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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Business Plans for International Businesses
Joan Keston Wednesday, March 05, 2008
When creating a business plan for international business, there are some fundementals that have to be followed. Although many of the issues that will affect your business plan may be somewhat difficult to quantify in advance, they must be raised and analyzed and continually assessed as you proceed with the execution of your strategy. Their significance may be the ultimate cause of the success or failure of your international venture.
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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.
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Know Your Buyer
Bill Warner Monday, February 04, 2008
Before you ever approach an angel investor, you absolutely need to understand your business and have done the research and analysis necessary to write a business plan. One of the first questions you will get from any investor is, “who will buy your product or service?” You need to have a crystal clear answer to that question or the investor will conclude that you do not understand your business.
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The Ten Keys to a Successful Business Plan
Bill Warner Thursday, January 17, 2008
If you were to ask twenty experienced business people what it takes to have a successful business plan, chances are you will get many of these answers and more. Here is my view of what a successful business plan is made of.
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Who Are Your Buyers, and Who Feeds Them
Bill Warner Tuesday, January 15, 2008
Once you have the overall industry landscape figured out, the next step is to go deeper and describe who the buyers, suppliers and distributors are, and what drives them. This is the food chain that some researchers refer to. Start with the buyer; your customer. Within a company, who is the buyer? Is it a CIO? Is it a VP of service? Is it the purchasing manager? Is it the buyer for a retail store? Is it the VP of development? Whoever it is, describe the buyer’s recognition of the problem you solve, the criteria that will be used to determine the purchase, the likely availability of resources to support the purchase, and the decision process that you will be confronted with.
