
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M&A Exits Are Ha enin Earlier
Toda its not uncommon for com anies to
be acquired just a couple of years fromstartu
Club Penguin, near where I live, is a website
It was sold to Disney for $750 million cash Just two years from startup
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Com anies Dont Need Much
Another im ortant trend is that toda s
companies usually dont need much capital
$ tens of millions so VCs were essential Today, very valuable companies are being
built on just tens of thousands of dollars Club Penguin, and many others, had no
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What This Means For An els
Most ac uisitions are under
$20 million in value
transactions done - especially today Modern companies dont need much capital
an exit for under $30 million
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An els and VCs - More Different
This new environment is creatin a clearer
understanding of how different angels andtraditional VCs reall are
From an exit perspective, there are three
1. Minimum investment size
. n mum re urn requ re
3. Acceptable time to exit
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Size of Avera e VC Firms
$350
$250
$300
$150
$200
Millions
$50
$100
$0
1980 1985 1990 1995 2000 2005
Source: US National Venture Capital Association, Thomson Financial
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Avera e Ca ital er VC Princi le
$30
$20
$25
$15
Mi
llions
$5
10
$0
1980 1985 1990 1995 2000 2005
Source: US National Venture Capital Association, Thomson Financial
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VC Investment Prior to M&A Exit
$30
t
$20
$25
vest
me
$10
$15
so
fVCI
$5Millio
1996 1998 2000 2002 2004 2006 2008
Amount of VC investment prior to M&A exit in millions. 2008 data for Q1Source: Jeffries Broadview, Dow Jones VentureSource
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VC Fund Math
VC funds are lar er and lar er
Cant write a cheque for under $5 million
Traditional funds only invest money once
A VC fund needs a 20% annual return Simple math shows that the winners have to
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20xit
12
14
16
0xor30x
time to exit
6
8
10
Yearsto 10x Return 30x Return
0
2
4
N
umbero
AnnualReturnon InvestmentTo achieve a minimally acceptable VC fund return of 20% per year andassuming all of the returns are from 20% of investments
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Unwritten Contracts with Investors
Blo ers have hel ed entre reneurs, an els
and VCs understand each other better
Just increase the value of the shares
But now realize that investors also need to
Achieving an exit is part of the contract
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Unwritten Contracts with VCs
Unintentional Moonshot b Josh Ko elman
Simple rule of thumb for minimum multiples: er es x
Series B 4 to 7X eries 2 to 4X
So once ou si n a Series B term sheet at$50M post-money [which might be only $30million re-mone ouve basicall si ned
up for at least a $200M exit target
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92% of Exits Dont Work for VCs
VCs Need Exits over $100 million
Exits thatExits that also
work for
7.5%Angels and
Entrepreneurs92.5%
Data from Mergerstat
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Time from VC Financin to M&A Exit
8
56
3
4Years
1
2
1996 1998 2000 2002 2004 2006 2008
Median Time from initial VC financing to exit in years. 2008 data for Q1.Source: Jeffries Broadview, Dow Jones VentureSource
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What That Means for An els
A median of 7 ears doesnt sound so bad
But the reality is quite a bit worse
Its 7 years across, A, B and C rounds
about 12 years longer for the angels
At first glance that doesnt seem possible
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Lifetime of IT VC Funds
Source: Adams Street Partners 2006 analysis of funds then dissolved.The chart shows the year a 10 year fund was actually dissolved.
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An el Exits Without and With VCs
xit Without
bilityof s
Proba
WithVCs
Years From Investment to Exit
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How VCs Block Good Exits
Call from an entre reneur askin for hel in
understanding why the VCs were blocking areat exit o ortunit he had no idea
VCs have multiple mechanisms to block Board control, investment agreements, pref
shares and votes Happens much more often than people think
Dramatically increases risk of failure
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An el Investor Math
Investments as small as $25,000 can make
sense
are attractive Can easily reinvest the gains
entrepreneurs than traditional VCs
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An el Co-Investment
Just a cou le of ears a o, the conventional
wisdom was that angel investment toppedout at around $2 million er com an
Kauffman and ACA started talking about-
Now I regularly see groups of angelsinvesting $5 million to $10 million
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Investor Time Horizons
VCs can wait a decade or more - and often
need to for their math to work
in 3 to 5 years Especially in todays unstable economy
angels and VCs in todays exit environment
Wh h h VC i
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What happens when VCs invest
ew ns g s rom an a a20%
10%fEx
its
Failures 1x 5x
Exits5x 10xExits
in High MultipleExits
0%ercent
-10%
Loss 1x - 5x 5x - 10x 10x - 30x >30x
ngein
-20%
Ch
Exit Multiples
Source: Robert Wiltbank, Ph.D Willamette University withFunding from the Kauffman Foundation
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An els or VCs But Not Both
Fascinatin new research Ma 2008
Unique historical database of 182 Series A
outcomes are inferior when an els and VCsco-invest relative to when VCs invest alone.
-firms to have successful liquidity events
Optimum is Angels or VCs but not both
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An el or VC Checklist
Angels VCsAmount of capital required to
prove the business model
Under $3 to 5 million Over $3 to 5 million
Years before being able toexit
2 to 5 years 10 to 12 years
Most likely value of thecompany at the time of theoptimum exit
Under $50 million Over $100 million
Willingness to relinquishcontrol of important financialdecisions
Not always required Almost always required
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Summar
VC backed IPOs and big M&As are gone
When VCs invest, exits are much later andfailures are hi her
Angels can now invest over $5 million Most companies dont need much capital
Toda , the o timum strate for man
companies is: Angels to Early Exit