making syndicated angel investments is proven to lower the risk especially when making the first angel investment.
Bill Payne will share his wide experience on this fiels and give his best practices to find a balanced solution.
More information: www.fiban.org/billpayne
What Key Factors Should Risk Officers Consider When Using Generative AI
FiBAN - Angels in groups - By Bill Payne
1. Angel in Groups
Helsinki, May 7, 2012
BILL PAYNE
www.fiban.org/billpayne
2. Bill Payne is an active angel investor, board member, and advisor to entrepreneurs.
He assisted in founding four angel groups: the Frontier Angel Fund (2005), Tech
Coast Angels (San Diego – 2000), Vegas Valley Angels (2003) and Aztec Venture
Network (1999).
For three decades, Bill Payne has successfully founded or invested in over 50 start-
up companies. He served as an Entrepreneur-in-Residence to the Kauffman
Foundation for twelve years. While there, he directed the development of the
Power of Angel Investing education series for entrepreneurs and angel investors.
He has served as lead instructor for over 100 seminars in seven countries.
In 2009, Bill was named the Hans Severiens Award winner as the “outstanding angel
investor in America.”
4. The Capital Lifecycle
Investigation Feasibility Development Introduction Growth Maturity
Proof of Pre-Seed Seed & Early First, Second, etc...
concept Start-up
Government Sources
Self
PROFIT
Friends & Family Venture Capital
Angel Investors IPO, Banks
First Revenues
VALUE OF DEATH
TIME
5. Who Are These Angels?
Wealthy individuals – sophisticated investors
“Been there, done that” entrepreneurs
Invest time and money in portfolio companies
“Mad money”
Generally $25K-$250K per deal per angel
Many angel investments
Range of involvements
Lead investor – Chairman of the Board
Investor/advisor
Passive investor
6. Professor Josh Lerner
(Harvard University – 2010)
Regarding angel investors:
• Angels make a large and significant impact
on the success and survival of their
portfolio companies
• Mentoring and business contacts are even
more important than angels’ money
7. Motivation
VENTURE CAPITALISTS: make money
ANGELS
Return on Investment is the metric
Staying involved (sense of usefulness)
altruistic
Give back to community motivations
Affection for entrepreneurs
10. Quotes:
Dr. Bob Litan, VP Kauffman
• Companies less than five years old have
created 40 million jobs in the US in the
past 30 years
• Companies five years and older have, in
the sum, lost jobs in the past 30 years
11. American angels fund 20,000 new
companies per year that are in the
sweet spot of job creation in the US
14. Classic Assumptions
• High risk asset class
• A high fraction failed
• Shooting for home runs = >10X
• Seed/startup VC yields >20% IRR
• Paucity of data
15. Two Studies by Prof. Rob Wiltbank
(Willamette University, Portland, Oregon)
18. Time to Exit
16
Years from Investment to Exit
14
12 Pessimistic
10
8 Wiltbank Data
6
4 Optimistic
2
0
0 10 20 30 40 50
Return on Investment (ROI – cash on cash)
20. Adjusted Portfolio Strategy
Invest in at least 10 -25 deals (lifetime)
90% of deals return all capital invested in portfolio
10% provides all upside and must be a 20X
Investing in more than ten deals is good
Conversely, a small number of large angel
investments increases risk
All deals must have potential for 20X
Angel investing is a 10+ year commitment
Similar to VC investing, perhaps longer!
22. Portfolio Strategy: Gambling Analogy
Pay $1 and pick number from 1-10
Win $25 if you pick correctly (25X)
This is a skewed distribution (like angel investing)
Win 10% of time lose 90%
Expected Value is 2.5x ($1 for 10 plays, win $25)
Play once, likely lose; but could win $25
If you play many times, should win 2.5x what you bet
But also reduces chance big win (25x in one play)
23. Example: Gambling Analogy
Play 1 time likely lose money (90% of time)
could make 25X
Play 3 times probably lose your money
could make 8X, 17X or 25X
Play 10 times probably make money
most likely about 2.5X
Play 100 times expected return is 2.5X
Play 5000 times assured return is about 2.5X
24. Lessons Learned
1. The distribution of returns from the
Wilbank study strongly suggests that
invests pursue a portfolio strategy of at
least 10 investments and perhaps as many
as 25 investments to optimize returns.
2. Based on the Wiltbank
studies, anticipated returns for angel
investing is an IRR of 20-25% (~2.5X ROI)
3. Investor patience is required (10+ years)
25. Patience is required
Lemons Rot Faster than Plums Ripen
• -1X typically takes 2.5 to 3 years
• 10X is expected to take 4-5 years
• 30X could take 6-8 years or more
Hint: Angels should not expect high portfolio
yields (IRR) after only three years of investing!
26. Invest in at least 10 companies
But: How much should angels
invest in each deal?
27. Determining Size of Angel Investments
• Invest in at least 10 deals (lifetime)
•
•
•
• Determine total personal assets set aside for
angel investing (3-10% of total assets)
• Divide total commitment by 20 investments
•
28. Strategy: A Personal Choice
• Invest in each round of perceived winners
o Invest along side subsequent investors
o Invest a lot in some company, little in others
o OR…limit follow-on investing
• Invest in new companies
o Be very selective in follow-on investments
o Chose to diversify over betting on winners
29. Other Triggers for Investment
• Scalability and diversity are not only issues
• Vary by investor and within angel groups
• Some additional critical triggers may be:
•
•
•
•
•
•
32. Solo Angel Investing
• Process is time-consuming
• Deal sourcing
• Reading plans
• Due diligence
• Due diligence is difficult
• Finding vertical experience
• May require using outside experts
• Legal support is expensive
33. Advantages of Solo Angel Investing
• Control over the round of investment
• Take a little – take a lot
• Include only your friends
• Negotiate control ownership
• Grab hot deals
• Move quickly
• Dominate an emerging business sector
• Negotiate your own term sheet
34. Disadvantages of Solo Angel Investing
• Much more difficult
• To manage deal flow
• Doing sufficient due diligence
• Mentoring/supporting growth in funded companies
• Leads to larger investments
• Fewer to share any round
• Larger personal investments
• Pressure to invest in follow-on
• Less diversification
• See fewer deals
• Lose deals to others/no incentive to share deals
35. Solo versus Group Angel Investing
Group investing facilitates best practices
• Easier to see more deals
• More resources to evaluation deals
• More experts to mentor companies
• Business sector experts as Directors/Advisors
• M&A experts to facilitate exit
• Best practice for optimum returns (Wiltbank)
• Many, smaller investments
• Easy to make many, smaller investments
37. Larger Portfolio Improves Returns
1. Wiltbank Study – Investing in 10 -25 deals is a
best practice for optimum returns. Invest in more
deals – with smaller investments per deal
Investing with groups
• Increases deal flow
• More investors – less investment per deal per
investor
• More investors for follow-on investing
38. Due Diligence: In Group Investing
2. Extensive Due Diligence Improves Returns
• Group offers substantial business expertise
• Group members have time to do diligence
• Team due diligence is faster and more
comprehensive
40. 50% of deals were not
related
When related, they
typically had 14 years
of experience
41. Mentoring Funded Companies
3. More experts to mentor companies
• Business sector experts as Directors/Advisors
• M&A experts to facilitate exit
• Angels groups provide Director training and
establish Director/Board best practices
42. High = 1-2 times per month
Low = 1-2 times per yr
High: 3.7X (4 yrs)
Low: 1.3X (3.6 yrs)
43. Investing through Angel Orgs
• Increased deal flow – more deal choices
• Pick and choose the deals you like
• Variety of vertical experience available
• Expertise in due diligence
• Mentors for growing portfolio companies
• Standardized processes and term sheets
• Great camaraderie among the like-minded
44. Growth in US Angel Groups
350
300
250
200
150
100
50
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Center for Venture Research (pre 03 data) and Kauffman Foundation/ARI (04- data)
45. Profiles of US Angels (Wiltbank – US)
Years investing 9
Number of investments 10
Total exits/ closures 2
Years as entrepreneur 14.5
Number ventures founded 2.7
Age 57
Percent of net worth 10%
Education University
46. Engagement from Each Angel
Ten portfolio companies
Engaged with 2-4
o Chairman
o Director
o Mentor/coach
Passive with six or more
Available, if needed
47. Typical US Angel Group Deal - 2011
• $150,000 to $2 million in a single round
o Median round size $700,000
o Median from local angel group: $250,000
• 20-40% ownership in company
• Board position(s)
• Special voting rights
• Liquidation preference
48. Engagement of Angels
5 to 20 angels invest in a company
Which angels engage with the company
Available Time
Vertical Experience, familiar with M&A exits
Good rapport with entrepreneur
How many will be involved
One or two – depending on need
Others on call for special assistance
Note: Most angels are part-time investors
49. Angel Roles in Portfolio Companies
Board of Directors
Advisor, mentor, coach
o Of CEO, of management team
Step in during crisis (temporary)
Assist in raising additional money
o Another angel round
o VC or strategic money
Tee up the company for exit
Angels are active in a few deals and
passive in most
52. Nondisclosure Agreements (NDAs)
• Most angels and VCs will not sign
o See too many deals
o Integrity is key to continuing business
o Not motivated to steal technology
• May sign NDA…
o During due diligence, not earlier
o Covering a very narrow set of issues
• Business Plan - no proprietary information
53. High Growth vs Lifestyle Companies
Lifestyle companies
• Organic growth
• Great income source for entrepreneurs
• Flexible exits
o Sell
o Stay engaged into retirement
o Give business to children
• Not fundable by investors
(no anticipated exit)
54. High Growth vs Lifestyle Companies
Fundable Companies (high growth)
• High growth potential
• Need investor’s capital to grow
• Exit strategy defined at outset
o IPO (very unlikely)
o Sell to public or private company
• Entrepreneur builds wealth
but perhaps not high income
56. Angel Rating System
Management team 0-30%
Size of opportunity 0-25%
Product & technology 0-15%
Sales channels 0-10%
Competitive advantage 0-10%
Size of this round 0 - 5%
Need for more funding 0 - 5%
57. Don’t Like These Ratios?
Management team 25-40%
Size of opportunity 20-30%
Product & technology 10-30%
Sales channels 5-20%
Competitive advantage 5-20%
Size of this round 0-5%
Need for more funding 0-5%
BUT: Don’t Make Product/Technology 95%
58. Fundable Management Teams
CEO
o Coachable (very important)
o Integrity
o CEO experience, Leadership
o Vertical experience
o Team members identified
Team
o Balance and complete
o Experience working together
59. Size of the Opportunity
Scalable
o $20 million (min.) in revenues in 5 years
o (VCs look for >$100 million)
Large niche market
o Achieve high revenues
with minimum competition
High gross margins
o Growth with internally generated cash
o Requires less investment capital
60. Product and Technology
Product available for customer validation
o Prototype
o Beta test
• Unique technology
o Patents, trademarks
o Trade secrets
o IP protection underway
• Manufacturability in quantity validated
61. Intellectual Property
Patents, trademarks, trade secrets
Competitive advantage is a “must have”
o Competition with resources cannot just reverse
engineer and compete
o But, IP does not bring great value to startups
because they do not have resources to defend
Intellectual Property primary value at exit
o Acquiring companies insist on IP
o Great IP adds substantial value at exit
62. Marketing and Sales
Customer validation is available
o Investors need to verify with customers
o Essential to investment
• Marketing/branding issues addressed
• Reasonable sales channels defined
• Some partnerships established
• Competitive advantage identified
o Small competitors, fractured marketplace
63. Other Issues
International
o Sales and marketing off-shore
Direct or landed presence
Capital
o Size of this round
o Subsequent funding required
Small (angels) or Large (VCs)
Raising money off-shore
Substantially increases risk
65. Typical Angel Group Deals (p1)
• Management team has:
o Integrity
o Experience (management, business vertical)
o Identified key advisors/directors
o Key players in the wings
• And…CEO is coachable
• Willing to build a functional board
o Entrepreneur will not have control
66. Typical Angel Group Deals (p2)
• The business will scale
o Build revenues to >$20 million in five years
• The business serves a large niche market
o No major players as direct competitors
• Large gross margins can be expected
• M&A exit are feasible within 5+ years
o Multiple acquiring targets can be identified
o Technology key to target’s tech roadmap
67. Typical Angel Group Deals (p3)
• Company has prototype ready for customers.
• Customers have been identified and
have been shown the product or prototype.
• Customers can validate that the product is a
pain killer, not a vitamin pill
• Company has unfair competitive advantage
68. Typical Angel Group Deals (p4)
• The business model can be validated
• Reasonable sales channels are available
• Customer acquisition costs are low
• Competition is fractured
(Microsoft is not lurking around the corner)
69. Typical Angel Group Deals (p5)
• Entrepreneurs is flexible on terms
• 20+X ROI is possible (not all angels agree..)
• Valuation is reasonable
• Structure of deal allows input/control by
investors.
• Board makeup is flexible by entrepreneur
• CEO is willing in advance to step aside when
opportunity justifies this Board decision
70. AVOID COMPANIES WHO HAVE
MADE FIVE COMMON MISTAKES
(Traps Entrepreneurs Must Avoid)
74. 4. Don’t allow entrepreneurs to “ball
park” revenues as a percentage of the
total market.
75. 5. Don’t be impressed with
“first mover advantage”
76. Summary
• Betting on the Jockey, not the horse
• Looking for companies with large
opportunities in niche markets
• Seeking a competitive advantage
• Skeptical about companies that have huge
capital requirements.
79. Angel Group Investing Process
PROCESS SOURCE COMMENTS %
Deal Flow Referenced or Groups seek 100%
New unreferenced deals
Pre-screening Staff review Criteria for Investment 50%
Screening Members Due Diligence or Reject 20%
Due Diligence Team of 4-6 Invest or Reject 5-10%
Investor Varies by Deal Collect money ~2%
Commitment Seek additional investors
Closing Varies by Deal Include outside investors? ~2%
80. Deal Flow
• Many deals come from
members, incubators and local lawyers
(etc.)
• Groups encourage unreferenced deals
from local community
• Refer outside deals to groups local to
the deal
81. Pre-screening Deal Flow
• Pre-screening done by
o Staff
o Interns (students from local schools, trained
by angels)
o Small groups of members
• Based primarily Criteria for Investment
o Published on website (next slide)
82. Criteria for Investment
• Geography (local deals)
• Business sectors of interest
• Range of acceptable round sizes
o Typically $150,000 to $1 million
• Upper valuation limit
• Preferred stage of development
• Other criteria
83. Screening
• Presentation to some or all members
• Structured meeting
• Using PowerPoint template
• Timed presentation, Q&A, private discussion
and feedback to entrepreneur
• Objective
o Move on to Due Diligence phase, or
o Optional recommendations to entrepreneurs
84. Due Diligence
• Team of angel members (4-6)
• Negotiate term sheet (not part of DD)
• Use due diligence checklist
• Validate investment opportunity
o Management team, Size of opportunity
o Technology/IP, Capital required, financials
• 2-3 months, decision to write checks
• Document in DD book, share with others
85. Investment
• DD team recruits investment from group
• Collect investment funds
• Make decision about investment from
other groups (70% of US deals are shared)
• Provide DD documentation to others
• Select lead investor (board directors)
• Close deal
86. Syndication with Other Groups
• Move quickly
• Provide with Due Diligence book
• Make entrepreneur and lead investor
available to syndication partners
• Emphasize importance of timing
• Close deal
89. Models in the US
• Organizational models
o Angel networks
o Angel funds
• Management models
o Member managed
o Manager managed
o Administrative support
90. Funds or Networks
Angel Funds Angel Networks
Manager-managed X X
Member-managed X
Time commitment X X X
Dues X X X
Carry (preferential return) X X
Individual investments X
Group investments X X
91. Angel Funds
• Pool money in advance
• Screen and Due Diligence as group
• Vote of members determines investments
• Member managed or
• Hired manager
o Leads the process
o Provides administrative support
o Is paid thru dues and/or “carry”
92. Angel Networks
• Members do the heavy lifting
o Screen and Due Diligence as group
o Negotiate common term sheet
o Select a deal lead
• Members make personal investment decisions
o Some pass – no investment
o Other invest a little…or a lot
• Usually some administrative support
93. Strengths and Weaknesses
Group Organization Model
Strengths Weaknesses
Network
Individual decisions Less diversification
Less investment in recessions
Diversification for all members Group decisions
Fund
Pooled funds- recession proof More startup work
Accounting issues
94. Manager-led Networks and Funds
• The manager
o Leads the process
o Provides administrative support
o Is paid thru dues and/or “carried interest”
o Or, provided by public agencies
• Sometimes do “heavy lifting in
o Due diligence
o Coaching, pre-investment
• Member must engage post investment
95. Strengths and Weaknesses
Member versus Manager Leadership
Strengths Weaknesses
Member
Member engagement Administrative load
Leadership succession
Consistent leadership Member engagement
Manager
Single point of contact Operational costs
Carried interest cost
96. Side-by-side Group Investing
• Individual member investing along side angel funds,
or
• A fund established to invest along side individual
angel network members
• Add leverage for angel group
• Let’s members fund their favorite companies
• Allows network members to diversify portfolio
98. Automatic Side-by-Side Fund
No manager, no carry Leverage to angel group
No fiduciary responsibility Angels can diversify
Typical investment: Other accredited investors
o 30-50% match, if can invest
o 5 angels in network Fees could offset costs of
invest at least $250K angel organization
Diversified portfolio Possible to engage
10 to 20 investments governments as investors
101. Trend towards Angel-only Deals
• World-wide VCs are troubled
• Returns are low
• Raising new funds very difficult
• Follow-on funding by VCs problematic
• Many angels look for angel-only deals
• Require few million US dollars to succeed
• Syndicated angels in multiple rounds can fund
• Seek earlier exits via M&A, not IPOs
102. Definitions
• Syndication and Co-investment have similar
definitions, depending on the region
• In some jurisdictions, investing as part of a
single, local angel groups is syndication
• In US group investing is the standard (and not
considered syndication or co-investment)
• In other locals, syndication (or co-investment)
means different investment groups (angel
groups, VCs, family investors and others)
investing in the same round.
103. Syndication (or co-investment)
within US Angel Groups
• Standard practice for US angel groups
• Average round size 2011: $700,000
• Local group invested about 1/3 = $250,000
• Cooperate on due diligence
• Negotiate a single term sheet
• Coordinate with a single deal lead
• Leverage group investment for best terms
• Invest a little, invest a lot…or pass
104. Syndication (or co-investment)
among several US Angel Groups
• Trend growing rapidly
• Local group leads the deal
• All groups agree to single term sheet
• Coordinate with a single deal lead
• Local group shares due diligence results
• Principal advantage:
• Raise more money
• Engage more investors (and expertise)
• More investors available for follow-on rounds
• Not so dependent on VCs for follow-on
106. Growth in US Angel Groups
350
300
250
200
150
100
50
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Center for Venture Research (pre 03 data) and Kauffman Foundation/ARI (04- data)
107. New Zealand Angel Groups
• New Zealand Demographics
• Land mass of UK, population of 4 million
• 14 angel groups, spread over the country
• About as active as Boston in the US
• Invest together as a group, similar to the US
• Syndicate deals
• All groups participate
• Small VCs engage
• About 50% of deals involve more than one group
108. Trend for Multi-group Syndication
Among Kiwi Angel Groups
NZ Young Company Finance 2012
109. Multi-group Syndication in New Zealand
• Exports are key to NZ economic success
• Raising money in multiple rounds is critical
• Raise money for startup
• Raise money to demonstrate traction locally
• Raise money for exports
• Raise money to create landed presence off-shore
• Successful fundraising offshore only possible
after offshore product validation
110. Keys to Success
(With a Group or Between Groups)
• Build trust with other investors
• Join due joint due diligence teams
• Sharing deals goes both ways
• Single investor contact point
• One term sheet
• Share due diligence
• Cooperate finding best angel experts
• Single lead investor
• Cooperating angels can fund larger deals