Angel Investing Talk 4-10-08

David Rose from NY Angels and Angelsoft spoke tonight at the 92nd Street Y’s Tribeca location on Hudson Street on Angel investing. About 225 people in attendance.

Key ideas: 600K companies start every year. Only 50k are funded by angels. Rest are funded by the founders, or by friends/family.

VC: Professional investors.
Angels: Rich-ish people investing own money and their mentoring time for a good economic and personal returns. – Early Stage Deals.
Profile of Angels – 57 yrs old, masters degree, 15 year entreprenur, 2.7 ventures founded. Has to be an accredited investor (1MM in assets,or 200k/yr income for 2 years or more). Invest for 9 years, in avg of 10 companies, have had 2 exits/closures, and 10% of their wealth is in angel investments.

Startup food chain is: You! first. You fund your own business. But, if you’re at a University or can create an app, you can go for an SBIR/STTR grant – phase I is up to 100k, phase II is up to 700k. Or, Bootstraping – get your own contracts/sales, and start up yourself.

Banks don’t like to invest – they rent money.

When you sell shares of your company, your first stage is usually sold to friends and family. This is a first test – if you believe you have a business that can scale, if you can’t convince friends or family to invest, there’s probably a problem.
Next stage – Angels – 25k – 250k.
In the middle -the gap – between 250k and 2MM. – Angel Groups – group of angels who share deal flow, pool capital, shared expenses (via dues), variety of experience, standardized terms, and lets them be smarter investors and enjoy social experience.

Later on stages – Venture Capital Firms, 200k and up.

Over time, there have developed over 300 groups. Typical groups do 7.3 deals, 4.5 are new, rest are follow-on, 1.9 mm (NY angels did 5-6MM), do aprox 250MM per round, on average. Typical angels are investing around 33K. NY Angels do 25k minimum per investment.

VCs invest in less than 1% of deals. Angels, about the same.

NY Angels get 30-40 plans/month. What do they look for?

• Great Entrepreneurs – integrity, passion, skills, expertise in the domain, business management skill, leadership, commitment, vision, ability to listen and be coachable
• Scalable business model – something that will get big, fast. Which is why web businesses can get funded.
• Unfair advantage – something special that’s important to the angels , ex patents
• External Validation – ex. sales, beta tests with known companies, great advisors,
• Low investment required –
• Reasonable Valuation – in case of angels, that often has to be low valuation – 1MM to 2-3MM

Secret economics of Angels –

1. $1MM for angel investment from a person’s portfolio. Must diversity portfolio so
2. Distribute it across 10 deals
3. 1.25(to the 6th) = 3.8x ROI – it’s as risky as it gets, wants 25% annualized return, this is a long term hold 5-7 years (6 yrs).
4. However, not every investment returns that amount.

• 5 return 0. 0
• 2 return 1x. 0.2 return
• 2=3x return. 0.6 return
• 3.8-.8 – last deal has to return 3x money. You have to make 30x to help the angel make their return.

So, if your deal isn’t in the position of returning 30x, they won’t invest.

How do you find an angel? Network and tell everyone. Get introductions. Lawyers, accountants, etc. LinkedIn could be good for it.

Angel groups have two parts of a process.
Part 1.

1. Have a detailed business plan. They may not read the whole plan, but you must know the answers to the questions they’ll ask
2. Research the groups to find a good fit.

Application to the group – including a video.
You get a one pager back, and gives to the angels, all the salient features of your business.

Angels get this – and try to figure out which are appropriate for them.

Part 2 – if your submission is accepted, (30 submit, 15 go forward)

1. You’ll meet a screening committee – 3 deals per month are recommended forward to present
2. You’re coached by angels to improve your presentation
3. You’re then able to present to whole group
4. Exec committee meets – once they find good company – will present to other groups in a network
5. Attend a Due Dilligence meeting (2 hours) – meeting with those who are interested, go through financials, meet with mgmt team
6. Negotiate terms sheet

From the angels’ point of view – showing dashboard that’s the backend for over 400 angel groups.
Your submission creates a secure deal room, where angels can collaborate, links to your documents, your video, your one line pitch and your summary, your referrals. System also tracks the updates, the notes, etc.
This also lets other angels see who’s investing and their commitment.

For entrepreneurs, your one upload can be shared with all angels via “Open deals.”

UPDATE: Apparently the final few lines of what I wrote last night didn’t post – I had some trouble with the WIFI (Free wifi appreciated, 92nd St Y, but it was having some issues).

So, I thought David did an excellent job laying out the Angel landscape and helping entrepreneurs see it both from their side and from the Angel’s side. The networking both before and after the event was pretty high quality. I spent some time with Hank Williams and Jason Olim, both of whom will be on my panel at NYSIA this coming Monday the 14th. Also got a chance to catch up with Franklin Madison from ITAC and Sanford Dickert. I also caught up briefly with Karen Kline from Softbank, who always has something going on.