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Angel Investing 101

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David Weekly's Angel Investment Deck. Meant as an introduction to investing in US-based companies as an accredited investor. Covers Angel List, syndicates, syndicate funds, venture capital, common risks and pitfalls.

NOTE: Does not constitute legal or financial advice and is not a solicitation for investment.

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Angel Investing 101

  1. 1. Angel Investing 101 Making & Losing Money As A Hobby david@weekly.org Online / Public Version → read the speaker notes!
  2. 2. Disclaimers This is not legal or financial advice. Consult a lawyer/CFP/CPA. There may be material errors in this presentation. (Hopefully not too many.) This is very risky stuff; never invest angel money you can’t afford to lose. Please give feedback to make this course better!
  3. 3. Who This Course Is For Accredited investors* investing in early-stage, privately-held US-incorporated tech startups. * I'll define this in a few slides
  4. 4. Prework Please read my Guide to Stock and Options now. Read the Third Edition. The first two had some pretty material errors. ;)
  5. 5. Some of What We Will Try To Cover Cautions & Definitions: Control, Dilution, Liquidity Venture Capital: Structure & Returns Angels, Angel Groups, AngelList, Syndicates Crowdfunding Deal Flow Being a Great/Terrible Angel
  6. 6. What We Will Not Cover (but feel free to ask questions) Meeting your retirement goals Fancy sh*t like Variable Prepaid Forward Options Investing as an unaccredited investor Structuring advisory agreements How to start a company / hire / etc.
  7. 7. Important Distinction Startup A high-risk, potentially high-reward enterprise that will likely fail but could potentially scale to be worth billions. Usually: TAM >$1bn, gross margin >50% Goal: Scale. Small Business A enterprise formed with a goal to sustain operations profitably and grow as-needed to fulfill customer demand. Can grow into a Big Business over the course of many decades. Usually: Time to first revenue <3mo. Goal: Cash-flow positive.
  8. 8. My Background Founded two startups: one still independent, one acqui-hired by Facebook. Founded Mexican.vc (2010), drone.vc (2014), and neuron.vc (2016). Global startup mentor & advisor w/several notable exits (Plaxo, Attassa, Like.com, YourTrove, PistonCloud). Wrote “Guide To Stock & Options for Startups” and “The Mechanics of AngelList Syndicates”. Founded Hacker Dojo (coworking space), investor in 40+ startups, advisor in 10+. EIR at Trinity Ventures, mentor at Founder Institute.
  9. 9. Why Be An Angel? (Good Reasons) Give back to the startup community Exposure to entrepreneurial energy & ideas Learn how about how early concepts are framed Inspiration for how to think about your own startup ideas A small part of a broad investment portfolio (max 10% net worth)
  10. 10. The Right Expectations Most startups fail. Of those that don’t, most fail to return capital. You will have very little control or visibility into your investments. Your investments will be nearly wholly illiquid. Successful investments may take 9+ years to achieve liquidity. One investment that does well will likely moot all the others. It’s incredibly difficult to predict which startups will win: diversify!
  11. 11. Cautions, Definitions, & Risks
  12. 12. Cautions You will probably fail to beat the public markets. 80% of VC firms failed to beat ETFs. (They are professionally bad at their jobs!) You should make sure you enjoy the process at least as much as the outcome!
  13. 13. Accredited/Qualified Accredited Investor: ● Single and 2015 & 2016 you made >$200k and expect that in 2017. ● Married and 2015 & 2016 you both made >$300k and expect that in 2017. ● or $1m in assets not including your primary residence. Above assumes you’re investing as an individual, not e.g. a Trust. >$5m in assets? You’re a Qualified Purchaser - even fewer restrictions.
  14. 14. Sophisticated Sophisticated Investor: new for 2016 Not very well defined by the SEC -- but a “pre-existing, substantive relationship” is required between an issuer and investor, requiring the issuer to evaluate the investor’s “accreditation, financial sophistication, financial circumstances and ability to understand the nature and risk of the interests being offered.” When joining AngelList you must cite the people you know in your investor application as evidence of your sophistication. Saying you took this class will help! Ideally you will have also made other startup investments.
  15. 15. Risks for Angels Dilution: Company requires a lot of capital to get to success / some flat rounds. You’ll get very little protection against dilution: even if the company is successful you may end up with little. Acquihires: Early-stage company “sells” to another in deal great for founders & employees but investors might end up with little-to-nothing. Carve-outs: Mid-stage company sells to another with carve-outs for founders, managers, and later investors. Angels get little to nothing. (Usually this is a bail out / escape valve.)
  16. 16. High Risks for Startups Lack of Product/Market Fit: Nobody wants what’s being built & couldn’t “pivot” to something that did make sense / came to market too early. Bad Model: CAC > LTV, money-losing machine. Founder Exhaustion: Want free food, 401k matching, and parental leave. ;) Cash Management: Team not scrappy enough / didn’t raise enough. Legal: Fundamental premise of business offering not found to be lawful.
  17. 17. Medium Risks for Startups Bad Board: Founders lose voting control, forces founding team out & replacement CEO is lame / forced early sale. Visa Issues: Foreign founder loses right to be in US. Infighting: Founders squabble, distracting team & causing bad atmosphere. Talent: Team can’t hire the talent it thinks it needs / gets poached. Zombie: Product can’t transcend niche appeal, making enough to keep the lights on but without growth / uninvestable.
  18. 18. Low(er) Risks for Startups Outright fraud: Founders ran off to Caribbean with seed capital IP: Sued out of existence by patent troll / mean big company Theft: Another company steals the startup’s ideas and out-executes them
  19. 19. Venture Capital
  20. 20. What is a VC? A professional whose job it is to invest other people’s money in high-risk, high- return companies. GPs: General Partners put in >1% of fund’s capital & direct decisions. LPs: Limited Partners (e.g. pension funds, sovereign wealth) provide the $$$. Funds generally last 10 years (but get extended as needed); half set aside as “dry powder” for follow-on / pro ratas.
  21. 21. VCs are Paid on “2 & 20” 2% annual management fee (funds under management) - pretty high for people bad at their jobs! These numbers are getting pushed downward. 20% “carry” - profits after returning the fund. Generally requires a “unicorn”.
  22. 22. Typicalish Round Sizes $100k - $250k: passive / vertical follow-only funds: SkyFund, KPCB Edge $250k - $2m: seed / microVC: Flywheel, Felicis $2m - $20m: Series A (“venture” round): Sequoia, Greylock, KP, Andreesen $5m - $50m: Series B (“growth” round): $10m++: Series C & beyond (“expansion” round)
  23. 23. VC Caveats Not every good business is VC-investable. Carry only paid after returning a fund! Excellent results for team may not be excellent VC results: ● 5 people, $5m/year generating $3m/year profits ● $50m exit on $5m invested. 500 Startups is working on making this a new venture asset class: doubles & triples. Published results July 20 in WSJ: 18-23% IRR.
  24. 24. VC Tips Associates don't pull much weight; find a partner who will make the deal happen. Partner meetings often on Mondays; that’s when decision is made on the spot, right after the pitch. Typical timeline: one partner (sniff) → two partner (vet) → area leads (assess readiness) → full partner meeting (invest) 30-60 days to close, diligence is intensive. Pitching is a full-time effort so try and do it infrequently! Better to have inbound than outbound.
  25. 25. Angel Investment Structure
  26. 26. Taxes on Equity ● Act of investment not taxable (received same value as paid) ● Held for <12mo: Short term cap gains = income (~40% fed + ~10% CA) ● Held for >12mo: Long term cap gains = 15-20% fed + ~10%CA ● Held for >60mo: Qualified Small Business Stock (if C corp, <$50m post) 0% fed, can roll over sooner than 5yrs to new QSBS w/0% tax! ( Lots of caveats/AMT, talk to your lawyer!) Cap gains clock only starts running once you acquire shares. Not options, not convertible notes, not a SAFE note.
  27. 27. Instruments: Convertible Note Technically a debt instrument (with requisite interest) but never designed to be repaid in cash. At the next equity round, the debt converts into equity. Benefits: quick legal paperwork, very typical / doesn’t raise eyebrows. Typical seed: 12 month term, 6% interest, 20% discount, $5m cap, 2x liq. Watch out for uncapped notes, esp with a larger (long runway) raise. Term duration is just a formality.
  28. 28. Other Instruments SAFE Note: Variant of convertible note without awkward dates. Relatively common, won’t raise eyebrows. However, weak protections - some stories of early SAFE investors getting pushed out / diluted deliberately. Series Seed: Simple / standardized priced equity round. Won’t raise eyebrows, much faster & cheaper than full Series A. Benefit of starting long term cap gains clock immediately.
  29. 29. Mechanisms for Coming To Terms “Lead”: You set the terms of the investment, management agrees. Do this after you’re comfortable. “Follow”: Some other investor set the terms, you get the same terms as them. Start as an angel following experienced investors. “Party Round”: Management team set the terms of investment and is looking for investors to agree to those terms. Be careful for overvaluation / uncapped.
  30. 30. Sourcing Direct: Deal exposed to you through your network. You connect with founders and are personally brought into the deal. Syndicate: Deal exposed to you through fellow Angel on AngelList. You invest through their syndicate. Angel Group: You pay a fee to participate in a group of angels that have startups pitch to you. Incubator / Demo Day: Program that presents startups to you for investment
  31. 31. Sourcing Tips Be focused - in what communities are you known? What kind of startups want to come to you? Hang out your shingle, connect with those communities, reach out to founders in the vertical. Reach out to your network - make sure they know you’re actively investing and in what. Scrub through AngelList & Crowdfunder for promising deals in your area. Consider participating in or starting a syndicate to scale.
  32. 32. Flags for Early Stage Companies NDA: Won’t actually tell you what the company is or does out of fear you’ll steal their idea. Asks you to sign an NDA. (It’s okay if they ask you to keep their special sauce close to the vest - and obviously do honor this.) Not a Delaware C Corp: Can cause serious issues in later rounds; should ask them to convert/incorporate as Delaware C corp ASAP. Patents: Emphasizes that their value is that they’ve “filed patents” (probably just unenforceable provisionals) especially for relatively simple consumer software.
  33. 33. Flags for You Conflict w/your employer: Startup is in any way close to your day job in a way that could cause the perception that you’re either feeding your Employer's secrets to the company or vice versa. Definitely avoid personal investments in your Employer's vendors, especially if you have a role in vendor selection. If it feels like it could be awkward, disclose to Employer. Portfolio Conflict: If you’ve already invested in or are considering an investment in a similar company, maintain a “Chinese wall”; very bad form if something leaks from one to another - the karma bank is real!
  34. 34. Valuing Startups Mostly magic. Start by watching others & developing an opinion.� Valuing by revenue/cash flow multiples only works for mature businesses. Saner: by TAM weighted by risk weighted by likely dilution. (If this all goes well, how much would these shares really be worth, discounted against failure %.) For very early stage, even TAM will be unclear. Goal should be to give the company enough $ to materially advance the company for next 18mo and to have enough % to be interesting but small enough to leave room for A, B, C...
  35. 35. Evaluating Startups Do they make you/others excited about the opportunity? Do they have vision? Do they actually understand their customer and technology? Can they explain it to you? Do they respond defensively or comprehensively? Is the team rapidly iterating to improve their offering or are they planning a big splashy release? What motivates the team? Are they going to stick through The Long Grind or are they fixated on an exit? What are they trying to prove?
  36. 36. Being a Great Angel Forward articles relevant to the company (clients/competitors/acquirers/research) Share (non-Employer related) ideas with them. Brag about them on social media when they hit key milestones. Introduce them to potential partners, hires, acquirers, customers, other portfolio companies! Solicit new investment opportunities from them!
  37. 37. Being a Bad Angel Leaking! Demanding special rights / advisory shares / retainer agreements. Exercising RoFRs, demanding a sale, halting a sale. Calling notes. Attempting Board takeovers. Micro-managing.
  38. 38. Overall Strategy Get buyin from your S.O.!! Don’t invest more than ~10% of your net worth. Set aside some money for follow on / pro ratas. Aim to build a basket of 30+ startups over 10 years. Be someone who people want to get investment from!
  39. 39. AngelList Syndicates
  40. 40. Syndicate Overview Influential angel says “invest alongside me; same terms!” (syndicate lead) Pitches deal to followers after committing to invest. $8k/deal fee to AL, they manage all the backoffice. ($0 management fee) Typical: 5% carry to AL, 15% to lead (lead % can vary by syndicate) New: can apportion carry to advisers.
  41. 41. Syndicate Funds New (2016) vehicle to automatically invest in a portfolio of companies the syndicate would invest in with guaranteed best-access. No additional carry or per-deal fees. $20k fixed fee for setup of fund. No investor control over which companies syndicate invests in.
  42. 42. Crowdfunding
  43. 43. Customer money is best money. Non-dilutive! Zero interest! Cash to execute up front! Validation! But - hard obligation to deliver; software timelines are hard and hardware timelines even harder. “I’m sure I can just fly to Shenzhen and get this prototype turned into a final production line in a few weeks - it can’t be that hard, right?” Hardware often more expensive to deliver than customers paid; need to supplement. But Kickstarter has transformed hardware plays.
  44. 44. ICOs?!
  45. 45. Deal Flow & Evaluation
  46. 46. Beginning Join someone you trust alongside them, see how they evaluate deals and find deals, soon you will learn how to use these powers yourself. Syndicates are a good way to do this. Your dealflow will be proportional to your network but don’t “network”, be useful to people. Word will spread.
  47. 47. Plant a Flag Have an opinion - have a controversial view on where the world is going and put your money where your mouth is. Returns will be proportional to the correctness and unusualness of your insight. Mexican.vc → “Why on earth would you invest in a place so ridden with crime and drugs?” - racism and poor data blinded other investors to the opportunity. Be specific enough to be the first - everyone in the drone space wanted to talk to me after I announced drone.vc as the world’s first drone fund. Deals that come to you are great.
  48. 48. Solicit Remind friends, family, and colleagues that you invest and to keep a lookout for companies in the spaces you want to invest. Post about your industry, learn more, have an opinion. Convene good folks in the industry. It’s incredibly useful and helps place you at the hub of the network.
  49. 49. Evaluate Meta: you’ll probably screw this up so err on the side of investing less in more things. (Attempt to) control for your biases and spend disproportionate time on folks who don’t look like Bill Gates. Women, ethnic minorities, etc. Check out NewME. Fixate on product; does the team understand the problem they’re solving and who they’re solving it for? Does the leader have charisma? Would you work for them? Do they listen and learn? Confidence + humility.
  50. 50. Act Don’t leave an entrepreneur hanging, make a decision quickly. Give feedback about why you invested or didn’t invest. Few investors do and mature entrepreneurs value the candor. Be kind in how you frame it, though. If you’re investing, make a best effort to get other investor friends on board; bringing someone a quality deal is a gift that will likely be repaid in time.
  51. 51. War Stories
  52. 52. Advisory Agreements Took a two year vesting NQSO grant for helping source key hires. Grant didn’t have acceleration on Change of Control. Company took a long time to issue. One month after issuing they were acquired in a large cash transaction. I got 1/48th my grant. �
  53. 53. Zombies Founded a company, grew it to 4m users/mo, valued at ~$20m, owned most of it. � Then company took longer than expected to break out, had down rounds. Then washed out. Company still running, I own 0.01%. �
  54. 54. The Long Grind Led small round in brilliant pair of techies who were literally starving when I first met them. One had just arrived from Anchorage - the other, Latvia. They met on IRC. (Pro tip: this is a good sign.) Latvian ran into visa issues and returned to Latvia, Alaskan gave up and literally stopped emailing with anyone else, including co-founder. Reasonable people would give up here. Latvian fired him, became CEO. Company still running and growing after 5+ years. Total funds raised <$100k.
  55. 55. Travis Kalanick 1st company: Scour. Sued for hundreds of billions. Oops. 2nd company: RedSwoosh: raised millions, bottom fell out of market, everyone else left, single-handedly built it back up from the ashes, sold to Akamai. 3rd company: Uber. Yay! But.. Overnight successes are often a decade+ in the making.
  56. 56. Sean Parker 1st company: Napster. Raised millions. Wrote a bad email that got the company sued out of existence. Got fired from his own company. 2nd company: Plaxo: raised millions as CEO and founder, got fired from his own company. 3rd company: Facebook. Raised millions as President, got fired from his own company, but not until he taught Zuck how to not get fired. Owns $bns in $FB. 4th company: Airtime. Oops.
  57. 57. Thank you! Feedback Welcome: david@weekly.org // @dweekly // AL
  • chrispretorius

    Feb. 16, 2019

David Weekly's Angel Investment Deck. Meant as an introduction to investing in US-based companies as an accredited investor. Covers Angel List, syndicates, syndicate funds, venture capital, common risks and pitfalls. NOTE: Does not constitute legal or financial advice and is not a solicitation for investment.

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