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Angel Investing

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  1. Senator Enzi’s Inventors Conference April 20, 2006 Angel Investing “Fools rush in where angels fear to tread” Wayne Greenberg wayne@welldog.com 307-721-8875

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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 womenangels.net • CTEK Angels (www.ctek.biz) largest in front range

  8. 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.

  9. 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

  10. 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

  11. Pitfalls • Unaccredited investors • Terms that inhibit subsequent fundings • Devils • Shoppers • Control freaks • Panic’ers • Invisible Men • Lack of follow on capability

  12. 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

  13. What’s an Angel to Do? DUE DILIGENCE

  14. What is Due Diligence? • 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)

  15. Why Due Diligence Is So Important • 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

  16. “[A] 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

  17. Trying to find the Gazelles…

  18. Areas of Interest to Angel Investors

  19. Management Product Market Competition Capital Relationships Return Legal Categories for Due Diligence

  20. Management Is 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?

  21. Product • 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?

  22. Market, Marketing (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?

  23. Competition • 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?

  24. Relationships • 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?

  25. Capital • 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?

  26. Return • 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?

  27. Legal • 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

  28. Resources

  29. Books

  30. Books AngelsRead

  31. List of Angel Networks – Inc Magazine http://www.angel-investor-news.com/index.htm Angel Investor News http://www.gsb.stanford.edu/ces/resources/angel_financing.html Stanford Entrepreneurial Center http://www.keiretsuforum.com/ The Keiretsu Forum http://www.angelcapitalassociation.org/default.aspx The Angel Capital Association Internet Resources http://www.inc.com/articles/2001/09/23461.html

  32. Wayne Greenberg wayne@welldog.com