How to Attract Venture Capital

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2. Introduction. What is an angel?(As known as: Informal investor; private investor.). 3. Introduction. What is an angel?An individual who invests his or her own money at arm's length in a business owned by a third party.. 4. Introduction. What is an angel?An individual who invests his or he

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How to Attract Venture Capital

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1. How to Attract Venture Capital Definition of An Angel Angel Activity & Importance

2. 2 Introduction What is an angel? (As known as: Informal investor; private investor.)

3. 3 Introduction What is an angel? An individual who invests his or her own money at arm’s length in a business owned by a third party.

4. 4 Introduction What is an angel? An individual who invests his or her own money at arm’s length in a business owned by a third party. Not friends, family

5. 5 Introduction What is an angel? An individual who invests his or her own money at arm’s length in a business owned by a third party. Not friends, family Tend to be high net worth individuals who have had previous success in business

6. 6 Introduction What do angels Look Like? Mostly males, over 50 High income & net worth Mostly successful entrepreneurs Very limited number of lawyers, physicians, dentists majority are business owners and former business owners Well educated professionals or have post-graduate degree

7. 7 Introduction Must understand the process! The venture capital industry includes many firms with substantial funds to invest It is often a challenge for an entrepreneur to tap into this vital source of financing. The venture capital process begins with an introduction to a venture capitalist.

8. 8 Venture Capital Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. Venture Capital is a form of "risk capital” The main sources of venture capital are venture capital firms and "business angels"

9. 9 Venture Capital Obtaining venture capital is substantially different from raising debt or a loan Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business Venture capital is invested in exchange for an equity stake in the business

10. 10 Venture Capital Venture capitalist prefer to invest in "entrepreneurial businesses" Venture capital firms usually look to retain their investment for between three and seven years or more.

11. 11 Choosing the Right Angel The criteria for selecting the right venture capitalists to approach include: geographic area industry specialization stage of development size of investment preferences. Also important are whether the fund will act as a lead investor and whether there are complementary or competing invested ventures within the fund’s portfolio.

12. 12 Why are Business Angels Important? Money: angels provide substantial quantities of financing

13. 13 Why are Business Angels Important? Money: angels provide substantial quantities of financing Position: Angels invest in growing firms, in segments where so-called capital market gaps are argued to be limiting

14. 14 Why are Business Angels Important? Money: angels provide substantial quantities of financing Position: Angels invest in growing firms, in segments where so-called capital market gaps are argued to be limiting Non-financial contributions enhance viability and improve growth performance

15. 15 Money: How Much? On average, an angel invests about $110,000 per firm in Canada. Have range of activity among angels. Some make 1 or 2 investments over five years; Others make 2-3 investments per year. Sometimes invest as part of syndicates; solo.

16. 16 Money: How much?

17. 17 Money: How Much? Angels provide substantial early-stage financing. How much? Recent large scale survey of 11,000 SME(Small and Medium Enterprise) owners reveals 18% of business owners have made investments in businesses owned by third parties during the last year.

18. 18 Money: How Much? Suppose ~1,000,000 SMEs; and an average investment of about $110,000 ? 18% of 1,000,000 @ $110,000 = $20 billion per year, nationally. Have at least four other assessments that Canadian angels invest between $1 and $5 billion annually.

19. 19 Money: How Much? Compare with investments made by Canadian institutional venture capital firms: 2000: $6.6 billion 2001: $4.9 billion Wetzel (1983), Sohl (2001) report 4:1 ratio of angel to VC capital in US For early-stage firms, angels are collectively at least as important as the national VC market!

20. 20 Money: How Much? In addition to the funds they invest, angels report holding substantial amounts of capital available for financing growing SMEs The problem is not a shortage of risk capital.

21. 21 Importance: Position Angels seek out high growth firms To compensate for risk, angels look for annualized rates of return of at least 25% Are patient 7-7 rule: for each $1 invested angels want to exit with $7 after 7 years Only growth-oriented firms can meet these rate of return requirements

22. 22 Importance: Position tend to exit via strategic sale, repurchases by original founders, third-party acquisitions exits via IPOs (initial public offering), sales to VCs happen, but not as frequently as other exits

23. 23 Importance: Position Business angels invest in most sectors (regional effects) and where many people say there is a ‘capital market gap’ – in early stage growth-oriented businesses

24. 24 Importance: Position Angels tend to invest close to home in businesses with which they (or members of their syndicates) are familiar Capital is put to work locally because scale of investments does not warrant long geographic reach Contributes to creation, sustenance of business clusters Fosters local networking and innovation

25. 25 Importance: Non-financial Benefits of Angel Financing Surveyed 42 Ottawa-region technology firms to learn about non-financial contributions angels may have made to firms 33 respondents identified 66 examples of contributions

26. 26 Non-financial Benefits of Angel Financing Non-financial contributions were coded into six categories Advice Contacts Hands-on assistance Boards of Directors & Advisors Market & Business Intelligence Credibility

27. 27 Non-financial Contributions of Angels

28. 28 Non-Financial Benefits of Angel Financing: Advice “They [private investors] assisted by providing guidance to management, and … they also provided guidance in the development of a corporate governance process and reporting discipline.”

29. 29 Non-Financial Benefits of Angel Financing: Advice “In addition to making cash available, [the] investor provided assistance preparing our business plan to present to potential investors, provided legal opinions, helped map strategy when dealing with difficult situations encountered with customers, provided assistance in accessing government programs, [and] assisted in dealing with banks during negotiations concerning lines of credit.”

30. 30 Non-Financial Benefits of Angel Financing: Contacts “Both our significant angel investors … assisted by providing guidance to management, and through their networks of … contacts they assisted in finding individuals interested in providing additional financing.” “[He] assisted with accountants, lawyers, hosting our website … got us meetings with his contacts that we would have had to work a lot harder to get otherwise.”

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