An Introduction to

ANGEL INVESTING

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

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

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

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 .

How do Angels fit into Entrepreneur-friendly Communities .

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

New Company Formation and Funding Sources for Startup Companies .

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

000 Each investor: $ 40.000. family & fools Typical round: $10.000 Each investor: $ 2.000.000 Source: estimate • Not accredited Unsophisticated Investing in a friend Passive 1-2 lifetime investments ($100 to $5.000 Source: Center for Venture Research • • Venture Capital Typical round: $7.000 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 • Angels Typical round: $600.000 Source: PWC MoneyTree • .000 Each investor: $3.• Friends.

)  35 .50.000  200.000 (est.000  < 500 .Funding Seed and Startup Entrepreneurs (typical year) • • • • Startup companies Funded by FF&F Funded by Angels Funded by VCs  500.

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

An Angel Portfolio Strategy .

advisor – Passive • Most of ROI from 1 .An Angel Investing Strategy: Portfolio Considerations • • • • 5-10% of net worth (asset allocation) 8-10 investments (risk diversification) High tech. no tech (your choice) Variety of involvements – Lead investor – Board.2 of 10 companies . low tech.

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

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 • Can afford to lose invested funds • Implications: • Giving up regulated disclosure .

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 .000 invested 100% reserves.Implications: Angel Investor Net Worth • • • • • Typical angel investment ~$25K 10 investments = $250.

7 Historical 20 Year Returns for Alternative Assets 18.7 16.Angel Expectations: 25%/yr 25 20 Returns 15 10 5 0 Seed Fund s 22. HFRI Equity Hedge Index Hedg e Fund s Buyou ts S&P 500 NASDA Q .5 14.2 All Ventu re Source: Venture Economics.9 13.4 18.

all portfolio companies must demonstrate the opportunity for a 20-30X return on investment.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. .

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 .

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

Economic Benefit from Angel Invested Entrepreneurs and their Companies .

We have absolutely no data but Consider 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 .

We have absolutely no data but Consider 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. .

Post-Investment Relationship .

Coach. not paid consultant . Director – Except in emergency. Mentor.Angels invest time in portfolio companies • Angels bring expertise to portfolio – – – – Business acumen Vertical expertise Financial experience Director service • Common roles – Advisor.

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 .

Why Angels Join Groups .

Growth in Angel Organizations 00 0 00 0 00 0 00 0 00 0 00 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 00 00 00 00 00 1 1 1 1 00 00 00 00 00 Data provided by Professor J. University of New Hampshire . Sohl.

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 .

entrepreneur-friendly Pick and choose the deals you like Great camaraderie among the like-minded .Investing through Angel Orgs • • • • • • Dividing the work eases the pain Variety of vertical experience available Standardized processes and term sheets Deal flow encouraged.

The Angel Investing Process .

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

Meeting 1 in 2 raise money 1 in 72 who apply receive investment .Deal Flow Statistics • • • • • Prescreening Screening Due Diligence Investment OVERALL      1 in 4 to Screening 1 in 3 to DD 1 in 3 to Inv.

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64/5.00 4.54/5.00 4.00 4.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 Important topics & content Relevant & beneficial information Well presented information 4.00 .60/5.60/5.

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

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) .

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 .

This introduction to angel investing was developed by the Kauffman Foundation for the Angel Capital Association. For more information on Kauffman’s Angel Initiative. It is designed as a recruiting tool for angel organizations and to introduce interested groups to the subject. contact: Marianne Hudson (800) 489-1447 mhudson@kauffman. the Angel Capital Association. or the Power of Angel Investing seminar for new angel investors.org .

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