PowerPoint Presentation

Angel in GroupsHelsinki, May 7, 2012BILL PAYNEwww.fiban.org/billpayne

Bill Payneis an active angel investor, board member, and advisor to entrepreneurs. He assisted in founding four angel groups: the Frontier Angel Fund (2005), Tech Coast Angels (San Diego 2000), Vegas Valley Angels (2003) and Aztec Venture Network (1999).

For three decades, Bill Payne has successfully founded or invested in over 50 start-up companies. He served as an Entrepreneur-in-Residence to the Kauffman Foundation for twelve years. While there, he directed the development of the Power of Angel Investing education series for entrepreneurs and angel investors. He has served as lead instructor for over 100 seminars in seven countries.

In 2009, Bill was named the Hans Severiens Award winner as the outstanding angel investor in America.

AGENDAAngels: Importance to US EconomyPortfolio Strategy for AngelsStudy: Returns for Angels in GroupsImplications of Study to Investing StrategyInvesting with Groups versus Solo InvestingAngel Group Investing ProcessAngel Group ModelsSyndication Among Angel Groups

Copyright BillPayne.com 2012InvestigationFeasibilityDevelopmentIntroductionGrowthMaturityThe Capital LifecycleProof of conceptPre-SeedSeed &Start-upEarlyFirst, Second, etc...PROFITTIMEVALUE OF DEATHGovernment Sources Friends & FamilyAngel InvestorsIPO, BanksVenture CapitalSelfFirst RevenuesWho Are These Angels?Wealthy individuals sophisticated investorsBeen there, done that entrepreneurs Invest time and money in portfolio companiesMad moneyGenerally $25K-$250K per deal per angelMany angel investmentsRange of involvementsLead investor Chairman of the BoardInvestor/advisorPassive investorProfessor Josh Lerner(Harvard University 2010)Regarding angel investors:Angels make a large and significant impact on the success and survival of their portfolio companies Mentoring and business contacts are even more important than angels money

MotivationVENTURE CAPITALISTS: make moneyANGELSReturn on Investment is the metricStaying involved (sense of usefulness)Give back to community Affection for entrepreneursaltruisticmotivationsUS Job Creation (1977-2005)Kauffman Foundation 2009

9Quotes: Dr. Bob Litan, VP KauffmanCompanies less than five years old have created 40 million jobs in the US in the past 30 yearsCompanies five years and older have, in the sum, lost jobs in the past 30 yearsAmerican angels fund 20,000 new companies per year that are in the sweet spot of job creation in the USQuestionsPortfolio Strategy for AngelsClassic AssumptionsHigh risk asset classA high fraction failedShooting for home runs = >10XSeed/startup VC yields >20% IRRPaucity of dataTwo Studies by Prof. Rob Wiltbank (Willamette University, Portland, Oregon) Nov. 2007Returns to Angel Investors in Groups North American group affiliated angelsFunded by the E. M. Kauffman Foundation

May 2009Siding with Angels (UK) Funded by National Endowment for Science, Technology and the Arts and the British Business Angel AssociationUS Angels (07)UK Angels (09)# of Angels 539158# Investments30971080# of Exits1137406ROI2.6X/3.5 yrs2.2X/4 yrsIRR27%22%% of Deals/% of Returns7% of Deals/75% of Returns9% of Deals/80% of Returns$20 million in five yearsThe business serves a large niche marketNo major players as direct competitors Large gross margins can be expected M&A exit are feasible within 5+ yearsMultiple acquiring targets can be identifiedTechnology key to targets tech roadmap Typical Angel Group Deals (p3)Company has prototype ready for customers.Customers have been identified and have been shown the product or prototype.Customers can validate that the product is a pain killer, not a vitamin pillCompany has unfair competitive advantageTypical Angel Group Deals (p4)The business model can be validatedReasonable sales channels are availableCustomer acquisition costs are lowCompetition is fractured (Microsoft is not lurking around the corner)Typical Angel Group Deals (p5)Entrepreneurs is flexible on terms20+X ROI is possible (not all angels agree..)Valuation is reasonableStructure of deal allows input/control by investors.Board makeup is flexible by entrepreneurCEO is willing in advance to step aside when opportunity justifies this Board decision

AVOID COMPANIES WHO HAVE MADE FIVE COMMON MISTAKES(Traps Entrepreneurs Must Avoid) 1. Taking dumb money from many investors! 2. Pitching product and technology. Entrepreneurs must present their business plan and the investment opportunity3. Overestimating the market size4. Dont allow entrepreneurs to ball park revenues as a percentage of the total market. 5. Dont be impressed with first mover advantageSummaryBetting on the Jockey, not the horseLooking for companies with large opportunities in niche marketsSeeking a competitive advantageSkeptical about companies that have huge capital requirements.

QuestionsAngel Group Investing ProcessAngel Group Investing ProcessPROCESSSOURCECOMMENTS%Deal FlowReferenced or NewGroups seekunreferenced deals100%Pre-screeningStaff reviewCriteria for Investment50%ScreeningMembersDue Diligence or Reject20%Due DiligenceTeam of 4-6Invest or Reject5-10%Investor CommitmentVaries by DealCollect moneySeek additional investors~2%ClosingVaries by DealInclude outside investors?~2%Deal FlowMany deals come from members, incubators and local lawyers (etc.)Groups encourage unreferenced deals from local communityRefer outside deals to groups local to the dealPre-screening Deal FlowPre-screening done byStaffInterns (students from local schools, trained by angels)Small groups of membersBased primarily Criteria for InvestmentPublished on website (next slide)Criteria for InvestmentGeography (local deals)Business sectors of interestRange of acceptable round sizesTypically $150,000 to $1 millionUpper valuation limitPreferred stage of developmentOther criteria

Screening Presentation to some or all membersStructured meetingUsing PowerPoint templateTimed presentation, Q&A, private discussion and feedback to entrepreneurObjectiveMove on to Due Diligence phase, orOptional recommendations to entrepreneurs

Due Diligence Team of angel members (4-6)Negotiate term sheet (not part of DD)Use due diligence checklistValidate investment opportunityManagement team, Size of opportunityTechnology/IP, Capital required, financials2-3 months, decision to write checksDocument in DD book, share with others

Investment DD team recruits investment from groupCollect investment fundsMake decision about investment from other groups (70% of US deals are shared)Provide DD documentation to othersSelect lead investor (board directors)Close deal

Syndication with Other Groups Move quicklyProvide with Due Diligence bookMake entrepreneur and lead investor available to syndication partnersEmphasize importance of timingClose deal

QuestionsModels for Angel OrganizationsModels in the USOrganizational modelsAngel networksAngel fundsManagement modelsMember managedManager managedAdministrative supportFunds or NetworksManager-managedMember-managedTime commitmentDuesCarry (preferential return)Individual investmentsGroup investmentsAngel FundsAngel NetworksXXXXXXXXXXXXXXAngel FundsPool money in advanceScreen and Due Diligence as groupVote of members determines investmentsMember managed orHired managerLeads the processProvides administrative supportIs paid thru dues and/or carryAngel NetworksMembers do the heavy liftingScreen and Due Diligence as groupNegotiate common term sheetSelect a deal leadMembers make personal investment decisionsSome pass no investmentOther invest a littleor a lotUsually some administrative supportStrengths and WeaknessesGroup Organization ModelStrengthsWeaknessesNetworkIndividual decisionsLess diversificationLess investment in recessionsFundDiversification for all membersGroup decisionsPooled funds- recession proofMore startup workAccounting issuesManager-led Networks and FundsThe managerLeads the processProvides administrative supportIs paid thru dues and/or carried interestOr, provided by public agenciesSometimes do heavy lifting inDue diligenceCoaching, pre-investmentMember must engage post investment

Strengths and WeaknessesMember versus Manager LeadershipStrengthsWeaknessesMemberMember engagementAdministrative loadLeadership successionManagerConsistent leadershipMember engagementSingle point of contactOperational costsCarried interest costSide-by-side Group InvestingIndividual member investing along side angel funds, orA fund established to invest along side individual angel network membersAdd leverage for angel groupLets members fund their favorite companiesAllows network members to diversify portfolioSide-by-Side Investing

Automatic Side-by-Side FundNo manager, no carryNo fiduciary responsibilityTypical investment:30-50% match, if5 angels in network invest at least $250KDiversified portfolio 10 to 20 investmentsLeverage to angel groupAngels can diversifyOther accredited investors can investFees could offset costs of angel organizationPossible to engage governments as investors

QuestionsCo-Investment and SyndicationTrend towards Angel-only DealsWorld-wide VCs are troubledReturns are lowRaising new funds very difficultFollow-on funding by VCs problematicMany angels look for angel-only dealsRequire few million US dollars to succeedSyndicated angels in multiple rounds can fundSeek earlier exits via M&A, not IPOsDefinitionsSyndication and Co-investment have similar definitions, depending on the regionIn some jurisdictions, investing as part of a single, local angel groups is syndicationIn US group investing is the standard (and not considered syndication or co-investment) In other locals, syndication (or co-investment) means different investment groups (angel groups, VCs, family investors and others) investing in the same round.Syndication (or co-investment) within US Angel GroupsStandard practice for US angel groupsAverage round size 2011: $700,000Local group invested about 1/3 = $250,000Cooperate on due diligenceNegotiate a single term sheetCoordinate with a single deal leadLeverage group investment for best termsInvest a little, invest a lotor passSyndication (or co-investment) among several US Angel GroupsTrend growing rapidlyLocal group leads the dealAll groups agree to single term sheetCoordinate with a single deal leadLocal group shares due diligence resultsPrincipal advantage: Raise more moneyEngage more investors (and expertise)More investors available for follow-on roundsNot so dependent on VCs for follow-on

US Angel GroupsCo-Invested Deals in 2011

Halo Report - 2012Growth in US Angel Groups

Source: Center for Venture Research (pre 03 data) and Kauffman Foundation/ARI (04- data)New Zealand Angel GroupsNew Zealand DemographicsLand mass of UK, population of 4 million14 angel groups, spread over the countryAbout as active as Boston in the USInvest together as a group, similar to the USSyndicate dealsAll groups participateSmall VCs engageAbout 50% of deals involve more than one groupTrend for Multi-group Syndication Among Kiwi Angel Groups

NZ Young Company Finance 2012Multi-group Syndication in New ZealandExports are key to NZ economic successRaising money in multiple rounds is criticalRaise money for startupRaise money to demonstrate traction locallyRaise money for exportsRaise money to create landed presence off-shoreSuccessful fundraising offshore only possible after offshore product validation

Keys to Success(With a Group or Between Groups)Build trust with other investorsJoin due joint due diligence teamsSharing deals goes both waysSingle investor contact pointOne term sheetShare due diligenceCooperate finding best angel expertsSingle lead investorCooperating angels can fund larger dealsQuestionsMORE INFORMATIONwww.fiban.org/billpayneChart152< 1X< 1X341X to 5X1X to 5X85X to 10X5X to 10X310X to 30X10X to 30X4.5> 30X> 30X

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