Raising Money from Angel Investors

1. Raising Money from Angel Investors Oregon Entrepreneurs Network Webinar - Jan 29, 2009 Dennis Powers 503-292-3513 dennis.cornerstone@comcast.net

2. Agenda • Who is an Angel Investor - and what motivates them to invest. • Understanding Angel Investor realities. • Where to find Angels. • Investor readiness and preparation. • The Due Diligence process. • Criteria of an ideal Angel Deal.

3. The Funding Continuum Proof-of Concept Product Design Product Development Manufacturing/ Delivery Discovery Idea Pre-seed Funding Seed Funding Expansion/Mezzanine Start-up Funding Source of Capital Founder Venture Funds FriendsandFamily Institutional Equity Angels Angel Groups Loans / Bonds Seed Funds

4. Attributes of Angel Investors • Often successful entrepreneur • “Accredited Investor”–regulatory assumption of financial sophistication and risk tolerance • Expectation of financial reward • Role in entrepreneurial process • Involvement in entrepreneurial company: wisdom and expertise • Community involvement • Social responsibility • Local businesses; regional investment

5. Angels vs VCs

6. Operational Expertise Angel Guardian Angel Relevant Industry Experience Financial Return Angel Professional Entrepreneur Angel Relevant Entrepreneurial Experience Not all Angels are alike MORE LESS LESS MORE

7. Angel Investor Realities • Statistically Angel Investors reject 80% of the deals presented • Average outcomes of Investments made: • 45% fail • 40% are the “living dead” • 15% are winners • Since at the seed stage it is impossible to predict which ones will be winners ……………. • Therefore, all portfolio companies must demonstrate the opportunity for a 20-30X return on investment.

8. Finding Angels • Friends and Family • Other Entrepreneurs who you worked with in the past • Services providers – Attorneys, Accounting firms, etc • Oregon Angels Online • Angel Groups • Investment Conferences Its all about Networking! There are no short-cuts!

9. Northwest Angel Groups

10. NW Investment Conferences

11. How to prepare for Angel Investors • Same as for any other funding source • Well prepared business plan and due diligence documents • Know your market! Size, competition, distribution, verticals, etc. • Solid management • Know your limitations and needs • Advisors and/or board of directors • Professional advisement and support -legal, accounting, etc.

12. What angel Investors Want • A solid management team- angel investor is investing in people • Team Brings Sector, Startup Skills • A solid business plan- convincing and complete • Novel (new) or disruptive business concept (may be regional) • Sound and compelling IP • Clear understanding of Competition and how to win • A business structured for investment- Delaware ‘C’ corp.; formal shareholder’s agreement • Scalable business • Financial Projections that make sense for investors • Realistic valuation • A viable exit strategy- ongoing concern, or M&A, IPO not usually an option • The potential for a solid return- 10-25X in 5-7yr

13. Investor Readiness • “Readiness” is all about preparation • There are no short cuts • At the end of the day the preparation is all about mitigating the concerns investors have about risk • Risk areas include: • Management • Product • Market • Financial • Investor Communication/Sales Tools • Executive Summary • Business Plan • Elevator Pitch • Investor Presentation

14. The Executive Summary • Contact name, address, phone numbers, e-mail address • Business idea in clear language - avoid excessive technical information • Management team, including executive team's track record • List your advisors, significant investors, and board of director • Clear description of product or service, including competitive analysis • Describe the market to be served, including current size and growth rate • Describe your sales & marketing strategies for reaching customers • Discuss your company's unfair advantage • Provide a brief income statement of sales & net income for next 3-5 years • Discuss your funding strategy and how much money you are seeking ----now and in later rounds • List the estimated percentage of ownership investors will receive • Discuss your exit strategy

15. Business Plan • Executive Summary • Business objectives • Principal products or services • Technology and development program • Market and customers • Management team • Financing requirements • Company description • History and status • Background and industry • Company's objectives & strategies (briefly) • Company's strategies • Market • Market summary and industry overview • Market analysis and forecasts • Industry trends • Target Customers

16. Business Plan (continued) • Products • Product description and comparisons • Innovative features (patent coverage) • Applications • Technology • Product development and R&D effort • Product introduction schedule and major milestones • Future products (product evolution) • Competition/Competitive Position • Sales and Marketing • Channel strategy • Sales and distribution model • Customer plan • Manufacturing/Operations (if appropriate) • Service and field engineering (if appropriate) • Facilities (if appropriate)

17. Business Plan (continued) • Management and ownership • Founders and key employees • Stock ownership • Organization and personnel • Future key employees and staffing • Incentives (stock option and stock purchase plans) • Financial data and financial forecasts • Assumptions used • 3-year plan • 5-year plan • Capital required and use of proceeds • Appendices • Detailed management profiles • References • Product descriptions, sketches, photos • Recent literature on product, market,

18. Elevator Pitch • It’s the last thing you prepare but often the first contact with a potential investor • The essence of your company • An opportunity tell just enough to get an investor interested (usually a minute) • Sets the stage for follow-up opportunity

19. The Anatomy of the 10 Minute Pitch* Introduction {00:30 seconds} The Problem Traction The Solution {02:30 seconds} Market Size Customers Revenue Model Sales Cycle {06:30 seconds} Competition Partners Management Advisory Board {08:30 seconds} * Source - Alliance of Angels Financials The Offer {10:00 min.}

20. The Angel’s Process • Pre-screening • Screening • Due diligence • Investment presentation • Follow-up discussions and meetings • Closing

21. Purpose of Due Diligence • Establishes that obvious issues are non-issues or addressable • Uncovers issues you not have considered • Allows you to get to know the founders • Identifies key drivers critical to success • Provides enough data for personal ROI analysis

22. Due diligence review covers: • Corporate/Structure Organization • Funding/Ownership • Proposed Deal • Financial Structure/ Financial model/ projections/ best and worse case scenarios • Product/Service • Customers • Suppliers • Regulatory/ Reimbursement • Marketing/ Customer validation/ supplier Business strategy/ over all market/ competition • IP and freedom to operate • Entrepreneur/ team background

23. Investor Evaluation Process • Individual Angels or Investor Groups based use many different methods for evaluation and analysis. • All come down to the Evaluation of Risk: • Management Risk • Market Risk • Product Risk • Financial Risk

24. Evaluation Questions • Management Risk • Strong domain experience? • Functional Expertise? • Startup company experience? • History of execution and success in previous roles? • Planned Key employee additions? Timing • Current Advisors or existing Board members? • Do they have “skin in the game”?

25. Evaluation Questions (cont.) • Market Risk • Is it a must have or like to have? • Is the market itself healthy • Size, Expected Growth rates? • How is the market segmented? • What is the target market/customers? • What is the competitive environment? • What companies currently service this market? • What motivates buying decisions? • What is the company’s competitive advantage? • Is it too early or too late? • Is there a feasible sales strategy • How will the product be sold • Direct vs Indirect? • Are there planned/existing strategic partnerships?

26. Evaluation Questions (cont.) • Product /Technology Risk • Is the product/service clear? • Stage of development • Proof of concept, working prototype, Alpha, Beta, Pilot, or product launched? • Is there customer validation? • How will it be produced? Where? • Is there Intellectual Property? Patents? • Does the product demonstrate competitive advantages? Are they sustainable? • What does the product roadmap look like?

27. Evaluation Questions (cont.) • Financing Risk • Terms of the Deal • Debt vs Equity? • Valuation? • Amount to be raised? • Are they raising enough? Is there a cushion in the budget? • Are milestones realistic for the amount raised? • Follow on rounds of financing planned? • What is the exit strategy? Does it look plausible?

28. Criteria for an Ideal Angel Deal • Management team with relevant domain or startup successes • Large, rapidly growing markets • Unique products with proprietary technology or service offerings that meet customers' important needs • Credible and balanced business plans including key execution milestones • Clearly articulated sustainable competitive strategies • Patents or other intellectual property barriers to entry • Realistic, achievable financial projections, high return on investment (ROI) potential and clear exit strategy  • Reasonable valuation and investment terms • A willingness to accept advice and coaching