Raising Money from Angel Investors Oregon Entrepreneurs Network

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

Agenda n n n 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.

The Funding Continuum Discovery Idea Proof-of Concept Product Design Pre-seed Funding Seed Funding Product Manufacturing/ Developmen Delivery t Expansion/Mezzanine Start-up Funding Source of Capital Founder Friends and Family Venture Funds Institutional Equity Angels Angel Groups Seed Funds Loans / Bonds

Attributes of Angel Investors n n n n 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

Angels vs VCs Angels VC’s Funding amounts $25 K to $1. 5 M $500 K and above Motivation to Invest Not just return driven Strong emotional component Often likes to be a coach, Bragging rights Mostly return driven But some adjustments for other VCs and Entrepreneurs Accessibility Prefer anonymity Reachable via referrals or groups Highly visible Prefer to only look at deals referred from their networks Geographical focus Regional, with in a 4 hr drive Regional, National, International depending on firm Key reasons to invest Personal chemistry with Mgmt Detail Plan with large markets Sustainable competitive advantage Nearly developed product Some operating history with a strong experienced team Sustainable competitive advantage Investment vehicle Common or Preferred Stock Occasionally convertible debt Preferred Stock Long term value added Operational experience Common Sense advice Specific Industry expertise Experience in managing growth Deep pockets Networks for additional capital Experience in managing IPO or sale exits Reaction to bad news Roll up sleeves and help to solve the problem, Open up rolodex Intense communications and coaching Open up rolodex, Help structure new financing or mergers Fire management Target exit time 5 to 7 years 3 to 5 years Target Returns 15 to 25% IRR 20% to 40% IRR

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

Angel Investor Realities n n Statistically Angel Investors reject 80% of the deals presented Average outcomes of Investments made: n n n 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 -30 X return on investment.

Finding Angels n n n 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!

Northwest Angel Groups Angel Group Alliance of Angels Keiretsu Forum (Seattle chapter) Northwest Energy Angels Location URL Seattle www. allianceofangels. com Seattle, Kirkland, Boise, Portland www. keiretsuforum. com Seattle www. nwetc. com/nweangels. php Oregon Sustainability Angels Portland www. sustainabilityangels. org Portland Angel Network OREGON ANGEL FUND Portland www. oef. org/programs/pan/ Portland Venture Group Portland glennjsmith@yahoo. com Puget Sound Venture Club Seattle www. pugetsoundvc. com Seraph Capital Forum Seattle www. seraphcapital. com Tacoma Angel Network Tacoma www. tacomaangelnetwork. com Women's Investment Network Portland www. oef. org/programs/win/ The Zino Society Seattle www. zinosociety. com Lane Venture Forum Eugene http: //www. eugenechamber. com/bus _info/entre_resources. htm

NW Investment Conferences Conference Typical Timing Website March 12, 2009 www. oen. org April/May www. nwen. org/esif. htm The Gorge Angel Conference May 19, 2009 www. gorgeangelconference. com The Zino Society Conference September Angel Oregon Early Stage Investment Forum The Bend Venture Conference www. zinosociety. com October www. bendvc. com Venture NW November www. oen. org Seed Oregon Sept - Jan www. oen. org Willamette Angel Conference May 14, 2009 www. willametteconference. com

How to prepare for Angel Investors n n n n 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.

What angel Investors Want A solid management team- angel investor is investing in people n - A solid business plan- convincing and complete n • • n Team Brings Sector, Startup Skills 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 -25 X in 5 -7 yr

Investor Readiness n “Readiness” is all about preparation n 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: • • n Management Product Market Financial Investor Communication/Sales Tools n n Executive Summary Business Plan Elevator Pitch Investor Presentation

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

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

Business Plan (continued) n Products n n n n n Competition/Competitive Position Sales and Marketing n n n 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) Channel strategy Sales and distribution model Customer plan Manufacturing/Operations (if appropriate) Service and field engineering (if appropriate) Facilities (if appropriate)

Business Plan (continued) n Management and ownership n n n 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 n n n Assumptions used 3 -year plan 5 -year plan n Capital required and use of proceeds n Appendices n n Detailed management profiles References Product descriptions, sketches, photos Recent literature on product, market,

Elevator Pitch n n 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

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 * Source - Alliance of Angels {08: 30 seconds} Financials {10: 00 min. } The Offer

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

Purpose of Due Diligence n n n 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

Due diligence review covers: n n n 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

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

Evaluation Questions n Management Risk n n n n 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”?

Evaluation Questions (cont. ) n Market Risk n n 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? n What is the competitive environment? • What companies currently service this market? • What motivates buying decisions? • What is the company’s competitive advantage? n n Is it too early or too late? Is there a feasible sales strategy • How will the product be sold • Direct vs Indirect? n Are there planned/existing strategic partnerships?

Evaluation Questions (cont. ) n Product /Technology Risk n n Is the product/service clear? Stage of development • Proof of concept, working prototype, Alpha, Beta, �Pilot, or product launched? n n n 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?

Evaluation Questions (cont. ) n Financing Risk n Terms of the Deal • Debt vs Equity? • Valuation? • Amount to be raised? n n 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?

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