# Presentation: 705409

## Wayne Greenberg
wayne@welldog.com
307-721-8875

- wayne@welldog.com
- 307-721-8875

- “Fools rush in where angels fear to tread”

**Angel Investing**

**Senator Enzi’s Inventors Conference**
**April 20, 2006**** **

## What Are Angel Investors?

- Term originated with funding of Broadway plays in the early 1900’s (getting productions “off the ground”)
- Generally: High net worth individuals who invest in early stage entrepreneurial companies
- Tend to be former entrepreneurs themselves
- Typically come in between 3F’s and VC’s
- Investments between $10k and $500k
- Tend to invest in business areas they know
- Invest mostly locally
- Some organized into groups (“networks”) but not professional money managers

## Angel Investor Prototype

- 47 years old, annual income around $100k
- Net worth of $750k, college educated
- Invests $37,000 per venture
- Is or has been self employed
- 7 of 10 investments w/in 50 miles of “home”
- 9 of 10 also provide loans or loan guarantees in addition to equity investment
- 9 of 10 investments go to companies with <20 employees
- Bases many decisions on referrals and who else is in

## Angel Investing2004 Statistics

- 225,000 active angels in U.S.; over 200 angel groups active
- $24B invested in 2004 (vs. $22B for VC’s)
- Average invested per company - $469,000
- 30x the _number_ of companies than VC’s
- Angels fund 60% of all TECH companies seeking < $1M
- 40-50% of investments result in losses

- Source: Center for Venture Research

## What Motivates Angels

- ROI
- Home Runs
- Grand Slam Home Run
- $100k in Amazon = $26M at IPO
- Give back
- Stay involved
- Want to contribute their personal skills and contacts
- Shopping for new gig

## Finding Angels

- Degrees of separation
- Your school, church, neighborhood
- Other business owners
- Your banker, lawyer and accountant
- Your family and friends
- Network, network and more networking
- Organized angel groups – ignore 50 mile rule
- Angels beget more angels

## Angel Groups

- Formed to share risk, information, leads, due diligence and contract negotiation
- Most are very informal; some have actual “funds” managed by the group
- About 1 in 5 deals that passes initial group screen gets funded
- Mostly regional but some specialties like womenangels.net
- CTEK Angels (_[www.ctek.biz](http://www.ctek.biz/)_) largest in front range

## What Should You Ask/Do

- What is their investing experience?
- Talk to one of their investment references.
- What do they know about your industry?
- What contacts do they have for:
- Sales?
- Alliances?
- Channels?
- Can they bring other investors in?
- Will they want to be involved? What relationship will they want? Will they be TOO busy for you to touch when needed?
- How is the chemistry between you and the angel?
- Spend time getting to know the angel.

## Angels vs. Venture Capitalists

- Earlier stage companies
- Faster decision process
- More geographically diverse
- Less due diligence
- More likely to provide hands on expertise
- Prefer smaller investments
- Less dilution
- Easier to stage phases and valuation increases
- Far easier on terms
- Follow on investments may not be there

## Angel Deals

- Can be as sophisticated as VC’s
- Or not...
- Many do not want to be involved but all want to be informed
- Since the bust many angels are gun shy and want more complete legal documentation and protections
- Advent of Sarbanes and other rules also make for more caution

## Pitfalls

- Unaccredited investors
- Terms that inhibit subsequent fundings
- Devils
- Shoppers
- Control freaks
- Panic’ers
- Invisible Men
- Lack of follow on capability

## For Angel Investors, It’s Primarily About Measuring and Managing Risk

- All businesses share similar risk factors
- Minimizing each or identifying the one(s) most problematic is key
- People Risk
- Market Risk
- Product Risk
- Capital Risk

## What’s an Angel to Do?

- DUE DILIGENCE

## What is Due Diligence?

- Generally: an investigation into the financial and commercial activities of a business in connection with a proposed acquisition or disposal of an interest in that business. The due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information.
- Legally: a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depending on the relative facts of the special case. (*Black’s Law Dictionary*)

## Why Due Diligence Is So Important

- Refines the price/value
- Identify potential "deal killer" defects in the target
- Mitigates legal (and other) risks
- Verification that the transaction complies with investment criteria
- Identification of synergies w/in investor group
- Ensures that post-investment plans will have best chance for success

## 

“[A] lack of due diligence is 
by far the greatest regret 
angel investors have.”

-Angel Investing: Matching Start-Up Funds With Start-Up 
Companies - The Guide For Entrepreneurs, 
Individual Investors, And Venture Capitalists

- “[A] lack of due diligence is
- by far the greatest regret
- angel investors have.”
*-Angel Investing: Matching Start-Up Funds With Start-Up *
*Companies - The Guide For Entrepreneurs, *
*Individual Investors, And Venture Capitalists*

## Trying to find the Gazelles...

## Areas of Interest to Angel Investors

## Categories for Due Diligence 

- Management
- Product
- Market
- Competition

- Capital
- Relationships
- Return
- Legal

## Management Is this management team able to grow their venture rapidly and successfully? 

- Have they done “it” before?
- Do they have industry knowledge and experience?
- Do they have the necessary key positions filled?
- Have they identified their own weaknesses and have a plan to fill those voids?
- Are there sufficient incentives in place for key employees?
- Are the principals trustworthy?
- Have they begun to build solid advisory/legal teams?

## Product

- Is the product/service unique and fully developed?
- Does it create compelling benefits for the target customers?
- Can the team articulate the value proposition clearly and consistently?
- If it is not fully developed, does management understand the time and dollars required to complete development?
- What intellectual property protection exists?

## Market, Marketing (and Sales)

- How large is the market?
- Is it large enough to support rapid growth and attractive margins?
- Do they have credible and systematic market research?
- What is the basic value proposition and can it be easily and consistently articulated?
- Does management's marketing plan make sense?
- How will the product reach the market? Via what channels? What pipeline exists?
- Is there a sales culture in the company?
- Are there existing customers the investor can interview?**  **

## Competition

- What are the barriers to entry by competitors?
- Who are the competitors and what strengths do they possess?
- Are there major players who could become competitors?
- Has the company effectively mapped their own capabilities against those of their competitors?
- How will the venture gain and defend its target market position?

## Relationships

- Who are the vendors and what are the risks associated with key supplies or raw materials?
- Have/can those risks be mitigated?
- Are there strategic partnership agreements with other players that are beneficial/necessary to the venture?
- Are any in place?
- Have any been identified?
- Can the vendors be contacted?
- Who are the company’s advisors and mentors?

## Capital

- How much investment capital is needed?
- In how many rounds?
- What does this round buy in terms of increased value
- How will it be deployed?
- Does the cash flow analysis demonstrate this need?
- Are there legitimate Plans B and C?

## Return

- Is the potential return on this investment sufficiently attractive in relation to the risk?
- Is there a clear exit strategy for the investors/company?
- Does the time horizon fit with the client’s needs/desires?
- Does the management team clearly understand the key business elements that must be managed for the venture to be successful?

## Legal

- Review as much as possible:
- Contracts – contactors, vendors, suppliers, customers, employees, SLA’s
- Capital Structure
- Corporate documents – articles, by laws, etc.
- IP – patents, copyrights, trademarks
- License agreements
- Leases
- Litigation or threats of litigation
- Employee policies
- Environmental review

## Resources

## Books

## Books AngelsRead

## Internet Resources

- http://www.inc.com/articles/2001/09/23461.html

## Wayne Greenberg
wayne@welldog.com 

- _[wayne@welldog.com](mailto:wayne@welldog.com)__ _