1. Angel Investing Gary Rowe

2. Tech Coast Angels (TCA) CA Non-Profit Founded in 1997 CA Non-Profit Founded in 1997 The largest angel group in the US – investing primarily in Southern California The largest angel group in the US – investing primarily in Southern California Los Angeles (92 members) Inland Empire (16 members) Central Coast (22 members) Members are encouraged to Members are encouraged to – collaborate within and across networks. – attend any TCA meeting or activity. – participate in any member-led investment San Diego (102members) Orange County (70 members) Over 300 members organized in five networks overseen by a Board of Governors Over 300 members organized in five networks overseen by a Board of Governors –syndicate larger deals (new) –provide mentoring and guidance as well as capital Sierra Angels Desert Angels Alliance of Angels Life Science Angels Golden Seeds

3. Outline Funding Alternatives Funding Alternatives Angel Investing Angel Investing Angel Investing Decision Process Angel Investing Decision Process

4. Starts with the Entrepreneur An idea for doing something better, faster, cheaper You build on the idea and bring in others The frenzy starts…this will be great, we will be rich…the euphoria peaks with the first Excel spreadsheet… Revenue from nothing to $1 billion in 5 years…it must be true, it’s in Excel

5. Then Reality sets in I only have $5K in the bank I have to cover my monthly living expenses I’ll have to leave my current job/salary I need outside funding or my idea will never see the light of day

6. Funding Alternatives Self fund—may limit growth, but no dilution Friends/Family—early stage funding Angel Investments—$250K - $1.5 million VC funding—$3million - $20+ million

7. Angel Investing

8. What Is Angel Investing? Angel investors provide Seed Funds for proof of concept, proof of concept, product development, product development, market research, market research, business plan development, business plan development, recruiting management and recruiting management and early production. early production. TCA $ $ $ $ $ $ Angel investors also provide Startup Capital for early stage product development, initial marketing, expansion and growth.

9. Who are Angel Investors ? TCA Accredited* investors who invest their own capital CEO They come from diverse operating backgrounds C-Level Managers, C-Level Managers, Entrepreneurs, Entrepreneurs, Senior Executives & Other Professionals Senior Executives & Other Professionals They mentor and coach entrepreneurs Serve as directors Serve as directors Provide industry contacts & advice Provide industry contacts & advice Assist with team building, strategic planning and subsequent fundraising Assist with team building, strategic planning and subsequent fundraising They can devote time and add substantial value *Securities Act of 1933 - net worth > $1 M, income exceeding $200,000 in each of the two most recent years or a trust with assets > $5 M

10. % of All Start-Up Firms > 90% < 10% < 1% < $10 M $10 M to $50 M $50+ M 5-Yr Revenue Projection < 20% 20% to 50% > 50% Annual Growth Rate Internal Bootstrapping & Angels Angels & VCs Primary Sources of Funding Angel Investing, Osnabrugge & Brown Spectrum of Start-Up Investments Lifestyle Firms Entrepreneurial Firms Middle Market Firms High-Potential Firms ANGEL’SINTEREST

11. Investment Per Round (Millions) Number of Investors $5.0$7.5$10$2.5 Power of Angel Investing, Payne Angels VCs Gap Investor Focus Scarce capital – very few deals Wealthy, solo, private investors Strategic partners – corporate investors Boutique VCs Alliances between Angels and VCs Seed Track Funding

12. Angel & VC Markets Are Large, Complementary $19.2 B 55,480 Deals Mostly Early Stage 2008 Angel Investments UNH Center for Venture Research Mostly Late Stage 3,808 Deals $28.3 B 2008 VC Investments National Venture Capital Association Early Late STAGE Connect Framework Presentation - Jack Florio

13. WHAT DO ANGEL INVESTORS EXPECT? ROI = 30% - 40% Revenue Experienced management team Ongoing relationship with management 1 2 3 4 5 Investment Horizon 3 - 7 years 6 7

14. Preferred Raise 0 20% 30% 40% 50% 60% Connect Framework Presentation - Jack Florio 80%60%40%20%0 Preferred Investment Stage How are Angels Currently Investing ? $500 K - $750 K > $750 K < $150 K $150 K - $250 K $250 K - $500 K Seed/Startup Expansion Later Stage Early Stage Source: 2009 Angel Capital Association - Angel Group Confidence Survey and 2008 Member Directory

15. What Do Angels Bring to a Start-Up ? Guidance & Team Building Mentoring and Coaching Mentoring and Coaching Active on Board of Directors Active on Board of Directors Advisory Board Participation Advisory Board Participation Business Contacts Additional Management Additional Management Customers Customers Vendors Vendors Strategic Partners Strategic Partners Service Providers Service Providers Follow-on Financing Follow-on Financing Funding Direct Direct Venture Capital Affiliates Venture Capital Affiliates

16. Member Portfolio Considerations 5-10% of net worth (asset allocation) 5-10% of net worth (asset allocation) 8-10 investments (risk diversification) 8-10 investments (risk diversification) Most of ROI from 1 - 2 of 10 companies Most of ROI from 1 - 2 of 10 companies High tech, low tech, no tech High tech, low tech, no tech Variety of involvements Variety of involvements – Lead investor – Board, advisor – Passive

17. Member Portfolio Strategy Expect to exit in 3-7 years (assume 7) Expect to exit in 3-7 years (assume 7) You want a balanced portfolio You want a balanced portfolio – Seek to build a portfolio of companies covering all stages of development – Perhaps in multiple business sectors Build to a 10 company portfolio gradually Build to a 10 company portfolio gradually – Invest in 2-3 companies per year – Diversify (stage, sector, …)

18. Getting Funded by Angels

19. TCA Investing Process Pre-Screen 40+ Applications/Month Members VC Affiliates SponsorsWebsiteUniversities Word Of Mouth PR 20+ Companies Funded Each Year

20. Angel Investment Decision Process How TCA (and other investors) make decisions Investment is about maximizing returns while minimizing risk—early stage companies are higher risk which is why investors generally need more equity to offset higher risk Understanding what investors look for is valuable in helping entrepreneurs shape their business plans and funding strategies Following slides are how TCA evaluates invesments

21. Start With The Idea & Why Its Valuable? What urgent problem does it solve? Who is going to buy it? What would they pay to get this value? How is it better, faster, cheaper than alternatives? Will they adopt your new technology before you run out of money?

22. Good Ideas The next Big Thing Disruptive Technology that can form the core of a new business A new application enabled by the Convergence of New Technologies A novel New Application of an existing technology. A new Killer App

23. Then Determine if the Idea is Fundable ? A market opportunity sufficiently large to create a business with at least $50 to $100 million in annual revenues. A compelling, well articulated strategy for capturing and defending a significant market share. Proprietary technology or other strong barriers to entry. Strong management (not necessarily a complete team) with relevant and successful experience. An exit strategy for the investors. Lastly, the company valuation must fit within TCA’s risk/reward expectations for the investment. A desire for advice and coaching

24. Will They Use the Funds Raised Effectively ? Capital sought must take the company to the next level and materially increase its valuation. Prototype Patent Filing Product Development Market Research Product Launch Major Contract Management Team Proof of Concept

25. Will They Need Follow-On Funding ? Early money is inferior to later money Later Early Early money (Angel) must be used for growth $ $ $ $ $ $ Early money investors need to see significant increase in value Later money (VC) is used to ready the company for acquisition or IPO HOWEVER SO Early money investors will want a significant (30%-50%) ownership stake in the company Company Angels And The most desirable companies are those that don’t need further funds or will quickly become attractive to VCs VC

27. Look For Deal Killers We have no competition! I must remain President - FOUNDERITIS This is the Valuation. Take It or Leave It. All I need is Your money If we build it, they will come I can’t explain the technology in simple terms – It’s just too complicated We don’t own the IP We want to use your money to pay our salaries and retire the company’s debt. We’ve been too busy to put together a business plan We don’t have a shareholder/partner agreement

28. Question Exaggerated Claims 1.Our projections are conservative. 2.In 3 years our market will be $50B. 3.Our key customer will sign our contract next week. 7.Our competitors are too slow to be a threat. 8.Beta sites will pay to test our software. 9.Our patents make our business defensible. 10.All we have to do is get 1% of business. 4.Key employees will join us as soon as we’re funded. 5.No one else is doing what we do. 6.Several outside investors are doing due diligence.

29. Examine Pro Forma 201020112012201320142015 Revenues 0.271.002.505.3310.3122.17 COGS 0.190.631.612.784.549.07 Gross Profit 0.080.370.892.565.7713.09 R&D Expense 0.300.770.390.500.540.64 Sales & Business Development 0.010.400.901.501.752.00 G&A (Include Clinical & Regulatory) 0.010.350.881.251.50 Profit (B/Tax) 0.787.75 Cash Flow (Cumulative) 3.71 Financing0.151.50 1.75 Cumulative 0.151.653.15$4.90 M Headcount711192123 % of Niche Market? Consistent w/ # of units sold & sales cycle? GPM ~ 50% Does this match business sector? Reasonable % of Revenue? Sales, R&D and G&A High/Low? Follow-On Rounds 4 Yrs Negative Profits

31. Typical Terms to Consider Required Funds Debt vs. Equity Debt Equity Valuation Cap Table Shareholder Rights

32. Debt vs. Equity Convertible debt financing is an investor loan that has a future conversion-to-equity feature. Convertible debt typically converts (often at a discount & sometimes with a cap) to equity the next time capital is raised Conversion to equity is based on the valuation set at the time of “qualified financing.” Convertible Debt Equity Investor’s capital is exchanged for company equity The exchange rate is determined by the pre-money valuation for the company Conversion to cash or to common stock is based on the valuation set at the time of the next “qualified financing” round.

33. Valuation - Berkus Method (Early Stage Start-Up) Attractiveness of Core Idea Upon Which the Company is Founded $500,000 Good management is in place to execute to the plan in the early stages of rapid growth $500,000 The company has struck impressive strategic alliances with either vendors or customers, adding to barriers of entry for other businesses. $500,000 The company has a completed product or prototype and has demonstrated its attractiveness before an appreciative customer candidate. (Which further reduces the risk of investment, adding to value.)$500,000 Add Company Attribute $2,000,000

34. Summary Many entrepreneurs need outside funding Angel investors fill a valuable need for high- potential start-ups seeking $100K -$1.5 million Angel groups such as Tech Coast Angels bring investors together to collaborate on deals, due diligence and funding Understanding angel investor decision criteria will help entrepreneurs get funding

35. Thank you Entrepreneurial Playbook blog: http://garyjrowe.comhttp://garyjrowe.com