Angel InvestingSome of the Important Rules Have

Changed

Mike PanesisPresident, Central Coast Network

Tech Coast AngelsNovember 16, 2011

About angel investing

Angel investing is not new

What is an angel investor?

Anyone who makes a private investment in a company, typically a start-up

Typically, but not necessarily, accredited: $1 million in investable assets (not including value of

primary residence) OR $200K in income ($300K joint)

Often are entrepreneurs themselves

How many potential accredited angel investors are there?

Source: http://money.cnn.com/2011/05/05/pf/millionaire_rise/index.htm, Angel Capital Association, Cap Gemini/Merrill Lynch World Wealth Report 2001

Only ~7,000 members of angel groups (2009)

Change in angel investing has a lot to do with advancing technology

10 years ago Now Buy your own servers, in advance Software distributed in boxes Dial-up internet access Need $1M+ to start a business Capital intensive manufacturing

Rent virtual servers by the hour Software distributed online Broadband internet access common Can start a business for <$100K Low cost prototypes & offshore mfg

Founder, friends & family investment is expected FIRST Greater importance placed on market validation Lower entry point for angel investment Led to the rise of angel groups as specialized social networks

Effect on angel investing

About TCA

Largest angel investing group Invests in Southern California

companies (mostly) Group negotiation, individual

investment 12-20 deals per year Invests in more than tech

Hardware/Software Life Science Digital Media Consumer Products/Services CleanTech/Industrial Financial Services

5 TCA Networks

TCA Investing Process

Find

• Networking Events• Quick Pitch Competitions• Industry Group Meetings• Mentoring

Filter

• Funding Application• Pre-Screen (Vertical & Virtual)• Screen (Local x5)• Dinner Meeting (Local x5)

Fund

• Due Diligence• Write Check

Follow

• Board Participation• Personal Networking• Plan for Next Round

Why (and why not) pursue angel capital?

Good

More fundraising options

Common term sheet More tolerant of pitch

flaws Decision-making

priorities:1. Heart2. Head3. Wallet

Brings more than money to the deal

Bad and/or Ugly

Process takes time Requires more

patience Usually rational, but

not always More sensitive to

valuation

Tips for success with angel groups

A good pitch covers all of these… The problem you solve Market size Company & products Business model (how you make money & grow) Team Competition (and why you win) Barriers to entry Financial projections: sales, gross margins & EBITDA, 5

years Raise amount & use of funds Valuation Exits

If you only have one chance to pitch, bring your best stuff… 15 minutes long, followed by 15 minutes of Q&A. Greatest contributor to the investment decision. As much a sales pitch as an investment pitch. Needs to be rehearsed, memorized and internalized. One presenter is best. Put a lot of thought into your valuation.

When you pitch to an angel group, you’re really looking for one person.

Awesome!

Pitch

Awesome!

That person loves the pitch, clearly sees the value proposition, is willing to invest, and will be your advocate inside the angel group. We call this person the Deal Lead.

It’s always about friends & family

Why?

Friends & family invest because they know and trust you.

Angels rely on their “friends & family” to decide if they should trust you. Then they invest.

Once they trust you, angels open up their networks.

What matters most?

Reputation Trust Who you know What you know Passion

If you first meet a Tech Coast Angel at your screening, then you waited too long.

Entrepreneurs & Small Businesses need a network to thrive.

You don’t have to succeed first to start giving back. Local networking groups

805startups: http://www.meetup.com/805-Startups SBStartups: http://www.meetup.com/startupsb

TCA-sponsored events Quick Pitch (San Diego) & Fast Pitch (LA & OC) Meetup Group (OC): http://www.meetup.com/techcoastangels

Mentoring opportunities Small Business Development Center (SBDC): http://edcsbdc.org UCSB Technology Management Program (TMP), New Venture

Competition (NVC): http://www.tmp.ucsb.edu

What’s next

TCA initiatives

Syndication Cooperation among angel groups Shared due diligence speeds investment decisions

Angel Capital for Entrepreneurs (ACE) Fund Invests where TCA members invest Don’t have to be a TCA member to invest

Seed Track For early stage companies with a missing piece 10 minute pitch Investors commit up to $100K on the spot 30 day close

The changing business and investing landscape for angels

Business Sustainable business Entrepreneurship as an

early career choice Incubators, accelerators et.

al. Rediscovering the

manufacturing sector Mass applied research (e.g.

hackerspaces)

Investing AngelList

~1,800 accredited angels

400 investments in 18 months

Still need local groups CrowdFunding

Expands the investor pool

Spreads risk Self-governance is key

Need more angels!

How the Feds can help

Remove Barriers

LegislationBig Company Misbehavior

Effect on Small Business

Sarbanes Oxley

Creative paper shredding

Difficult to IPO

Dodd Frank Too big to fail

Limits accredited investors

Patent Reform

Patents as a profit center

Favors first to file over first to invent

Add Value Fund cutting edge research Subsidize infrastructure H.R. 2930: Entrepreneur

Access to Capital Act (Crowdfunding) Greatly increases pool

of potential angel investors

Passed the House, 407-17

Questions?