Angel Investing
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Transcript of Angel Investing
Wayne [email protected]
307-721-8875
“Fools rush in where angels fear to tread”
Angel Investing
Senator Enzi’s Inventors ConferenceSenator Enzi’s Inventors ConferenceApril 20, 2006April 20, 2006
Inventor’s Conference, 2006
Wayne Greenberg
What Are Angel Investors?
Term originated with funding of Broadway plays in the early 1900’s (getting productions “off the ground”)
Generally: High net worth individuals who invest in early stage entrepreneurial companies
Tend to be former entrepreneurs themselves Typically come in between 3F’s and VC’s Investments between $10k and $500k Tend to invest in business areas they know Invest mostly locally Some organized into groups (“networks”) but not
professional money managers
Inventor’s Conference, 2006
Wayne Greenberg
Angel Investor Prototype
47 years old, annual income around $100k Net worth of $750k, college educated Invests $37,000 per venture Is or has been self employed 7 of 10 investments w/in 50 miles of “home” 9 of 10 also provide loans or loan guarantees in
addition to equity investment 9 of 10 investments go to companies with <20
employees Bases many decisions on referrals and who else is
in
Inventor’s Conference, 2006
Wayne Greenberg
Angel Investing2004 Statistics
225,000 active angels in U.S.; over 200 angel groups active
$24B invested in 2004 (vs. $22B for VC’s) Average invested per company - $469,000 30x the number of companies than VC’s Angels fund 60% of all TECH companies
seeking < $1M 40-50% of investments result in losses
Source: Center for Venture Research
Inventor’s Conference, 2006
Wayne Greenberg
What Motivates Angels
ROI Home Runs Grand Slam Home Run
$100k in Amazon = $26M at IPO Give back Stay involved Want to contribute their personal skills and
contacts Shopping for new gig
Inventor’s Conference, 2006
Wayne Greenberg
Finding Angels
Degrees of separation Your school, church, neighborhood Other business owners Your banker, lawyer and accountant Your family and friends
Network, network and more networking Organized angel groups – ignore 50 mile rule Angels beget more angels
Inventor’s Conference, 2006
Wayne Greenberg
Angel Groups
Formed to share risk, information, leads, due diligence and contract negotiation
Most are very informal; some have actual “funds” managed by the group
About 1 in 5 deals that passes initial group screen gets funded
Mostly regional but some specialties like womenangels.net
CTEK Angels (www.ctek.biz) largest in front range
Inventor’s Conference, 2006
Wayne Greenberg
What Should You Ask/Do What is their investing experience? Talk to one of their investment references. What do they know about your industry? What contacts do they have for:
Sales? Alliances? Channels?
Can they bring other investors in? Will they want to be involved? What relationship will they
want? Will they be TOO busy for you to touch when needed? How is the chemistry between you and the angel? Spend time getting to know the angel.
Inventor’s Conference, 2006
Wayne Greenberg
Angels vs. Venture Capitalists
Earlier stage companies Faster decision process More geographically diverse Less due diligence More likely to provide hands on expertise Prefer smaller investments
Less dilution Easier to stage phases and valuation increases
Far easier on terms Follow on investments may not be there
Inventor’s Conference, 2006
Wayne Greenberg
Angel Deals
Can be as sophisticated as VC’s Or not… Many do not want to be involved but all want to be
informed Since the bust many angels are gun shy and want
more complete legal documentation and protections Advent of Sarbanes and other rules also make for
more caution
Inventor’s Conference, 2006
Wayne Greenberg
Pitfalls
Unaccredited investors Terms that inhibit subsequent fundings Devils
Shoppers Control freaks Panic’ers Invisible Men
Lack of follow on capability
Inventor’s Conference, 2006
Wayne Greenberg
For Angel Investors, It’s Primarily About Measuring and Managing Risk
All businesses share similar risk factors Minimizing each or identifying the one(s)
most problematic is key People Risk Market Risk Product Risk Capital Risk
What’s an Angel to Do?
DUE DILIGENCE
Inventor’s Conference, 2006
Wayne Greenberg
What is Due Diligence?
Generally: an investigation into the financial and commercial activities of a business in connection with a proposed acquisition or disposal of an interest in that business. The due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information.
Legally: a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depending on the relative facts of the special case. (Black’s Law Dictionary)
Inventor’s Conference, 2006
Wayne Greenberg
Why Due Diligence Is So Important
Refines the price/value Identify potential "deal killer" defects in the
target Mitigates legal (and other) risks Verification that the transaction complies with
investment criteria Identification of synergies w/in investor group Ensures that post-investment plans will have
best chance for success
Inventor’s Conference, 2006
Wayne Greenberg
“[A] lack of due diligence is by far the greatest regret
angel investors have.”
-Angel Investing: Matching Start-Up Funds With Start-Up Companies - The Guide For Entrepreneurs, Individual Investors, And Venture Capitalists
Inventor’s Conference, 2006
Wayne Greenberg
Trying to find the Gazelles…
Inventor’s Conference, 2006
Wayne Greenberg
Areas of Interest to Angel Investors
Inventor’s Conference, 2006
Wayne Greenberg
Categories for Due Diligence
Management
Product
Market
Competition
Capital
Relationships
Return
Legal
Inventor’s Conference, 2006
Wayne Greenberg
Management Is this management team able to grow their venture rapidly and successfully?
Have they done “it” before? Do they have industry knowledge and experience? Do they have the necessary key positions filled? Have they identified their own weaknesses and have a
plan to fill those voids? Are there sufficient incentives in place for key
employees? Are the principals trustworthy? Have they begun to build solid advisory/legal teams?
Inventor’s Conference, 2006
Wayne Greenberg
Product
Is the product/service unique and fully developed?
Does it create compelling benefits for the target customers?
Can the team articulate the value proposition clearly and consistently?
If it is not fully developed, does management understand the time and dollars required to complete development?
What intellectual property protection exists?
Inventor’s Conference, 2006
Wayne Greenberg
Market, Marketing (and Sales)
How large is the market? Is it large enough to support rapid growth and attractive
margins? Do they have credible and systematic market research? What is the basic value proposition and can it be easily and
consistently articulated? Does management's marketing plan make sense? How will the product reach the market? Via what channels?
What pipeline exists? Is there a sales culture in the company? Are there existing customers the investor can interview?
Inventor’s Conference, 2006
Wayne Greenberg
Competition
What are the barriers to entry by competitors? Who are the competitors and what strengths do
they possess? Are there major players who could become
competitors? Has the company effectively mapped their own
capabilities against those of their competitors? How will the venture gain and defend its target
market position?
Inventor’s Conference, 2006
Wayne Greenberg
Relationships
Who are the vendors and what are the risks associated with key supplies or raw materials? Have/can those risks be mitigated?
Are there strategic partnership agreements with other players that are beneficial/necessary to the venture? Are any in place? Have any been identified?
Can the vendors be contacted? Who are the company’s advisors and mentors?
Inventor’s Conference, 2006
Wayne Greenberg
Capital
How much investment capital is needed? In how many rounds? What does this round buy in terms of
increased value How will it be deployed? Does the cash flow analysis demonstrate
this need? Are there legitimate Plans B and C?
Inventor’s Conference, 2006
Wayne Greenberg
Return
Is the potential return on this investment sufficiently attractive in relation to the risk?
Is there a clear exit strategy for the investors/company?
Does the time horizon fit with the client’s needs/desires?
Does the management team clearly understand the key business elements that must be managed for the venture to be successful?
Inventor’s Conference, 2006
Wayne Greenberg
Legal
Review as much as possible: Contracts – contactors, vendors, suppliers, customers,
employees, SLA’s Capital Structure Corporate documents – articles, by laws, etc. IP – patents, copyrights, trademarks License agreements Leases Litigation or threats of litigation Employee policies Environmental review
Resources
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Books
Inventor’s Conference, 2006
Wayne Greenberg
Books AngelsRead
Inventor’s Conference, 2006
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Internet Resources
List of Angel Networks – Inc Magazine
http://www.gsb.stanford.edu/ces/resources/angel_financing.html
Stanford Entrepreneurial Center
http://www.angelcapitalassociation.org/default.aspxThe Angel Capital Association
http://www.angel-investor-news.com/index.htm
Angel Investor News
http://www.keiretsuforum.com/
The Keiretsu Forum
http://www.inc.com/articles/2001/09/23461.html
Wayne [email protected]