RISK, RETURN AND ACCESS TO ANGEL INVESTING CAIA ASSOCIATION EDUCATIONAL EVENT Hosted by: Refreshments courtesy of:
The CAIA Charter THE GLOBAL BENCHMARK IN ALTERNATIVE INVESTMENT EDUCATION Geir Watland
CAIA ASSOCIATION Founded in 2002, the Chartered Alternative Investment Analyst (CAIA) Association is the global authority in alternative investment education. Vision & Mission Establish the CAIA designation as the benchmark for alternative investment education worldwide. Promote professional development through continuing education, innovative research, and thought leadership. Advocate the highest standards of professional ethics. Provide a network for industry professionals to connect globally as well as a member career center
GLOBAL PRESENCE
MEMBER ASSET CLASS FOCUS AND REGIONAL DISTRIBUTION CAIA Members work across a variety of asset classes globally. Hedge Funds 65% Fixed Income Alternatives 50% Private Equity 45% Real Estate 41% Commodities 39% Managed Futures 32% Real Assets Infrastructure, Farmland, Timberland 30% Structured Products 29% Venture Capital 18% 0 18 35 53 70 32% 13% 55% Americas Asia-Pacific Europe, Middle-East, Africa Data: Member Survey, December, 2015
MEMBERSHIP GROWTH 10,000 8,000 8,400 6,000 5,700 4,000 3,265 2,000 0 561 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* *2016 Data through May 31, 2016
SEATTLE Membership 88 Active Members Candidate Growth 9+ Level 1 Candidates for fall 2016 11+ Level 2 Candidates for fall 2016 Easy, quick and fun! Only two exams!! Sign up NOW!!! Goals Continue to organize educational events Promote the CAIA designation and support candidates Establish a full Seattle Chapter by H1 2017 Please check out website: www.caia.org
Risk, Return and Access to Angel Investing Seattle Angel Fund Susan Preston
WHO ARE ANGEL INVESTORS? Make equity investments generally not loans Invest in early-stage companies Often successful entrepreneurs or retired business persons Active investors = invest both time and money in companies Accredited investors - SEC definition Invest their own money Generally invest in local companies Give back and support of economic growth Part time investors
COMPANIES BACKED BY AMERICAN ANGELS
Financing Product Dev FINANCING LIFE CYCLE Proof-of Concept Product Design Product Development Manufacturing/ Delivery Discovery Idea Pre-seed Funding Seed Funding Start-up Funding Expansion/Mezzanine Operating Cap. Founder Crowdfunding Venture Funds Friends and Family Business Growth Fund Angels Institutional Equity Government Grants Angel Groups Seed Funds Government Loans Loans / Bonds
TOTAL CAPITAL: ANGELS AND VCS (US) Angel Investments 2013: 72,000 deals $24.8B 2014: 73,400 deals $24.1B 2015: 71,110 deals $24.6B VC Investments 2013: 9,291 deals $45B 2014: 10,501deals $69B 2015: 10,293 deals $79B Sources: Venture for Venture Research, UNH & Pitchbook/NVCA
2016 TRENDS
2016 TRENDS
2015 Presents ANNUAL the REPORT 2015 Annual Report
Median and Mean Round Sizes Angels Only 2015 Shows Round Sizes Increasing, Mean Ownership of Angel round is Relatively Stable 20-25% $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 $1,164k $833k $829k $835k $850k $500k $500k $510k 2012 2013 2014 2015 Median Round Size Mean Round Size Mean Ownership Percentage 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Millions USD Median and Mean Round Sizes Angel Co-Investments Round Sizes Trending Up When Angel Groups Co-Invest With Non-Angels $2.5 $2.0 $1.70M $1.83M $1.91M $2.00M $1.5 $1.45M $1.50M $1.60M $1.0 $1.21M $0.5 $0.0 2012 2013 2014 2015 Median Round Size Mean Round Size
Angel Investment Size ANGEL INVESTOR PROFILE Individual Angels invest $10,000 to $250,000 Angel Groups invest between $100,000 to $1,000,000 Investments surprisingly broad Angels are sheep, we follow the most recent trends Syndication allowing average deal size to increase Data Source: Angel Capital Association
MOST ACTIVE ANGEL GROUPS 2015 TOTAL DEALS
% of Total TRACKING ANGEL RETURNS 2016 2007 2009 2016 Exit multiple
TRACKING ANGEL RETURNS 2016 Multiple Hold IRR <1X 10% of exits to $ 2016 Tracking Angel Returns 2.5X 4.5yrs 22% 70% 85% 2007 2.6 3.5 27% 52% 90% 2009 2.2 3.6 22% 56% 80%
Risk & Return of Angel Investing: Practical Strategies for Diversifying Matthew Le Merle
TOPICS WE LL EXPLORE TODAY 1. Angel Returns, Best Practices & Case for Diversification 2. Observed Angel Behaviors/Practical Constraints Faced 3. Practical Strategies for Diversification Pros and Cons 4. Conclusion
1A. ANGEL RETURNS ATTRACTIVE 2016 Multiple Hold IRR 2.5X 4.5yrs 22% <1X 10% of exits to $ 70% 85% 2007 2.6 3.5 27% 52% 90% 2009 2.2 3.6 22% 56% 80% Early stage VC 05-11 2.1 29% Gross TVPI & includes carried value
1B. BEST PRACTICES DRIVING RETURNS Driver Proprietary deal flow Strong angel led due diligence culture Active participation in portfolio companies Deep expertise in investment areas Tight relationships with follow on investors Comment Sourced through relationships less bad actors/behaviors Up to 70% for established angel groups Angels that spend more than 40 hours achieve a 5.9x return compared to low diligence investors who achieve a 1.1x return* Angels who interact 2 times a month or more with portfolio companies achieve a 3.7x return compared to passive investors who achieve a 1.3x return* Angels investing in areas of direct industry experience achieve multiples twice as high as those invested outside their expertise* Leading angel groups partner with venture capital and strategic investors to enable follow on rounds and exits * Source: Kauffman Foundation, Professor Wiltbank of University of Willamette, Keiretsu Capital
1C. CASE FOR DIVERSIFICATION Given skew of returns and reliance on 10x exits approximately 40% of investors will return no capital As angels we focus on return but can manage risk too Diversification does not increase return, but does raise probability of achieving the expected population return Larger portfolio of investments improves risk profile: 12 Investments = 75% 24 investments = 90% 48 investments = 95% * Source: Professor Wiltbank of University of Willamette
2A. OBSERVED BEHAVIORS SURVEY OF 250 KEIRETSU FORUM MEMBERS, 2016 2 17 19% 55 IRR in % 57 45 >20% 10 to 20% <10% 42 99 % 81 Number of Companies >30 15 to 30 <15 0 Expected Returns Sources: Fifth Era survey of 250 Keiretsu Forum members 1 Diversified: Expectation Actual Portfolio Size
2B. PRACTICAL CONSTRAINTS SURVEY OF 250 KEIRETSU FORUM MEMBERS, 2016 Reasons given for insufficient diversification Allocation (say 10%) given net worth limits investment # Minimum investment sizes limit portfolio size Requires too much time to be active across large portfolio Don t have enough time to attend enough meetings Uncomfortable investing outside own area of expertise Don t see enough in home geography Sources: Fifth Era survey of 250 Keiretsu Forum members
3A. PRACTICAL STRATEGIES FOR ANGEL PORTFOLIO DIVERSIFICATION If the intent is to play the same game and not invest in some other game (e.g. Spray and pray) Guiding Principles: Investments must be Angel Investments or some other asset return is being captured. E.g.: Not other asset classes (Public markets, Real estate, Series B/later VC/PE etc.) Made by angels investing in groups US, North America, International geographical sector focus needs consideration Best practices of Angels investing in groups must be ensured No or low cost is best (to capture largest return)
3B. STRATEGY DISCUSSION Guiding Principles Less in more (Syndicate) Angel Co- Investment Funds as LP Equity Crowdfunding (Direct /syndicates /funds) Incubator/A ccelerator Funds as LP VC Micro Funds as LP Investments are Angel Investments Yes Yes Can be? Can be Proprietary Deal flow Yes Can be? Yes? Strong angel led DD culture Active participation in portfolio companies Yes Can be? Can be? Yes Can be? Yes Can be Deep expertise in investment areas Tight relationships with follow on investors Yes Can be? Can be Can be Yes Can be Can be Can be Can be No/Low costs Yes???? 16
4. CONCLUSION Angel returns attractive in mid 20 s IRR s Angels demonstrating best practices benefit most Given skewed returns, diversification needed 24 (to 48) or more investments likely required Angels rarely meet this diversification threshold Practical constraints intervene most have < 15 Five key strategies exist but all but one raise issues Recommend more smaller investments, syndication and exploring strategies/vehicles that maintain best practices
TODAY S SPEAKER Matthew Le Merle Managing Partner, Keiretsu Capital & Fifth Era matthew@keiretsucapital.com http://www.angelresourceinstitute.org/ www.keiretsucapital.com/angel-returns/
RISK, RETURN AND ACCESS TO ANGEL INVESTING OCTOBER 12, 2016 Moderator Frank Paganelli, Chair of the Startups & Emerging Companies Practice Group, Lane Powell Panelists Susan Preston, Managing Member, Seattle Angel Fund Matthew Le Merle, Managing Partner, Fifth Era and Keiretsu Capital