Lecture 1 Outline of Last Lecture 3II Legal environment Continued III Recruiting Sources IV Decruitment V Tips for Managing Downsizing VI Selection Devices VII Employee Selection Interviews VIII Illegal Interview Questions A Can t Ask B Can Ask IX Written Tests X Performance Simulation Tests XI Selection Summary XII Workforce Diversity A Benefits B Managing Diversity XIII HRM Issues Sexual Harassment XIV Managers Bookshelf The No Asshole Rule Outline of Current Lecture XV Angel Investment XVI Why angels matter XVII Angels comes 3 forms XVIII Angel Networks XIX Angel Organizations can help fill capital gap XX Constraints XXI Engaging Angels A How to find angels B Investment expectations C What attracts them you to your deal D Process Deals and implications XXII Business Plans are Essential A Elevator pitch B Executive summary C Full Business Plan XXIII Angel Rating system XXIV Fundable Management teams A CEO XXV The opportunity XXVI Closing the Deal Current Lecture Important Things for Entrepreneurs to Know About Angel Investors 1 From 1980 2005 firms less than 5 years old accounted for all net job growth in the U S 2 Roughly 20 billion is invested by Angels into early stage firms annually 3 Angels sometimes form collaborative groups There are believed to be approximately 300 angel groups or networks in the U S Texas has 17 formal angel networks 4 Most Angels will invest in companies within an area that takes 4 hours or less to drive to 5 Angel investing is very risky 6 Each Angel network has its own process to deal with entrepreneurial applications for investment 7 Between 1 and 4 applicants out of every 100 receive investment from an Angel s 8 Angels usually require a business plan to review a firm for potential investment Angels invest smaller amounts in many companies 600 000 new businesses each year Angels invest in 55 000 under 10 new businesses Investors are looking to get return on their capital Texas and green regions highest to achieve venture capital Bay Area draws most investment Dollars California 49 California manages 64 cents in each dollar and invest 49 cents Angels invest in 90 of outside equity for startups Companies backed by American Angels o Costco Yahoo Amazon Best Buy Google Paypal Why angels matter o Angels give you more than capital try to help you with your business o A really great angel helps an entrepreneur See around the corner Gain a sober second opinion Network with people who can help build the business By being an ambassador Gain credibility in a field Angels comes 3 forms o Cashed out entrepreneur hands on help o Someone with excess professional income doctors lawyers willing to passively give you resources available to help o Inherited wealth inherited money from earlier generation networks Each of these angel groups provide something different Angels started to band together formally through associations in networks opportunity presented to everyone in network o In Austin Central Texas Angel Network o 17 networks in Texas 300 in US Angel groups are small but important subset of All American angels o 4 2 million multimillionaires in US o 225 000 of those are Angel investors in US o 12 000 belong to Angel network in US To be an angel investor must be qualified investor SEC s desire to protect you and your money from someone who wants to scam you Promise on Angel groups o Creating a new class of investor Entrepreneur friendly Developing sophistication excellent processes Angel Organizations can help fill capital gap o Most will invest 5 000 10 000 a piece collectively 250 000 500 000 o In Texas 400 000 o Total 20B a year o Angels on west coast tend to invest more o Will invest in any capital category Constraints o Proximity to where they live o Angels in Texas typically invest within 4 hours drive travel time from where they live Engaging Angels o How do you find angels Business plan in top shape Referrals Web site matching Warning Find local angel group Directories of angel groups o What do angels expect Investment expectations From Investor s Perspective Return on investment Company involvement Advisor board management passive From company perspective Find or provide follow on investment Introduction to potential partners or customers Very little interaction o What attracts them you to your deal Fundamental reason ROI Angel investing is very risky 1 or 2 of every 10 investments brings most of return hard to tell which companies will return Current return estimates for portfolios Annual IRR of 27 If business gets VC funding later angel investment is often diluted Some really great angels looking for 10 to 30x return o Process Deals and implications Can take 1 4 months to receive investment Deal flow statistics Prescreening screening due diligence investment overall 1 to 4 in 100 Writing business plans o Entrepreneur must write plan o See pitching angel investors Forms of business plans o Elevator pitch 2 min product opportunity differentiation attract interest o Executive summary 2 4 page written summary attract interest not closing o Powerpoint 20min cover whole plan find serious investors o Full Business Plan 20 50 pages plus appendices Angel Rating system o 1 Management Team o 2 Size of opportunity Market o 3 Product service o 4 Sales channels o 5 Stage of Business o 6 Size of this round o 7 Need for more funding o 8 Quality of plan Fundable Management teams o CEO CEO experience Vertical experience Coachable Leadership o Balance of team The opportunity o Scalable 30M in revenues in 5 years VCs look for 100M o High gross margins o Large niche market o Unfair competitive advantage o Ready for customers Angels become minority investors Common mistakes in pitching angels o Only discuss technology product o Not prepared for presentation practice o Presentation too long o Inappropriate appearance Closing the Deal o Understand the Terms in Legal docs Start up funding terms are unique Study these terms Read term sheets and valuation Talk to your advisors Consult with experienced entrepreneurs Stay flexible on terms esp valuation Understand common practice Closing Execute the plan o Remain patient