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From Invention to Start-Up: Money - Angels and Strategic Partners November 28, 2006. Susan Preston Entrepreneur-in-Residence Ewing Marion Kauffman Foundation AND Director of Attorney Training and Professional Development Davis Wright Tremaine. Proof-of Concept. Product Design. Product

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from invention to start up money angels and strategic partners november 28 2006

From Invention to Start-Up:Money - Angels and Strategic PartnersNovember 28, 2006

Susan Preston

Entrepreneur-in-Residence

Ewing Marion Kauffman Foundation

AND

Director of Attorney Training and Professional Development

Davis Wright Tremaine

financing life cycle

Proof-of

Concept

Product

Design

Product

Development

Manufacturing/

Delivery

Discovery

Financing Life Cycle

Product Dev

Idea

Pre-seed

Funding

Seed Funding

Expansion/Mezzanine

Start-up Funding

Financing

Operating Cap.

Founder

Venture Funds

Friends and Family

Institutional Equity

Angels

Loans / Bonds

Angel Groups

Government Grants/Loans

Seed Funds

venture capital statistics investments in us
Venture Capital Statistics: Investments in US
  • 2005 – invested $21.7 billion (2,939 deals)
  • 2004 – invested $20.9 billion (2,876 deals)
  • 2003 – invested $18.9 billion
  • Increase due largely to late stage investments:
    • $9.7 billion in 2005
    • $7.2 billion in 2004
    • $4.9 billion in 2003
  • Less than 2% in early/seed stage

Source: NVCA

slide5

Venture Capital Investment:

Historical and 2006 Projected

Source: MoneyTree

slide6

Average VC Deal Size

Per Financing Round ($ Million)

Source: NVCA

us angel investments
US Angel Investments
  • 2005 – invested $23.1 billion (49,500 deals)
    • Increase of 2.7% in $’s over 2004
    • Increase of 3.1% in deals over 2004
  • 2004 – invested $22.5 billion (48,000 deals)
  • 2003 – invested $18.1 billion
  • 227,000 active angels
    • 20% Healthcare/medical devices and equipment
    • 18% Software
  • 55% in seed/start-up
  • 43% in post-seed/start-up (10% increase over 2004)

Source: Center for Venture Research

who are angels
Who Are Angels?
  • Angels are accredited investors who:
    • Expect a financial return
    • Believe in giving back to their communities
    • Invest locally and regionally
    • Participate in the investment process
    • Show interest in personal relationships with companies and employees
    • Offer wisdom and guidance to entrepreneurs
financial attributes of angels
Financial Attributes of Angels
  • Provide early-stage investment dollars
  • Invest smaller dollar amounts per investment
  • Partially fill funding gap left by venture capitalists (VCs)
  • Invest individual wealth
  • Can tolerate loss of entire investment
  • Have diversified portfolios
  • Invest with “patient money”
angels and vcs similarities
Angels and VCs – Similarities
  • Selective in investments
  • Requirements for an investable company
  • Expectation of return on investment - scalable
  • Similar investment terms (though angels can and often are – or must be – simpler)
  • Bring the attributes of a professional investor
angels and vcs differences
Angels and VCs –Differences
  • Venture capitalists:
      • Invest on “home-run” theory
      • ROI is ultimate goal
      • Investing 3rd party money
      • Often more demanding and actively involved than angels:
        • Control often issue
        • Can requirement board and advisor approval and corporate actions
  • Angels:
      • Invest for returns – may be more modest expectations
      • Social /community aspect to investments
      • Individuals investing their own wealth
      • Patient money
slide12

Investment Preference

39 groups reporting

slide13

$5.00

$4.50

$4.00

$3.50

$3.00

$2.50

Startup/Seed

$2.00

$1.50

$1.00

$0.50

$0.00

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006*

*2006 Estimated Value

Valuations Of Venture Capital Seed/Startup Rounds ($Millions)

finding angel investors
Finding Angel Investors
  • Angel Organizations:
    • Several in Puget Sound area including: AoA, PSVC, Seraph Capital Forum, Zino Society, Keiretsu Forum, Tacoma Angel Network, Bellingham Angel Network
  • Professional Service Providers
  • Investment Forums
  • Business Plan Competitions
  • Professionally-funded Start-ups
  • Venture Capitalists
  • Corporate Boards
forms of investment
Forms of Investment

Debt (note) Equity (stock)

Options Warrants

Debt: collateralized, non-collateralized, interest in cash or stock (deferred?), convertible (at election or automatic?), length of time, etc.

Equity: common vs. preferred, dividends, many other terms discussed below

professional investors
Professional Investors
  • Angels, venture capital, corporations typically receive:
    • Preferred stock
    • Convertible debt with warrants or additional stock
  • Provide more than money: Can be proactive in developing business through (“win together”):
    • Company building experience
    • Company functionality experience
    • Industry experience
    • Contacts for partners, customers and follow-on financing
what professional investors are looking for investable companies
What Professional Investors Are Looking for: Investable Companies
  • Clear path to profitability
  • Solid management
  • Realistic business concept and plan
  • Scalable business
  • Competitive edge/Technical superiority
  • Market acceptance
  • Realistic financial projections
  • Realistic valuation
  • Clear, well-articulated exit strategy

Bottom line: Opportunity for financial return

what professional investors are looking for investable companies19
What Professional Investors Are Looking for: Investable Companies
  • How does an investor make this determination?
    • Passion of entrepreneur (presentation)
    • Team track record – individually and together Entrepreneur’s ability to succinctly articulate vision and mission
    • Entrepreneur seeks advice of trusted, experienced, honest advisors
    • Coachable entrepreneur
what professional investors are looking for investable companies20
What Professional Investors Are Looking for: Investable Companies
  • How does an investor make this determination?
    • Competitors researched and understood
    • Clear market differentiator
    • Value proposition for customer clearly evident
    • Market access strategy clear and realistic
    • Comprehensive summary of risks (and plans to cope/address)
    • Profit potential – good margins
    • Marketability of company – M&A exit
      • Type, timing and realistic purchasers
term sheets debentures
Term Sheets: Debentures
  • Convertible Debentures (Notes):
    • Automatic upon event or investor controls conversion
    • Note term
    • Interest: cash or stock; payment schedule; part of conversion
    • Security interest/collateralized?
term sheets preferred stock rights preferences and privileges of preferred stock
Price

Use of Proceeds

Dividends

Liquidation preference

Anti-dilution provisions

Redemption

Protective provisions

Information requirements

Registration rights

Right of first refusal

Co-sale rights

Option pool

Founder vesting

Inventions agreements

Term Sheets: Preferred StockRights, preferences and privileges of preferred stock
summation
Summation
  • Angels invest primarily in seed/start-up rounds
  • Angels represent patient money
  • Angels are becoming sophisticated investors
  • Angels make excellent advisors and mentors
  • Many companies will need only angel investors
  • Be open, coachable and realistic
  • Show your commitment, passion and drive
  • The essence of due diligence:
    • So what?
    • Who cares?
    • Why you?
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