From invention to start up money angels and strategic partners november 28 2006
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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 l.jpg

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 l.jpg

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 l.jpg
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



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Venture Capital Investment: Millions)

Historical and 2006 Projected

Source: MoneyTree


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Average VC Deal Size Millions)

Per Financing Round ($ Million)

Source: NVCA


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US Angel Investments Millions)

  • 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


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Who Are Angels? Millions)

  • 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


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Financial Attributes of Angels Millions)

  • 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 l.jpg
Angels and VCs – Similarities Millions)

  • 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


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Angels and VCs –Differences Millions)

  • 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


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    Investment Preference Millions)

    39 groups reporting


    Slide13 l.jpg

    $5.00 Millions)

    $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 l.jpg
    Finding Angel Investors Millions)

    • 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 l.jpg
    Forms of Investment Millions)

    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 l.jpg
    Professional Investors Millions)

    • 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 l.jpg
    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


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    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 l.jpg
    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 l.jpg
    Term Sheets: Debentures Companies

    • 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 l.jpg

    Price Companies

    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 l.jpg
    Summation Companies

    • 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?