Angel Investors
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Grad school MBA Finance class on something light and topical: angel investors.
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Angel Investors
- 1. ANGEL INVESTORS Financing a Business Colin Burns | Corey Bugay | Francois Kuate
- 2. WHAT IS AN ANGEL INVESTOR A wealthy individual willing to invest own money in a business start-up “Angel investor” was first used in 1978 byWilliam Wetzel Angel investors are often accredited investors individuals that make $200,000 or more in base salary every year maintain a net worth of over $1,000,000. Between 5-7.2 millions potential accredited investors in USA 756,000 of them have made an angel investment (active angel investors) Typically invest smaller amounts of money in individual companies (up to $250,000)
- 3. WHAT IS AN ANGEL INVESTOR (CON’T) Angel investments are high risk investments. Between 10,000 and 15,000 angels belong to about 330 angel groups in USA and Canada Investment profile of angel investors Potential return of at least 10 times the original investment within 5 years holding period Effective IRR for typical successful portfolio is between 20 to 30% Most available source of funding for early-stage ventures.
- 5. WHY ANGEL INVESTORS Typically ex-corporate executives Deep pocket books Well connected Mentor Flexible business terms No high monthly fees Not just tech focused
- 7. WHY ANGEL INVESTORS Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group. Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth inWeb site traffic and Web site rankings.The improvement gains typically range between 30 and 50 percent.
- 8. PREPARING FORYOUR INVESTORS Structure your company for offerings. Do your homework. Know how to play fast pitch. Investors are not equal and money is not just green.
- 9. HOWTO FIND ANGEL INVESTORS Start with the people you know and trust Dallas Angel Network Universities with an entrepreneurial program Business Incubators VC Clubs Angel Confederacies Local Government “Chamber of Commerce, Economic Development Agencies” Trade Associations and Publications Crowd Funding “AngelList, Gust, Kickstarter, Indiegogo”
Editor's Notes
- Definition: An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies. http://en.wikipedia.org/wiki/Angel_investorThe term angel investor originally comes from Broadway, where it was used when describing the people that provided financing for theatrical productions. In 1978, William Wetzel, a professor at the University of New Hampshire and founder of its Center for Venture Research, adopted the term “angel” to describe investors who provided seed capital in the USA. http://en.wikipedia.org/wiki/Angel_investorThe federal securities laws define the term accredited investor in Rule 501 of Regulation D as:a director, executive officer, or general partner of the company selling the securitiesa natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year http://www.sec.govAccording to the recent Reynolds survey, there are currently 756,000 angel investors in the U.S. who have made an angel investment or participated in a friends and family round of financing. However, There are currently between 5-7.2 million people in the United States who are accepted as accreditedinvestors. http://www.forbes.com/sites/tanyaprive/2013/03/12/angels-investors-how-the-rich-invest/Angel investors typically invest smaller amounts of money in individual companies than venture capitalists do, making them a possible resource for companies that have exhausted their "friends and family" financing options but are not ready to approach VCs for capital. In general, angel investors own financial assets between $1M and $10M and are comfortable allocating up to 10% of their portfolio to high return/high risk investments such as early stage companies. The typical investment for a member in a given deal is $25k. http://www.inc.com/articles/2000/12/21310.html
- According to the Angel Capital Association, there are over 330 groups in the United States and Canada that are active within the startup community.While angel investors have a long history, angel investment groups are a quite recent phenomenon. Beginning in the mid 1990s, angels began forming groups to collectively evaluate and invest in entrepreneurial ventures. These groups are seen as having several advantages by the angels. First, angels can pool their capital to make larger investments than they could otherwise. Second, each angel can invest smaller amounts in individual ventures, allowing participation in more opportunities and diversification of investment risks. They can also undertake costly due diligence of prospective investments as a group, reducing the burdens for individual members. Fourth, these groups are generally more visible to entrepreneurs and thus receive a superior deal flow. Finally, the groups frequently include some of the most sophisticated and active angelinvestors in the region, which results in superior decision-making. http://www.hbs.edu/faculty/Publication%20Files/10-086.pdfAngel investments bear extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as 'low' as 20-30%. While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures. http://en.wikipedia.org/wiki/Angel_investor
- FRANCOIS – TALK ABOUT THIS.“Not all Angel Investors invest only in Silicon Valley. The truth is that 69% of investments take place outside of California and New England, including a booming presence in the Southeast, Great Lakes, and Mid-Atlantic.”
- http://www.forbes.com/sites/tanyaprive/2013/03/12/angels-investors-how-the-rich-invest/http://hbswk.hbs.edu/item/6347.html?wknews=041910http://www.go4funding.com/Articles/Angel-Investors/The-pros-and-cons-of-using-angel-investors-for-your-new-business.aspx
- http://www.inc.com/magazine/20000401/18114.htmlBe ready, structure your company and offerings so that they are attractive to potential investors.Making sure that company records and employee-stock-option agreements fulfilled legal requirements for a first round of financingMake sure stock purchase agreements are most favorable to executivesIf you are IPO bound know the difference between offering preferred stock vs. common. Avoid “cheap stock” issue. That problem can arise if the Securities and Exchange Commission sees a large discrepancy between an IPO stock price and the price at which pre-IPO common stock options were issued.Ultimately you must have an exit strategy for your investors. They are looking to grow their capital investment. This can be done by an IPO or selling the company to a larger firm. 2. Do your homework. You should know your company inside and out….especially your financials. There is nothing worse than getting to the table with a potential investor and not being able to paint a clear picture of your company. You are running the firm and if you don’t know what is going on, who does? A great example of this is watching an episode of Shark Tank. They shoot someone down in each episode simply because they were not prepared.3. Be able to pitch to pitch your company within a few minutes. You may not always get the time you want to be able to get your point across. Be able to do it quickly while still making an impact. If you can peak someone's interest in a few minutes they will want to give you more time to further explain your business. This area should focus on your customer, what you are offering, why you are unique, and where you are going. 4.”Entrepreneurs fail to understand that not all angel investors are equal. Money is not just green. There is what we call smart money and obnoxious money. And obnoxious money will cost you time and energy”—Carol Sands, Angels' Forum. Some angel investors will look more like a VC by trying to gain large chunks of the company’s equity. You can also come across an investor that is a lot of work. Some of the companies I have seen have had to assign individual employees to run lender services. The investors can be intensively inquisitive without offering any of the guidance or tools a rival angel will provide.
- Network! Use everyone you know to get you that first meeting. The best resources may the person you did not ask. It is common for your attorney, accountant, lenders, or friends to know an angel investor. Many of the articles that I have read state that people find angels through this grass roots networking. They reach out to as many people as they can to get a short list of contacts between 5 and 10. Once they have their short list of angels they try to get an opportunity to pitch their idea. I have found that angel investors tend to know other investors and run in packs. If you can gain the favor of one they will start to funnel others your way. "You can get 50 to 100 leads from a list of 5 or 10 of the right people,“ McCready, Venture Planning Dallas Angel Network- “The Dallas Angel Network creates the optimal environment for entrepreneurs to receive mentoring and advice from experienced, deal-seeking angels. Guidance from DAN volunteers and angels helps facilitate a productive and efficient funding process.” DAN Webpage. DAN does not charge you any fees during your capital raising experience. They are a not for profit organization run by volunteers and financial investors. They receive funding from sponsors and in return advertise them on their site and at meetings. The network has minimal requirements at the beginning stage. They simple ask that you submit a well developed business plan or executive summary. This should be no longer than three pages. If you are selected as a potential entrepreneur they will help you with every other step along the way. They have mentors that will guide you through expectations, deal documentation, deal leadership, legal advice, and ultimately pair you with investors. http://www.dallasangelnetwork.com/Investors know that a university setting with an entrepreneurial program is ripe with ideas. The professors running and teaching in these programs can often be a great asset in finding angel investors. Most business incubators are known for offering cheap rent of office space, shared services, and professional assistance. These are also hot beds for investors looking for the next big thing. VC clubs are a formal network of VC’s. However, it is also possible to network with them to find potential angel investors.Angel confederacies are informal groups that have band together to share knowledge and deals. You find one in the group and you have hit a vein to the network.These local gov. agencies are working to grow their economy. They can be used as a resource to get in touch with other like minded individuals that have gone down your same path. They can also be in contact with Angels.These people write about the industry you are in and tend to know everything there is. They constantly meet people through their job. They can be a great resource in the process of finding financing. http://www.entrepreneur.com/article/52742