GETTING READY TO GROW YOUR COMPANY TechBA ACCELERATION PLAN

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GETTING READY TO GROW YOUR COMPANYTechBA
ACCELERATION PLAN

• Angel Investors and Angel Groups
• An Introduction and Analysis
• 1-27-05
• Tom Cervantez
• Partner, Davis Wright Tremaine LLP
• tomcervantez_at_dwt.com
• 415-276-6508
• Susan Preston
• Entrepreneur-in-Residence
• Ewing Marion Kauffman Foundation

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Overview of Session

• Financing Statistics
• Reasons for Establishing an Angel Group
• Community Assessment
• Decision Matrix
• Legal Structure
• Investment Evaluation and Process
• Angel group investing and deal structures
• Meeting Structure
• Public Relations and Promotions

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Financing Life Cycle
Product Dev
Idea
Pre-seed Funding
Seed Funding
Expansion/Mezzanine
Start-up Funding
Financing
Operating Cap.
Founder
Venture Funds
Friends and Family
Institutional Equity
Angels
Loans / Bonds
Angel Groups
Seed Funds
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National Venture Capital Investments 2000 2003
Source National Venture Capital Association
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Venture Capital Seed and Early Stage Financing
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U.S. Investment Statistics

• Venture capital invested a total of 18.3 billion
  in 2003
• Only 354 million in seed and start-up
• Only 2 of total investments in seed and start-up
• Only 166 deals in seed and start-up
• In US, only 1/3rd of Fortune 500 companies ever
  received venture capital funds

Source National Venture Capital Association
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U.S. Investment Statistics

• Angels invested approximately 18.1 billion in
  2003 (basically the same as venture capitalists)
• In 42,000 ventures
• Primarily in seed and start-up rounds
• Historically angels annually invested 30
  billion in 50,000 ventures
• 7 to 1 nascent to active angel investor ratio

Source University of New Hampshire, Center for
Venture Research
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Attributes of Angel Investors

• Often successful entrepreneurs
• Accredited Investor regulatory assumption of
  financial sophistication and risk tolerance
• Expectation of financial reward
• Role in entrepreneurial process
• Involvement in entrepreneurial company wisdom
  and expertise
• Community involvement regional investment
• Social responsibility

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Angel Investing Preferences

• Sector Preference Deals
• Manufacturing 8.6 8.1
• Software 34.2 39.8
• Telecommunications 8.0 2.6
• Electronics/Hardware 9.5 4.8
• Life Sciences 10.6 14.0
• Biotechnology 10.8 5.5
• Other High-Tech 10.8 15.8
• Retail 4.6 5.4
• Other 4.6 3.9

Source University of New Hampshire Center for
Venture Research
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Reasons For An Angel Organization

• Quality deal flow
• Greater investment clout from combined dollars
• Collective due diligence
• Education formal and informal
• Group social benefits
• (Also the attributes to attract members)

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What Are Angel Organizations?

• Groups of individual investors
• May also have venture capital fund and corporate
  sponsorship representatives
• Active investors, directly involved in the
  investment process
• Not passive Not a broker/dealer
• Individuals with common interest
• Typically invest locally and value group dynamics

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Angel Organizations The Fundamentals

• Accredited investors
• Attract quality deal flow
• Generally have a uniform interest in group
  mission of investment
• Keeps meetings focused on investing
• Sophisticated Investors No hard and fast
  definition
• A Champion
• Absolutely necessary (as individual or group)
• Significant time commitment
• Will influence ultimate organizational structure
• Ability to promote desired membership

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Legal Structures

• Statistics
• 44 are nonprofit and/or 501(c) organizations
• 38 are limited liability corporations
• 9 are corporations
• 7 are informal groups or affiliations
• General and limited partnerships were not favored
  legal structures
• Source Center for Venture Research, University
  of New Hampshire 2003 Angel Organization Survey

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Investment Structure

• Investment Vehicles Two essential forms
• Group Investment Individual Investment
• Pooled funds Group due diligence
• Pledged or committed funds Individual assessment
• Also, fund investment with side individual
  investments or vise versa

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Investment Structure

• Company Investment Vehicles Two essential forms
  and view from the company
• Convertible Notes Preferred Stock
• Flexibility on valuations Set terms/valuation
• Normally have warrants No warrants
• The recommended path from a company perspective
  is to take angel/seed in convertible note
  investments

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Membership

• Selection
• Number of members (5 to 125)
• Increased number of members (over 15) argues
  against informal structure
• Set number of members?
• For management purposes
• Exclusiveness
• Fund structure
• Invitation only
• Annual renewal of membership

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Investment Evaluation and Process

• Deal Sourcing
• Deal Screening
• Coaching
• Company Presentations
• Due Diligence
• Investment Vehicles
• Investment Terms and Negotiation
• Follow-On Relationships
• Meeting Structure

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Investment Evaluation and Process (continued)

• Investment Statistics
• 70 of angel groups leave investment decisions up
  to the individual members
• 23 of the angel groups invest by majority group
  decision
• Of those that invest by majority decision, 90
  are structured as LLCs, supporting previous
  discussions that the LLC legal structure appears
  to be the preferred group investment vehicle
•  7 of angel groups invest through investment
  committee decision
• No responding angel group required unanimous
  decision for investment
• Source Center for Venture Research, University
  of New Hampshire 2003 Angel Organization Survey

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Meeting Structure

• Time and Location
• Regularity, seasonal issues
• Convenient location and time of day
• Format
• Length of meeting goals for each meeting
• Networking needs
• Company presentations
• Timing of company submissions, screening mtg
  coaching and actual presentations
• Education
• Regular with meeting and/or separate, intensive
  programs
• Who Does What?

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Public Relations and Promotions

• Not Glossy Ads
• Knowledge of Group and Activities
• Promotes deal flow
• Promotes membership
• Confidentiality of Members

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Summary

• Angel investors fill critical need beyond seed
  but before institutional investment
• Find the right connection in the angel group to
  help improve your odds of presenting
• Angel investors often invest in convertible note
  and warrant rounds or Series A rounds
• Do your due diligence on the angels and the group
  you are thinking of presenting to