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From Invention to Start-Up: Money - Angels and Strategic Partners November 28, 2006. Susan Preston Entrepreneur-in-Residence Ewing Marion Kauffman Foundation AND Director of Attorney Training and Professional Development Davis Wright Tremaine. Proof-of Concept. Product Design. Product - PowerPoint PPT Presentation
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From Invention to Start-Up:Money - Angels and Strategic
Partners
November 28, 2006
Susan PrestonEntrepreneur-in-Residence
Ewing Marion Kauffman FoundationAND
Director of Attorney Training and Professional DevelopmentDavis Wright Tremaine
Financing Life Cycle
DiscoveryProof-ofConcept
ProductDesign
ProductDevelopment
Manufacturing/Delivery
Fin
anci
ng
Idea Pre-seedFunding
Seed Funding
Expansion/Mezzanine
Operating Cap.
Friends and Family
Angels
Seed Funds
Venture FundsFounder
Institutional Equity
Loans / Bonds
Pro
du
ct D
ev
Angel Groups
Start-up Funding
Government Grants/Loans
Venture Capital Statistics: Investments in US
2005 – invested $21.7 billion (2,939 deals) 2004 – invested $20.9 billion (2,876 deals) 2003 – invested $18.9 billion Increase due largely to late stage investments:
$9.7 billion in 2005 $7.2 billion in 2004 $4.9 billion in 2003
Less than 2% in early/seed stageSource:
NVCA
Venture Capital Investments by Stage of Development ($s in Millions)
0
5000
10000
15000
20000
25000
2003
2004
2005
Source: MoneyTree
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Dollars (in $B) No. of Deals
Venture Capital Investment:
Historical and 2006 Projected
Source: MoneyTree
$7.4 $7.2$7.6 $7.4$7.8
$7.1$7.2$7.2$7.2$7.4$7.4$7.3$6.8
$6.3$6.3$6.6
$7.1
$0
$2
$4
$6
$8
2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06
Average VC Deal Size
Per Financing Round ($ Million)
Source: NVCA
US Angel Investments
2005 – invested $23.1 billion (49,500 deals) Increase of 2.7% in $’s over 2004 Increase of 3.1% in deals over 2004
2004 – invested $22.5 billion (48,000 deals) 2003 – invested $18.1 billion 227,000 active angels
20% Healthcare/medical devices and equipment 18% Software
55% in seed/start-up 43% in post-seed/start-up (10% increase over 2004)
Source: Center for Venture Research
Who Are Angels?
Angels are accredited investors who: Expect a financial return Believe in giving back to their communities Invest locally and regionally Participate in the investment process Show interest in personal relationships with
companies and employees Offer wisdom and guidance to entrepreneurs
Financial Attributes of Angels
Provide early-stage investment dollars Invest smaller dollar amounts per investment Partially fill funding gap left by venture
capitalists (VCs) Invest individual wealth Can tolerate loss of entire investment Have diversified portfolios Invest with “patient money”
Angels and VCs – Similarities
Selective in investments Requirements for an investable company Expectation of return on investment -
scalable Similar investment terms (though angels can
and often are – or must be – simpler) Bring the attributes of a professional investor
Angels and VCs –Differences Venture capitalists:
Invest on “home-run” theory ROI is ultimate goal Investing 3rd party money Often more demanding and actively involved than angels:
Control often issue Can requirement board and advisor approval and corporate
actions Angels:
Invest for returns – may be more modest expectations Social /community aspect to investments Individuals investing their own wealth Patient money
Investment Preference
0 5 10 15 20 25 30 35
Telecommunications
Software
Semiconductors
Retail/ Distribution
Other
Networking & Equipment
Medical Devices & Equipment
Media & Entertainment
IT Services
Industrial/ Energy
Healthcare Services
Financial Services
Electronics/ Instrumentation
Consumer Products/ Services
Computers & Peripherals
Business Products/ Services
Biotechnology
39 groups reporting
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*
*2006 Estimated Value
Startup/Seed
Valuations Of Venture Capital Seed/Startup Rounds ($Millions)
Valuation: Expected ROIs ROI Five Year ROI
Seed 60%+/year 10X+
Start-up 50% 8X
Early stage 40% 5X
2nd stage 30% 4X
Near exit 25%/year 3X
Finding Angel Investors Angel Organizations:
Several in Puget Sound area including: AoA, PSVC, Seraph Capital Forum, Zino Society, Keiretsu Forum, Tacoma Angel Network, Bellingham Angel Network
Professional Service Providers Investment Forums Business Plan Competitions Professionally-funded Start-ups Venture Capitalists Corporate Boards
Forms of Investment
Debt (note) Equity (stock)
Options Warrants
Debt: collateralized, non-collateralized, interest in cash or stock (deferred?), convertible (at election or automatic?), length of time, etc.
Equity: common vs. preferred, dividends, many other terms discussed below
Professional Investors
Angels, venture capital, corporations typically receive: Preferred stock Convertible debt with warrants or additional stock
Provide more than money: Can be proactive in developing business through (“win together”): Company building experience Company functionality experience Industry experience Contacts for partners, customers and follow-on financing
What Professional Investors Are Looking for: Investable Companies Clear path to profitability Solid management Realistic business concept and plan Scalable business Competitive edge/Technical superiority Market acceptance Realistic financial projections Realistic valuation Clear, well-articulated exit strategyBottom line: Opportunity for financial return
What Professional Investors Are Looking for: Investable Companies
How does an investor make this determination? Passion of entrepreneur (presentation) Team track record – individually and together
Entrepreneur’s ability to succinctly articulate vision and mission
Entrepreneur seeks advice of trusted, experienced, honest advisors
Coachable entrepreneur
What Professional Investors Are Looking for: Investable Companies
How does an investor make this determination? Competitors researched and understood Clear market differentiator Value proposition for customer clearly evident Market access strategy clear and realistic Comprehensive summary of risks (and plans to
cope/address) Profit potential – good margins Marketability of company – M&A exit
Type, timing and realistic purchasers
Term Sheets: Debentures Convertible Debentures (Notes):
Automatic upon event or investor controls conversion
Note term Interest: cash or stock; payment schedule;
part of conversion Security interest/collateralized?
Term Sheets: Preferred StockRights, preferences and privileges of preferred stock
Price Use of Proceeds Dividends Liquidation
preference Anti-dilution
provisions Redemption Protective provisions
Information requirements
Registration rights Right of first refusal Co-sale rights Option pool Founder vesting Inventions agreements
Summation Angels invest primarily in seed/start-up rounds Angels represent patient money Angels are becoming sophisticated investors Angels make excellent advisors and mentors Many companies will need only angel investors Be open, coachable and realistic Show your commitment, passion and drive The essence of due diligence:
So what? Who cares? Why you?