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Senator Enzi’s Inventors Conference April 20, 2006. Angel Investing. “Fools rush in where angels fear to tread”. Wayne Greenberg 307-721-8875. What Are Angel Investors?.

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Angel investing l.jpg

Senator Enzi’s Inventors Conference

April 20, 2006

Angel Investing

“Fools rush in where angels fear to tread”

Wayne Greenberg


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What Are Angel Investors?

  • Term originated with funding of Broadway plays in the early 1900’s (getting productions “off the ground”)

  • Generally: High net worth individuals who invest in early stage entrepreneurial companies

  • Tend to be former entrepreneurs themselves

  • Typically come in between 3F’s and VC’s

  • Investments between $10k and $500k

  • Tend to invest in business areas they know

  • Invest mostly locally

  • Some organized into groups (“networks”) but not professional money managers

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Angel Investor Prototype

  • 47 years old, annual income around $100k

  • Net worth of $750k, college educated

  • Invests $37,000 per venture

  • Is or has been self employed

  • 7 of 10 investments w/in 50 miles of “home”

  • 9 of 10 also provide loans or loan guarantees in addition to equity investment

  • 9 of 10 investments go to companies with <20 employees

  • Bases many decisions on referrals and who else is in

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Angel Investing2004 Statistics

  • 225,000 active angels in U.S.; over 200 angel groups active

  • $24B invested in 2004 (vs. $22B for VC’s)

  • Average invested per company - $469,000

  • 30x the number of companies than VC’s

  • Angels fund 60% of all TECH companies seeking < $1M

  • 40-50% of investments result in losses

Source: Center for Venture Research

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What Motivates Angels

  • ROI

  • Home Runs

  • Grand Slam Home Run

    • $100k in Amazon = $26M at IPO

  • Give back

  • Stay involved

  • Want to contribute their personal skills and contacts

  • Shopping for new gig

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Finding Angels

  • Degrees of separation

    • Your school, church, neighborhood

    • Other business owners

    • Your banker, lawyer and accountant

    • Your family and friends

  • Network, network and more networking

  • Organized angel groups – ignore 50 mile rule

  • Angels beget more angels

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Angel Groups

  • Formed to share risk, information, leads, due diligence and contract negotiation

  • Most are very informal; some have actual “funds” managed by the group

  • About 1 in 5 deals that passes initial group screen gets funded

  • Mostly regional but some specialties like

  • CTEK Angels ( largest in front range

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What Should You Ask/Do

  • What is their investing experience?

  • Talk to one of their investment references.

  • What do they know about your industry?

  • What contacts do they have for:

    • Sales?

    • Alliances?

    • Channels?

  • Can they bring other investors in?

  • Will they want to be involved? What relationship will they want? Will they be TOO busy for you to touch when needed?

  • How is the chemistry between you and the angel?

  • Spend time getting to know the angel.

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Angels vs. Venture Capitalists

  • Earlier stage companies

  • Faster decision process

  • More geographically diverse

  • Less due diligence

  • More likely to provide hands on expertise

  • Prefer smaller investments

    • Less dilution

    • Easier to stage phases and valuation increases

  • Far easier on terms

  • Follow on investments may not be there

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Angel Deals

  • Can be as sophisticated as VC’s

  • Or not…

  • Many do not want to be involved but all want to be informed

  • Since the bust many angels are gun shy and want more complete legal documentation and protections

  • Advent of Sarbanes and other rules also make for more caution

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  • Unaccredited investors

  • Terms that inhibit subsequent fundings

  • Devils

    • Shoppers

    • Control freaks

    • Panic’ers

    • Invisible Men

  • Lack of follow on capability

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For Angel Investors, It’s Primarily About Measuring and Managing Risk

  • All businesses share similar risk factors

  • Minimizing each or identifying the one(s) most problematic is key

    • People Risk

    • Market Risk

    • Product Risk

    • Capital Risk

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What’s an Angel to Do? Managing Risk


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What is Due Diligence? Managing Risk

  • Generally: an investigation into the financial and commercial activities of a business in connection with a proposed acquisition or disposal of an interest in that business. The due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information.

  • Legally: a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depending on the relative facts of the special case. (Black’s Law Dictionary)

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Why Due Diligence Is So Important Managing Risk

  • Refines the price/value

  • Identify potential "deal killer" defects in the target

  • Mitigates legal (and other) risks

  • Verification that the transaction complies with investment criteria

  • Identification of synergies w/in investor group

  • Ensures that post-investment plans will have best chance for success

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“[A] Managing Risk lack of due diligence is

by far the greatest regret

angel investors have.”

-Angel Investing: Matching Start-Up Funds With Start-Up

Companies - The Guide For Entrepreneurs,

Individual Investors, And Venture Capitalists

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Areas of Managing RiskInterest to Angel Investors

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Management Managing Risk








Categories for Due Diligence

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Management Managing RiskIs this management team able to grow their venture rapidly and successfully?

  • Have they done “it” before?

  • Do they have industry knowledge and experience?

  • Do they have the necessary key positions filled?

  • Have they identified their own weaknesses and have a plan to fill those voids?

  • Are there sufficient incentives in place for key employees?

  • Are the principals trustworthy?

  • Have they begun to build solid advisory/legal teams?

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Product Managing Risk

  • Is the product/service unique and fully developed?

  • Does it create compelling benefits for the target customers?

  • Can the team articulate the value proposition clearly and consistently?

  • If it is not fully developed, does management understand the time and dollars required to complete development?

  • What intellectual property protection exists?

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Market, Marketing Managing Risk(and Sales)

  • How large is the market?

  • Is it large enough to support rapid growth and attractive margins?

  • Do they have credible and systematic market research?

  • What is the basic value proposition and can it be easily and consistently articulated?

  • Does management's marketing plan make sense?

  • How will the product reach the market? Via what channels? What pipeline exists?

  • Is there a sales culture in the company?

  • Are there existing customers the investor can interview?

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Competition Managing Risk

  • What are the barriers to entry by competitors?

  • Who are the competitors and what strengths do they possess?

  • Are there major players who could become competitors?

  • Has the company effectively mapped their own capabilities against those of their competitors?

  • How will the venture gain and defend its target market position?

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Relationships Managing Risk

  • Who are the vendors and what are the risks associated with key supplies or raw materials?

    • Have/can those risks be mitigated?

  • Are there strategic partnership agreements with other players that are beneficial/necessary to the venture?

    • Are any in place?

    • Have any been identified?

  • Can the vendors be contacted?

  • Who are the company’s advisors and mentors?

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Capital Managing Risk

  • How much investment capital is needed?

  • In how many rounds?

  • What does this round buy in terms of increased value

  • How will it be deployed?

  • Does the cash flow analysis demonstrate this need?

  • Are there legitimate Plans B and C?

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Return Managing Risk

  • Is the potential return on this investment sufficiently attractive in relation to the risk?

  • Is there a clear exit strategy for the investors/company?

  • Does the time horizon fit with the client’s needs/desires?

  • Does the management team clearly understand the key business elements that must be managed for the venture to be successful?

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Legal Managing Risk

  • Review as much as possible:

    • Contracts – contactors, vendors, suppliers, customers, employees, SLA’s

    • Capital Structure

    • Corporate documents – articles, by laws, etc.

    • IP – patents, copyrights, trademarks

    • License agreements

    • Leases

    • Litigation or threats of litigation

    • Employee policies

    • Environmental review

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Resources Managing Risk

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Books Managing Risk

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Books Managing RiskAngelsRead

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List of Angel Networks – Managing RiskInc Magazine

Angel Investor News

Stanford Entrepreneurial Center

The Keiretsu Forum

The Angel Capital Association

Internet Resources

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Wayne Greenberg Managing Risk