Understanding the Early Stage Capital Market in Georgia, Delivered at TAG March, 2008

1. Early Stage Capital in Georgia
Michael S. Blake, CFA
Adams Capital, Inc.
StartupLounge.com
michael@adamscapital.com
March 6, 2008
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3. The Perception of Boston and Sand Hill
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4. Adams Capital, Inc.
Valuation boutique
•
We’re awesome
•
I’m a consultant
•
See me for more information
•
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5. StartupLounge.com
• 501(c)(6) non‐profit
• Co‐founded by Scott Burkett and Michael Blake
• Key players: Stacy Williams, Charlie Paparelli, Jerry
Recht, Anne Simons
• Goal is to facilitate early‐stage capital investments in
Georgia
– Educating entrepreneurs (podcasts, PitchCamp)
– “Safe” networking meetings for entrepreneurs (Capital
Connections – to be renamed Capital Lounge)
– “Safe” networking for angel investors (Angel Lounge)
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6. Learning Outcomes
Understand the local capital market reality
•
Understand the “to do” list for raising capital
•
Avoid silly deal‐killing mistakes
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Raising capital is a skill set.
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Don’t fight City Hall
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Call to action
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($) – I think it’s worth spending money on
•
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7. The Challenge of Early Stage Capital
“Baseball is supposed to be hard. It’s the hard
that makes it great.” – Tom Hanks as Jimmy
Dugan in A League of Their Own
Scarce capital is a reality of our society. The
riskier the venture, the scarcer the capital
gets.
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8. Asset Allocation 101*
Recommended Asset Allocation Alternative Investment Allocation
La rge‐ca p Stocks
Sma l l ‐ca p
Stocks
Bonds Venture
Interna ti ona l
Stocks Real Estate
Emergi ng
Ma rkets
Al terna ti ve
Inves tments
Hedge Funds
Private Equity Allocation Deal Allocation
Deal 1
Deal 2
Venture Funds Deal 3
Deal 4
Angel Investing
Deal 5
Deal 6
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*Source: BNY Mellon, Recommended “Growth & Income” Asset Allocation for Net Worth of over $5 MM

9. Oh Atlanta!
• Atlanta has been a tough private equity town
– Real estate has diverted a lot of private equity money
– Disparate geography means less concentration of
anything, including investors
– Successful entrepreneurs take their money off the
table after cashing out
– Investors not very visible or accessible
– Atlanta is new to the angel capital game
– Long (painful) memories about 2000‐2001
– Few home runs attract few new investors
– No venture‐friendly dominant industry
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10. Real Estate – Bane of the Early
Stage Capital Seeker
Real estate has presented formidable competition for the investment dollar
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11. Window of Opportunity
Wall Street would say that real estate is “underperforming”
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12. The Funding Gap
It is MUCH tougher to find capital between $1 MM to $5 MM
$0 $100 MM $1 B
Don’t manufacture a need for
more money
$1 MM $5 MM
Angels don’t have the capital
Venture funds don’t have the interest
• Too many deals
• Too expensive to manage lots of small deals
• No skill set for deals that small
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14. Deals are Getting Done!
1. Source: PWC Money Tree through ScottBurkett.com
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15. Taking Matters Into Your Own Hands
• Be resourceful
• Be methodical – have a
plan!
• Plan 3 to 12months
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16. Who Are Angel Investors?
• Most are somewhat wealthy (net worth of over $1 MM, few
are really wealthy ($10 MM+)
– 4% of U.S. households have a net worth of $1 MM+
• They may or may not work full‐time
• Many want to be involved in the company directly (buy in
with a job)
• Many combine consulting with investment
• Generally earned their own money (few angels are trust‐fund
babies)
• Many invest for reasons beyond purely a financial return
– Cause driven, fun factor
• SEC has own definition of “accredited investors”
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17. Finding Angel Investors
• It’s all about networking
• Social networking works better
than business networking
• Get introductions
• Don’t expect money or even
interest right away
• Leverage trusted advisors
• Find companies in which they’ve
already invested
• Unless you’re Abraham, don’t
expect the angels to come to you
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19. Other Sources of Early Capital
Personal assets
•
– Home, car, retirement funds
– Entrepreneurs don’t see it as risk; they see it as the requirement to achieve a
goal
– It’s not the investor’s job to believe in the power of your dreams
Credit cards
•
– Are you going to let $20K in debt to stand between you and success?
Friends and Family
•
– Their return is seeing you succeed
SBIR/STTR Grants
•
– Generally require co‐investment from the private sector
Other economic development funding sources
•
– Generally won’t fund seed stage, but there are exceptions
SBA and other loans generally only if you’re willing to put up personal
•
collateral
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20. Meetings and Money
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21. Angel Homework
• Find out what their background is
• Learn their professional experience
• Learn their personal circumstances to extent
tactfully possible
• Talk to their business associates and investee
companies
• Be ready to deliver your elevator pitch at any
time
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22. What Angel Investors Want
• Sound, easy‐to‐understand idea
• Customers or clear path to customers
• Obscenely high returns
– 5‐10x money invested in 5 years unless balanced
by something else
• Have fun
– Get along with you
– Really like and understand the industry
• Stay away from too much detail
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24. Handling Rejection
Be gracious
•
Don’t press
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Thank them for their time
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Accept negative feedback and evaluate its
•
merit dispassionately
• Ask for references to others for whom your
opportunity might be a better fit
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25. Proceed with Caution
False angels
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Bad angels
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Capital brokers
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Pay‐to‐pitch
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Online matchmaking
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Hostage‐holding service
•
providers
• Job‐seekers
• CFO wannabes
• Also criminals
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26. Smoking Out Fake Investors
• Certain questions will help you
detect the phonies
• Ask questions early
• Seek reference
• Don’t go “Guantanamo” on
them
• Don’t be afraid to get bad
answers
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27. Good Angel Deals
Some market/customer validation ($)
•
Failure must be painful to the entrepreneur
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Unfair competitive advantage or exclusion
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Succinct, clear, well‐presented pitch
•
– Don’t get tied to your demo
• Easy due diligence
• Entrepreneur acts entrepreneurially and professionally
– Think like a guerilla
• Someone has to be on the hook full‐time, preferably
more than one person
• Consider licensing rather than manufacturing/producing
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29. Market Validation
• If you’re lousy at sales, improve
• If you have no interest in improving, get a
proven sales pro on your team
• Talk to customers, even before you have a
product
• Pre‐sales, letters of intent
• Trade shows ($)
• Invest in high‐end marketing materials, even
mockups ($)
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30. Sources of Exclusion
• Patent, trademark, copyright,
trade dress ($)
• Trade secrets
• Know‐how
• Capital
• Contacts (supplier, customer,
technical)
The Great Wall of China was
• Market access
designed to be the ultimate
barrier to entry.
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31. How Much Funding to Solicit
•Customer validation
•Major technical goal
•Key hire(s)
•Patent
J
u
s
t
Too Little Buffer (Too Much)
R
$0 $1 MM
i
g
h
t
• What can you accomplish with the funding?
• Key is a really solid financial model ($)
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32. Your Pitch
Be brief
•
Be specific
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Be quantitative
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Be convincing
•
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33. Deal Killers
• Desperation
• Paranoia (NDA’s, etc.)
• Arrogance (you have all the
answers)
• Pushiness
• Dishonesty (even
accidental)
• Excuses
• Discussion of valuation
early on
• Salary‐replacement deals
• Being high‐maintenance
• Leading with 100‐page
offering memorandum
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34. Your Advisors
• Advisory board stops you from drinking too
much Kool‐Aid
• Help you meet capital sources
• Help you meet customers
• Get rid of resume‐hounds
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36. Closing the Deal
• Like pushing string
• Angels have to understand the market, opportunity and
technology
• Angels must have personal faith in you and they must like you
• Angels must feel like they can contribute something other
than money
• May want someone they trust to “lead”
• Don’t nitpick
• Try not to let value get in the way
• If you’re really emotional, get someone to help you negotiate
($)
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37. Typical Investment Terms*
• Investor gets convertible participating preferred
stock (1x liquidation preference)
• $500K ‐ $4 MM pre‐money valuation
• Sell around 40% to the investor (seed stage)
– (have 38% left after Series A)
Investors can veto subsequent transactions
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Founders still control board
•
Full‐ratchet is rare
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20% or less allocated to incentive option pool
•
*Dow Jones Venture Capital Deal Terms Report, Published 10/2007
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38. Capital‐Seeking To Do List
• Do homework on business and create a great
summary document
– Legal review ($), professional editing and formatting ($)
• Create pitch deck
• Seek (pro bono) advisors
• Identify investors
– When rejected, revise and repeat
• Educate investors
– When rejected, revise and repeat
• Discuss terms
– When rejected, revise and repeat
• Finalize agreement
– Legal review ($)
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39. Case Study #1
• ATL – based software company (sole proprietorship)
– Sarbanes‐Oxley compliance
• Closing $500K funding right now from “name” ATL investor
• Key positives
– Verifiable expressions of interest from real customers
– 90% complete product
– Put every dollar he had into venture at significant financial risk
• Turning point(s)
– Fired all consultants and focused only on people who could help him
raise capital or find customers
– Hired investment banker to negotiate his deal
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40. Case Study #2
• IVOX ‐ commercial vehicle tracking services company
• Raised $600K in the last year
• Key positives
– Customers
– Competent managers working for free for a year or more
• See StartupLounge.com podcast on assembling a management
team
• Turning point
– Won 2007 GRA/TAG Business Launch Competition
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41. Case Study #3
• Healthcare informatics company
• Received $250K commitment
• Key positives
– Worked at it over a year
– Potential customers willing to attest to interest in
buying product
• Turning point
– Found investor with lifelong connection to space
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42. Facts of Life in the
Start‐up Ecosystem
• What we can’t “fix”
– California and Boston have been at this since 1947
• Atlanta got started in the late 1980’s
– Real estate will continue to compete for dollars
– Can’t manufacture home run investments
– You’re not going to meet many angel investors
just hanging out at Starbucks or attending staged
networking events
– You’re not going to raise $500K for an “idea”
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43. Repairing the Start‐up Ecosystem
• Need to educate entrepreneurs on the company‐
building process
• Demand more of service providers
• Encourage investors and successful entrepreneurs to
participate in the role of mentor to entrepreneurs
and other angel investors
• Reject business models that exploit uninitiated
investors
• More investor and owner‐friendly meetings
• Investor‐friendly meeting locations and formats
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44. Summary
• Angel money is hard to find because the economy
works that way
• Angel money can be found with great effort, earnest
networking, and strong preparation
• Most opportunities to spend money in the process of
raising money aren’t worthwhile
• It’s easy to kill a deal by losing focus
• Be focused, organized, energetic, positive, and open‐
minded
• Atlanta is not likely to be Boston or California in this
generation
• Are YOU part of the solution or the problem?
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47. Thanks!
Questions?
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