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ANGEL INVESTING

ANGEL INVESTING. An 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

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ANGEL INVESTING

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  1. ANGEL INVESTING An Introduction to

  2. 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

  3. 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

  4. 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

  5. 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

  6. How do Angels fit into Entrepreneur-friendly Communities

  7. VCs Funding Sources • Grants • Banks • SBIRs Angels Colleges & Universities Entrepreneurship Center • Sources of • Technology • Innovations • Product Ideas Companies • Bus Plans • Education • Networking Labs Entrepreneur-friendlyCommunities Service Providers Mentors Coaches Role models ENTREPRENEURS Talented People

  8. New Company Formation and Funding Sources for Startup Companies

  9. Who are Funding Startup Companies • Friends, Family (and Fools) – FFF • Angel Investors • Venture Capitalists • Other • Government grants (SBIRs, etc.) • State and local programs

  10. Friends, family & fools Angels Venture Capital Not accredited Unsophisticated Investing in a friend Passive 1-2 lifetime investments ($100 to $5,000 each) Accredited Expertise and personal money Active Investing in entrepreneur Portfolio of angel deals Limited partnership Institutional money General Partners active Invest in company Large portfolio Typical round: $10,000 Each investor: $ 2,000 Source: estimate Typical round: $600,000 Each investor: $ 40,000 Source: Center for Venture Research Typical round: $7,000,000 Each investor: $3,000,000 Source: PWC MoneyTree

  11. Startup companies Funded by FF&F Funded by Angels Funded by VCs 500,000 200,000 (est.) 35 - 50,000 < 500 Funding Seed and Startup Entrepreneurs(typical year)

  12. Estimated that 90% of Outside Equity Capital in Seed/Startup Stage Companies is Sourced from Angels

  13. An Angel Portfolio Strategy

  14. 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

  15. Implications of this Strategy • Net Worth Requirements (testing the SEC definition of an accredited investor) • Return on Investment implications

  16. 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 • Canafford to loseinvested funds • Implications: • Giving upregulated disclosure

  17. 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

  18. Historical 20 Year Returns for Alternative Assets 22.4 25 18.7 18.7 20 16.5 14.9 13.2 15 Returns 10 5 0 Seed Funds All Venture Hedge Funds Buyouts S & P 500 NASDAQ Source: Venture Economics, HFRI Equity Hedge Index Angel Expectations: 25%/yr

  19. 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.

  20. 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

  21. 12000 20X 10000 100X 8000 IPO 6000 M&A 4000 2000 0 2000 2001 2002 1999 2002 Software Industry Equity Update Exit Strategies

  22. Economic Benefit from Angel Invested Entrepreneurs and their Companies

  23. We have absolutely no data butConsider 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

  24. We have absolutely no data butConsider 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.

  25. Post-Investment Relationship

  26. 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

  27. 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

  28. Why Angels Join Groups

  29. Growth in Angel Organizations Data provided by Professor J. Sohl, University of New Hampshire

  30. 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

  31. 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

  32. The Angel Investing Process

  33. Summary:Angel Investing Process • Pre-screening • Screening • Due diligence • Investment presentation • Follow-up discussions and meetings • Closing

  34. 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 Deal Flow Statistics

  35. 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

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

  37. 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)

  38. SUMMARY • Angels are making a difference • In job creation • In wealth creation by 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

  39. 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) 489-1447 mhudson@kauffman.org

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