Angel investing 101

transcript

ANGEL INVESTING 101www.NicoleGravagna.com

ngravagna@gmail.com

Share. Tweet as you learn. @NicoleGravagna

START WITH INTRODUCTIONS

WHAT IS ANGEL INVESTING?• An individual investing in a private company

• Usually for equity

• Sometimes alone, sometimes in a group

• Without insisting on a lot of legal control

• Lending help where appropriate

AN ANGEL INVESTOR IS:

• an accredited investor

• not always experienced

• who can live without the cash

• who hopes to get their money back 2x or more in 10 years or fewer

ACCREDITED INVESTOR• Reported $200k last year in

income

• Expects to do the same this year

• Unless married (then $300k)

• OR owns $1M in assets not including the primary home

• OR someone who manages a fund or group of accredited investors

NOT ACCREDITED?

You can still invest.

NON-ACCREDITED INVESTORS

• Friends & family rounds

• Debt is better than equity for you and the company

• Or become a VC!

ANGELS• High wealth individuals

• Not formally trained investors

• Various motivations

• Investing their own money

• Usually with others

• Usually $15k to $100k per angel

• But really it could be any amount

VENTURE CAPITALISTS• Investing other people’s

• Raised a fund that they now deploy

• $100k to $50M investments

• Work alone or syndicate

• Will be active members of the board

HIGH GROWTH

• Generally includes software or other technology

• One to five years of work before anything can be sold

• Requires $500k to $2M to create the product

• Capital generally pays developers and engineers

PHYSICAL PRODUCT

PHYSICAL PRODUCT COMPANY

• Product is a tangible thing

• The invention is unique

• Upfront capital goes to design, patents, and manufacturing

• The normal Angel/VC model isn’t great for this kind of company

ONE ANGEL PORTFOLIOY1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11

Co 1 $15k $0kCo 2 $25k $75kCo 3 $25k $5kCo 4 $35k $0kCo 5 $50k $0kCo 6 $50k $0kCo 7 $50kCo 8 $100k $450kCo 9 $100kCo 10 $50 $0k

PORTFOLIO ANALYSIS

• Invested $500k over 4 years

• At year ten 8 of 10 investments are liquid, 2 are ongoing concerns

• Two investments returned 2x or more

• Five returned nothing

• One returned <1x

• The total portfolio returned $530k + two ongoing concerns

ANOTHER ANGEL PORTFOLIO

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11Co 1 $15k $0kCo 2 $25k $75kCo 3 $25k $5kCo 4 $35k $0kCo 5 $50k $0kCo 6 $50k $800k

Co 7 $50kCo 8 $100k $0k

Co 9 $100kCo 10 $50 $0k

ANOTHER POSSIBILITY

• $500k invested

• $880k returned + two ongoing concerns

YET ANOTHER ANGEL PORTFOLIO

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11Co 1 $15k $0kCo 2 $25k $45kCo 3 $25k $5kCo 4 $35k $0kCo 5 $50k $200k

Co 6 $50k $60k

Co 7 $50kCo 8 $100k $0kCo 9 $100kCo 10 $50 $0k

YET ANOTHER POSSIBILITY

• $500k invested

• $310k returned + two ongoing concerns

FOLLOW ON FUNDINGY1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11

Co 1 $15k $25 $0kCo 2 $25k $45kCo 3 $25k $5kCo 4 $35k $0kCo 5 $50k $125 $500k

Co 6 $50k $60k

Co 7 $50kCo 8 $100k $0kCo 9Co 10

YOUR PORTFOLIO

The key to hedging your odds

ANGEL INVESTING

• Returns in the multiples possible

• Company can benefit from your expertise

• Personal connection to founders

• Personal connection to other investors

• Interesting and educational

Pros Cons• Can’t pull money out until liquidation

• Cash is tied up for years

• High likelihood of loss

• There are tax implications to equity ownership

• Limited control over company decisions

STANDARD ANGEL DEAL

• $15k-$100k per angel

• Total raise = $500k-$2M

• Convertible note

• No board seat

CONVERTIBLE NOTE(aka convertible debt) an early stage investment vehicle

CONVERTIBLE NOTE

• Accepted investment vehicle for early stage companies

• Cheaper transaction because of less legal paperwork

• Puts off the decision of setting a valuation

• Your investment is technically debt (avoids tax implications)

• Conversion to equity occurs when the first equity round takes place

• You get a discount on the purchase price of the equity shares

INVESTOR-FOUNDER RELATIONSHIPThis is a happy fist bump!

THE CATCHfounder and investor should quickly get on the same side

of the table !

except…

INVESTOR COMPETITIONA savvy founder should always try to gather more investors than can fit in the round.

An “oversubscribed” round: good for the founder and limits the power of the investor.

THE CATCH-22

• Oversubscription is good for the investor too!

• Insurance for when someone backs out at capital call

• You want your friends in the round with you

• Validation of a good deal

• Smart investors actually help oversubscribe the round

BECOME A STARTUP EXPERTthis is not corporate business at all

–Steve Blank

“A startup is a company designed to search for a repeatable and scalable business model.”

VETTING DEALSLearn to measure value in early stage companies

FIRST RULESee a lot of deals

SECOND RULE

Talk to other angels about deals

THE REST OF THE RULES

• Founder is coachable & able to attract talent and capital

• The company makes sense

• The company is scalable

• A 10x or higher ROI is possible

• $100M in revenue is possible - soon

FOUNDER COACHABILITY• Founder is the only constant

• Founder must be able to take and manage advice

• The company can pivot at any time

• The market can shift

• The technology can fail

THE PLAN

The founder doesn’t need to have the answers. !!

The founder does need to have a plan to empirically uncover the answers.

A SCALABLE BUSINESS

• The cost of selling the product or service plummets as the number of units sold rises

• Software is inherently scalable

• And other things are too

10X ROI OR HIGHER

• Figure out what wild success looks like using current assumptions.

• If you can’t get 10X ROI under wild success situation, then don’t invest.

• Unless the likelihood of wild success is very high.

THE MAGIC #How long does it take for the business to get to $100M in

revenue?

FUNDAMENTALS

• A company needs to find and serve a paying customer before its going to be a profitable company

• The company must exit for you to get your money back

• Every company has limitations beyond capital—find them. Understand them.

FUNDAMENTALS

THE CUSTOMER

• A good company knows its customer

• serves its customer

• and can get paid by the customer

(The customer always has cash)

USER VS

CUSTOMER The customer doesn’t always

use the product !

and the user doesn’t aways pay (look-a-likes can be confusing)

FALSE PROBLEMSProblem analysis often

uncovers a tree of symptoms leading to the true problem

QUESTION THE

SOLUTIONMany problems are social in nature and cannot be easily solved with a new app or

device.

FUNDAMENTALS

BEGIN WITH THE EXIT

• Equity investors get paid when the company is acquired or goes public.

• You do not get paid when the company brings in a lot of revenue.

• You do not get paid when the next investor invests.

COMPANY LIFE CYCLEAngels join at the larvae stage

FINANCING PLAN

VC Series A

VC Series B $11M

Angel Seed $800k

Bootstrap $200k

Exit: Acquisition

MILESTONE PLAN

Growth and

ramp up sales

Expand into 2o market

Product completion distribution

and sales

Minimum viable

product

Exit: Acquisition

EQUITY CAPITAL

Invest capital only when the raise will get the company to

the next value-increasing milestone.

VALUE-INCREASING MILESTONES

• Own property

• Buy the rest of the monopoly

• Add a house

• Add multiple houses

• Add a hotel

FUNDAMENTALS

FIND THE EDGESAnd use them to make real projections

THE “NOW” EDGE

• With no more business development, how much product can the company sell right now, per year?

• How much will it cost to make and sell exactly that? This is the size of the minimum round.

“WILD SUCCESS” EDGE

• If the company had all the money in the world, what is the next limiting factor?

• Use this to calculate your financials under the circumstance of wild success.

• Use these numbers to determine the max raises.

DUE DILIGENCEHow much is enough?

!Due diligence is your research to determine whether this is a

smart investment.

BE HELPFUL DURING DUE DILIGENCE

Guide the founder

Golden unicorn founders will do it right in spite of having no idea what they are doing. They will still need help.

BE SWIFT ABOUT IT

• Are there any glaring problems? Fraud, bankruptcy, mistakes with previous investors.

• Have you discovered the hard part?

• Do you have all the documents you need to make a decision in 48 hours?

WILD GOOSE INVESTOR CONCERNS

• Dilution - OMG my shares get diluted in second and third rounds!

• Valuation - OMG how is company with no product worth $1M?

• Board seats - OMG I don’t get a seat on the board!

Don’t b

e a PI

4 THINGS THAT CRASH A COMPANY

1. Failing to serve a paying customer by solving a real problem

2. Team infighting

3. Poor capital plan

4. Poor growth management

(In order of when the poor choice is made)

TECHNICAL THINGSDo some reading on this stuff

CAPITALIZATION TABLE

How to make a cap table Ask the VCs version

TERM SHEETS

Plain English Term Sheet National Venture Capital Association Documents

ANGEL TERMINOLOGY• Term sheet - legal document detailing legal terms of the investment agreement

• Cap Table - list of all shareholders and their rights to shares

• Convertible note - temporary investment vehicle that leads to ownership of shares

• Equity round - direct purchase of shares

• IRR (Internal Rate of Return) - Cash returned with respect to the length of time it was in play.

• ROI (Return On Investment) - The amount of money returned after investing

• Exit - Liquidation of assets usually by acquisition or IPO

• Multiple - The number of times your money doubled while invested

ANGEL TERMINOLOGY (PT2)• Due diligence - homework done to understand a deal

• Syndication - pooling capital with other investors

• Broker dealer - a person paid a percentage to connect investors with deals (it’s not recommended to use these people in early stage deals)

• Seed stage - first non-friends and family round generally under $1M

• Spray and pray - invest a little in a lot of companies

• Follow-on - putting more money in the same company in future rounds, often to retain the original percentage ownership

• Anti-dilution - term sheet terms that protect investors in future rounds only when the company is not doing well

ANGEL TERMINOLOGY (PT3)• Lead investor - The investor who acts as point person for the other investors. No need to invest the

most $, or have the most experience.

• Down round - The company is valued lower in this round than the last. Not good.

• Traunched - A $500k investment round might be traunched and collected half now and half in 9 months.

• Valuation - The cash value of the company. Based on assets, not EBITDA in early stage.

• Burn rate - The speed at which the company burns through cash.

• Preferred shares - At liquidation, these shares are paid back first. When the payout is small, this matters a whole lot more.

• Common shares - Founder stock, FFF stock, stock paid to advisors and consultants, paid after preferred.

ANGEL GROUPS• Chattanooga Renaissance Fund - Local angel-backed

• Jump Fund - Local angel-backed, women-focused

• Rockies Venture Club - Come visit Denver!

• Angel List - online (follow famous angels)

• Gathering of Angels - Atlanta (small investments)

• Atlanta Technology Angels

Inside

utside

LEARN MOREwww.NicoleGravagna.com

ngravagna@gmail.com

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Angel investing 101

Small Business & Entrepreneurship