Raising Money from Angel Investors

Oregon Entrepreneurs NetworkWebinar - Jan 29, 2009

Dennis Powers503-292-3513

dennis.cornerstone@comcast.net

Agenda

Who is an Angel Investor - and what motivates them to invest.

Understanding Angel Investor realities. Where to find Angels. Investor readiness and preparation. The Due Diligence process. Criteria of an ideal Angel Deal.

The Funding Continuum

Discovery

Proof-ofConcept

ProductDesign

ProductDevelopment

Manufacturing/Delivery

Idea Pre-seedFunding

Expansion/Mezzanine

Source of Capital

Friends and Family

Angels

Seed Funds

Venture Funds

Founder

Institutional Equity

Loans / Bonds

Angel Groups

Seed Funding

Start-up Funding

Attributes of Angel Investors

Often successful entrepreneur

“Accredited Investor”–regulatory assumption of financial sophistication and risk tolerance

Expectation of financial reward

Role in entrepreneurial process

Involvement in entrepreneurial company: wisdom and expertise

Community involvement

Social responsibility

Local businesses; regional investment

Angels vs VCs

Angels VC’s

Funding amounts $25K to $1.5M $500K and above

Motivation to Invest

Not just return drivenStrong emotional componentOften likes to be a coach, Bragging rights

Mostly return drivenBut some adjustments for other VCs and Entrepreneurs

Accessibility Prefer anonymityReachable via referrals or groups

Highly visiblePrefer to only look at deals referred from their networks

Geographical focus Regional, with in a 4hr drive Regional, National, International depending on firm

Key reasons to invest

Personal chemistry with MgmtDetail Plan with large marketsSustainable competitive advantage

Nearly developed productSome operating history with a strong experienced teamSustainable competitive advantage

Investment vehicle Common or Preferred StockOccasionally convertible debt

Preferred Stock

Long term value added

Operational experienceCommon Sense adviceSpecific Industry expertise

Experience in managing growthDeep pocketsNetworks for additional capitalExperience in managing IPO or sale exits

Reaction to bad news

Roll up sleeves and help to solve the problem, Open up rolodex

Intense communications and coachingOpen up rolodex, Help structure new financing or mergersFire management

Target exit time 5 to 7 years 3 to 5 years

Target Returns 15 to 25% IRR 20% to 40% IRR

Not all Angels are alike

Relevant Industry Experience

Relevant EntrepreneurialExperience

Operational Expertise

Angel

Guardian Angel

Financial Return Angel

Professional Entrepreneur

Angel

LESS

MORE

LESS MORE

Angel Investor Realities

Statistically Angel Investors reject 80% of the deals presented

Average outcomes of Investments made: 45% fail 40% are the “living dead” 15% are winners

Since at the seed stage it is impossible to predict which ones will be winners …………….

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

Finding Angels

Friends and Family Other Entrepreneurs who you worked with in the past

Services providers – Attorneys, Accounting firms, etc

Oregon Angels Online Angel Groups Investment Conferences

Its all about Networking! There are no short-cuts!

Northwest Angel Groups

Angel Group Location URL

Alliance of Angels Seattle www.allianceofangels.com

Keiretsu Forum (Seattle chapter)

Seattle,Kirkland, Boise, Portland

www.keiretsuforum.com

Northwest Energy Angels Seattle www.nwetc.com/nweangels.php

Oregon Sustainability Angels Portland www.sustainabilityangels.org

Portland Angel NetworkOREGON ANGEL FUND

Portland www.oef.org/programs/pan/

Portland Venture Group Portland glennjsmith@yahoo.com

Puget Sound Venture Club Seattle www.pugetsoundvc.com

Seraph Capital Forum Seattle www.seraphcapital.com/

Tacoma Angel Network Tacoma www.tacomaangelnetwork.com

Women's Investment Network Portland www.oef.org/programs/win/

The Zino Society Seattle www.zinosociety.com/

Lane Venture Forum Eugene http://www.eugenechamber.com/bus_info/entre_resources.htm

NW Investment Conferences

Conference Typical Timing Website

Angel Oregon March 12,2009 www.oen.org

Early Stage Investment Forum

April/May www.nwen.org/esif/esif.htm

The Gorge Angel Conference

The Zino Society Conference

May 19, 2009

September

www.gorgeangelconference.com

www.zinosociety.com/

The Bend Venture Conference

October www.bendvc.com/

Venture NW November www.oen.org

Seed Oregon Sept - Jan www.oen.org

Willamette Angel Conference

May 14, 2009 www.willametteconference.com

How to prepare for Angel Investors

Same as for any other funding source Well prepared business plan and due diligence documents

Know your market! Size, competition, distribution, verticals, etc.

Solid management Know your limitations and needs Advisors and/or board of directors Professional advisement and support -legal, accounting, etc.

What angel Investors Want

A solid management team- angel investor is investing in people - Team Brings Sector, Startup Skills

A solid business plan- convincing and complete• Novel (new) or disruptive business concept (may be

regional) • Sound and compelling IP• Clear understanding of Competition and how to win• A business structured for investment- Delaware ‘C’ corp.;

formal shareholder’s agreement• Scalable business• Financial Projections that make sense for investors• Realistic valuation • A viable exit strategy- ongoing concern, or M&A, IPO not

usually an option The potential for a solid return- 10-25X in 5-7yr

Investor Readiness

“Readiness” is all about preparation There are no short cuts At the end of the day the preparation is all about mitigating the concerns investors have about risk

Risk areas include:• Management• Product• Market• Financial

Investor Communication/Sales Tools Executive Summary Business Plan Elevator Pitch Investor Presentation

The Executive Summary

Contact name, address, phone numbers, e-mail address

Business idea in clear language - avoid excessive technical information

Management team, including executive team's track record

List your advisors, significant investors, and board of director

Clear description of product or service, including competitive analysis

Describe the market to be served, including current size and growth rate

Describe your sales & marketing strategies for reaching customers

Discuss your company's unfair advantage

Provide a brief income statement of sales & net income for next 3-5 years

Discuss your funding strategy and how much money you are seeking ----now and in later rounds

List the estimated percentage of ownership investors will receive

Discuss your exit strategy

Business Plan

Executive Summary Business objectives Principal products or services Technology and development program Market and customers Management team Financing requirements

Company description History and status Background and industry Company's objectives & strategies (briefly) Company's strategies

Market Market summary and industry overview Market analysis and forecasts Industry trends Target Customers

Business Plan (continued)

Products Product description and comparisons Innovative features (patent coverage) Applications Technology Product development and R&D effort Product introduction schedule and major milestones Future products (product evolution)

Competition/Competitive Position Sales and Marketing

Channel strategy Sales and distribution model Customer plan

Manufacturing/Operations (if appropriate) Service and field engineering (if appropriate) Facilities (if appropriate)

Business Plan (continued)

Management and ownership Founders and key employees Stock ownership Organization and personnel Future key employees and staffing Incentives (stock option and stock purchase plans)

Financial data and financial forecasts Assumptions used 3-year plan 5-year plan

Capital required and use of proceeds

Appendices Detailed management profiles References Product descriptions, sketches, photos Recent literature on product, market,

Elevator Pitch

It’s the last thing you prepare but often the first contact with a potential investor

The essence of your company An opportunity tell just enough to get an investor interested (usually a minute)

Sets the stage for follow-up opportunity

Introduction

The Anatomy of the 10 Minute Pitch*

The Problem

The Solution

Market Size

Revenue Model

Sales Cycle

Customers

Partners

Traction

Advisory Board

Management

Competition

{00:30 seconds}

{02:30 seconds}

{06:30 seconds}

{08:30 seconds}

{10:00 min.}

Financials

The Offer

* Source - Alliance of Angels

The Angel’s Process

Pre-screening Screening Due diligence Investment presentation Follow-up discussions and meetings

Closing

Purpose of Due Diligence

Establishes that obvious issues are non-issues or addressable

Uncovers issues you not have considered Allows you to get to know the founders Identifies key drivers critical to success

Provides enough data for personal ROI analysis

Due diligence review covers:

Corporate/Structure Organization Funding/Ownership Proposed Deal Financial Structure/ Financial model/

projections/ best and worse case scenarios Product/Service Customers Suppliers Regulatory/ Reimbursement Marketing/ Customer validation/ supplier

Business strategy/ over all market/ competition IP and freedom to operate Entrepreneur/ team background

Investor Evaluation Process

Individual Angels or Investor Groups based use many different methods for evaluation and analysis.

All come down to the Evaluation of Risk: Management Risk Market Risk Product Risk Financial Risk

Evaluation Questions

Management Risk Strong domain experience? Functional Expertise? Startup company experience? History of execution and success in previous roles?

Planned Key employee additions? Timing Current Advisors or existing Board members?

Do they have “skin in the game”?

Evaluation Questions (cont.)

Market Risk Is it a must have or like to have? Is the market itself healthy

• Size, Expected Growth rates?• How is the market segmented?• What is the target market/customers?

What is the competitive environment?• What companies currently service this market?• What motivates buying decisions?• What is the company’s competitive advantage?

Is it too early or too late? Is there a feasible sales strategy

• How will the product be sold• Direct vs Indirect?

Are there planned/existing strategic partnerships?

Evaluation Questions (cont.)

Product /Technology Risk Is the product/service clear? Stage of development

• Proof of concept, working prototype, Alpha, Beta, Pilot, or product launched?

Is there customer validation? How will it be produced? Where? Is there Intellectual Property? Patents? Does the product demonstrate competitive advantages? Are they sustainable?

What does the product roadmap look like?

Evaluation Questions (cont.)

Financing Risk Terms of the Deal

• Debt vs Equity?• Valuation?• Amount to be raised?

Are they raising enough? Is there a cushion in the budget?

Are milestones realistic for the amount raised?

Follow on rounds of financing planned? What is the exit strategy? Does it look plausible?

Criteria for an Ideal Angel Deal

Management team with relevant domain or startup successes

Large, rapidly growing markets

Unique products with proprietary technology or service offerings that meet customers' important needs

Credible and balanced business plans including key execution milestones

Clearly articulated sustainable competitive strategies

Patents or other intellectual property barriers to entry

Realistic, achievable financial projections, high return on investment (ROI) potential and clear exit strategy 

Reasonable valuation and investment terms

A willingness to accept advice and coaching