Angel Investors Deal With New Economy
Bill Warner Wednesday, October 15, 2008
Well, who isn’t angry about this economic mess we find ourselves in? Angel investors are positively angry. That is, they are just as angry as anyone else, but they also see positive action that is needed to pull through this.
I just returned from a three day conference of the Southeast Angels held in Savannah, GA, where 75 angels from 8 states were in attendance, representing 16 of the 25 Angel Capital Association member organizations in the southeast, including North Carolina angels from the Inception Micro Angel Fund, Piedmont Angel Network, Triangle Accredited Capital Forum, and the Wilminton Investor Network.
The conference was the best ever, with greatly increased attendance and some very interesting investment deals presented. But, the talk that penetrated every presentation and discussion was about what they are going to do concerning the failures in the financial markets.
Reasons for Anger
A lot of realities have just hit angels very hard, and it isn’t pretty. Most are not new, but have suddenly become very pressing:
- If they are invested in the public markets, they are seeing a tremendous decline in the value of their investments.
- Depending on what they are invested in, their losses could be astronomical especially if they are invested in financial institutions or the real estate market.
- Their own companies are feeling the impact of the slow movement of credit as they try to borrow money for business operations.
- Revenue growth for their portfolio companies is curtailed because customer buying is declining.
- The chances of getting another round of funding, either from angels or venture capital are greatly reduced as sources for these funds tighten up.
- Any portfolio company that is not cash flow positive now is in trouble.
The Angel’s Response
Overall, most angels are focusing on the fundamentals by instructing their companies to pay attention to what they can control. They are getting back to basics on sales generation, cost management, expense control, wise capital expenditures and reducing debt, as they batten down the hatches for the rough times ahead. Here’s what is going on:
- Angels are insisting that their companies have a realistic view of sales generation and revising their revenue, cost and expense forecasts accordingly. In other words, it’s now critical to be really real.
- If one of their portfolio companies has a chance to close an investment round now, they should do it without delay, even though valuations will probably be lower. The opportunity may be short lived.
- A portfolio company that is not cash flow positive now and hasn’t figured out how to make it so very quickly may face a rapid shut down. The likelihood of getting another chance to achieve positive cash flow is slim.
- They realize that venture capital is going to get squeezed by their limited partners and new funds are going to be tougher to find, and subsequent rounds, if any, will be smaller. That means they are going to have to hold more in reserve to provide further financing of the part of their portfolio that has a chance of surviving.
- The capital calls that are made to fuel additional investments are going to feel resistance as angel members have less money to invest.
- Valuations will be dampened and M&A transactions will be tougher to find. Angels want to see more aggressive strategies for exits and they will be willing to take a lower return to cash out earlier.
- Getting them interested in a new start-up investment is going to be extremely difficult. Entrepreneurs will have to really focus on putting together businesses that move rapidly to profitability and positive cash flow by showing how customer sales will occur reliably and that cost and expense infrastructures are appropriate.
- Angels will become much more prescriptive about financial management by digging into every aspect of marketing and sales plans, development operations, support infrastructures, capital expenditures and employee salaries. They are going to pay a lot of attention to how their money is spent.
- As occurred early this decade with VC’s, angels may move to more mature companies that represent lower risks. This will challenge entrepreneurs to form businesses that can rapidly reach profitability and positive cash flow.
- Angel groups will engage in increased syndication in order to aggregate enough money to finance new companies and to further share in the risk of these investments.
- Individual angels that are not experienced and are not members of an angel organization will get weeded out as their confidence gets shaken by the failure of their current investments.
As one of our most seasoned angel investors, Horace Stimson, recently told me, “I am always looking for the silver lining when times are tough. Capital does need to be put to work at some point and in productive ways.” Horace, like many angel investors, see opportunities for great deals at low prices as the demand for capital continues to be strong. Horace also sees a movement of private angels to joining angel organizations where they get the opportunity to share risk, learn from the judgment of others and diversify their investments. The Inception Micro Angel Fund and the Triangle Accredited Capital Forum have been growing recently as more and more angels take the opportunity to join angel groups.
As we have done over and over again, we will pull through this and respond to the new economic realities. After all, we are dealing with the beginnings of new businesses that fuel the majority of our economy.
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Angel Investors Are Feeling The Crunch
Bill Warner Sunday, October 12, 2008
Private angel investors as well as organized angel investor networks and funds are already feeling the impacts of the economic downturn that has just hit us. The average angel investor is well over 50 years old and is getting ready for retirement or is already retired. Their portfolio of investments is financing their lifestyle. With the volatility in the public markets, some are seeing their net worth and their cash flow from investments drop by 30% to 40%, and they haven’t seen the bottom yet.
The Impacts to Angel Investors
Angels are getting hit in many ways. Whether it is an impact to personal wealth and cash flow, ability to borrow money, downturn of business for their own companies, or ability to find new angel investor money for additional investment, the picture isn’t pretty.
- If they are invested in the public markets, they are seeing a tremendous decline in the value of their investments.
- Depending on what they are invested in, their losses could be astronomical especially if they are invested in financial institutions or the real estate market.
- Their own companies are feeling the impact of the slow movement of credit as they try to borrow money for business operations.
This all adds up to a need to conserve cash and reprioritize their investments to lower risk opportunities.
- Depending on their investment strategies, they may decide to sell the securities that have been irreparably harmed.
- They may conclude that the depression in the market is not over and that we are going to fall deeper into depression, and therefore put their money into very low risk investments.
- They may actually increase investments in areas that are fundamentally sound, getting great deals in this depressed market.
No matter how you look at it, their personal portfolio is in turmoil and is undergoing some massive reengineering.
The Impacts to Angel Investment
Like the VC’s, angels are encouraging their portfolio companies to conserve cash by getting even more focused on their core businesses and driving profitable revenue.
- If the company can make a deal for additional angel investment now, take it, no matter what the valuation. Angels realize that any portfolio company that is not already cash flow positive is in dire trouble. Raising money later is going to be very hard.
- They want to see more aggressive strategies for exits as they will be willing to take a lower return to cash out earlier. Entrepreneurs will have to focus on creating earlier exit opportunities and creating greater shareholder value faster.
- Many will become much more selective and even pull back on making any further investments until the economy stabilizes and they find out exactly where they stand, holding in reserve some funds to protect their current company investments.
- Getting them interested in a new investment in a start-up is going to be extremely difficult. Entrepreneurs will have to really focus on putting together their business plans to show not only an attractive opportunity but a substantial return more rapidly than ever before.
- As occurred early this decade with VC’s, angels may move to more mature companies that represent lower risks. This will challenge entrepreneurs to form businesses that can reach profitability and positive cash flow earlier.
Angels are angry right now. Well, actually, who isn’t angry? I wish our presidential candidates were angrier though. We all have been let down by every agency that is supposed to protect us as well as businesses who lost all common sense. In less than ten years, we burst another bubble. We need a new administration and congress that will provide appropriate oversight and make the changes necessary to continue a free market economy without government influence for purposes of social engineering.
As we have done over and over again, we will pull through this and respond to the new economic realities. After all, we are dealing with the beginnings of new businesses that fuel the majority of our economy.
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Angel Investors and Entrepreneurs - Living a Bad Dream
Bill Warner Monday, October 06, 2008
Watching the economic news unfold over the last week was like living a bad dream. Like most dreams, it was a slow moving series of events that brought us closer and closer to economic disaster as the flow of credit became more and more constipated.
Financial institutions are failing, including our own Wachovia Bank, coming off the failures of Lehmann Brothers, Fannie Mae, Freddie Mac and others. The administration put guns to our heads telling taxpayers that they had to pay $700B or else the world as we know it would end. Congress denied all accountability and served up some more pork to fix the problem, moving us closer to the abyss of socialism. McCain gave a head fake of leadership, while Obama again ducked and weaved his way to looking like the almighty savior with a few good speeches.
So, there in that bad dream stand angel investors, whose portfolios of investments are being crushed by the resulting market downturn. But, the dream is not over. We still have not gotten a complete awakening of what is going on and what else is going to drop on our heads. What does this mean for angel investors and the entrepreneurs that need them?
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Angel Investing Brought To Earth
Bill Warner Sunday, October 05, 2008
A standing room only crowd participated in a recent Angel Connection Event where angel investors, entrepreneurs and other business professionals gathered to learn what angel investing is all about as well as to meet new business associates.
Co-sponsored by WRAL Local Tech Wire and the Triangle Accredited Capital Forum, this is the first Angel Connection event.
“We are thrilled with the interest shown in last night’s event and the exciting information provided about the world of angel investing,” said Rick Smith, General Manager and Editor of WRAL Local Tech Wire.
“This event more than exceeded our expectations. We all got the opportunity to get some valuable information about angel investing that we don’t normally see,” said Bill Warner, Chairman of the Triangle Accredited Capital Forum.
Featured speaker
This inaugural event featured Catherine Mott, CEO and founder of BlueTree Capital Group and BlueTree Allied Angels of Pittsburg, PA, and board member of the Angel Capital Association.
Catherine delivered a comprehensive perspective of the angel investing industry, highlighting some very important trends:
- Of the 500,000 start-up companies in the US each year, 40% will be financed by friends and family, 10% by angel organizations and less than 1% by venture capital firms.
- Formal angel investor organizations are rapidly growing from nearly 100 in 1999 to over 250 today, 165 of them are members of the Angel Capital Association, representing over 6,800 angels, an average of over 40 angels per organization.
- However, it is estimated that there are between 200,000 to 500,000 active angels throughout the US who have invested over $26B in 2007, growing from $15B in 2002.
- Angel organizations bring much more power and understanding to the investing process via their pooled deal flow, business experience, industry knowledge, due diligence and investment strength.
- The average amount invested per round by each investor group has increased 10% to $266K in 2007, the vast majority of which is going into seed or early stage companies.
- Medical devices and software lead the way as the most popular industry for angels, followed closely by business products and services, industrial/energy, IT services and biotechnology.
- Angel organizations are quite territorial, wanting to invest locally or regionally. However, with the growth of syndication between angel organizations, their reach is widening.
Profile of an angel
Catherine gave a quantitative profile of what a typical angel is. So when you are searching for angels, here is what they look like:
- Nine years of investing experience
- Investing in 10 companies
- Has had 2 exits
- 14.5 years of experience as an entrepreneur
- Has founded 2.7 ventures
- 57 years old
- 10% percent of wealth in angel investing
- Has a master’s degree
“Survey says”
Catherine shared the results of a recent survey by the Kauffman Foundation that sheds some light on how angel investing is performing:
- Overall, angels are achieving a 2.6X return on their investment over a 3.5 year period for an IRR of 27%.
- Over 50% of angel investments have less than a 1X return on investment, with 35% being dead losses.
- 34% of their investments have a 1 to 5X return, while the remainder is greater than 5X.
- Spending considerable time in due diligence directly correlates to investment success. Low due diligence time has led to a 1.1X return in 3.4 years, while high due diligence time has led to a 5.9X return in 4.1 years.
- Having angels with relevant industry experience also correlates to investment success, indicated by 1.3X returns in 3.6 years with no industry experience and 3.7X returns in 4.0 years with considerable industry experience.
- Angel participation as advisors and board members as well as ongoing operational and financial monitoring helps increase the chances of success. Those that were involved 1 to 2 times per year achieved 1.3X returns in 3.6 years, while those involved 1 to 2 times per month achieved 3.7X returns in 4.0 years.
- Interestingly enough, those investments that did not require a follow-on investment from the same angel organization got better returns than those that did; 3.6X returns versus 1.4X returns respectively.
Future trends
Catherine predicted that the world of angels is going to have more important changes in the future:
- There will be a rapid increase in university-connected angel groups
- Green/clean-tech company investments are emerging rapidly
- Women angel groups will be forming
- Co-investment regionally, US-wide and cross-border will increase
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Investor Presentations - The Short Story
Bill Warner Sunday, April 06, 2008
I just got through working with a team of business people that are coaching some of the entrepreneurs who are trying to get ready to make their investor presentations at an upcoming venture conference. It reminds me how important it is to be able to get your story across in just ten minutes and in a way that is compelling and complete.
Here’s a reminder of what you have to talk about in the ten minutes. You need to deliver twelve important messages:
- The problem – Explain that you are solving a very important industry problem and why it is a problem that needs to be solved.
- The solution – Show that you have a unique and compelling solution to the problem that nobody else has.
- Market definition – Define the size and growth of the market segment that you will focus on and that you know all about the buyer of your product or service.
- Competition – Summarize your understanding of the competitive landscape and that you know your differentiation and how to beat them all.
- Product and service definition – Describe the most important features of your product or service and the quantifiable benefits they bring to your buyer.
- Barriers to entry – Show how difficult it will be for anyone else to replicate what you are doing and that you are protected from the copying and theft of what you have innovated.
- Value proposition – Summarize the major customer value points that make your product a “must have” for the buyer.
- Marketing plan – Demonstrate that you know how to create market awareness and generate sufficient leads for sales to achieve their sales forecast.
- Sales plan – Explain the sales channels that you will actually use to achieve sales results and make sure that it links to the revenue in the financial forecast.
- Management team – Describe who the top management team and explain why they are the best to lead the company through it’s start up phase.
- Financial forecast – Show the five year forecast of revenue, profit and cash and highlight when you will be profitable and cash flow positive.
- Investor highlights – Describe the financing strategy of the company and how much money you need, along with what the investor gets for the investment, the use of funds and the potential exit strategy.
You can get this across in ten minutes, but your goal is to generate tremendous interest by the investors so that they want to meet with you and learn much more about your company. In other words, this presentation is a tool to “get a meeting” with the investors.
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Southeast Angel Investors Huddle Up
Bill Warner Sunday, March 30, 2008
I had the pleasure of attending a meeting of the Southeast members of the Angel Capital Association in Greensboro last week. We saw some very good start up company presenations and spent some time sharing war stories. More importantly was the clear interest in being able to more quickly and efficiently share investment opportunities amongst the member organizatons. Most angel organizations cannot provide all the financing that is needed for a start up company themselves. They often need to find other investors to share in the deal in order to come up with all of what is needed. This form of syndication is gaining interest and momentum not only in the Southeast, but across the country. There still is a lot to do to work out the details of how this works, but many angel organizations have already engaged others to make simultaneous investments in start ups.
This is good news for entrepreneurs, but a dual edged sword. When an entrepreneur presents to one of the angel organizations in the Southeast, most of the others will know about it very quickly. That means that entrepreneurs have to be well prepared to make their first presentation. The result is that, if it goes well, everyone will know it. If it goes badly, everyone will know it too. The message to entrepreneurs is, “be well prepared before you make your first presentation.”
We saw some very encouraging news about the outlook for angel investing for 2008. It looks like most angel organizations will be able to at least sustain their level of investing in 2007, despite the difficulties that are emerging in the economy. So it is still full speed ahead for entrepreneurs who need angel investors. Contact the Triangle Accredited Capital Forum for guidance.
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Know the Buyer’s Food Chain
Bill Warner Saturday, March 22, 2008
Knowing that you have, or will have, a winning product does not give you time to rest. You have to grease the skids by making your buyers aware that you have a product that solves an important problem that they have. Founded upon your in-depth understanding of your buyers, you need to structure the appropriate marketing campaigns that raise buyer awareness of the product’s value and availability. This can be mind numbing work, but is very necessary in order to not have surprises that could stop your business later. Many hours spent on understanding the distribution channel can save you from a whole lot of costly mistakes later when you are trying to get the revenue for your hard work.
Know How the Buyer Buys
Almost always, it is not obvious how the buyer actually buys. Knowing this is the subject of millions of dollars that some companies spend in order to introduce products to the consumer retail industries. Advertising agencies and research firms get rich figuring this stuff out. The best way, and a lot cheaper, is to ask them yourself. Approach representative examples of your buyers and ask them how they purchase products in your market segment. Answer these questions:
- Who do they buy from
- Where do they learn about new products
- What are the payment requirements
- What incentives are offered
- What are the terms and conditions for the purchase
- Is credit required
- What are the price ranges
- How is the delivered
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How to Find Angel Investors
Bill Warner Wednesday, February 20, 2008
So you have completed your business plan, determined how much money you need, practiced your presentation, and are now ready to approach angel investors to raise the capital needed to launch your business. But, you don’t know any. You have heard about the angel organizations in the area. You have read about the venture capital firms as well. Where do you start looking?
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Know Your Business
Bill Warner Wednesday, February 20, 2008
Once you have given your elevator pitch and you have gained interest from a potential investor, the flood gates have been opened for a barrage of questions that you really have to be prepared to answer. You really have to know your business completely.
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Who are Angel Investors?
Bill Warner Monday, February 04, 2008
Entrepreneurs often talk about needing angel investor money to launch their companies. When asked about their financing plan, they are heard to say, “I am going to raise $500K from angels.” When asked what their strategy for approaching angels is and who they are going to approach, they often go silent and have a blank look on their faces.
