Lecture 14 Angel Investors

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Lecture 14Angel Investors
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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

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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

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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

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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)
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Angel Types

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

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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

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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

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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

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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.

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Typical Term Sheet Terms
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Typical Term Sheet Terms
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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
• Dont overcontrol

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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
• Dont used complex capitalization schemes -
  angels invest as an LLC
• Personal chemistry is important
• Keep investor informed

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• Wisconsin Angel Network
• http//www.wisconsinangelnetwork.com/
• Angel Presentation
• http//wan.mediasite.com/wan/Viewer/Viewers/Viewer
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