Angel Investing. Introduction and Discussion. July 26, 2016 Milton Sigelmann

Transcription

1 Welcome!

2 Angel Investing Introduction and Discussion July 26, 2016 Milton Sigelmann

3 Angel Investor - Definition An individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

4 Good Angel Investor - Definition An Angel investor who takes the time to learn how to invest in business start-ups successfully.

5 Who can invest? Accredited Investor is a term used by the Securities and Exchange Commission (SEC) to refer to investors who qualify to invest in companies that are exempt from certain securities registration requirements. An individual with income exceeding $200,000 in each of the two most recent years, or a married couple with joint income exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year. An individual (or married couple) whose (joint) net worth exceeds $1 million, excluding the value of a primary residence. 5

6 Angel Investing Landscape Angels invest about $25 billion in about 74,000 start-up companies per year. (Kauffman Foundation) Venture Capitalists invested about $60 billion in about 4,500 companies in About $20 billion were in seed or early stage companies. (National Venture Capital Association) Angels invest in about 1 out of 30 companies they see. Some good companies don t get funded but there are a lot of companies that shouldn t be funded. Angel returns are widely distributed. 6 out of 10 are likely to fail. (no positive return) 6

7 Yikes! Why would anyone do this?! There is money to be made. With discipline, 25% return per year is a reasonable goal. Angel investments can be part of a diversified portfolio. Angel investments are largely uncorrelated with other asset classes, reducing overall portfolio risk. There is a lot to learn about interesting companies, ideas, people, deals. You could help a company succeed with other than financial resources. You can make a difference. It s fun 7

8 What do we know about angel investments in the US and UK? Robert Wiltbank Data

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10 Distribution of Returns by Venture Investment Hold: 3.0 yrs. Avg. Holding Period: 3.5 years 40 $80M Percent of Total Exits Hold: 3.3 yrs. $60M $40M 10 Hold: 4.6 yrs. $20M Hold: 4.9 yrs. Hold: 6.0 yrs. 0 < 1X 1X to 5X 5X to 10X 10X to 30X > 30X Blue bars: % of exits in that Category Green Bars: $ s returned in that Category Exit Multiples

11 Outcomes Split by Due Diligence 70.0 Percent of Exits X better multiple for 20+ due diligence <1X 1X to 5X 5X to 10X 10X to 30X >30X Multiple Category Less Than 20 Hours 20+ Hours

12 Putting Entrepreneurial Capital to Work Returns are NOT normally distributed, average doesn t mean much. It is a homerun game. All venture investors are wrong more than they are right. BUT the lifetime return to VC is approx. 15% (apples) The research shows Angel returns to be in the 2.5x range in 4 years (oranges) Persistent Angel investors can match and even outperform VC returns. A portfolio of at least 6 investments makes being in the black more likely than not. Due diligence, industry expertise, and some participation do seem to reduce failure and help overall returns.

13 Now Lower!

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17 Only one of most active investors in 2015 was a VC

18 What did we just learn Good Angels make money. (IRR = = 25.7%) Only a small percentage of investments are responsible for most of the portfolio returns. Most investment are likely to fail. More due diligence can decrease the number of companies that fail in a portfolio. Good Angel investors often beat VC returns. Pacific Northwest seems to be increasing angel investments. Data should be taken with a grain of salt. Some of it is old, incomplete, and/or misleading. 18

19 Form of Investments The most common forms of investment for Angels are: Convertible Debt: usually in the form of a convertible note Equity: usually in the form of preferred stock 19

20 Convertible Note Key Terms Term Interest Rate Discount Cap

21 Equity Key Terms Voting Rights Liquidation Preferences Price / Valuation Conversion Information / financial Participation Future Rights

22 Return Metrics Multiple The amount of money that is pocketed at an exit, divided by the investment. Multiple = money out / money in. Example: invest $5,000, at exit receive $50,000. Multiple = 50,000/5,000 = 10. Return on Investment (ROI) Multiple 1. (This just subtracts out the original investment to come up with the return.) Example: invest $5,000, at exit receive $50,000. ROI = 50,000/5,000 1 = 9. Internal Rate of Return (IRR) The annualized percent of return. IRR = multiple 1/y - 1, where y = years Example: invest $5,000, at exit in 5 years receive $50,000. IRR = = 58.5% 22

23 Can I calculate if a company will be successful? No! Yikes! Then why do it?! Basic financial analysis is necessary to establish if a company is appropriate for an investment Looking into the finances can identify issues to investigate further Unrealistic assumptions Sensitivities Missing information Expenses (e.g. labor, marketing, rents, etc.) Etc. 23

24 Portfolio Financial Goals / Guidelines Achieve an internal rate of return of about 25%. Own a minimum number of good quality companies to spread out the risk because of the high failure rate. ( 20 if possible) Invest only a portion of your net worth dependent on your risk tolerance. Typical guidelines: 5% of your assets excluding primary residence 10% of free cash flow 24

25 Portfolio Financial Goals / Guidelines Since a typical minimum investment is $25K, one should think carefully about how to achieve the desired diversification. 25

26 Portfolio Financial Goals / Guidelines IRR goal = 0.25 years = 5 Average Multiple = 3.1 IRR goal = 0.25 years = 9 Average Multiple = 7.5 Company multiple Company multiple A 0 B 0 C 0 D 0 E 0 F 1 G 1 H 2 I 3 J 24 A 0 B 0 C 0 D 0 E 0 F 1 G 1 H 2 I 3 J 68 26

27 Portfolio Financial Goals / Conclusion The possibility of high multiples on all the companies in your portfolio is necessary to mitigate the risk of failure and underperformance of most of your companies. It is not unreasonable or greedy to expect a minimum of 10x, and more appropriately 20x to 30x. There are some factors that should be considered in mitigating risk which could lower the acceptable multiple. Early exit Revenue redemption Protective terms 27

28 Angel Investing Options Lone Wolf Active Angel Group (SAC/SAF) Passive Angel Fund (Alliance of Angels Sidecar) Angel Network (Element8, Alliance of Angels) Online Platform/Syndicate (Angel List) Accelerator/MicroVC (9Mile Labs, Techstars) 28

29 What Makes a Great Company Team Market Opportunity Product/Solution Evidence of Traction

30 What Makes a Great Investment A Great Company Deal Terms An Exit / Redemption

31 Valuation Methodologies Scorecard Dave Berkus Risk-Factor summation Etc. Comparables Negotiation Financial Return Acceptability 31

32 Resources 10 Do s and Don ts for Raising Capital from Angel Investors (Angel Capital Association webinar, Jim Connor and Catherine Mott) Top 10 Things You Need to Know Before Your First Investment (Angel Capital Association webinar, Troy Knauss) What Makes an Investable Company? (Angel Capital Association webinar, Susan Preston) Angel Investing by David Rose (book) Get In Get Out: 100 Rules for Successful Start-Up Deals by Troy Knauss, Greg Pool, and Michael Cain (book) 32

33 Questions? 33