# Presentation: 135704

## PRIVATE EQUITY INVESTINGAN OVERVIEW OF THE FIELDPRESENTATION FOR NIH CONFERENCEBethesda, MD

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## LET’S START WITH THE TWO MOST PROMINENT CATAGORIES:	1.  ANGELS	2.  VENTURE CAPITALISTS

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## WHO ARE THESE ANGELS?FIRST AND FOREMOST, THEY ARE ACCREDITED INVESTORS.....

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## AN ACCREDITED INVESTOR IS A PERSON WHO HAS A NET WORTH OF $1M AND OR AN ANNUAL INCOME IN EXCESS OF $200K FOR THE PREVIOUS 2 YEARS AND THE EXPECTATION OF THE SAME FOR THE NEXT YEAR. 

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## WHO SAYS SO ?....THE FEDERAL GOVERNMENT:SECURITIES AND EXCHANGE COMMISSION

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## Who Are These Angels?

**Wealthy individuals – “accredited investors”**
**“****Been there and done that” entrepreneurs**
** ****Have made several angel investments**
** ****Investing “Mad money”**
**$25K to $250K per investment per angel**
**More than  400,000 active angels**
**Potential 5 million angels**

**Notes:**
(This is about the half-way point in this presentation.)

Angels:
Are “been there, done that” entrepreneurs investing their “mad money” (<10% of net worth – their “go to Vegas” money).  
Generally have 8-12 investments of $25-250K, 95% between $25 and $100K, average $40K (for TCA).
Play a variety of roles in these companies (can’t be chairman of each), from chairman to passive.

## THERE ARE A VARIETY OF WAYS ANGELS CAN AND DO MAKE THEIR INVESTMENTS.....

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## THE INDIVIDUAL OR ....“LONE WOLF INVESTOR”

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## ADVANTAGES FOR THELONE WOLF1.  NIMBLE AND QUICK2.  INDEPENDENT DECISION3.  BIG REWARD...(MAYBE)

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## HOWEVER, THERE ARE A FEW DISADVANTAGES:1. SOLE RESOURCE2. SOLE RISK3. LACK OF TIME4. DUE DILIGENCE EFFORT5. TOO QUICK TO WRITE CHECK

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## ANGEL FORUMS.....THE NEXT LEVEL OF INVOLVEMENT

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## AN ANGEL FORUM IS A LOOSE CONFEDERATION OF INDIVIDUAL ANGEL INVESTORS WHO MAY COME TOGETHER ON A DEAL.

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## A FORUM MAY OFFER SOME ADVANTAGES....

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## THE COMMITTED FUND....ANGELS PUT THEIR MONEY ON THE TABLE...

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## WHY COMMIT ?

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## A COMMITTED FUND OFFERS SOME DISTINCT ADVANTAGES:1.  MORE PORTFOLIO DIVERSITY2.  MORE RESOURCES TO USE3.  BETTER DUE DILIGENCE4.  SPREAD THE RISK !

**Notes:**
During the next 20 minutes, I hope to dispel a few myths in the popular press about early stage investors, describe and compare angel and VC investors and then provide you with a bit of the flavor of the current investing environment in the emerging sector.

## NOW THAT WE ARE AUTHORITIES ON ANGELS...WHO OR WHAT IS A VENTURE CAPITALIST ?

**Notes:**
Here is the first of three myths related to early stage investing that I plan to address:

## Venture Capitalists

**General partners**
**Salaried managers**
**Minimal investment**
**Huge upside**
**FUNDED by Limited partners**
**Corporations, pension funds, **
**	****wealthy individuals**
**Totally passive involvement**
**Over 700 venture capital funds**
**Size:  $20 million to $5 billion**

**Notes:**
I like to use a mutual fund analogy to describe VCs. 
General partners are very bright investor/managers who have minimal “skin in the game” who are motivated by a huge upside, 20-30% of the gains on  investments.

Limited partners are totally passive: pension plans, insurance companies, financial institutions, endowments, foundations, corporations and wealthy individuals.

There are currently about 700 VCs in the US but the number is currently decreasing.  Their size ranges from $20 million to $5 billion and above.

## Sources of Venture Funds

**Source: 2001 data from 2002 NVCA Yearbook, prepared by Venture Economics**

**Notes:**
As was mentioned earlier, there are many sources of funds for venture capitalists.  All these are limited partners.  

Other countries are not so fortunate.  Pension  plans in Canada, for example, are prohibited from investing in venture capital firms.

## A misconception...Venture Capitalists are engaged in starting companies

**Notes:**
Here is the first of three myths related to early stage investing that I plan to address:

## VCs Are Moving Away From     	     Seed/Startup

**441**

**166**

**VCs Are Moving Away From     ****	****     Seed/Startup**

- % of All VC Funds

**Source:  PWC-MoneyTree**

**Notes:**
As you can see, venture capitalists are abandoning seed and early stage companies.

## Entrepreneurs are usually funded from:- Friends and family ( maybe fools) then- Angel investors, then- Venture capitalists, then.......?   

**Notes:**
The popular press would lead you to believe that entrepreneurs start companies with money from friends and family, and then:
  get more money from angels
  secure a VC round of investment
  and, then go public

I would like to provide you with enough facts so we can all dispel this misleading myth.

## HERE ARE SOME  QUICK FACTS:

- <1 in 10 Start-ups obtain angel financing
- <1 in 1000 Start-ups are VC financed
- <1 in 10,000 new companies go public
- <1 in 100 angel-funded companies
-                  go public via IPOs

**Notes:**
Lead Instructor:  Pick a couple that interest you and let the audience read the rest.  My favorites are:

Less than 1 in 10 companies obtain angel funds
Less than 1 in 10 companies angel deals are funded by VCs
Less than 1 in 100 angel-funded companies go public via IPOs

##  Annual Sources of Startup Funding

**VCs  ****(NASVF data)**
**Angel investors**
**     ****(Center for Venture Research)**

**< $3 billion**
-   **(<500 companies)**
** ****~$30 billion**

**Notes:**
  VCs  invest in a tiny number of startup companies.  VCs are really later stage investors.

  State Funds are small in comparison and are also really focused on later stage companies.

## Slide 25

**Notes:**
This slides shows all the M&A activity and all the public offerings in this country in the past four years.  This data is not limited to venture-backed companies and includes some data for the spin-off of divisions of larger companies.  Nonetheless, the data is clear.  Even during the hottest years for IPOs of venture-backed companies, the ratio of M&A exits to IPOs was 20x.  Now the ratio is at least 100:1.  

## Conclusion:Angel investors provide about 90% of the seed and early stage outside equity capital for start up entrepreneurs.  This is a combination of “lone wolves”, forums and committed funds.

**Notes:**
Angel investors represent over 90% of the equity investments in early stage ventures and bring equal value in advisory and mentoring roles.

## Why do angel investors make such risky investments?Here is one reason

**Notes:**
(self explanatory)

## Seed vs Alternative Investments

**Notes:**
Because seed investments are inherently very risky, over time, the ROI of seed investments exceeds all other equity investments.

## Motivation

**Venture Capitalists:  make money**
**Angels**
**Staying involved into “codgerhood”**
**	****    ****(sense of usefulness)**
**Give-back**
**Affection for Entrepreneurs**
**Investment of “mad money”**
**Return on Investment **

**Notes:**
Important:
VCs invest in companies.  ROI is their only concern.

Angels invest in entrepreneurs and have many motivations.  ROI is an important metric.

## Median Pre-Money by Stage-FACTOID

**$101**

**$29**

**$30**

**$44**

**$15**

**$21**

**$7**

**$8**

** **

**$14**

** **

** **

** **

** **

** **

**$2**

**$2**

**$6**

**$0**

**$20**

**$40**

**$60**

**$80**

**$100**

**3Q98**

**1Q99**

**3Q99**

**1Q00**

**3Q00**

**1Q01**

**3Q01**

**Later**

**Rounds**

**Second**

**Round**

**First **
**Round**

**Seed **
**Round**

**Source: PWC MoneyTree**

**Notes:**
This is the good news.  Valuations are down...back to pre-bubble ranges.  It seems to me that valuations in 2003 have dropped even further and a little below those of 2001.  This is good news for angel investors. 

## SO WE HAVE A BASIS IN KNOWLEDGE OF ANGELS AND VENTURE CAPITALISTS...YOU HAVE A FUNDING NEED.....NOW WHAT???????

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## KNOW WHERE TO GO.....ANGEL OR VC ?

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## THE KEY IS TO DO YOUR HOMEWORK !

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## Trends in Venture Investment

**Trends in Venture Investment**

**100**
**  ****80**
**  ****60**
**  ****40**
**  ****20**

**$ Billions**

**Notes:**
You have seen this, of course.  In 2003, many of us expected the level of funding to resume the growth curve extrapolated between 1992 and 1996, however, VC funding has dipped below that line and continues to decrease into the first quarter of 2003.  While we suspect the bottom will be found this year, we have no evidence yet of this. 

Frankly, the VC industry is in trouble and there are no signs of improvement on the horizon.  VCs have lots of money on the sidelines and are making later and later stage investments.  Consequently, VCs are making fewer and fewer early stage investments.  Frankly, most of their investments are in portfolio companies, that is, companies in which they have made earlier investments.

## VCs Are Moving Away From Seed/Startup...REMEMBER THIS SLIDE?

**441**

**166**

**VCs Are Moving Away From Seed/Startup...****REMEMBER THIS SLIDE?**

- % of All VC Funds

**Notes:**
Since seed investments are invariably smaller than later stage investments, VCs gravitated away from seed investments.

## Conclusion:VCs have too much money on the sidelines, which must be  put to work. They cannot afford to spend their time on seed and early stage deals.

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## Capital Availability Gap:  $1-5 million

**Scarce capital – very few deals**
**Wealthy, solo, private investors**
**Boutique VCs - many new, small VCs**
**Unique alliances between angels and VCs**

**Notes:**
There are a few players in the “gap,” funding deals  between $2 and $5 million rounds.  These are:  
  wealthy solo investors
  strategic partners
  boutique VCs (often wise, senior VCs who saw this opportunity early) and have founded smaller seed funds.
  new alliances between angels and VCs

VCs, for years, ignored angel investors.  But, these new smaller boutique seed VCs are partnering with angels.  Angels provide these angels leverage, by serving on Boards or in mentoring roles before these companies are large enough to benefit from the VCs attention.  These VCs usually have great connections to deeper pockets, for later rounds.

## Entrepreneurs:Go Where the Investors Are!

- Investment (one round)

- Number of Investors

**$5 million**

**$10 million**

**Angels**

**VCs**

- GAP

**Notes:**
When entrepreneurs show me with plans calling for $3 million in seed funding, I explain that $3 million is the wrong number....and they need to go back to the drawing board.  Why?  Because the number of investors currently doing $3 million rounds is tiny.  But the number of investors doing $500,000 rounds or even $7 million rounds is much, much larger.   I suggest they redesign their funding schemes to raise less than $1 million in their first round.  If they can meet the milestones attached to the first round of funding, perhaps they will be able to raise additional money.

The funding gap described in the slide is of serious concern to angel investors.  With VCs on the sidelines for early stage investors, we angels must do substantial due diligence to assure deeper pockets are available to fund larger deals, which need several rounds of funding.

## SO IT’S GOING TO BE THE ANGELS IN THE EARLY ROUNDWHAT ARE YOU GOING TO ASK FOR?

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## MOST IMPORTANTLY....HOW ARE YOU GOING TO ASK FOR IT ?

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## THE BASIS WILL BE YOUR BUSINESS PLAN.....MOST IMPORTANTLY- THE SUMMARY AND PITCH !

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## YOU HAVE AN IDEA.....NOW WHAT DO YOU DO?

## 	What constitutes a good business plan ?  a.	Is the Executive Summary clear and concise ? b.	If an outsider read the summary, would they 		understand exactly what your business is all about ?c.	Does the summary create a high level of interest ?d.	Think about being at a cocktail party and having 	someone ask you “what does your business do?”  	Could 	you  answer concisely in 2 minutes or less?

## Summarize the plan: like the jacket cover on a novel, tell the reader in a CLEAR, CONCISE and COMPELLING way, enough about the contents to convince them to read on.Show the need: Explain the problem in search of a solution, the extent of the problem, and the desire in the marketplace for the solution.Describe your solution: Provide a description of your offering, explaining how it meets the market need in a better manner than any of the possible alternatives.

## Establish credibility: describe your enterprise, key personnel, history of success and measurable objectives.Explain your delivery methods: keep in mind that a better mousetrap doesn't guarantee success.  Be prepared to describe planned promotions, sales techniques, channels of distribution and post sales support.Acknowledge barriers to success: Explain the how you will deal with expected or potential market resistance, difficulties of access to the market and competitive reactions to your offering.

## State requirements for long term success: assuming initial market acceptance of your offering, describe your need to handle growth, improving the initial offering and developing new offeringsProvide financial projections: Show expected revenues, expenses, capital requirements, cash flows and balance sheets.Explained financial returns: Explain when and how investors will experience a return on their investment.			LIQUIDITY EVENT !

## 	If you are going to cite reports, studies, statistics, etc for business verification.....cite authoritative studies or market surveys that are directly applicable to the point you are making.

## SO YOU MADE THE PITCH AND SET THE HOOK.....WHAT NOW ?

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## FOLLOW UP WITH THE INVESTORBE PREPARED FOR DUE DILIGENCE	VALUATION	TERM SHEET	DONE!

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## THE REAL DEFINITION OF THE VALUE OF AN EARLY STAGE COMPANY IS:  “That point at which an investor’s fear is in equilibrium with his greed.”

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## THE TERM SHEET IS NOTHING MORE THAN A CLEAR AGREEMENT IN WRITING DEFINING ALL THE TERMS AND RIGHTS OF THE INVESTOR AND THE COMPANY.

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## A TERM SHEET WILL NORMALLY HAVE ANYWHERE FROM 10 TO 21 SECTIONS.EACH SECTION CAN BE WRITTEN IN A WIDE RANGE OF FAVORABILITY TO EITHER THE INVESTOR OR ENTREPRENEUR.

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## REVIEW:WE HAVE COMPARED AND CONTRASTED ANGELS AND VCs.

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## WE HAVE LOOKED AT WHERE EACH GROUP INVESTS AND HOW THEY CAN BE ORGANIZED

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## WE HAVE TAKEN YOU THROUGH THE SCENARIO OF A START UP LOOKING FOR MONEY....WHERE AND HOW.

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## WE HAD A CRASH COURSE IN WHAT A BUSINESS PLAN SHOULD LOOK LIKE AND DO AS IT RELATES TO ASKING FOR FUNDING.

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## ANY QUESTIONS ?

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.

## SOME RESOURCES:1. THE ANGEL INVESTOR’S HANDBOOK 	BY GERALD A. BENJAMIN & JOEL MARGULIS2. TERM SHEETS AND VALUATIONS	BY ALEX WILMERDING3.  WWW.ASPATORE.COM4.  WWW.INCEPTIONMICROANGELFUND.COM

**Notes:**
The average investment made by 
VCs increased dramatically, creating a huge 
gap between the average VC investment size and 
the average angel investment size.