1. The Entrepreneurial
Ecosystem
Part 5:
Dr. Michael R. Burcham
Building an Angel
e. michael@michaelburcham.com
Community w. www.michaelburcham.com
t. www.twitter.com/michaelrburcham
f. www.facebook.com/michael.r.burcham
l. www.linkedin/in/michaelburcham

2. Starting companies are like having babies –
fun to conceive but hell to deliver.
And once their born, they’re yours to feed
until they are self sustaining.
- Anonymous

3. Who Are Angel Investors?

4. Who Are Angel Investors?
• High Net Worth Individuals
• Have an “Early Stage” Preference for Investing
– Individuals - $25,000 - $50,000
– Organized Groups - $100,000 - $500,000
• Often successful, exited entrepreneurs or retired business
persons – active investors
• Tend to invest both time and money in companies
• Angels invest their own money (not money managers)
• They mostly invest in local companies and entrepreneurs

5. Definition:
Accredited Investor
• Financial position of investor:
• Net worth: $1 million, or
• Annual personal income: $200K, or
• Family income: $300K
• Assumption:
• Knowledgeable – capable of due diligence
• Can afford to lose invested funds
• Implications:
• Giving up regulated disclosure

6. Profile of Angels - Median
• Years investing 9
• Number of investments 10
• Total exits/ closures 2
• Years as entrepreneur 14.5
• Number ventures founded 2.7
• Age 57
• % wealth in angel investing 10%
• Level of Education Masters degree

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

8. How are Angel Investors Organized?
• Individuals
– Other Successful Entrepreneurs
• Organized Groups
– One signature for all dealings
– Better preparation for institutional rounds

9. Pros/Cons of Angel Investors
PROS CONS
• Terms offered • Follow-on investment
• Speed • Less sophisticated on terms
• Simpler investor relations and value – may create issues
• Often have helpful, relevant for later stage investors
experience to share:
– Business acumen
– Vertical expertise
– Financial experience
– Director Services
• Common Roles:
– Advisor, Mentor, Coach, Director
– Rarely a Paid Consultant

10. General Differences in Angels & Venture Groups
Angels VC’s
Funding amounts $25K to $1.5M $500K and above
Motivation to Invest Not just return driven Mostly return driven
Strong emotional component But some adjustments for other VCs and Entrepreneurs
Often likes to be a coach, Bragging
rights
Accessibility Prefer anonymity Highly visible
Reachable via referrals or groups Prefer to only look at deals referred from their networks
Geographical focus Regional, with in a 4hr drive Regional, National, International depending on firm
Key reasons to invest Personal chemistry with Mgmt Nearly developed product
Detail Plan with large markets Some operating history with a strong experienced team
Sustainable competitive advantage Sustainable competitive advantage
Investment vehicle Common or Preferred Stock Preferred Stock
Occasionally convertible debt
Long term value Operational experience Experience in managing growth
added Common Sense advice Deep pockets
Specific Industry expertise Networks for additional capital
Experience in managing IPO or sale exits
Reaction to bad news Roll up sleeves and help to solve the Intense communications and coaching
problem, Open up rolodex 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

11. How Do Angel Investors Fit within the
Entrepreneur Ecosystem?

12. Ecosystem Component for Investing
Non-Equity Financing Equity Financing
Angel Financing
Self Finance /
Venture Capital
Bootstrapping
Debt /
Private Equity
Bank Finance
Public
Stock Markets

13. The Funding Continuum
Discovery Proof-of Product Product Manufacturing/
Concept Design Development Delivery
Pre-seed
Idea Seed Start-up Expansion/Mezzanine
Funding Funding Funding
Source of Capital
Founder Venture
Seed
Funds Funds
Friendsan Institutional
dFamily Equity
Angels
Loans
Angel Groups

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

15. Estimated that 90% of Outside Equity Capital
in Seed/Startup Stage Companies
is Sourced from Angel Investors

16. Angels Invest in the Majority of
Startup & Early Stage Deals
Number of Deals in 2010: Angel Investment and Venture Capital
Source: “Jeffrey E. Sohl, Center for Venture Research” and 2010 NVCA Yearbook

17. Angels: Majority of Startup Funding
Funding by Source & Stage, 2010
Funding by Source and Stage- 2009
15,000
Venture Capital
12,500 Angels
US$ Millions
4,672
10,000
7,500 1,596 Sources:
5,511 Center for
5,000
8,272 Venture
6,160 5,912
2,500 Research and
2,640 PwC
0 528
MoneyTree
Seed Early Expansion Later
Investment Stage
Angel Investors 2010 Venture Capital 2010
• $17.60 billion • $17.69 billion
• ~57,000 deals • ~2,800 deals
• 35% seed/startup • 9% seed/startup
• 47% early stage • 65% later/expansion capital
• ~ 259,500 individuals • Total 794 firms (not all active)

18. The Life Cycle of The Investment Process
They like the idea Term Sheet
The
100
Negotiated
Due Diligence Deal
Ecstasy
Rejections Interest
0 Shown
Reformulate
Last Minute
Plan
Business Demands/
Agony Plan Expectation
All Reject
Mismatch
-100
9 to 12 months

19. What Behaviors Drive
Investors?
1. Fear
2. Greed

20. How Do We Find & Develop Angels
within our Entrepreneurial Ecosystem?

21. Recommendation 1:
Identify Potential Angels in the Community
Examples:
• High Net Worth Individuals
• Retired Business Executives
• Active Serial Entrepreneurs
• Known Angels Who are Relatively Inactive

22. Finding Angels
• Friends and Family
• Other Entrepreneurs who you worked with in the past
• Services providers – Attorneys, Accounting firms, etc
• Angel Groups
• Investment Conferences
Its all about Networking! There are no short-cuts!

23. Finding Angels…
U.S.
Millionaires Informal
Investors Active
4,200,000 AngelsCent
3 study
estimates er for Venture
Research Investors
1,000,000
in Angel
225,000 Groups
12,000

24. Recommendation 2:
Organize a Meet Up or Discussion
• Angel investing works best when there is a sense
of “community” within the group. As they get to
know one another and discuss the idea, you’re
likely to gain more traction.
• Invite 3-4 active Angels from nearby cities if you
don’t really have any active Angels – to share their
story and discuss why they invest.

25. Motivation:
Why Be an Angel Investor?
• Helping entrepreneurs
• Stay engaged – using skills and experiences to help build
business
• Giving back to community or university
• An active form of investing – not just watching markets
• Return on Investment is the metric

26. Recommendation 3:
Provide Formal Training
• Process for Investing
• Terms and Term Sheets
• Valuation Models
• Thinking “Portfolio” as an Approach
• Risks
• Expectations and Time Horizons
• Board Roles, etc

27. Angel Investor Realities
• Statistically Angel Investors reject 80% of the deals presented
• Average outcomes of Investments made:
– 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 10-20X return on investment.

28. Recommendation 4:
Establish a Process for Angels
• Timing for when the entrepreneur is introduced to
or meets with the angel
• Periodic “Pitch Days” for groups of angels to hear a
concept (or several concepts) to be followed up
with individual meetings
• Ensure all legal and accounting issues are already
addressed before angel meetings
• Timing for the funding-raising process, expectations
for closing a round, etc.

29. Do’s & Don’ts
• Get deals done – angels need to invest in 2-4 deals per year or
more to be proficient.
• Investors choose people over ideas.
• Don’t drag on decisions, be helpful. It’s “angel” investor not
“devil” investor
• Don’t ever charge the entrepreneur to present to the angels.

30. Recommendation 5:
Deliver a GREAT Product to the Angels
• Ensure the entrepreneur has had good mentoring
and coaching before Angel meetings – including
having a viable business model and a few early
customers (or potential customers)
• Insist the entrepreneur tell their story well and are
well prepared for the meeting (materials, etc)

31. What Materials Do You Need?

32. Recommendation 6:
Periodic (Quarterly) Meet-ups for Angels
• Continue to build a sense of “community” – makes
it easy to invite new individual Angels into the
group or discussion
• Share best-practices, celebrate wins, learn from
those investments that don’t go so well.

33. Summary:

34. Building an Angel Community
1 2 Produce 3
Identify Offer
An Investable
Potential Angels Training Workshops
Product
• Befriend Local • Invite an active • Connect
Angels Angel Investor to entrepreneurs to
share experiences Mentors and
• Identify Successful Resources
Entrepreneurs who • Train about the
might consider Process, Term • Insist entrepreneurs
becoming an Angel Sheets, Valuations tell story well and
are prepared
• Organize “Meet Ups” • Discuss issues of
or info sessions to risks, time horizons • Develop a Process
allow Angels to meet and expectations of introducing the
and build community Entrepreneur to the
Angel at the right
time

35. Building an Angel Community
1 2 Produce 3
Identify Offer
An Investable
Potential Angels Training Workshops
Product
• Befriend Local • Invite an active • Connect
Angels Angel Investor to entrepreneurs to
share experiences Mentors and
• Identify Successful Resources
Entrepreneurs who • Train about the
might consider Process, Term • Insist entrepreneurs
becoming an Angel Sheets, Valuations tell story well and
are prepared
• Organize “Meet Ups” • Discuss issues of
or info sessions to risks, time horizons • Develop a Process
allow Angels to meet and expectations of introducing the
and build community Entrepreneur to the
Angel at the right
time

36. Building an Angel Community
1 2 Produce 3
Identify Offer
An Investable
Potential Angels Training Workshops
Product
• Befriend Local • Invite an active • Connect
Angels Angel Investor to entrepreneurs to
share experiences Mentors and
• Identify Successful Resources
Entrepreneurs who • Train about the
might consider Process, Term • Insist entrepreneurs
becoming an Angel Sheets, Valuations tell story well and
are prepared
• Organize “Meet Ups” • Discuss issues of
or info sessions to risks, time horizons • Develop a Process
allow Angels to meet and expectations of introducing the
and build community Entrepreneur to the
Angel at the right
time

37. Closing Thoughts
• By providing equity capital and mentoring to entrepreneurs,
Angels are making a difference
– In job creation
– In wealth creation
• Encourage Angels to plan a portfolio strategy as they begin
investing
• Organize the Community – Develop a “Process”
– Good deal flow
– Robust processes
– Great camaraderie