Angel Investing in the Internet Age

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Angel Investing in the Internet Age
Houston Angel Group
June 15, 2001

• Howard H. Stevenson
• Sarofim-Rock Professor of Business Administration
• Harvard Business School

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An Old Guy Speaks on Investing in the Internet Age

• Interest in technology
• Student of Entrepreneurship
• Happy investor in startups
• Happy seller of distributed stock
• A believer and a skeptic

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Good News and Bad News

• The world is changing
• Business models are changing
• Valuations are changing
• Expertise is changing
• Some jobs still need to be done
• Opportunity for angels has never been greater

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Changing World

• Connectedness
• Binary evaluation of the future
• Rapid mood swings
• A massive sense of entitlement
• Free memory
• Free storage
• Free capital in huge amounts
• Free everything

No Loyalty
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Fast Changing Business Models
2001
2000

• Built to sell, not built to last
• Mass customization, flexibility
• Get It Right First
• Happiness is a positive cash flow
• A paycheck is a good thing to have

• Reach, eyeballs, stickiness and growth
• Reach, eyeballs, stickiness and growth
• Get Big Fast
• Pay in options
• Win big or be a turkey
• Im out of here! Dude!

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Valuations no price is too high for some stocks
or low enough for others

• Concentration on winners and rotation
• The new math of acquisitions
• The old math of holding companies
• Stock splits and index membership
• Sell side cheerleading
• Volatility

All with impact on the private market
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Internet Capital Groupa b2b leader
2.25 share on 5/30

• Formed 3 years ago
• Public at 6/ share in June 99
• Down to 170 traded as high as 210
• Three Public Companies, 44 private companies and
  cash
• Invested 350 million - Market cap of 45 billion
• Implication at 100x selling at a 15 premium

1.21
710 million
10
25
2.0
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Whoops!

• Yahoo -87.6
• Broadcom -43.7
• Veritas -41.8
• Internet Capital -37.2
• Sycamore -36.8
• Network App -29.2
• PMC-Sierra -28.1
• Infospace -26.5
• Akamai Ariba -26.3

• Cisco -325.7
• Microsoft -237.6
• Intel -205.7
• Lucent -179.2
• Oracle -140.6
• Sun Micro -104.4
• TI - 93.8
• Motorola - 91.6
• ATT - 88.9

Source Forbes 4/16/01
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Holes Below the Waterline

• Yahoo -91.1
• Broadcom -84.4
• Veritas -63.1
• Internet Capital -98.0
• Sycamore -91.6
• Network App -80.9
• PMC-Sierra -83.3
• Infospace -96.1
• Akamai -95.6

• Cisco -68.9
• Microsoft -45.2
• Intel -51.3
• Lucent -82.7
• Oracle -61.0
• Sun Micro -63.5
• TI -63.2
• Motorola -74.3
• ATT -58.6

Source Forbes 4/16/01
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Some Histories
Vitria Technologies
Amazon.com
E-Toys
Interliant
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Still Some Are Loved
But a lot less than they used to be
Ciena
Juniper
Sycamore
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Would I Have Missed Cisco?
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The Venture Capital Business
More than all VC raised before 1999
Cash will be available, so they said until April
2000
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Maybe the Old Economy is Back
Or maybe not
Hershey
Pulitzer, Inc
National Golf Properties
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Changing Expertise Is Required

• Business Development
• Chief Technical Officer
• Standards Management
• Hosting and Application Service Providers
• Portals and Vortals
• Internet Relationship Management for Software
  and Customer Chains

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Problems that remain

• Creating product
• Selling
• Delivering
• Hiring
• Motivating
• Firing
• Training

the answer?
Is outsourcing
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A Big Question For Us All
Has Investing changed?
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The Science of Angel Investing

• 18 sourcing activities
• 12 valuation methods
• 3 fundamental structures
• 25 value events
• 5 supporting roles
• 7 harvest methods

But it is still an art
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Seven Fundamentals

• Sourcing
• Evaluating
• Valuing
• Structuring
• Negotiating
• Supporting
• Harvesting

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Four Levers of Early Stage Returns
Sourcing Evaluating Valuing Structuring Negotiatin
g SupportingHarvesting
1. Whether you choose winners
1. Whether you choose winners
2. How the deal is structured
3. The Price you Pay
3. The price you pay
4. How much dilution occurs
4. How much dilution occurs
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4 Levers of Early-Stage Returns
Sourcing Evaluating Valuing Structuring Negotiatin
g SupportingHarvesting
1. Whether you choose winners
2. How the deal is structured
3. The Price you Pay
4. How much dilution occurs
All four levers have to be on in order to get a
win. If only one is off, you will not prosper.
Winner
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Choosing Winners

• Sources
• People
• honesty
• energy
• achiever
• knowing and being known
• leadership
• Choosing the playing field
• Plan
• 200 Plays

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Deal Structure

• Simple and understandable
• Robust to changing conditions
• Flexible and forgiving
• Fair and perceived to be

The only good deal is when every wins
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Pricing

• Understandable
• Room for extraordinary profit
• Fair to entrepreneur
• Leaves room for future investment and investors

A balancing act
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Managing the Dilution Process

• Start low
• Define, measure and meet the milestones
• Find the appropriate investors at each stage
• Be able to follow on (or be clear that you dont)

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Your Challenges

• Know yourself
• taste for risk
• desired roles
• investment capacity
• Treat the other party with respect
• saying no early and positively
• documenting a deal
• dealing with problems

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Why Investing Must Change
Old World
New World

• Hard to go wrong
• Rules clear
• Local competition
• Level financing field
• Customers with personal ties and commitment
• Imperfect information

• Hard to go right
• Rules unclear
• Global competition
• Varying financing standards
• Customers with NO ties and commitment
• Almost instant data

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Complexity, Scale and Response Time In the
Internet World
Changing technologies and competition require
scale and rapid response
The Trilema of Modern Business
Complexity and structure slow response
Scale requires complexity and structure
Or just go for it!
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Keys To Management In The Internet Age

• Emphasis on responsibility
• Building solid teamwork
• Reward functional excellence
• Insuring continuous adaptive change
• No surprises control
• Accepting the right kinds of failure

What you seek
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Seven Fundamentals

• Sourcing
• Evaluating
• Valuing
• Structuring
• Negotiating
• Supporting
• Harvesting

Many ways to fail, All needed for success
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Risks to Successful Investors

• Inflexibility from successful past practice
• Bureaucratic processes
• Isolation
• from new technology
• from customers
• Hubris generating over commitment
• Short term thinking and greed

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A Very Strange Time

• Money is being made and lost in big gobs
• Separation between success and SUCCESS is huge
• We will all have to change the way we do business
• Companies will have to be built to last, not
  built to sell!

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Six Questions For You

• What am I betting on?
• Does the company know its economic model?
• Who will want the company to succeed?
• Will it be able to formulate a sound strategy to
  seize opportunities and combat threats?
• Will proposed management be able to transform and
  reinvent the organizations capabilities?
• If there is no IPO market for 5 years will this
  still be a good investment?

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The Commercial
Winning Angels AuthorsDavid Amis Howard
Stevenson Publishers Financial Times
Prentice Hall