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GETTING READY TO GROW YOUR COMPANYTechBA ACCELERATION PLAN
Angel Investors and Angel Groups:An Introduction and Analysis
1-27-05
Tom CervantezPartner, Davis Wright Tremaine LLP
Susan PrestonEntrepreneur-in-Residence
Ewing Marion Kauffman Foundation
Overview of Session
• Financing Statistics• Reasons for Establishing an Angel Group• Community Assessment• Decision Matrix
• Legal Structure• Investment Evaluation and Process• Angel group investing and deal structures• Meeting Structure• Public Relations and Promotions
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
National Venture Capital Investments 2000 – 2003
$0
$5
$10
$15
$20
$25
$30
$35
Dol
lars
in B
illio
ns
Q100
Q200
Q300
Q400
Q101
Q201
Q301
Q401
Q102
Q202
Q302
Q402
Q103
Q203
Q303
Q403
$28.5 $28.3$26.5
$22.6
$12.9$11.2
$8.5$7.9
$6.7$4.4$4.2 $5.0
$6.0$4.5 $4.7$4.2
Source: National Venture Capital Association
Venture Capital: Seed and Early Stage Financing
1999 $3.3 Billion 809 deals
6.1% 14.4%
2000 $3.0 Billion 672 deals
2.9% 8.3%
2001 $767 Million 251 deals
1.9% 5.4%
2002 $352 Million 155 deals
1.7% 5.1%
2003 $354 Million 166 deals
2.0% 6.1%
U.S. Investment Statistics
• Venture capital invested a total of $18.3 billion in 2003– Only $354 million in seed and start-up– Only 2% of total investments in seed and start-up– Only 166 deals in seed and start-up– In US, only 1/3rd of Fortune 500 companies ever
received venture capital funds
Source: National Venture Capital Association
U.S. Investment Statistics
• Angels invested approximately $18.1 billion in 2003 (basically the same as venture capitalists)– In 42,000 ventures– Primarily in seed and start-up rounds
• Historically: angels annually invested $30 billion in 50,000 ventures
• 7 to 1 nascent to active angel investor ratio
Source: University of New Hampshire, Center for Venture Research
Attributes of Angel Investors
• Often successful entrepreneurs• “Accredited Investor” – regulatory assumption of
financial sophistication and risk tolerance• Expectation of financial reward• Role in entrepreneurial process• Involvement in entrepreneurial company: wisdom and
expertise• Community involvement; regional investment• Social responsibility
Angel Investing PreferencesSector Preference Deals
• Manufacturing 8.6% 8.1%• Software 34.2% 39.8%• Telecommunications 8.0% 2.6%• Electronics/Hardware 9.5% 4.8%• Life Sciences 10.6% 14.0%• Biotechnology 10.8% 5.5%• Other High-Tech 10.8% 15.8%• Retail 4.6% 5.4%• Other 4.6% 3.9%
Source: University of New Hampshire: Center for Venture Research
Reasons For An Angel Organization
• Quality deal flow• Greater investment clout from combined dollars• Collective due diligence• Education: formal and informal• Group social benefits
(Also the attributes to attract members)
What Are Angel Organizations?
• Groups of individual investors May also have venture capital fund and corporate sponsorship
representatives
• Active investors, directly involved in the investment process Not passive; Not a broker/dealer
• Individuals with common interest Typically invest locally and value group dynamics
# MEMBERS
0
2
4
6
8
10
12
14
16
5 10 15 20 25 50 100 200
GroupsATTENDANCE
0
2
4
6
8
10
12
14
16
18
5 10 15 20 25 50 100 120
Groups
# ON SCREENING COMMITTEE
0
1
2
3
4
5
6
7
8
9
1 2 3 4 5 6 7 8 9 10 12 15 17 18 20 30 120
GroupsTOP METHOD TO
RECRUIT MEMBERS
0
5
10
15
20
25
30
Other Members Other Members and Bizcommunity
Groups
ANNUAL FEE
0
1
2
3
4
5
6
7
8
9
10$0
$500
$1,0
00
$1,5
00
$2,0
00
$2,5
00
$5,0
00
$10,
000
$12,
500
Groups
# COMPANIESPRESENTING
EACH MEETING
0
5
10
15
20
25
1 2 3 4 13
Groups
COMPANY PRESENTATION LENGTH
0
2
4
6
8
10
12
14
16
10 15 20 30 35 40 45Minutes
Groups
Legal Entity & Tax Exempt
02468
101214161820
LLC
C co
rp
501
C6
501C
3
Non-
prof
it
NONE
Mut
Bene
fit
Groups
MEETINGS PER YEAR
0
5
10
15
20
25
30
3 4 6 10 12 24 52
% MEMBERSHIP ATTENDING
0
1
2
3
4
5
6
7
40%
50%
60%
70%
80%
90%
100%
Groups
INVESTMENT MEETING
0
5
10
15
20
25
30
35
Separate NextMeeting
Other None
GroupsMEETING FORMAT
02468
1012141618
Bkf
ast
Lunc
h
Din
ner
On-
line
Ret
reat
Mix
ed
Con
fCal
l
Groups
YEARS OPERATIONAL
0
2
4
6
8
10
12
0.5 1 2 3 4 5 10 15 20
Groups
AVERAGE % EQUITY
0
1
2
3
4
5
6
7
8
5%
10%
15%
20%
25%
30%
35%
40%
Groups
AVERAGE $/DEAL 2003
0
1
2
3
4
5
6
7
8
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
2500
Deals
# FULL TIME EMPLOYEES
0
5
10
15
20
25
30
35
0 1 2 3 4 5
Groups
MAIN AREAS OF INVESTMENT
0
5
10
15
20
25
30
35
40B
iote
ch
no
log
y
Bu
sin
es
s P
rod
uc
ts a
nd
Se
rvic
es
Co
mp
ute
rs a
nd
Pe
rip
he
rals
Co
ns
um
er
Pro
du
cts
an
dS
erv
ice
s
Ele
ctr
on
ics
/Ins
tru
me
nta
tio
n
Fin
an
cia
l Se
rvic
es
He
alt
hc
are
Se
rvic
es
Ind
us
tria
l/En
erg
y
IT S
erv
ice
s
Me
dia
an
d E
nte
rta
inm
en
t
Me
dic
al D
ev
ice
s a
nd
Eq
uip
me
nt
Ne
two
rkin
g a
nd
Eq
uip
me
nt
Re
taili
ng
/Dis
trib
uti
on
Se
mic
on
du
cto
rs
So
ftw
are
Te
lec
om
mu
nic
ati
on
s
OT
HE
RS
Groups
Angel Organizations: The Fundamentals
• Accredited investors: Attract quality deal flow Generally have a uniform interest in group mission of
investment Keeps meetings focused on investing
Sophisticated Investors: No hard and fast definition• A Champion
Absolutely necessary (as individual or group) Significant time commitment Will influence ultimate organizational structure Ability to promote desired membership
Legal Structures
• Statistics44% are nonprofit and/or 501(c) organizations38% are limited liability corporations9% are corporations7% are informal groups or affiliationsGeneral and limited partnerships were not favored
legal structures
Source: Center for Venture Research, University of New Hampshire 2003 Angel Organization Survey
Investment Structure
• Investment Vehicles: Two essential forms:
Group Investment Individual Investment
Pooled funds Group due diligence
Pledged or committed funds Individual assessment
Also, fund investment with side individual investments or vise versa
Investment Structure
• Company Investment Vehicles: Two essential forms and view from the company:
Convertible Notes Preferred StockFlexibility on valuations Set
terms/valuationNormally have warrants No warrants
The recommended path from a company perspective is to take angel/seed in convertible note investments
Membership
• Selection: Number of members (5 to 125) Increased number of members (over 15) argues
against informal structure Set number of members?
For management purposes Exclusiveness Fund structure
Invitation only Annual renewal of membership
Investment Evaluation and Process
• Deal Sourcing• Deal Screening• Coaching• Company Presentations• Due Diligence• Investment Vehicles• Investment Terms and Negotiation• Follow-On Relationships• Meeting Structure
Investment Evaluation and Process (continued)
• Investment Statistics: 70% of angel groups leave investment decisions up to the
individual members 23% of the angel groups invest by majority group decision
Of those that invest by majority decision, 90% are structured as LLCs, supporting previous discussions that the LLC legal structure appears to be the preferred group investment vehicle
7% of angel groups invest through investment committee decision
No responding angel group required unanimous decision for investment
Source: Center for Venture Research, University of New Hampshire 2003 Angel Organization Survey
Meeting Structure• Time and Location:
Regularity, seasonal issues Convenient location and time of day
• Format: Length of meeting; goals for each meeting Networking needs Company presentations Timing of company submissions, screening mtg; coaching and
actual presentations• Education:
Regular with meeting and/or separate, intensive programs• Who Does What?
Public Relations and Promotions
• Not Glossy Ads• Knowledge of Group and Activities:
Promotes deal flowPromotes membership
• Confidentiality of Members
Summary
• Angel investors fill critical need beyond seed but before institutional investment
• Find the right connection in the angel group to help improve your odds of presenting
• Angel investors often invest in convertible note and warrant rounds or Series A rounds
• Do your due diligence on the angels and the group you are thinking of presenting to
