“Angel Investing 101”

John May

Darden Progressive Incubator

July 11, 2005

John May

Co-founder, New Vantage Group, Vienna, VA

Co-Manager, The Dinner Clubs (3), Active Angel Investors, and affiliated angel venture groups (2)

Advisor, Calvert Ventures, Solstice Capital, Women’s Growth Capital Fund & Conservation International’s Verde Ventures

Batten Fellow and Director, Northern Virginia Initiative, Darden Graduate School of Business Administration, University of Virginia

Co-Author, Every Business Needs an Angel (Crown Business: 2001)

Co-Editor, State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing (Darden Business Publishing: 2003)

Participant in international forums and lectures – Paris, Tokyo, Bangkok, Malta, Copenhagen, Mexico City, Helsinki, Santiago

The World of Angel Investing

Part mentoring

Part venture capital

Part psychic reward

Part adventure

But first, VC’s: Seeding or Fertilizing?

• Early-stage VC is broke

• Indigestion in the food chain

• Looking back instead of looking forward

The Field

Small private businesses in the US

Emerging growth opportunities for investors

High-tech start-ups

Job and innovative generation

“Mentor” capital

The Pain: A Chronic Problem

Becoming a successful big company takes a lot of hard work

Tapped out after FFF and own money

Capital gap is $250,000-$2.0M range

Pre-bankable companies need support of all kinds

Is Institutional Venture Capital the Answer?

Uniquely American, only 50-year old experience

Managed for OPM – now $260B-plus cottage industry

Dominated by pension funds and $150M-+ pools and funds

Heavily high-tech and No. California and Massachusetts (55% of deals)

Doesn’t play at the seed-stage easily, very selective - less than 5% of venture capital into seed

Venture Capital Disbursements to Portfolio Companies

2,750$18.9 B2003

2,600$21.2 B2002

3,767$40.0 B2001

5,458$103.5B2000

3,956$59.4B1999

3,155$22.0B1998

2,696$17.2B1997

# of CompaniesAnnualYear

2,876$20.9B2004

…And It’s Gotten Worse

Amount of Venture Capital Invested by Stage in the US (in millions)

Stage 2002 2003 2004Seed/Start-up

304 1.4% 385 2.0% 346 1.5%

Early-stage 4,076 19.2% 3,378 17.8% 3,885 16.9%

Expansion 13,301 62.7% 10,304 54.4% 9,511 41.5%

Later 3,543 16.7% 4,879 25.8% 9,198 40.1%

TOTAL 21,224

100.0%

18,946

100.0%

22,940

100.0%

Sources: National Venture Capital Association Yearbook 2003 & Money Tree 2004 US Report

But Healthcare % is Increasing

First quarter ’05 biotech and medical devices 2nd and 3rd largest VC investments

’04 biotech totaled $3.8 billion

’04 medical devices totaled $1.8 billion

Total is over $5.6 billion in 578 companies (largest in four years)

How Individuals Have Played Throughout History

Wealthy families

Broadway angels

Professor Bill Wetzel and high-tech angels

90’s boom and growth of wealth and VC’s

HNW Individuals and the Alternative Asset Class

Why should any investor participate in alternate assets?

Real estate, timber, oil, gas, private equity are core alternative assets

Allocation of 5-10% is appropriate as control more investible wealth

Use alternate assets to increase total return – offsets high risk inherent in inefficient markets

VC as part of mix may be appropriate

A National Status Report 1994-2004

Number of millionaires grew to over four million

Angels number around 250,000 – GEM says over one million informal investors in U.S. alone

Structured angel groups grew from 10/15 in ’94 to 175+ in 2004

Center for Venture Research at UNH reports 48,000 transactions by angels in 2004

Seed and Early-Stage Investing by Type of Investor (2004)

# of Transactions

$100 B

(GEM Report)

$18.7 B

(Sohl)

$20.9B

(NVCA) $384 M

Investment $

Type of Investors

48,000

1, 000,000 2,876 193

Individuals Angels Institutional VC

“Real” VC Seed Invest

Potential Angels in the U.S.

4,200,000

GEM ReportInformalInvestors Members

of ACA

Professor Jeff Sohl’s

Active Angels (est.)

U.S. Millionaires

1,000,000

225,000

5,000

GEM Report

The GEM Report found more than 50% invest in relatives’ businesses

Investor’s Relationship to Investee

Close Family 41.8%

Other Relative 10.5%

Work Colleague 6.1%

Friend/Neighbor 28.5%

Stranger 9.4%

Other 3.6%

So What Is An Angel, Really?

Our definition is –

Accredited individual

$20,000 or more per deal

Has lost money in venture in past!

Patient capital - mentor

Angels vs. VC’s

“Warm” money

Customized term sheets

Blend of psychic and financial reward

Due diligence still important

Pitching up the person as well as the pocketbook

Many Variations of Non-VC Group Investing

Ad hoc, one-time partnerships

Angel networks

Pledge funds

Angel Limited Partnerships

Member-led and manager-led LLC’s

Other (be creative)

Angel Groups in Our Region

Private Investors Network Women's Angel Network

Capital Investors Group Maryland Angel Council

The Dinner Club CEO Club

eMedia Club Active Angel Investors

Washington Dinner Club Ad-hoc groups everywhere

Capital Access Network

Full Member

Provisional Member

Angel Capital Association Members by Region

Are All Angels Alike?

Over-47 year old white male, $125K/year, cashed- out entrepreneur is historic prototype

Marriage partner

Networker

Executive recruiter

Therapist

Strategic Partner

General utility player

Fundraiser

The Future: Issues and Innovations

HNW individuals will want more involvement in their wealth management

Entrepreneurs will continue to become investors – will become mentors

Structured angel groups will provide risk minimization

US will continue to be high tech, entrepreneurship leader

Web-Based Resources

Angel Capital Association (for North America)

(www.angelcapitalassociation.org)

National Association of Seed and Venture Funds

(www.nasvf.org)

European Angel Network (Europe)

(www.eban.org)

National Venture Capital Association

(www.nvca.org)

Community Development Venture Capital Association

(www.cdvca.org)

Kauffman Foundation

(www.emkf.org)

Books/Studies

Benjamin, Gerald A. and Margulis, Joel B., Angel Investing - How to Find and Invest in Private Equity, New York: John Wiley & Sons, 2000.

Benjamin, Gerald A. and Margulis, Joel B., The Angel Investor's Handbook: How to Profit from Early-Stage Investing, New York: Bloomberg, 2001.

Gompers, Paul and Lerner, Josh, The Venture Capital Cycle, Cambridge, MA, MIT Press, 1999.

Hill, Brian E. and Power, Dee, Attracting Capital From Angels: How Their Money and Their Experience Can Help You Build a Successful Company, New York, John Wiley & Sons, 2002.

Keeley, Robert H., Cooper, Jeffrey M. and Bloomer, Gary D., Business Angels: A Guide to Private Investing, available from the Kauffman Foundation, Kansas City, 1998.

Books/Studies (cont’d.)

May, John and O'Halloran, Elizabeth F., State of the Art: An Executive Briefing on Cutting-Edge Practices in American Angel Investing, Charlottesville, VA: Darden Business Publishing, University of Virginia, 2003.

Osnabrugge, Mark Van and Robinson, Robert J., Angel Investing: Matching Start-up Funds with Start-up Companies - The Guide for Entrepreneurs, Individual Investors, and Venture Capitalists, San Francisco: Jossey-Bass, 2000.

Simmons, Cal and May, John, Every Business Needs an Angel: Getting the Money You Need to Make Your Company Grow, Washington DC: Crown Business, 2001.

Williams, Kelly, Working with Angel Investors for Community Development, New York: Community Development Venture Capital Alliance, 2003.

Be half full, be patient, collaborate, and remember,

“Every Business Needs an Angel”