Lecture 14

Angel Investors

Angels• Early 1900s theatrical productions• Patrons of the arts• Provided funds to assist producers

• Critical capital gap, between “friends and family” and VCs – more than $25,000 but less than about $1.5 million

• Number of households in the US that fit that profile is approximately 630,000

• Angels invest in 10 to 20 times more companies than VCs

Angels• Usually invest using preferred stock, which offers the

owner more rights than common stock, • Typically acquire 20-30% of a company in the first

round of financing. • Like to make a return of 5 to 10 times their initial

investment in order to achieve a return on their own portfolio of between three and five times their investment

• Have a strong emotional stake in investing and enjoy coaching others and the rush of fast-paced company growth

Angel funding• Approximately 5-8% of total early-stage market

– Angel groups are known– Reliable, complete data

Provides a check on total early-stage numbers• $11.6 million, up 57%

– National average, 1.8%• Average deal size: $275,000• •Co-investing is increasing

– Multiple angel networks invest in single deal– 42 deals reported, but represent fewer financing

events

Venture Capital Investments for WI, MN, and US 2003-2007

2003 2004 2005 2006 2007

US $19.6 Billion(2,865 Deals)

$21.6 Billion(2,966 Deals)

$21.7 Billion(2,939 Deals)

$25.5 Billion(3,416 Deals)

$30.5 Billion(3,914 Deals)

Minnesota $222 Million(60 Deals)

$353 Million(50 Deals)

$228 Million(44 Deals)

$321 Million(36 Deals)

$434 Million(54 Deals)

Wisconsin $42 Million(11 Deals)

$58 Million(11 Deals)

$69 Million(12 Deals)

$73 Million(20 Deals)

$90 Million(21 Deals)

Angel Types• Guardian angel • Operational angel • Entrepreneur angel • Hands-off angel • Control freak • Lemming

Accredited Investor• A net worth of at least $1 million or• Annual income of at least $200,000 in the most

recent two years or• Combined income with a spouse of $300,000 during

recent two years

Angel Groups

• • Social bonds and networking • • Access to pre-qualified deal flow • • Leverage intellectual capital and expertise of

individual members • • Learn from each other regarding deal evaluation

skills • • More extensive due diligence capability • • Alignment of members’ interests • Angel groups can be structured in various ways:

Angel Group Structures

• • Each member owns a portion of the legal entity representing the group

• • Limited liability corporations are formed by individuals to invest in specific deals

• • The group is a non-profit entity and individual angels invest independently

• Annual fees in the range of $100 to $2000 per member.

• Larger angel groups have either formed their own funds or joint ventured with venture capital funds

Exits from Angel Investments

• • Strategic Sale: The company is sold, often to another industry player.

• • Initial Public Offering: While this method can be lucrative, it can be a very difficult exit method to execute. There are numerous rules and requirements involved with an IPO, and it is very time-consuming.

• • Partial Sale: The investor sells his stake in the company back to management or to another willing buyer.

• • Bankruptcy: If the company is not successful, it can declare bankruptcy, either restructuring its operations or going out of business completely.

Typical Term Sheet Terms

Typical Term Sheet Terms

Best Practices for Angels• Help the Startup• Diversify portfolio by investing smaller amounts in

more firms• Less than 10% of total portfolio• Set aside funds for followup investment• Know Termsheets• Compensation for due diligence and board

membership• Don’t overcontrol

Best Practices for Entrepreneurs

• Choose and excellent idea• Make an excellent business plan• Use informal networks to target angels• Look for sector expertise, experience and networks• Invest your own capital• Find out which members of a group are decision

makers• Don’t used complex capitalization schemes - angels

invest as an LLC• Personal chemistry is important• Keep investor informed

• Wisconsin Angel Network– http://www.wisconsinangelnetwork.com/

• Angel Presentation– http://wan.mediasite.com/wan/Viewer/Viewers/Viewer240TL3Banner.aspx?mode=Default&peid=4518c913-e596-4a49-

83c0-3b1b193c3563&pid=c8ac07da-4a5b-4d3a-a010-23c3f65c9055&playerType=WM7