Date post: | 01-Nov-2014 |
Category: |
Documents |
Upload: | ed-chalfin |
View: | 781 times |
Download: | 0 times |
Angel Investing Lessons from the Trenches
Ed Chalfin CEO/Founder – MIE Labs, Inc.
9250 Bendix Road North Columbia, MD 21042
410-440-2860 [email protected]
Background
• BSEE - Penn State University 1981
• MAS-Management – Johns Hopkins Univ 1990
• Analog IC Design Engineer >30 years
• Founded Integrated Circuit Designs (ICD) 1995
• ICD acquired by Texas Instruments 2007
• Joined Baltimore Angels 2010
• Left TI to found MIE Labs 2012
• Affiliate of MCE and volunteer mentor
11/12/2012 Ed Chalfin - [email protected]
2
Highlights
• What is Angel Investing? • My Experiences with Angel Investing • Why aren’t Angels investing in my startup? • What do you Need to Know About Angels? • What are Angels Looking for in a Pitch? • Some Mistakes Entrepreneurs Make • Who are the Angels and Where do you Find
Them? • Pitching the Baltimore Angels – How Does it
Work?
11/12/2012 Ed Chalfin - [email protected]
3
And Now for Something Completely
Different… • Unlike others who have presented in the Speaker
Series, I am NOT a true ‘expert’ on my topic
• I am a novice – Angel investor only since 2010
• What I have learned I have learned mostly the hard way ($$) by doing
• Hope that others can gain from my experience
• This is an open discussion - please feel free to interrupt at any time
11/12/2012 Ed Chalfin - [email protected]
4
What is Angel Investing?
• “An angel investor or angel is an affluent individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity” - Wikipedia
• Angels generally concentrate on early stage (seed stage) investments
• Unlike VC’s, Angels invest their own money
• ‘Smart money’ vs. ‘Dumb money’
11/12/2012 Ed Chalfin - [email protected]
5
Why Did I Get Into Angel Investing?
• Working at large company made me miss the entrepreneurial world
• Have sufficient discretionary funds and prerequisite ‘Accredited Investor’ status
• Diversify my investments • Looking for a way to leverage my experience/mentor
others • Wanted to get more involved with and support the
local tech/entrepreneurial community • Interested in learning something new (3 years ago I
knew literally nothing on this subject)
11/12/2012 Ed Chalfin - [email protected]
6
Lessons Learned – Some Reasons Why
Not To Get Into Angel Investing • Get rich quick – IRR of 25-30% are possible but
take time and effort
• Be intimately involved in day-to-day operation of a startup (without all the hours of course)
• Have a low risk tolerance
• Want to sell services to startups
• Not really serious about it (unless you have tons of cash and are simply doing it for fun)
11/12/2012 Ed Chalfin - [email protected]
7
Some Things Haven’t Gone the Way I
Expected • Level of involvement – reporting
• Investment group dynamics (‘herding cats’)
• Emergence of Angel List as a platform
• 500 Startups/Super Angels
• Unrealistic expectations of startups/culture
• Need for an investor to have a focus/brand
• Need to think outside the box of my own perceptions
• BA group slowdown in 2011
11/12/2012 Ed Chalfin - [email protected]
8
You Shouldn’t Seek Angel Investment
Because… • You think it’s the only way to finance your
startup
• You want to pay yourself a huge salary while starting your own company
• You need working capital for a stable business
• Everyone is doing it (I didn’t)
11/12/2012 Ed Chalfin - [email protected]
9
Why Aren’t Angels Lining Up to Invest
in my Startup? • Not all startups/businesses are suitable
candidates for angel funding
▫ By its nature, angel investing is a homerun hitters game, so only capital efficient, scalable startups with a clear path to exit will be interesting to an angel
▫ May be too early or too late
• Not being a candidate for angel funding does not mean you don’t have a good business
11/12/2012 Ed Chalfin - [email protected]
10
The Reality – What is the Angel
Investor Faces
11/12/2012 Ed Chalfin - [email protected]
11
Source: Jeff Miller
Monte Carlo Simulation of Angel
Returns
11/12/2012 Ed Chalfin - [email protected]
12
Source: Jeff Miller
Angel Investing vs. Crowdfunding
• Currently you need to be an ‘Accredited Investor’ to be an angel >$1M net worth or >$200K/($300K with spouse) annual income
• Purpose is to validate that the investor ‘knows what they are doing’ and can afford to lose their investment
• My concerns with crowdfunding: ▫ Risk tolerance of ‘non-accredited’ investors ▫ Logistics of having huge number of small investors
on the cap table
11/12/2012 Ed Chalfin - [email protected]
13
So What Do You Need to Know About
Angels? • They see literally hundreds of pitches • They bet on the jockey (team) more than the horse
(idea) • They want to see good ‘coachability’ • They want to see ‘skin in the game’ • Traction (users and/or revenues) is critical • Generally focus on startups in verticals in which
they have significant knowledge/experience • Herd mentality (another form of traction) • You will need to pitch many investors/groups • They look for scalability and viable EXIT strategy
11/12/2012 Ed Chalfin - [email protected]
14
Exits are the Key
“Until you have an exit, Angel investing is really just a charitable contribution” – JH
• There is generally no real ROI without an exit
• Possible exits:
▫ Acquisition/acqui-hire
▫ Cash out on subsequent VC round
▫ IPO
▫ Business failure
11/12/2012 Ed Chalfin - [email protected]
15
What are Angels Looking For in a Pitch?
In a Nutshell… @davemcclure pro tip: first 30 seconds --
CUSTOMERS HAVE PROBLEM X, WHICH WE SOLVE BY DOING Y AND WE MAKE $Z. please practice. #w2pitch
11/12/2012 Ed Chalfin - [email protected]
16
Some Mistakes Entrepreneurs Make
• Pitch too soon - little traction, team incomplete
• Pitch too late – company in trouble
• Not enough skin in the game
• Not being coachable
• Valuation too high/one sided terms
• Don’t get to know investors before pitching
• Don’t explain what they will use the money for
• Don’t fully explore other financing options
• Not scalable, i.e. ‘lifestyle business’
11/12/2012 Ed Chalfin - [email protected]
18
You Must Understand Angel Investing is
a Homerun Hitters Game • Because no one is “Ted Williams” in this game • Majority of investments fail to return • The few winners must be 10-20X to make up for
all the losers • No one knows which ones will win and lose, so
they all MUST look like winners • Investors need to have ‘dry powder’ available for
follow-on investment in the winners • Startup must be SCALABLE and have a clear
EXIT strategy to be attractive to Angels
11/12/2012 Ed Chalfin - [email protected]
19
Who are the Angel Investors?
• Cashed-out entrepreneurs
• Wealthy individuals looking for diversification
• VC (Super Angels)
• Individuals and groups
• No matter how much money an individual has, if they are too (i.e. normally) risk averse they will not be an Angel
11/12/2012 Ed Chalfin - [email protected]
20
Where do you Find Angels?
• Network, network, network
• Local Angel groups
• Pitch events such as Distilled Intelligence
• Demo days
• Meetups like Baltimore Tech Breakfast
• AngelList
11/12/2012 Ed Chalfin - [email protected]
21
Some Angel Groups in the Local Area
• Baltimore Angels
• Dingman Angels
• Blu Ventures
• Active Angels
• NextGen Angels
• K Street Capital
11/12/2012 Ed Chalfin - [email protected]
22
Do Your Research
• Angels/groups tend to specialize in certain sectors
▫ IT, Biotech, Mobile, etc.
▫ B2B, B2C
• Research and get to know members of the group
• Look at deals that they have invested in to get a sense of their comfort zone
• Use LinkedIn, AngelList, etc.
• Most Angels I know are active in the community
11/12/2012 Ed Chalfin - [email protected]
23
About the Baltimore Angels
• Founded in 2009 by Dave Troy and a few others • Became somewhat dormant by mid-2011 as Dave
was heads down on 410 Labs • Dave assigned Greg Cangialosi as Managing
Director at end of 2011 • Dealflow, discipline and professionalism all have
improved in 2012 • Currently 45 members • 13 deals closed for $1.145M, 8 deals for $780K in
2012 alone • All portfolio companies are still alive, no exits as yet
11/12/2012 Ed Chalfin - [email protected]
26
Introduce Yourself!
• Don’t wait until you are ready to pitch to approach investors
• Most if not all angels are mentors as well
• Angels want to improve their dealflow and so will be happy to have a strong ‘bench’
• It is a huge advantage to pitch to a group where you already have had significant exposure and feedback
11/12/2012 Ed Chalfin - [email protected]
30
Pitching the Baltimore Angels
• Network with BA members and seek their advice as to when the timing is right
• In BA case, early (seed) stage tech startups with a launched product and some demonstrated traction are in the ‘sweet spot’
• Submit profile through BA website or Gust page
• Best results if a member is listed as referrer
11/12/2012 Ed Chalfin - [email protected]
31
Going Through the Process
• The BA Prescreen Committee reviews and rates submitted deals
• Each month the top 3 deals are invited to a pitch meeting, which occurs the 3rd Tuesday of the month
• Companies that are not deemed a good fit for the group are notified
• Some may be held over to a subsequent meeting
11/12/2012 Ed Chalfin - [email protected]
32
The Pitch Meeting
• Pitch meeting starts with networking, followed by private members-only meeting, followed by pitches
• Following pitches, a short members-only review session is held
• Deals with interest from the group are assigned a Deal Lead – no Deal Lead, no deal
• Feedback/networking continues • Valuable mentoring is often offered to startups
that are declined investment
11/12/2012 Ed Chalfin - [email protected]
33
Follow Up – Behind the Scenes
• Subsequent to the pitch meeting due diligence takes place if sufficient interest by the group
• Deal Lead interfaces with company
• Demos/additional pitches may be set up
• Meetings set up for due diligence
• Deal terms negotiated
• Investment closing organized
• Note: Baltimore Angels generally invest as individuals, not as a group
11/12/2012 Ed Chalfin - [email protected]
34
Important Investment Terms
• Early stage angel investments are trending towards Convertible Notes
• Important terms include:
▫ Interest rate
▫ Discount
▫ Valuation Cap
▫ Change of Control Preference (acqui-hire)
▫ Information Rights
▫ Pro-rata Rights
11/12/2012 Ed Chalfin - [email protected]
35
What Happens After the Investment?
• Regular updates/reports to the investors are encouraged (information rights)
• Good communication with investors should include requests for assistance as well as status updates – investors are a valuable resource
• Worst case is ‘radio silence’ followed by the ‘we’re running out of money’ call
• My experience has been mixed on this front
11/12/2012 Ed Chalfin - [email protected]
36
Baltimore Angels FAQ
• What percentage of pitching companies get funding from BA? ▫ Roughly 8/27 (~200 applicants in 2012)
• What is the typical level of funding per deal? ▫ Average ~$85K, min $30K, max $350K
• What is the form of investment? ▫ Convertible notes or Preferred equity
• Do the investors invest individually or as a group? ▫ Members invest individually, there are exceptions
• At what point in the company’s development are you ready to pitch? ▫ MVP demonstrated, revenue traction and/or user traction
11/12/2012 Ed Chalfin - [email protected]
37
For Further Research
• Winning Presentations for Raising Capital – Valerie Gaydos
• Moneyball – Paul Singh http://www.slideshare.net/paulsingh/moneyball-a-quantitative-approach-to-angel-investing-dc-sept-2012
• Takeaways from Three Years of Angel Investing – Gabriel Weinberg http://www.gabrielweinberg.com/blog/2012/08/takeaways-from-three-years-of-angel-investing.html
11/12/2012 Ed Chalfin - [email protected]
38