How Angel Groups and Universities Can Work Together

1
How Angel Groups and Universities Can Work
Together

• ACEF Annual North American Summit
• April 27, 2006

2
Introductions

• Panelists
• Tim Keane Marquette University, Golden Angels
  Network
• Bob Morrison DesertAngels, working with Univ.
  of Arizona
• Lita Nelsen MIT Technology Transfer Office
• Moderator
• Theresa Sedlack Univ. of Notre Dame,
  IrishAngels Network

3
Themes for the Session

• Universities can be excellent partners for angel
  groups
• Universities are interested in working with angel
  groups
• uAngels as communication forum for sharing best
  practices on university/angel collaborations
• There are many ways universities and angel groups
  can work together
• Panelists represent a variety of models for
  collaboration

4
Marquette University Golden Angels Network
Tim Keane Entrepreneur In Residence Marquette
University Golden Angels Network
5
Marquette Angel Investors

• Often successful entrepreneurs
• About 65 members mostly in Chicago, Milwaukee -
  70 alumni.
• Active in deal screening.
• Accredited Investors.
• Expectation of financial reward.
• Involvement in entrepreneurial company wisdom
  and expertise.

Began in February, 2003
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A few facts

• 50 founders or CEOs
• 60 prefer early stage opportunities
• Investment sweet spot 25k to 100k
• ROI expectation 3 to 7 years

• 45 have been involved with angel investments
• Top three experience groups
• Business/financial management
• Manufacturing
• Health care

7
Why did you join?

• Deal flow (40)
• Camaraderie (40)
• Education (40)
• Shared Expertise (35)
• Joint due diligence (33)
• Professional support (20)

8
Portfolio to date

• Seven investments in less than three years
• 2.7 Million invested
• 200,000 to 750,000 per deal
• Some debt with warrant, some convertible, some
  Preferred
• 8 to 15 individual investors per deal
• Implied bandwidth
• 6MM per year

9
Portfolio details

• Water park camera business
• Meeting management business
• Homeland Security ASP based software/service
  company
• Metagenomics (natural product molecules) company
• With VCs
• Nanotech congestive heart failure monitoring
• Purchasing software with AI data-mining
• Optical Genomic mapping services and hardware

10
Activities

• Members screen opportunities
• Some longer term deal development
• Advisory roles in pre-fundable companies
• Active in portfolio companies
• Board seats
• Management coaching

11
Current Activities in addition to normal deal
flow management

• Preparing two companies for sale
• Providing a temporary CEO for a portfolio company
  in transition
• Unpaid member/investor
• Assisting in planning for a rollup
• Additional financing
• Territory mapping
• Miscellaneous rolodex work

12
Why would a University want an angel network?

• Important part of an entrepreneurial education
  program
• Technology transfer and research opportunities
  for faculty
• Opens channels for students - learning and
  startup funds
• Active involvement of alumni
• Engagement with the local communities

13
Value to the University

• Aids in the call of Father Arrupe to Education
  for Justice
• Generates wealth in the hands of entrepreneurs
  engaged in building businesses and jobs
• Investor wealth brings benefit to the University
• Models ethical investing standards for students

14
Recruiting

• 100,000 alumni
• Friends and business associates
• Potential investors in the community with
  connections to or interest in deals

15
Member events

• Four dinner meetings per year in Chicago and
  Milwaukee to look at two opportunities per
  meeting.
• Web broadcasts in other months to look at one
  opportunity. (MediaSite Live - sonicfoundry.com)

16
A Structured Approach to Angel Involvement in
University Start-ups

• Robert Morrison
• Desert Angels, Tucson Arizona
• Patrick Jones, Director
• Office of Technology Transfer, University of
  Arizona

17
Goals Desert Angels UA Partnership

• Increase the Flow of Well-conceived, Lower-risk
  Start-ups From University RD
• Create a Structured, Reproducible Interaction
  Between University Tech Transfer and Angel
  Investors
• Provide a Framework for Experienced Angels to
  Mentor Entrepreneurially-minded Students, Staff
  and Faculty
• Expand the Opportunities for Entrepreneurship
  Involvement Across the University Community

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The Bottom Line

• The Desert Angels and UA Forming a Partnership
  Which Looks Like a Options Fund to the Angels and
  a Research Contract to the University

19
Visualization
Individual Angels
Desert Tech Fund
University
Contract
Investment Effort
Project Effort
Participating Angel
20
Key Points

• Only Angels That Wish to Do So Participate in the
  Fund
• (Initial Individual Investment Target Is 25,000)
• Faculty (or Others) Bring Projects Forward for
  Consideration
• Money Is Applied Only to Projects Approved By the
  Fund Participants
• (proof of concept, proof of application,
  prototype )
• Fund Holds Option Through the Contract on Results
  of Project

21
Participating Groups Receive Research And
Royalty Distribution
22
Advantages

• Gives Structure to
• Angel Involvement in the University Project
  Activities
• Licensing of IP Rights
• Leveraging off University Infrastructure and
  Resources
• Shortens Time to Follow-on Funding At Exercise of
  Option
• Provides Rest of Angel Community Known Investment
  Opportunity
• Provides Rest of Angel Community With Knowledge
  and Experience In the Specific Technology

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Advantages

• Provides Negotiate-Once-Use-Many-Times Format
  That Fits The Business Models of Both Parties
• Allows Business Risk Reduction to Occur In Step
  With Technical Risk Reduction Prior to Start-up
  Formation
• Creates an Environment for Mentoring by
  Experienced Business People
• Enables Better Ownership Position

24
Disadvantages

• Requires Angels To Create Organization That
  Serves As Option Fund
• Requires Active Angel Involvement
• Business Risk Reduction Requires Shadow Company
• Roll-up-the-sleeves Commitment Not Just S
• Grants Involved Angels An Option to Form a
  Company
• Option Is Not Free Lower Risk Increase Deal
  Flow At A Cost
• Not an Existing Company In Which to Invest
• Investment Will Be Required Upon Company
  Formation
• Need to Use More Than Once To Justify
• Not a Proven Idea

25
Unknowns

• Need To Run the Experiment To Know
• How Much Investment Per Project Is Truly Needed
  To Create Reasonable Success Over Portfolio Of
  Activities
• Dollars
• Time
• What Are Key Success Factors In
• Selecting Projects
• Moving Them Forward
• Creating Reproducibility

26
Addressing the Unknowns

• Run a Two Year Pilot with Leveraged Support
• Create Approximately 600,000 of Total Support
• 300,000 DA
• 200,000 Kauffman Supporting Student Activities
• 100,000 UA
• Discussions With Kauffman For Supporting Elements
  With Entrepreneurship Education Components
• Ability of OTT to Contribute In Supporting
  Internal Elements Related To Prototyping and
  Education
• Tranche The Funding (Into Fund And Projects)
• Dont Forget RD Tax Credits and Angel Investment
  Tax Credits

27
Dancing with AngelsMITs Entrepreneurial
Ecosystem and its involvement with angel
investors

• Lita Nelsen
• Technology Licensing
• Office
• MIT
• April 2006

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Entrepreneurial opportunities start everywhere at
MIT

• The laboratory (faculty, grad students,
  undergrads doing research)
• Project classes
• Business plan contest
• Dormitories
• The Muddy Charles Pub
• Conversations with friends and neighbors
• The local bar

29
Technology Licensing Office (TLO)

• Based on IPmanages the inventions that come from
  MIT, Whitehead Institute, Broad Institute,
  Lincoln Labs (not alumns)
• Over 1 billion/year in research
• Does the deals (license agreements including
  startups)
• A volume business
• 500 invention disclosures/year
• over 200 new inventions patented/year
• over 100 deals per year20 to 30 startups
• Senior staff all have technical AND business
  experience
• where angels tread

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TLO startup success depends on the infrastructure

• A large base of research
• A geographical environment experienced in
  entrepreneurship
• and
• The MIT Entrepreneurial Eco-systema diverse
  set of activities and offices that support the
  spin-out of technology-based companies

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(not all of the) Organizations in the MIT
entrepreneurial ecosystem

• Technology Licensing Office
• Deshpande Center
• I-Teams
• Enterprise Forum
• Venture Mentoring Service
• 100 K Student Business Plan Contest
• Student Venture clubs

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Deshpande Center

• Based on philanthropic donation from Desh
  Deshpande (a founder of Sycamore)
• Funds research projects on technologies close to
  spinning out as companies
• Catalysts from the business and investment
  community matched as advisors to each project
• Educational events for potential student and
  faculty entrepreneurs
• Community receptions
• Potential source of deal flow

33
I-Teams

• An elective subject in MBA program
• But also includes students from Engineering and
  Science
• Teams of students matched with Deshpande Center
  projects
• Evaluate projectsand their potential uses and
  markets--for commercializability potential

34
100K Student Business Plan Contest

• Run by students (who also raise the prize money)
• Judges from the local business community and the
  Institute
• Up to 100 entries each year (from all parts of
  MIT, frequently with MBA students part of team)
• A dozen or more get angel and/or venture funding
• Potential source of deal flow

35
Enterprise Forum

• Founded (and run) by volunteers from the business
  community
• Formally reports to Alumni Association, but MIT
  connection not required open to all
• Company presentations monthly
• Concept Clinic (embryonic companies)
• Startup Clinic
• 10-250 (companies in growth phase)
• Two annual conferences
• Excellent networking opportunities, some deal
  flow

36
Venture Mentoring Service

• Volunteer Mentors from business community advise
  budding companies and potential entrepreneurs
• Interviews mentors matches mentors with
  companies
• Open to all companies/entrepreneurs with MIT
  connection (including alums)
• Mentors need not have MIT connection
• Potential source of deal flow

37
Entrepreneurship Center

• At the MIT Sloan School of Management
• Coordinates and teaches some of the
  entrepreneurship courses at the Sloan School (MBA
  and others)
• E-teams Teams of students reporting to CEO of
  small entrepreneurial companies
• Short Courses on Entrepreneurship and Innovation
• Houses the 100K contest

38
How is the Eco-system organized?

• Its not!
• New activities arise organically
• If they are useful and serve a function, then the
  last and grow
• People make it work
• Strong dependence on volunteers from the business
  and investment community
• And a willingness of all the different
  organizations to work together to
• do the right thing

39
Starting Companies out of MIT Weve done more
than 300 to dateSome random examples

• Akamai
• Alnylam
• Ember
• Momenta
• Matritech
• Amberwave
• Agencourt
• Brontes
• Determina
• Chinook
• Voltaflex
• Watchpoint Media
• Advanced Inhalation Research

• A-123 Systems
• Elixir
• Innovative Biosensors
• Barrett Technology
• Salient Stills
• RSA Data Security
• Luminus Devices
• E-Ink
• Bluefin Robotics
• Voiceless Technologies
• Wilson Turbo-Power
• Weather Decision
• Z-Corp

40
What we tell investorsHow to work with the TLO

• Get to know us personally
• Hosts of Angels
• Website web.mit.edu/www/tlo
• Staff directory (specialize by technology field)
• COME VISIT (contact the appropriate officer)
• Tell us your fields of interest
• Tell us how much sweat equity you can put into
  a company
• Help us understand your risk profile

41
Be prepared for VERY early stage from the TLO

• World-class technology
• Highly skilled scientists/engineers
• Very early and broad intellectual property
• But
• No (or not much of a) business plan
• Embryonic management team (if any)
• (The Minus-Two Stage Company)

42
What does a deal look like?

• Its a license deal, not a founders deal
• Particular technology, defined by IP
• Often exclusive (maybe by field of use)
• Diligence terms criticalsometimes use money
  raised as surrogate diligence--for a while
• Financial
• Upfront and annual fees Tens of 1,000s
• Patent costs
• Royalties in low single digits
• Equity share in low single digits

43
Getting to know the angels

• Spring, 2005 Hosts of Angels
• MIT TLO invited members of New England Angel
  Investor networks
• We do business with people we know we assume
  you do the same
• --lets get to know one another

44
Hosts of Angels 2005

• Lunch with poster sessions
• Both recent spinouts and planning-stage potential
  spinouts
• Poster sessions for entertainmentnot to ask
  for funding
• Introduction and Guide through the MIT
  Entrepreneurial Eco-System
• Lecture and Panel on Angel Investing
• QA
• Wine Cheese and 2nd set of posters

45
Response from Angels

• Very positive
• QAs suggested that they learned new things
  about our operations
• Highly valued networking with each other
• Valued the poster sessions (with complaints from
  too early to too late)
• Asked that we do it again

46
Hosts of AngelsFall 2006

• New emphasis on Shirt-sleeve angels
• Operating experience in the technical and market
  domains in which they invest
• Actively involved in pulling the company
  together for investment
• Strategy
• Business Plan
• Management Team
• Actively involved in the early years of the
  companys development

47
Shirtsleeve Angels can serve different roles

• The Entrepreneur
• Interim
• or longer term
• Mentor/coach/advisorand connector to
  management talent, customers, and funding
• Active, involved Board member
• Consultant

48
How do we identify the shirtsleeve angels?

• May or may not be part of an organized angel
  investing group
• Their Shirtsleeve activities may be outside
  their investing group
• Word of mouth may be the primary way
• and will take time.
• But its worth the effort we need them!

49
WANTED Shirtsleeve Angel to help bring Minus-Two
Stage company to Fundability

50

• Well let you know what happens
• next year!

51
Elevator Pitch

• National mentoring network
• 165 entrepreneurial-minded members of Notre Dame
  family
• Primary mission to support entrepreneurial
  education mission
• 73 participated as judges/mentors in this years
  business plan competition, working with ND
  student and alumni entrepreneurs
• Emerging national angel investment group
• As byproduct of education and communication
  activities, which are led by entrepreneurship
  center
• Funding activities are led by network members and
  handled outside of entrepreneurship center
• At 2005 annual investment conference half of
  deals presented were funded.
• Funding amounts have ranged from 10,000 -
  5,000,000

52
Summary Observations from Panelists

• Virtually every university is looking for help
• Each university is different, so get to know
  their capacities
• University resources and partnership
  opportunities extend beyond tech transfer
• Student resources to support analysis,
  internships, etc.
• Keep in mind you are dealing with a university,
  not a corporation
• Could be unique issues to address, such as
  conflict of interest