Exit Strategies for Angel Investors 20090415 Part 1

7/31/2019 Exit Strategies for Angel Investors 20090415 Part 1

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Exit Strategies for Angel Investors

An el Ca ital AssociationAnnual Summit Workshop

April 15, 2009Basil Peters


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Schedule for the Worksho

Welcome (1:35)

Exit Strategies for Angel Investors (2:20)

Questions on Part 1 (2:35)

(2:45)

Maximizing Exit Value (3:35)

Questions on Part 2 (3:45)

Workshop on Valuation and Discussion (4:15)


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Outline of Part 1

The Current Exit Environment

Most Exits are Under $20 million

M&A Exits are Happening Earlier

Differences Between Angels and VCs

Optimum Strategies for Angels


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Toda s Econom

Recentl , several thin s have chan ed in

the economy,

The bi investment banks are one

In Q2 2008, for the first time in history, there

Many writers are saying the venture capital

model is broken perhaps permanently


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Entre reneurs and An els

Where I live in the Northwest entre reneur

and angel activity is high

record numbers of companies present And record angel attendance

decided to limit the number of members


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Well Need More Data To Be Sure

We ust dont have enou h data to know

whether this activity is a response to job lossin lar e com anies, or somethin else

But one theory is that it is a structural

Large doesnt seem to work anymore whether its companies or venture funds


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Investment Re uires Exits

Investin onl works if the investors can et

their money back even if it takes a while

work anymore because the type of exits the

arent happening anymore, and havent

But its still quite a good time for

entrepreneurs and angel investors


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Lots of Doom and Gloom in Exits

Lots written recentl in the mainstream

press about the bad news in exits

Total M&A transaction dollar volume hasfallen by at least a third

,


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We Alwa s Hear About The Bi Exits

The media alwa s re orts the reall bi exits

From my neighborhood, its exits like

or Biowares $800 million sale to EA Those exits arent happening very often now

smaller exits


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Small M&A Transactions

From: Current Environment for Exits by Brent Holliday, Capital West Partners


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Most Exits Are Under 20 Million

Mer erstat database shows the median

price of private company acquisitions isunder $25 million, when rice is disclosed

But the price is not disclosed in most smaller

I estimate the median price to be wellunder $20 million


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Exam les of Under 30 Million

Google bought Adscape for $23 million (now Adsense)

Google bought Blogger for 20 million (rumored)

Google bought Picasa for $5 million

Ask Jeeves bought LiveJournal for $25 million

Yahoo bought Flickr for $30 million (rumored)

AOL bought Weblogs Inc for $25 million (rumored)

Yahoo bought del.icio.us for $30 35 million (rumored)

Google bought MeasureMap for less than $5 million

Yahoo bou ht WebJa for around $1 million rumored

Yahoo bought Jumpcut for $15 million (rumored)


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Wh This Is Ha enin Now

One of m friends from a Fortune 500

company explained it this way:

at new ideas or startups

from zero to $20 million in value

u w u v ygrowing values from $20 million to $200


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Under 20 Million Is Eas

A com an riced at $100 million is

already out of our sweet spot

But at $20 million, its really easy for me to

Many big companies are spending more onM&A than internal R&D

,


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M&A Exits Are Ha enin Earlier

Toda its not uncommon for com anies to

be acquired just a couple of years fromstartu

Club Penguin, near where I live, is a website

It was sold to Disney for $750 million cash Just two years from startup


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Com anies Dont Need Much

Another im ortant trend is that toda s

companies usually dont need much capital

$ tens of millions so VCs were essential Today, very valuable companies are being

built on just tens of thousands of dollars Club Penguin, and many others, had no

-


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What This Means For An els

Most ac uisitions are under

$20 million in value

transactions done - especially today Modern companies dont need much capital

an exit for under $30 million


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An els and VCs - More Different

This new environment is creatin a clearer

understanding of how different angels andtraditional VCs reall are

From an exit perspective, there are three

1. Minimum investment size

. n mum re urn requ re

3. Acceptable time to exit


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Size of Avera e VC Firms

$350

$250

$300

$150

$200

Millions

$50

$100

$0

1980 1985 1990 1995 2000 2005

Source: US National Venture Capital Association, Thomson Financial


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Avera e Ca ital er VC Princi le

$30

$20

$25

$15

Mi

llions

$5

10

$0

1980 1985 1990 1995 2000 2005

Source: US National Venture Capital Association, Thomson Financial


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VC Investment Prior to M&A Exit

$30

t

$20

$25

vest

me

$10

$15

so

fVCI

$5Millio

1996 1998 2000 2002 2004 2006 2008

Amount of VC investment prior to M&A exit in millions. 2008 data for Q1Source: Jeffries Broadview, Dow Jones VentureSource


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VC Fund Math

VC funds are lar er and lar er

Cant write a cheque for under $5 million

Traditional funds only invest money once

A VC fund needs a 20% annual return Simple math shows that the winners have to


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20xit

12

14

16

0xor30x

time to exit

6

8

10

Yearsto 10x Return 30x Return

0

2

4

N

umbero

AnnualReturnon InvestmentTo achieve a minimally acceptable VC fund return of 20% per year andassuming all of the returns are from 20% of investments


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Unwritten Contracts with Investors

Blo ers have hel ed entre reneurs, an els

and VCs understand each other better

Just increase the value of the shares

But now realize that investors also need to

Achieving an exit is part of the contract


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Unwritten Contracts with VCs

Unintentional Moonshot b Josh Ko elman

Simple rule of thumb for minimum multiples: er es x

Series B 4 to 7X eries 2 to 4X

So once ou si n a Series B term sheet at$50M post-money [which might be only $30million re-mone ouve basicall si ned

up for at least a $200M exit target


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92% of Exits Dont Work for VCs

VCs Need Exits over $100 million

Exits thatExits that also

work for

7.5%Angels and

Entrepreneurs92.5%

Data from Mergerstat


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Time from VC Financin to M&A Exit

8

56

3

4Years

1

2

1996 1998 2000 2002 2004 2006 2008

Median Time from initial VC financing to exit in years. 2008 data for Q1.Source: Jeffries Broadview, Dow Jones VentureSource


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What That Means for An els

A median of 7 ears doesnt sound so bad

But the reality is quite a bit worse

Its 7 years across, A, B and C rounds

about 12 years longer for the angels

At first glance that doesnt seem possible


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Lifetime of IT VC Funds

Source: Adams Street Partners 2006 analysis of funds then dissolved.The chart shows the year a 10 year fund was actually dissolved.


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An el Exits Without and With VCs

xit Without

bilityof s

Proba

WithVCs

Years From Investment to Exit


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How VCs Block Good Exits

Call from an entre reneur askin for hel in

understanding why the VCs were blocking areat exit o ortunit he had no idea

VCs have multiple mechanisms to block Board control, investment agreements, pref

shares and votes Happens much more often than people think

Dramatically increases risk of failure


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An el Investor Math

Investments as small as $25,000 can make

sense

are attractive Can easily reinvest the gains

entrepreneurs than traditional VCs


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An el Co-Investment

Just a cou le of ears a o, the conventional

wisdom was that angel investment toppedout at around $2 million er com an

Kauffman and ACA started talking about-

Now I regularly see groups of angelsinvesting $5 million to $10 million


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Investor Time Horizons

VCs can wait a decade or more - and often

need to for their math to work

in 3 to 5 years Especially in todays unstable economy

angels and VCs in todays exit environment

Wh h h VC i


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What happens when VCs invest

ew ns g s rom an a a20%

10%fEx

its

Failures 1x 5x

Exits5x 10xExits

in High MultipleExits

0%ercent

-10%

Loss 1x - 5x 5x - 10x 10x - 30x >30x

ngein

-20%

Ch

Exit Multiples

Source: Robert Wiltbank, Ph.D Willamette University withFunding from the Kauffman Foundation


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An els or VCs But Not Both

Fascinatin new research Ma 2008

Unique historical database of 182 Series A

outcomes are inferior when an els and VCsco-invest relative to when VCs invest alone.

-firms to have successful liquidity events

Optimum is Angels or VCs but not both


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An el or VC Checklist

Angels VCsAmount of capital required to

prove the business model

Under $3 to 5 million Over $3 to 5 million

Years before being able toexit

2 to 5 years 10 to 12 years

Most likely value of thecompany at the time of theoptimum exit

Under $50 million Over $100 million

Willingness to relinquishcontrol of important financialdecisions

Not always required Almost always required


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Summar

VC backed IPOs and big M&As are gone

When VCs invest, exits are much later andfailures are hi her

Angels can now invest over $5 million Most companies dont need much capital

Toda , the o timum strate for man

companies is: Angels to Early Exit

Documents

Exit Strategies for Angel Investors 20090415 Part 1