What Entrepreneurs Need to Know About the Angel Investment Process Mary Anne Rooke Member, Angel Investor Forum Member, Angel Capital Association April 4, 2014 1
Today’s Podcast • • • • • • • •
Who are angel investors? Where do you find angel investors? How do angels help entrepreneurs? How does the angel investment process work? What do angels expect? What kind of returns do angels get? What are key issues and concepts in 2013 & 2014? Where do you find more information about angels? 2
Who Are Angel Investors? • Often successful, exited entrepreneurs or retired business persons – Active investors – Invest both time and money in companies
• • • • •
Accredited investors - SEC definition Invest their own money (not money managers) Generally invest in local companies Invest at least $20K in businesses not run by family 2011: 318,500 investors invested ~$22.5B in about 66,000 deals (mostly early-stage) 3
Geography – Where Do Angel Groups Invest? 2-hour drive 4-hour drive State/ province
Region No restrictions
0
Source: 2008 ACA Angel Group Confidence Survey
10
20
30
Percent of Groups 4
Investors Per Angel Group
Average = 43.1 Median = 34.5
40 35
Percent of Groups
30 25 20 15 10 5 0
2 to 10
11 to 25
26 to 50
51 to 75
76 to 100
101+
Source: 2011 ACA Confidence Survey and 2011 Member Directory 5
How Do Angels Help Entrepreneurs? • • • • • • • •
Many angels provide mentoring before and after investment Many serve as board members or observers Some join venture as C-level executive for an interim period Information rights in term sheet Often invest in multiple rounds to ensure entrepreneurs can grow Develop relationships with venture capital firms for expansion capital Help lead M&A process early on Angel monitoring/mentorship improves startup health – Harvard/MIT study shows angel support improves startup success rate 6
Angel Group Evaluation & Investment Process Submissions (~30 Plans Per Month)
Screening Team General Meeting Review Presentations (5 – 10 Plans (1 – 3 Plans Per Month) Per Month)
Managing Director prescreens emailed submissions.
Screening team votes on which companies to invite to general meeting.
Diligence & Term Sheet Negotiations (Coordinated by Managing Director & Deal Lead)
Managing Director polls members for level of investment interest in deals, recruits diligence team, and facilitates selection of deal lead to begin term sheet negotiations.
Source: James Geshwiler, CommonAngels, Boston
Deal lead closes transaction and the sidecar fund invests in companies that attract at least $250K in investment from at least 5 members.
Manage Investment
Board member represents member interests and seeks an attractive exit.
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Syndication – Multiple Angel Groups Needed to Fill Rounds
65% of Angel Groups Invest $150K to $500K Per Deal • Investment surprisingly broad • Average deal size increasing • Syndication needed among groups to fill rounds entrepreneurs need
Angel Group Investment Size
$500K to $750K
8%
$250K to $500K
42%
Source: ACA Confidence Survey, 2012
over $750K
4%
under $150K
23%
$150K to $250K
23%
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Average Total Investments Per Angel Group – 2011 $0 $25,000 to $100,000 $100,001 to $250,000 $251,000 to $500,000 $500,001 to $1,000,000 $1,000,001 to $2,000,000 $2,000,000 Plus 0
Source: ACA-SVB Confidence Survey – March, 2011
5
10
15
Percent of Groups
20
25
9
Preferred Investment/Company Stage 80
Percent of Groups
70
60 50
40
30
20 10
0 Seed/Startup
Seed/ Startup
Early Stage
Early Stage
Expansion
Expansion
Source: 2011 ACA Angel Group Confidence Survey and 2011 Member Directory
Later Stage
Later Stage 10
2012 Investment Preferences by Sector Business Products & Svcs Computer Hardware & Svcs Consumer Products & Svcs Electronics Energy & Utilities Environmental Svcs & Equipment Financial Services Healthcare Industrial Internet Media Mobile & Telecom Software
81.0%
77.8% 55.6% 77.8% 0%
10%
20%
Source: ACA Summit Confidence Survey – 2012
30%
40%
50%
60%
70%
80%
90%
Percent of Groups 11
Preferred Deal Terms Other 3%
Priced Rounds 83% Source: ACA-SVB Confidence Survey – March, 2010
Convertible Debt 14%
Percent of Groups 12
Groups
Average % Equity
10 9 8 7 6 5 4 3 2 1
Note: 39 groups reporting (Caution: source data is incomplete & unverified)
40%
35%
33%
30%
25%
20%
15%
12%
10%
5%
0
13
A Word About Expectations Related to Returns • Angel investing is VERY risky – 1 or 2 of every 10 investments brings most of return – Hard to tell which companies will return
• Current return estimates for portfolios: – Annual IRR of 27% - 2.6X in 3.5 years*
• If business gets VC funding later, angel investment is often diluted • Some really great angels therefore looking for 10 to 30X potential – Wide variety of expectations, depending on mix of motivations to be an angel
• Correct valuation is critical *Source: Rob Wiltbank, Willamette University, November, 2007 paper for Kauffman Foundation
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Distribution of Returns by Venture Investment 60
3.0 yr
Percent of Total Exits
50
Overall Multiple: 2.6X 35% - 0X
40
Avg Holding Period: 3.5 years 3.3 yr
Average IRR: 27%
30
20
4.6 yr
10
4.9 yr
6.0 yr
0
< 1X
1X to 5X
Source: Returns of Angels in Groups, 2007
5X to 10X Exit Multiples
10X to 30X
> 30X 15
Trends and Key Issues – Angel Investment • 4+ angel groups syndicate together & with family offices – Regions develop common terms and processes – Some interest in cross-border syndication
• • • • • •
Funds and sidecar funds (sustaining groups & expanding capital) Angel groups invest in multiple rounds Early exits – build early relationships between angels & strategics Vanilla term sheets – plain preferred stock Government interest in job creation JOBS Act and SEC rulemaking 16
More Information Angel Investor Forum - Connecticut www.angelinvestorforum.com Mary Anne Rooke www.rookeandassociates.com Angel Capital Association – National Association www.angelcapitalassociation.org www.angelresourceinstitute.org NOTE: ACA & ARI are NOT sources of equity capital and can’t evaluate biz plans.
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