Angel Investing

An Overview

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The angel network in the funding spectrum

2

Friends & Family (“love money”)Personal Savings

Business Angel Investors

Private EquityVenture Capital

IPO

Business Type Funding Required

Seed

Early Stage

Later Stage

Growth

<$100k

$100k-$2m

$2m-$25m

>$25m

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Why this matters …3

Rapid growth start-ups generate the most new jobs in an economy and require the highest amount of equity risk capital.

A 2005 study of 37 countries found that of various sources of funding (debt, private equity, venture capital, angel investor capital), only angel investor capital significantly positively influenced the propensity to be entrepreneurs.

Successful entrepreneurial hubs (Silicon Valley, Boston, New York) all have developed angel investor networks

Incubated start-ups rely heavily on angel networks for financing, contacts and strategy advice

Angel groups Fund new ventures Create jobs

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Angels are organizing globally in groups

4

First group (“Band of Angels”) started in Silicon Valley in 1994

Groups started in Canada and Europe in 1990’s

Rapid growth in 2000’s lead to new groups in many countries

USA Australia/NZ

Canada

30 300 350 20 25

Europe Asia/M-East

Latin America

5

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20

Africa

Why Angel Groups?5

Provide economies of scale and other benefits to : Angel investors

See more deal opportunities with less effort More industry viewpoints to effectively

screen deals More resources for due diligence and deal

negotiation Post-investment support and monitoring

enhances returns Entrepreneurs

One application leveraged to multiple investors

Wider network of contacts can be provided by more investors, as well as coaching and advisory support

Structured process that is quicker turn-around with more follow-on funding potential

Ecosystem impact Angel groups more effective in directing

resources to start-up businesses

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6

Angel Groups

Better deal flow and matching with start-

upsLessons

from experienced investors

Comraderie

Efficient due

diligence

Pooled funds for

larger investmen

ts

Risk sharing

Angel Group Benefits©2017

Source InfoDev 1/2017

Angel Group Ecosystem7 ©2017

The structured activity spectrum of the network

8

Angels

Entrepreneurs

ApplicationsOnline platform accessMarketing/OutreachScreening dealsMeetingsTrainingLeading due diligenceDeal structuring

ApplicationsOnline platform accessMarketing/OutreachAdvisor introductionsBusiness plan trainingPitch CoachingBusiness plan creationTeam development

Passive

ACTIVE

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Key Success Factors for Business Angel Investing

Experienced former entrepreneurs as angel investors

Member of an organized angel group Due diligence prior to investment Investing in sectors in which the angel investor

has experience and insight Portfolio diversification investing Training, mentoring, coaching for new angel

investors Well-functioning entrepreneurial ecosystem Social capital and networks (local and,

increasingly, international) Source : 2011 OECD Study/ACA

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BusinessDocuments

One Page Summary

Pitch

Agreements

Understanding the Angel Investment Process

10

Sourcing/Networking

Business Applications

Initial Deal Screening

Codified Business Plan

Deal Review at Pitch Meeting

Due Diligence

Final Terms Agreed

Closing

Support/Advisory/Monitoring

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BusinessPlan

Using Gust to Drive the Process

Applications online – efficient way to discriminate

Review and comment on likely deals Screening committee Ratings feature on Gust

Set interest level for investing Due diligence Closing process Events/meetings Resources/training

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Product/Technology Concept Barriers/Intellectual Property

Market Size/Growth Competition

Team Deal Terms/Valuation

Ensure a compelling valuation to allow for a return on investment after future funding dilution

(Above ratings system same as on Gust)

Screening Deals : Ranking the Chance of Success

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Angel Investor Valuation Models Ballpark ranges

For Hyper-growth Global : Multiples of Revenue For Usual-growth Local : Multiples of Profit To get high-end of valuation range :

Large end-market (TAM), Patents, Customer orders, Proven profit model, Experienced Team

Stage Usual-growth Local

Hyper-growth Global

Developed concept

$25k - $50k $100k - $500k

Proven prototype $50k - $100k $500k - $2mRevenue (>$10k) $100k - $500k $1m - $3m

Real revenue (>$250k)

$500k - $2m $2m - $5m

If exit, returns to angel

Probable 10X Possible 100X

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Standard term sheet outlining key aspects 3 structures

Equity (usually preferred) Debt (usually convertible into equity) Simplified Agreement for Future Equity (SAFE)

Key terms Valuation (dilution, pre vs post money) Board oversight/advisory Information rights Salaries/bonus/dividends – cash stays in

business Exit vs non-exit (lifestyle limits/carrots and

sticks) Minimum raise/closing

Deals Term Sheets & Agreements14 ©2017

Where start-ups will go if you don’t invest …

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Unique Selling Proposition (USP). Defined in a tweet - what is the need filled or problem solved? Any IP/know-how that cannot be duplicated?

Target market. Specific customer profile with payment options to buy the product/service.

Market size, growth, and share. Look for >$100m niches within markets with double-digit growth and double-digit penetration plan.

Competition. Current vs expected. Current customer alternatives.

Revenue model. Pricing model and revenue streams/waterfall/pipeline.

Sales/Marketing/Distribution. Online vs multi-level distributors, partners, or value-added resellers. International vs local?

Team. Experience, capabilities, location, x-factor. Operations/Production. In-sourced vs Outsourced. Time

to market vs cost. Financial Model. Variable contribution margins,

marketing and sales costs, overhead costs, and support costs. Cash flow projections vs funding.

Due Diligence – what could go right?16 ©2017

Founders spend frugally – couch surfStrategic acquirers have already talked to businessFounders have deep experience of industryReference customers have been signed upFree media coverage has commended businessPatent firm has expressed confidence in IPPassive co-investment by suppliers/customersFounders respond well to advice, adjust plans as needed

Due Diligence – Green Flags17 ©2017

Conducting a pre-mortem (funeral avoidance) If this business was bankrupt in a year, it

most likely would have been caused by … Risk removal = value creation Deal structuring protection mechanisms

Preferred Equity/Debt/Asset claim Management salaries/bonus/distributions Board governance (low-water marks for

cash) Dilution/options risks Non-compete contracts

Due Diligence – what could go wrong?18 ©2017

Founders have no ability to manage cash flowToo much of fundraising round going towards founder salariesFamily members in the leadership team and businessQuestionable ethics of founderLifestyle-business orientation of founderNo company website or e-mail addressesToo many competitors crowding in on marketFunding will not get business to break-even

Due Diligence – Red Flags19 ©2017

Avoiding the paralysis of analysis …20 ©2017

Roles for Business Angels in Investments Pre-close

Human Capital(Experience)

Social Capital(Relationships)

Sourcing & Screening

Market insightsScreening input

ContactsNetworking

Improving Pitch

Business basicsPlan 4 Pitch

Coaching

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Roles for Business Angels in Investments Post-close

Human Capital(Experience)

Social Capital(Relationships)

Business Growth

Strategic insight

Resources Contacts

Governance/Management

Board memberMonitoring

Mentoring

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-

10

20

30

40

50

60

<1X 1X to 5X 5X to 10X 10X to 30X >30X

Exit Multiple

Perc

ent o

f Exi

tsDistribution of Returns by Angel Investment

UK: Overall Multiple: 2.2XHolding Period: 3.6 years

US: Overall Multiple: 2.6XHolding Period: 3.5 years

Approx 22% IRR

Approx 27% IRR

Hold: 3.0 yrs.

Hold: 3.3 yrs.

Hold: 4.6 yrs.Hold: 4.9 yrs.Hold: 6.0+ yrs.

Source : Willamette University 2011

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Why be an Angel?

In recruiting business angels, the Milan-based Italian Angels use the following mantra :

“Financially attractive, professionally

stimulating,

personally fun”CAUTION

HIGH RISK INVOLVED

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Energy + Optimism + Capacity + Execution

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“Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it's the

only thing that ever has.”Margaret Mead