From Invention to Start-Up: Money – Angel, Venture and Strategic Partners February 20, 2007 Mary Baker Anderson Calipa Partners and Alliance of Angels

Financing Life Cycle Discovery Proof-of Concept Product Design Product Development Manufacturing/ Delivery Friends and Family Angels Seed Funds Venture Funds Founder Institutional Equity Loans / Bonds Angel Groups Government Grants/Loans Strategic Investment

Professional Investors Angels, venture capital, strategic investors (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 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

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 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

Who Are Angels? 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

Financial Attributes of Angels 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”

Forms of Investment Debt (note)Equity (stock) OptionsWarrants 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

US Angel Investments 2005 – invested $23.1 billion (49,500 deals) Increase of 2.7% in $’s over 2004 Increase of 3.1% in deals over – 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

Angel Investment Preference

Finding Angel Investors 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 Early Stage Investment Forum, Zino Zillionaire Business Plan Competitions Professionally-funded Start-ups Venture Capitalists Corporate Boards

Venture Capital Statistics: Investments in US 2006 – invested $25.5 billion (3,416 deals) 2005 – invested $21.7 billion (2,939 deals) 2004 – invested $20.9 billion (2,876 deals) 2003 – invested $18.9 billion (2,893 deals) Increase due largely to late stage investments  Less than 2% in early/seed stage Source: NVCA and Moneytree

Venture Investment by Deal Stage ($ millions)

Venture Capital Investment Source: MoneyTree

Average Venture Deal Size ($Mil) $6.6 $7.0 $7.25 $7.4 $7.5

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $ * *2006 Estimated Value Startup/Seed Valuations Of Venture Capital Seed/Startup Rounds ($ Millions)

Valuation: Expected ROIs ROIFive Year ROI Seed60%+/year10X+ Start-up50%8X Early stage40%5X 2 nd stage30%4X Near exit25%/year3X

Angels and VCs – Similarities 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

Angels and VCs –Differences Venture capitalists:  Invest on “home-run” theory  ROI is ultimate goal  Investing 3 rd 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

Strategic Investor Characteristics Typically invest in complimentary technologies Usually have an internal champion Often will invest in competitive technologies Unlike VC’s or angels who will place only one bet in a market segment Typically follow, don’t lead a round

Pros and Cons of Strategic Investment PROS Less price sensitive than other investors Can create instant credibility CONS Erratic follow on investment behavior Won’t always champion your product internally Can box you out of competitor products

Summation Angels usually invest initially in seed/start-up rounds Angels represent (more) patient money Angels are almost always sophisticated investors Angels make excellent advisors and mentors Strategic investment can be your best investment opportunity or your worst nightmare There is a place for angels, venture, and strategic investment, depending on the stage and investment needs of the company Many companies will need only angel investors Not all companies make great angel investments Be open, coachable and realistic Show your commitment, passion and drive