Raising Money from Business Angels

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Raising Money from Business Angels
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Whats an Angel?

• A person who provides capital from his own funds
  to a private business owned and operated by
  someone who is neither a friend nor family member.

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Many Different Types of Angels

• Accredited and unaccredited
• Active and passive
• Knowledgeable and naïve
• Interested in early and late stage ventures
• Providers of large and small amounts of money
• High- and low-risk investors
• Providers of debt and equity
• Investors as individuals and as part of groups

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Angel Market is Small

• Angel capital market is about 23 billion year
• About equal to VC market
• All informal investors provide 162 billion
• Only 8 percent of informal investments are made
  by angels 92 percent by friends and family
• Angels invest in only about 0.2 percent of U.S.
  companies
• But angels are important for certain types of
  startups

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Typical Angel

• Isnt an accredited investor
• Makes investment of 10,000
• Prefers cash flow positive businesses
• Is no better than friends and family
• Has no more entrepreneurial experience
• Makes no more informal investments
• Doesnt attract VC follow-on investment
• Not right investor for true high potential
  businesses, but useful for others

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Angel Groups

• Accredited investors
• Active investors
• Knowledgeable investors
• Interested in early stage ventures
• Provide of more money than typical angels
• Primarily equity investors
• Valuable for high potential companies

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But They are Very Rare

• In 2006, angel groups invested in only 512 of the
  25.4 million businesses in the U.S.
• In 2006, angel groups invested 250 million of
  capital

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Typical Angel Group

• Is three years old
• Has 37 members
• Is structured as a network (3/4)
• Is member led (59 percent)
• NEOs groups are Arch Angels and North Coast
  Angel Fund

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Investors in Angel Groups

• 5,600 people across the country
• All accredited investors
• Many with experience in high growth startups
• Many have made multiple angel investments
• Invest around 30,000 per investment round

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What Members of Angel Groups Are Looking For

• Early stage businesses
• High tech businesses
• Very high potential for growth - 50 million in
  sales in 5 years
• Clear exit strategy acquisition or IPO
• Investment around 250,000

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Investment Process

• Source deals through members and unsolicited
• Initial screen, weed 60-90 percent with no
  chance of funding
• Select companies for presentation, ¼ to ½ of
  remainder
• Typical presentation is 20 minutes with 20
  minutes of QA
• Group decides whether or not to do due diligence
• Subgroup does due diligence and reports back to
  members with recommendation
• Members decide whether or not to invest
• Group monitors investment with a board seat

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Highly Selective

• 400 companies apply to the typical angel group
  annually
• 24 companies present to the typical angel group
  every year
• 4 companies per year receive an investment from
  the typical group

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What Angel Deals Look Like

• Few angels have VC-like term sheets
• Convertible debt is used in less than 7 of
  investments
• Money is staged in only 21 of investments
• Investor veto of management decisions in only 5
  percent of cases
• 40 percent of investments are straight common
  stock
• 40 percent of investments involve debt
• But, angel group terms are getting more like VC
  terms
• Often preferred stock, rarely debt
• Adding VC-like terms and covenants

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Performance of Angel Group Investors

• ROI is 19.2 percent per year after investors
  opportunity cost is factored in (probably biased
  up by willingness to talk)
• But lots of variance
• 7 percent of investments account for ¾ of all
  returns
• 52 percent of the investments return less than
  the capital put in
• Only about 40 companies founded annually reach
  50 million in sales in 6 years in industries
  that investors target

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What the Best Investors Do Differently

• Are very selective
• Only about 500 U.S. startups hit the 50 million
  sales target so they dont believe projections
• Have high return expectations
• 30 X , Put in 100,000 get out 3 million
• Only 45 of angels have 10X return expectations
• Invest in the same industries as VCs
• Typical angels favor retail and personal services
• IPOs and acquisitions are concentrated in
  industries VCs invest in
• Conduct substantial due diligence
• 25 of angels will invest without seeing a
  business plan
• Only 15 of angels report doing extensive
  research
• More than half of angels get no independent
  references

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What the Best Investors Do Differently

• Are accredited investors
• Fewer SEC limitations
• Can invest as part of a group
• Can invest more money
• Become involved with their portfolio companies
• Bottom third of angels only spend 7 minutes per
  week per venture
• Use appropriate financial instruments
• 40 percent of angel only rounds are common stock,
• 40 percent of funding is debt)
• Avoid overvaluation
• Initial valuation of a business has a curvilinear
  effect on ROI
• Diversify across 10 investments
• Return across investments is worse than return to
  investors with multiple investments
• New investments in place of following on

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Implications for Entrepreneurs

• Be aware of how difficult it is to raise angel
  money
• Understand what angels are looking for
• Understand the angels investment process
• Angel groups are important type of investor
  between individual angels and VCs
• Choose the right type of angel dont choose
  angels who provide nothing more than money
• Recognize that the best angel investors have a
  unique approach to investing

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Questions and Comments

• ????????
• Scott Shane
• Case Western Reserve University
• Scott.shane_at_case.edu
• [phone]