© National Angel Capital Organization
Angel Capital
A Primer
© National Angel Capital Organization
• The not-for-profit industry association representing Angel Capital in Canada.
• Promotes a vibrant Angel community and culture in Canada through:– Development of formal Angel investor groups;– Best practices education and mentoring programs;– Formation of collaboration and co-investment mechanisms;
and– Encouragement of an efficient risk capital market in Canada.
• Mission: – Increase the quantity, quality, and success of Angel
investments in Canada, thus creating a greater pool of capital for the commercialization of innovation.
About the National Angel Capital Organization
© National Angel Capital Organization
Part IAngel Capital Investment:
An Introduction
© National Angel Capital Organization
• In Canada:– Angels invest $2.2B a year in Canada complementing the less
than $1B invested by Venture Capital– Angels invest, on average, $125,000 per round of funding– There are over 30 organized Angel groups in Canada
• In General:– On avg. an Angel investment creates 3.3 jobs at time of
investment– Angel deals often range anywhere between $25,000 -
$300,000+– Angel-backed firms are more likely to be approved for debt
financing– Companies with Angel investment report higher revenues and
assets– Companies with Angel investment are more likely to have
owners under 40
Some Angel Statistics
© National Angel Capital Organization
• Angel investors – definition and characteristics– High-net-worth individuals– Often entrepreneurs who have successfully founded
and/or operated one or more companies themselves– They typically mentor and invest their own personal
capital in seed- and early-stage companies– Most often involved prior to the commercialization
stage of the innovation– The oldest, largest, and most often used source of
outside funds for entrepreneurial firms.
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Angel groups and networks – definitions and characteristics– An organized body of Angels that meets to see pitches for
investment by entrepreneurs, and possibly to invest in them– Returns on investments accrue only to the participating investors – Often the investment decision is left to the individual investors,
who may or may not co-operate privately– Members’ investments are usually tracked by the group manager– Angel groups allow participating Angel investors to share deal flow,
best practices, industry knowledge, executive skills and experience, the due diligence on prospective investees, and an esprit de corps
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Stages of investment – from 3 Fs to stock listing• Seed stage - capital from friends, family & founder (the “3 Fs”), to
funds R & D to bring a product to the point of marketability
• Early stage - capital from Angel investors, to bring a product or service with some market traction fully into the marketplace
• Mezzanine stage - capital from either co-investing Angels or venture capitalists continues growth phase and builds profitability
– Later stages are often characterized by:• The issuance of an IPO and listing of the company's common stock
on a public stock exchange
• The company's merger with or acquisition by another company, including a CPC (of which more later)
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Seven deal screening questions– Is this a good deal for our Angel group?– Is this the right team to execute this business?– Does this business have superior proprietary products?– Do the products address a clear need in a large market?– Can they achieve key milestones with the requested funds?– Has this company made a compelling case for the overall
attractiveness of the business opportunity?– Are they valued properly and can investors achieve exit?
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Due diligence – checking out the opportunity– The Management Team– The Industry Segment (An Angel’s Comfort Zone)– The Growth Potential for the Company
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Term sheets – standard deal conditions– The financial structure of the investment– The mechanism by which the valuation will be set– Amount/parties investing– Use of funds– Downside protection– Expenses– Exclusivity/no shop/closing date– Milestones and tranches
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Common negotiation points– Separate the People from the Deal Terms– Focus on Interests, Not Positions– Invent Options for Mutual Gain– Use Objective Criteria and Fair Procedures
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Co-investment– Where more than one Angel group or network
collaborates to invest in a second-round investment opportunity in a company already backed by Angels in the first round
– The first Angel investor or group usually acts as the “deal champion”
– Requires a treaty to be formulated between groups– Allows diversification of investing, smaller amounts,
use of existing due diligence
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Valuation models – pre-money– Similar-Company Transaction– Replacement Method or All-In Method– Modified Berkus Method– Rule of Thirds– Standard Value– Discount to Terminal Exit Value (aka Rate of Return or
Venture Capital Method)– Value Later – Discount to Next Round
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Valuation models – post-money– If an investor makes a $100 million investment in a
company in return for twenty percent of the company's equity, the implied post-money valuation is $500 million
– However, the capital structure of companies often includes convertible loans, warrants, and option-based management incentive schemes, which complicates matters
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Exit strategies– Selling or distributing the portfolio company's shares
after an initial public offering (IPO)– A sale of the portfolio company or– A recapitalization:
• E.g. by replacing preferred stock with bonds in order to gain interest deductibility
Foundation Concepts of Angel Capital
© National Angel Capital Organization
• Deal flow– A term used by venture capitalists and
Angel investors, used to measure the number of potential investments that are reviewed in any given period.
– Can also be defined as the creation and maintenance of a flow of business proposals for evaluation and decision for financial backing.
The Expert Script of Angel Investing
© National Angel Capital Organization
• Stock options:– Employee stock options
• The employee is given an option to purchase shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years
• Sometimes used as partial compensation for below-market salaries
– Incentive stock options (i.e. for founder)• Guarantees continued founder involvement by being
released in stages
The Expert Script of Angel Investing
© National Angel Capital Organization
• Information rights– Rights granting access to a company's information,
i.e. inspecting the company books and receiving financial statements, budgets and executive summaries
– A must-have for investors
The Expert Script of Angel Investing
© National Angel Capital Organization
• Tranches– Funds flowing from investors to a company that
represent a partial round or an "early close" – Subsequent funds of the single round are generally
under the same terms and conditions as the first tranche (or early close), however, those funding the early tranches may receive bonus warrant coverage, in consideration of the additional risk.
The Expert Script of Angel Investing
© National Angel Capital Organization
• The capitalization table– A table showing the total amount of the various
securities issued by a firm. – This typically includes the amount of investment
obtained from each source and the securities distributed -- e.g. common and preferred shares, options, warrants, etc. -- and respective capitalization ratios.
The Expert Script of Angel Investing
© National Angel Capital Organization
• Anti-dilution measures– Investment in cos that will only require 1 or 2 rounds– Co-investment at the same valuation– Ratchets outlined in the term sheet to protect the
value of Angels’ original investment
The Expert Script of Angel Investing
© National Angel Capital Organization
• Cram downs– Extraordinary dilution, by reason of a round of
financing, of a nonparticipating investor's percentage ownership in the issuer
– An eventuality Angels try to mitigate or avoid with Anti-Dilution Measures
The Expert Script of Angel Investing
© National Angel Capital Organization
• Liquidation preferences– The right to receive a specific value for the stock if the
business is liquidated – The amount per share that a holder of a given series
of preferred stock will receive prior to distribution of amounts to holders of other series of preferred stock or common stock
The Expert Script of Angel Investing
© National Angel Capital Organization
• Returns on investment: – CARG: Compound Annual Growth Rate. The year-
over-year growth rate applied to an investment or other aspect of a firm using a base amount
– IRR: Internal rate of return. IRR is a technically a discount rate; the rate at which the present value of a series of investments is equal to the present value of the returns on those investments
The Expert Script of Angel Investing
© National Angel Capital Organization
Basic Organizational Structures of Early-Stage Capital
© National Angel Capital Organization
Basic Organizational Structures of Early-Stage Capital
© National Angel Capital Organization
Basic Angel Investment Process
© National Angel Capital Organization
Basic Angel Co-investment Process
© National Angel Capital Organization
• A convertible debenture is a type of business loan that gives the investor the option of converting the debt that has been provided to the investee into equity. – Advantages:
• Risk mitigated, repayment is made through the investment
Angel Investment Methods: Convertible Debentures
© National Angel Capital Organization
• Common stock:– Usually used for first rounds of funding: family, friends,
employees, etc. – A security that represents ownership in a corporation. – Holders elect board of directors and vote on corporate policy. – Holders are lowest priority for repayment in liquidation.
• Preferred stock:– Usually used in first round of third-party (Angel) investment.– Provides the investor with superior rights preferences and
privileges for their investment, e.g. liquidity rights.– Has priority over common stock.– Generally convertible into common stock at the time of an IPO.
Angel Investment Methods: Stock
© National Angel Capital Organization
• An Angel might invest with the expectation of going public through a CPC– Unlike traditional IPO, CPC allows directors to form a
co. with no commercial operations or non-cash assets and list it on the TSX-V to raise a pool of capital thru its prospectus
– Funds are used to seek investment in a growing business
– The investment in an operating company is the “qualifying transaction”, after which shares trade as a regular listing on the Exchange.
Angel Investment Methods: Capital Pool Corporations
© National Angel Capital Organization
• Technology – 10%– Unique, protected technology
• Traction in the Market – 30%– The market has already accepted and is
buying/adopting the company’s product
• Team – 60%– A management team with business acumen, domain
knowledge and operational expertise– An opportunity to get involved in or mentor the
management
What Angels Usually Look For
© National Angel Capital Organization
• In today’s economy Angels are also looking for companies that:– Have an exceptional, seasoned, proven management
team– Are not capital intensive – they can reach breakeven
with a few rounds of Angel investment/co-investment– Are revenue-positive and ramping to breakeven– Provide an opportunity to give back to the community
Trends in Angel Financing
© National Angel Capital Organization
Part IIAngel Capital:
One Part of the OverallCompany Finance Ecosystem
© National Angel Capital Organization
Angels in the Company Finance Ecosystem
From $5 billion in 2003 (SDTC), we estimate the gap has grown to ~$8 billion now for Canada.
© National Angel Capital Organization
• Where Angels Traditionally Fit– Early stage and seed stage companies– Pre-revenue or early-revenue – Partially complete management team
• Venture capital expected to provide follow-on financing for company to reach breakeven
Angels in the Company Finance Ecosystem
© National Angel Capital Organization
• Where Angels Fit Now– Early stage, seed stage, Series A & B companies also– Angels investing in later-stage opportunities also as
VCs are retreating– Angels organizing to sustain this move, e.g. co-
investment
• Expecting that Angel groups & co-investment will later take co. to breakeven
Angels in the Company Finance Ecosystem
© National Angel Capital Organization
• Comparing Angels and Venture Capitalists
Angels in the Company Finance Ecosystem
– VCs• Money managers – CFAs,
MBAs• Oversee other people’s
money• Report to their funders• Basically have little
experience in growing businesses
• Follow the 20/60/20 rule
– Angels• Serial entrepreneurs• Possess business acumen• Mentor companies• Provide cash• Patient money (But still
wanting an exit!)• 50% success rate• Give back to the community
- RAN
© National Angel Capital Organization
• Trust is essential when investing personal money • Relationships are as important as money for Angels
– It is a “high-touch” business
• Over distances and across borders relationships are even more important
• How DFAIT can help– Get Angels from different regions together– Help build relationships of trust between Angels– This underpins trust in new opportunities, mitigates risk
Facilitating Cross-Border Co-investment
© National Angel Capital Organization
• Partners:
– NACO and DFAIT• Time and Place:
– San Diego, May 8, 2008• Goals:
– Create more one-on-one relationships between investors, to facilitate cross-border investment
– Co-investment is done on the basis of relationships!• Results:
– Over 30 Angels attended from Canada, southern California and other countries
– Continuing contacts between Canadians and Californians– Media attention on the dinner itself (San Diego Daily Transcript)– Door opened for DFAIT to leverage the relationships Angels are always
building around the world
International Co-investment Dinner – A Case Study
© National Angel Capital Organization
Part IIIAngels and the Maelstrom:
Angel Capital in 2009
© National Angel Capital Organization
From Crisis to Chaos: The Current Situation
© National Angel Capital Organization
• We live in interesting times, characterized by:– A worldwide recession accompanied by global banking chaos
and frozen credit markets• Finance Minister: “Tighter credit is the #1 issue”• Eric Reguly: “Good companies with good products suddenly face
liquidity crises…”• Gov’ts worldwide increasingly by-passing banks – lending directly
– Public market illiquidity• Start-ups starved by traditional sources of finance• Investment Industry Association of Canada’s numbers showing Q4-
2008 “small business financings” down 45% from Q4-2007
– The prospect of a long-term downturn• SMEs especially are slashing growth factors like capital investment,
marketing, R & D, and training
From Crisis to Chaos: The Current Situation
© National Angel Capital Organization
From Crisis to Chaos: The Vicious Cycle
Collapsing housing market
Imploding banks & lending curbs
Spending cuts &mass layoffs
Plunging confidence
Further retreat
of banking
Steeper decline in confidence
Additional retrenchment by business & consumers
Sub-primemortgaging
disaster
© National Angel Capital Organization
• Venture Capital (VC) investments are decreasing and they are leaving early-stage capital markets, increasing the growth capital gap. – Deal activity in the Canadian VC market reached its lowest level
in 12 years in 2008, dropping 36% from 2007 alone.– In 2008, Ontario has led all other provinces in VC decline; Q1
2008 was 60% less than Q1 2007.
From Crisis to Chaos – Venture Capital
© National Angel Capital Organization
• How much (in Canada)?– $2.2B invested annually as of 2004– 2.5X early-stage VC investment that year ($871MM)
• In what? Companies with:– Faster potential ROI, lower capital needs, and lower valuations
• How are they investing? – Angel community is characterized by a continuum:
• Individual Angels• Angel groups• Angel Group Syndicates (Incl. Canada-US and Canada-Abroad)• Angel Funds (Rising trend in Canada: Sidecar and Dedicated)
• Why Groups? Better IRR!– Formal Angel groups in NA capturing 27.7% IRR annually over
~3 yrs
From Crisis to Chaos – Angels Are Still Investing
© National Angel Capital Organization
“Entrepreneurship is arguably the single most powerful force to create economic and social mobility. Because it is opportunity-centered and rewards only talent and performance…it enables people to pursue and realise their dreams, to falter and to try again, and to seek opportunities that match who they are, what they want to be, and how and where they want to live. No other employer can make this claim.”
- from New Venture Creation, by Timmons and Spinelli
The Power of Entrepreneurship
© National Angel Capital Organization
Questions?
Contact us at:
Bryan WatsonExecutive Director
National Angel Capital OrganizationPhone: 416-581-0009
E-mail: [email protected]: www.angelinvestor.ca
© National Angel Capital Organization
Thank You
W. Daniel Mothersill (Moderator)Rob Koturbash
David VerrillAlan Riding
© National Angel Capital Organization
• Submit their opportunity to apply to an Angel group at:– http://www.angelinvestor.ca/Angel_Deal_Submission.asp
• Refer them to the Angel group directory, so they may apply directly to an Angel group, at:– http://www.angelinvestor.ca/Angel_Directory.asp
• If they are Canadians looking for a second round of Angel funding, have them apply to present at the next Canadian Co-investment Summit May 22 in Toronto:– http://www.angelinvestor.ca/Company_Application_Page.asp
Responding to Inquiries by Companies
© National Angel Capital Organization
• Direct them to the next Canadian Co-investment Summit May 22 in Toronto
• Have them buy Age of the Angel:– Our Best Practices Manual at http://www.lulu.com
• Refer them to our new open-source compendium: – http://www.angelcapitalwiki.org
• Show them to the NACO blog: – http://naoangelinvestor.wordpress.com
• Tell them to visit:– http://www.angelinvestor.ca
Responding to Inquiries by Angel Investors
© National Angel Capital Organization
• Results of 1st Co-investment Summit held in Toronto:– Presented 25 companies to over 150 Angels from across North
America– Syndicates of Angel groups are executing $2 - $11 million deals
• Direct them to Co-investment Summits:– Spring 2009 Canadian Co-investment Summit, Toronto May
22nd• http://www.angelinvestor.ca/Co_investment_Summit.asp
– Hub Angels’ Co-investment Summit– Other Co-investment Summit
• Have Angel group manager, for initial investment, “Co-invest opportunity” in Angelsoft with other Angel groups
Responding to Co-investment Inquiries
© National Angel Capital Organization
• For the United States, see the ACA listing at:– http://www.angelcapitalassociation.org/
dir_directory/directory.aspx#2
• For Canada, see the NACO listing at:– http://www.angelinvestor.ca/Angel_Directory.asp
• Groups are listed by region in both directories
Angel investors & groups in North America