changing relationship between venture capital and angels - impact on funding of startups
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Changing Relationship Between Venture Capital And Angels
Impact On Funding Of Startups
Prepared byCharles V. Fishel
Hoffman Row Groupfor
IP SocietyFebruary 4, 2004
Venture Capital Trends
Price Waterhouse Money Tree at http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical on 040202
Venture Capital Historical Trend Data
$0 $5,000,000,000
$10,000,000,000
$15,000,000,000
$20,000,000,000
$25,000,000,000
$30,000,000,000
$35,000,000,000
1995-1
1996-2
1997-3
1998-4
2000-1
2001-2
2002-3
Investment Amount # of Deals
(National)
Venture Capital Trend Data Silicon Valley
$0
$2,000,000,000
$4,000,000,000
$6,000,000,000
$8,000,000,000
$10,000,000,000
$12,000,000,000
1995
-1
1995
-2
1995-
3
1995
-4
1996
-1
1996-
2
1996
-3
1996
-4
1997-
1
1997
-2
1997-
3
1997
-4
1998
-1
1998-
2
1998
-3
1998
-4
1999-
1
1999
-2
1999
-3
1999-
4
2000
-1
2000
-2
2000-
3
2000
-4
2001
-1
2001-
2
2001
-3
2001-
4
2002
-1
2002
-2
2002-
3
2002
-4
2003
-1
2003-
2
2003
-3
Investment Amount # of Deals
Price Waterhouse Money Tree at http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical on 040202
Bygrave, Portable MBA in Entrepreneurship (Wiley, 2d) p. 1
Levels of Funding - Firm Maturity
Self-fu
nding
Credit C
ards
Family
Friend
s
Supplie
rs
Commerc
ial Ban
ks
Asset-b
ased
Lenders
Instituti
ons
Insuran
ce Com
panies
Ventur
e Capit
alists
Private
Equity
Public
Equity
Public
Debt
Commerc
ial Pap
er
Levels of Funding - Firm Maturity
Self-fu
nding
Credit C
ards
Family
Friend
s
Supplie
rs
Commerc
ial Ban
ks
Asset-b
ased
Lenders
Instituti
ons
Insuran
ce Com
panies
Ventur
e Capit
alists
Private
Equity
Public
Equity
Public
Debt
Commerc
ial Pap
er
IPO
ANGELS
FFF VENTURE CAPITAL
Pre-Bust
Levels of Funding - Firm Maturity
Self-fu
nding
Credit C
ards
Family
Friend
s
Supplie
rs
Commerc
ial Ban
ks
Asset-b
ased
Lenders
Instituti
ons
Insuran
ce Com
panies
Ventur
e Capit
alists
Private
Equity
Public
Equity
Public
Debt
Commerc
ial Pap
er
IPO
ANGELS
FFF VENTURE
CAPITAL
Now
VC Investments by Stage (2003Q3)
0
10
20
30
40
50
60
Startup/Seed Early Stage Later Stage Expansion
Price Waterhouse Money Tree at http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical on 040202
“Pre-Bust”(1998)
lEntrepreneur self-funds through concept/patent application
lVCs step in to fund to IPO/acquisitionlAverage Deal Size: $4 – 6 Million
“Internet Boom”(1999-2000)
lEntrepreneur gets an idea!
lVCs step in to fund to IPO/acquisitionlAverage Deal Size: $10 Million
(+++)
“Post Bust”(2003)
lEntrepreneur gets an idealSelf-funds through revenue
generation
lVCs step in to fund to IPO/acquisitionlAverage Deal Size: $2 – 4 million lFewer deals done.
Valuation Changes1999:lSequoia Capital paid $5 million for
8% of eToys.
2003:lVCs agree to valuation of $4 million
and invest $4 millionl50%
SJ Mercury News, 5/18/2003, p.F1
l Venture market may be close to end of "post bubble" adjustment:
lhealthier technology stock market,
lhigher percentage of "new" Series A deals, and
l lower number of restructuring transactions.
The Buzz of the Week, PE and VC Issues and Commentary, December 16th, 2003
lNationwide, venture capital investments rose 6 percent to $4.49 billion from $4.24 billion in the third quarter, the highest level in a year
lSilicon Valley now provides more than 37 percent share of the nation's total venture capital -- up from the 34 percent average seen over the past six years.
Posted on Mon, Jan. 26, 2004 , Venture funding soars by 22% By Matt Marshall, Mercury News
lNationally, only 19% all the venture capital handed out in 2003 went to first-time fundings .
A Tough Chase for Venture Capital By Ellen McCarthy, Washington Post Staff Writer, Monday, February 2, 2004; Page E01
lUS venture capital investments jumped 15 percent in late 2003
lRisk-averse investors mostly shunned young startup companies, pushing late stage financing to a 20-year high.
http://www.msnbc.msn.com/id/4077505/ as of 040202
Changing Relationship Between Venture Capital And Angels
Shift Away from VC Funding
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002 2003 ytd
Non VC-backed IPOVC-Backed IPO
S.J. Mercury News, 5/18/2003, p. 1F
Shift Away from VC Funding
512003 ytd
81262002
86182001
1662182000
2782311999
305621998
Non-VC-backed IPO
VC-backed IPO
S.J. Mercury News, 5/18/2003, p. 1F
Angels vs. VCs
l Considerable overlap and interplay among langel investors, lprivate equity, and lventure capital.
The Private-Capital Survival Guide. From: Inc. Magazine, March 2003 | By: Harris Collingwood
Angels vs. VCs
l Boundaries between angel investors and venture-capital investors are particularly fluid, lhaving mainly to do with degree of
organization and size of their investments.
The Private-Capital Survival Guide. From: Inc. Magazine, March 2003 | By: Harris Collingwood
Funding “Sweet Spots”
12$15mFinancial Services16$22mRetailing/Distribution16$51mHealthcare Services12$99mElectronics/Instrumentation16$120mConsumer Products and Services32$146mIndustrial/Energy30$164mMedia and Entertainment31$167mComputers and Peripherals 24$168mSemiconductors37$173mIT Services28$209mBusiness Products and Services 48$324mNetworking and Equipment55$324mMedical Devices and Equipment73$492mTelecommunications
165$856mSoftware90$929mLife Sciences / Biotechnology
DealsAmountIndustry Sector
AMOUNTS RAISED BY SECTOR(National - 2003Q3)
Price Waterhouse Money Tree at http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical on 040202
Amounts Raised by Sector(National - 2003Q3)
$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000
B io t echno lo g y
T eleco mmunicat io ns
N et wo rking and Eq uip ment
IT Services
C o mp ut ers and Peripherals
Ind ust rial / Energ y
Elect ro nics/ Inst rument at ion
R et ail ing/ D ist rib ut io n
Ot her
Price Waterhouse Money Tree at http://www.pwcmoneytree.com/moneytree/nav.jsp?page=historical on 040202
Software
Favored Sectors
l Life sciences dominated investments for second consecutive quarter, ldisplacing software as top sector
l Lagging far behind:ltelecommunications and lnetwork sectors.
http://www.msnbc.msn.com/id/4077505/ as of 040202
Less-Favored Sectors
lComputer and communications sectors continue to fight for funding following massive over-investments during dotcom boom yearsl Telecommunications, which suffers
from lingering overcapacity, had hardest time raising new money.
http://www.msnbc.msn.com/id/4077505/ as of 040202
Software
lMost viable new software companies will be those that sell software as a service.
“VCs make Silicon Valley predictions” Robert Mullins http://www.bizjournals.com/sanjose/stories/2004/01/12/daily50.html?f=et79Silicon Valley /San Jose Business Journal, January 16, 2004
Nanotechnology
lMay be “next wave”.
[Offshore] Outsourcing
l Venture capital firms are encouraging outsourcinglOne major American venture capital
firm, for example, is understood to insist, as a condition of investment, that “any company it invests in outsource its computer programming tasks to the greatest extent possible.”
VCs Turn Their Gaze Offshore, Gabor Garai is a partner in the Boston office Epstein Becker & Green, `http://www.businessweek.com/smallbiz/content/feb2004/sb2004022_8952_sb020.htm at 040202
Outsourcing
l Outsourcing will increasingly be viewed by venture capitalists l not just a way to save money, l but to make money
l Outsourcing is a way for small companies to speed development and focus on their core competencies by leveraging cash.
VCs Turn Their Gaze Offshore, Gabor Garai is a partner in the Boston office Epstein Becker & Green, `http://www.businessweek.com/smallbiz/content/feb2004/sb2004022_8952_sb020.htm at 040202
Outsourcing
l Company's ability to attract venture capital won't be limited to its location, but increasingly to its ability to make the best use of its assets –l both physical and intellectual
l Thus, outsourcing may help smaller companies attract venture capital.
VCs Turn Their Gaze Offshore, Gabor Garai is a partner in the Boston office Epstein Becker & Green, `http://www.businessweek.com/smallbiz/content/feb2004/sb2004022_8952_sb020.htm at 040202
Strategic Alliances
lEasier fundinglParticularly working with investment
bankers and consultants.
Desperation = Tough Terms
l The more urgent an entrepreneur's need for money, l the more onerous are the terms
l Desperate companies may sell equity to someone and promise that investor will never be diluted
l Severe terms can stop company's growth cold."
The Private-Capital Survival Guide. From: Inc. Magazine, March 2003 | By: Harris Collingwood
Restrictive Terms
l During downturn, many venture capitalists, secured their investments with so-called ``liquidation preferences''
l Clauses guaranteed that, if start-up was sold, lVCs would get their money first –lbefore other executives or
employees.
Posted on Thu, Nov. 06, 2003, VCs hope higher spending will boost start-up salesBy Matt Marshall, Mercury News
Restrictive Terms
l This sets management and employees at odds with their VCslMay be counter-productive
l Start-up's employees won't profit, and will resist merger / acquisition
l Many deals fall apart on their own complexity.
Posted on Thu, Nov. 06, 2003, VCs hope higher spending will boost start-up salesBy Matt Marshall, Mercury News
Tough Termsl Down rounds continue to dominate (79%)
l However, use of some tougher terms such as lmultiple liquidation preference, l ratchet anti-dilution and l pay-to-play are trending toward more
customary levels
l Suggesting increased VC optimism.
The Buzz of the Week, PE and VC Issues and Commentary, December 16th, 2003
Angels
Traditional Angels
l In the past, most angels flew solo,
lmeeting with prospective entrepreneurs individually,
ldoing their own due diligence, and
l investing at their own pace.
A Chorus of Angels. Inc. Magazine, January 2004 | Page 38 By: Suzanne McGee Illustrations by: Christopher Neal
Major Hassle for Entrepreneurs
lCash-strapped business owners were forced to haul dog-and-pony shows from one angel to next,
lmaking the same pitch over and over.
A Chorus of Angels. Inc. Magazine, January 2004 | Page 38 By: Suzanne McGee Illustrations by: Christopher Neal
Good News?
l New wave of angel groups is changing
l Angel groups, generally composed of 50 to 60 wealthy individuals focus on reducing risk and increasing odds of finding a top-quality deal
l They are far more likely to spot a flawed business plan.
A Chorus of Angels. Inc. Magazine, January 2004 | Page 38 By: Suzanne McGee Illustrations by: Christopher Neal
Good News?
lAngels and seed funds that once provided needed capital for first two years of growth have adopted same criteria as traditional venture funds, lleaving entrepreneurs to fend for
themselves until they can demonstrate traction.
Three Trends in Startup Financing 03.04.2003 - By Robert Dellenbach http://www.avce.com/main.php?load=displayMatch&newsid=128 on 040131
Active Investors
l 200,000 individuals
l Typical startupl5 – 6 angels.
Center for Venture Research at University of New Hampshire, Press Release 6/11/03
Sector Analysis
l 40% - Softwarel 14% - Life Sciences l(other than biotech)
l 5% each for other sectors.
Center for Venture Research at University of New Hampshire, Press Release 6/11/03
Stage
l 2002:lAngels typically fund seed/start-up
stagel47% of angel investments in seed/start-up ventures
l 33% of investments were early stage.
Center for Venture Research at University of New Hampshire, Press Release 6/11/03
“In the Zone”
l If you are raising an angel round from individual investors and you can get away with selling 10-15% of your company
l If you are raising a Series A round from professional institutional VC investors and you can get away with selling 20-40% of your company.
12 Secrets of Negotiating the Best Valuation for Your CompanyBy Jeff Parness
Regional Angel
Groups
Silicon Valley Band of Angels
l Founded in 1995. Invests across all high-technology categories. Majority of investments have been made in the seed or early round (Series A or B): $82.6 million into more than 132 startups
l Sweet Spot: Silicon Valley-based high-tech start-ups.l Average investment: $1 millionl Number of angels/investors in the network: 150
l Contact:Band of Angels 3130 Alpine Rd. Suite 200-7003 Portola Valley, CA 94028 415-441-2887 info@bandangels.com
CVBI Angel Investor Network(Central Valley Business Incubator)
l Accepts applications only from businesses in California's Central Valley region.
l Average investment range:$10,000 to $500,000
l Contact:CVBI Angel Investor Network 2555 Clovis Ave. Clovis, CA 93612 559-292-9033 kfurtado@csufresno.edu
Sierra Angelsl Preference businesses located in Nevada, California, or
other nearby locations ---companies with unique products / proprietary technology.
l Sweet Spot: Northern Sierra-based companies.l Average investment range: $500,000 to $2,000,000l Contact:l Sierra Angels
PO Box 3215 Incline Village, NV 89450-3215 775-831-7804 Send E-mail to the most appropriate address: l Software@sierraangels.com
Computing_Communications@sierraangels.comHealthSciences@sierraangels.comInternet@sierraangels.comOtherTech@sierraangels.com
The Angels' Foruml Invests in companies based in Silicon Valley / SF Bay Area. l Portfolio companies include consumer products, enterprise
software, industrial products, Internet and E-commerce, medical devices and services, networking technologies, pharmaceutical, semiconductors, telecommunications, and wireless. Most start-up companies come to group prescreened through professional contacts in the banking, investment, and legal fields.
l Sweet Spot: Companies specializing in disruptive technologies.
l Average investment range: $100,000 to $750,000l Number of angels/investors in the network: 25
l Contact: The Angels' Forum PO Box 1605 Los Altos, CA 94023-1605 650-857-0700 inquiries@AngelsForum.com
Fast Angels
l Invests primarily in companies in Silicon Valley. Seeks out technology entrepreneurs focused on helping business "act faster, act smarter."
l Sweet Spot: Seed-round financing in companies with less than a $2.5-million valuation. Average investment range:$50,000 to $1 million
l Number of angels/investors in the network: 12
l Contact: Web site onlyl Submit business ideas via the Web site.
Monterey Investor Roundtable
l affiliated with Gathering of Angelsl Monthly presentations have included
environmental, biotech, biomedical, eCommerce, nanotechnology, explosive detection, software, hardware, semiconductors
l Investments are made by individual members (Roundtable does not seek to invest as a group)
l Contact:l cfishel@hoffmanrowgroup.com
Golden Capital Network
lConferences where entrepreneurs can present to VCs and Angels.
International Angels Organization
l Led by Hal Nissley
Non-Disclosure Agreements
Use of NDAsl Most U.S. venture capital and investment
banking firms will not execute NDAs because they: l see many different projects and l do not wish to inadvertently be perceived to be
in violation of NDAl May want to steal your idea…
l Instead, entrepreneurs must rely upon firm’s integrity as a firm and its close working relationship with the client to achieve successful outcomes.
NDAs - an Investment Banker’s Perspective
l “Possibly we could get NDA's from people we talk to but then how could they help us without discussing what we have with others. Usually these types of agreements are not signed with investment banking firms because of the very nature of the work we are dealing with.
l We have already spent substantial time defining who would be the critical partner in this matter, but it would be hard to deal with anyone without telling them what we are doing.
l It undercuts everything we will be talking about when we meet.”
Robert Spira, Chapman Spira and Carson
Secrecy Backfiredl Entrepreneur
refused to provide investment banker with information for due diligence
l By default, another firm “won” funding of $5.5 million.
lOnly do business with someone you can trust
l It’s safer than an NDA
lNDAs are nearly worthless…
Hoffman Row Group, Inc.
98 Del Monte Ave., Suite 205Monterey, CA 93940
Tel: 831-224-8800 • Fax: 831-401-2340cfishel@hoffmanrowgroup.com
www.hoffmanrowgroup.com
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