ANGEL INVESTING An Introduction to

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

New Company Formation and Funding Sources for Startup Companies

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

Friends, family & fools Angels Venture Capital Not accredited Unsophisticated Investing in a friend Passive 1-2 lifetime investments ($100 to $5,000 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 Typical round: $10,000 Each investor: $ 2,000 Source: estimate Typical round: $600,000 Each investor: $ 40,000 Source: Center for Venture Research Typical round: $7,000,000 Each investor: $3,000,000 Source: PWC MoneyTree

Funding Seed and Startup Entrepreneurs (typical year) Startup companies Funded by FF&F Funded by Angels Funded by VCs  500,000  200,000 (est.)  ,000  < 500

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

An Angel Portfolio Strategy

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

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

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

Angel Expectations: 25%/yr Source: Venture Economics, HFRI Equity Hedge Index Returns Seed Funds All Venture Hedg e Funds Buyout s S & P 500NASDAQ Historical 20 Year Returns for Alternative Assets

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

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

IPO M&A 2002 Software Industry Equity Update 20X 100X Exit Strategies

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

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

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 Data provided by Professor J. Sohl, University of New Hampshire

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

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

The Angel Investing Process

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

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

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 4.64/5.00 –Important topics & content 4.60/5.00 –Relevant & beneficial information 4.60/5.00 –Well presented information 4.54/5.00

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 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. It is designed as a recruiting tool for angel organizations and to introduce interested groups to the subject. For more information on Kauffman’s Angel Initiative, the Angel Capital Association, or the Power of Angel Investing seminar for new angel investors, contact: Marianne Hudson (800)