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Raising Capital Through Angel Investors

Mingles Tsoi 2009.05.30

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Disclaimer & Notice  This document has been prepared by Tsoi Ming To (“Mingles”) solely for use in the visual presentation to a private group of audience. It is not intended for general distribution to the public and may not be reproduced or redistributed.  The information contained in this document has not been independently verified. No representation or warranty express or implied is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or veracity of the information or opinions contained herein.  This document has been prepared solely for the purpose of presenting some ideas and guidelines of the subject theme for the seminar, workshop or training session, by assisting the audience in understanding the subject in a general knowledge level.  This document is furnished in confidence for your reference only and for no other purposes. The content of this document cannot be released to the third party unless it is given a written consent by Mingles.  Mingles reserves the right to claim for any compensation arising from the loss caused by the user's breach of this term.


Capital formation strategic pyramid IPO

VC seed funds informal VC large-scale loans private placement angels small business funding support from family, friends, key employees your own money


Matching with finance correctly

up to US$0.1M

Pre-start

With great idea, you need finance for additional research or produce a prototypes

up to US$1.0M

Start-up

No sales yet, you need finance for working capital such as, salary, initial marketing, product development & testing

US$0.1 - 1.5M

Early stage

Having a few sales, finance is required for marketing and operations, in order to make the business fly

US$0.2M up

Expansion

With profits and well established business operation, funding is required for new product development and exploring new markets


Capital formation strategies

equity terms

credit terms

valuation dilution control dividend redemption rights

interest rate amortization penalties pledged

debt

equity


Capital Financing Triangle

Š 2005 All rights reserved

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Balancing competing interests common objectives Growth in the value of business Entrepreneur wants/needs •maximum capital/valuation •avoid dilution/control •affordable cost of capital

Investor wants/needs •maximum return •mitigate risk/downside protection •input on future & •growth of the business/control

additional rounds of $ at more f avorable valuations

mutually beneficial exit strategy


Balancing four critical factors

Risk

Control

Return

Capital


Where did seed capital came from?

13% family 14% bank

2003 Inc. 500 survey

12% employees 9% friends 6% VC

78% personal savings

Personal Savings Bank Loans Family Employees/Partners Friends Venture Capital Mortgaged Property Government Guaranteed Loans Other

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Trustworthy sources

Personal Golden Circle

Š 2005 All rights reserved

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PE / VC

Pre-start

You are here

Start-up

APART or DEPARTED

Early stage

Expansion


What is Angel Investors  An angel investor or angel (aka a business angel or informal investor in Europe) is an  Affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.  A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.


The Original Story of Angel  The term "angel" originally comes from England where it was used to describe wealthy individuals who provided money for theatrical productions.  In 1978, William Wetzel, a professor at the University of New Hampshire and founder of its Center for Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the USA, and  He began using the term "angel" to describe the investors that supported them.


Types of Angels Business Angel private individual who invests and shares his personal management experience with the start-ups

Entrepreneurial Angel very rich entrepreneurial individual who invests to diversify portfolio or expand current business

Corporate Angel company that make regular large angel type for majority stakes

Professional Angel investor with background in professional careers, such as doctor, lawyer, accountant

Latent Angel rich individual who has made angel investment but not in the past three years


Business Angels have a Role in  Filling the equity gap in the start-up phase;  Investing in companies at a stage where VCs are no longer active;  Being an integral part of the chain of integrated finance tools;  Contributing to the culture of entrepreneurship in the region;  Agglomerating the existing investment capital in a region.


Differences between business angels and formal venture capital?

 Business angels invest their own assets and contribute their managerial skills, whereas venture capitalists invest the funds of others.  Business angels also invest lower amounts than venture capitalists. They tend to be involved in the early stages of a business’s lifecycle and their expectations in terms of ROI are more modest.  Business angels make their decisions of the future growth of a new business as venture capitalists are looking to the post records of already existing companies.


Equity Gap between Sources of Finance

Cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans.


Investment profile  Angel investments bear extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment.  Because a large percentage of angel investments are lost completely when early stage companies fail, business angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition.  Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period.  After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as 'low' as 20-30%.  While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds.


Business Angels in relation to Risk


The Pros and Cons of Business Angel Investors


For Start-up Entrepreneurs Â


Different steps that exist in the process of finding finance for his/her project


Checklist for Whether to Seek Angel or Not 

Management Team –

Target Customer –

Have you developed reasonable financial projections - including an income statement, cash flow and balance sheet and supporting spreadsheets - based on logical, realistic assumptions?

Exit Strategy –

Do you require between 200,000 RMB to 5,000,000 RMB to finance growth activities, including product development, recruiting key staff, launching sales and marketing activity?

Financial Projections –

Can you demonstrate how high margins (+15%) and consistent cash flow growth will be achieved?

Capital Needs –

Do you have a plan to achieve widespread market penetration for your products and services? How will you do this as efficiently as possible? Will you create an internal, direct sales team, or will you rely on external channel partners?

Profit Potential –

Have you protected your intellectual property? Have you performed an exhaustive search to be sure that you are not infringing on patents or trademarks held by others?

Sales Strategy –

Have you proven the concept behind your product or technology? Can this be confirmed with data or by objective experts? Have you built a comprehensive business plan to commercialize the technology?

Protected Intellectual Property –

Have you identified potential competitors? Do you understand your company’s differentiation points? Will true barriers to entry help your company to maintain a competitive advantage?

Technology –

Are the projected revenues in your product category large and growing? Can this be a several hundred million dollar market?

Competition –

Do you have an identifiable market segment? Is there a demonstrable and significant demand for your proposed solution?

Market Size –

Is your team experienced, driven, coachable, and willing to cede some control and decision-making authority to outside investors?

Do you have a clear exit strategy that will enable angel investors to generate a return of at least ten times their initial investment within five to seven years?

Business Plan –

Have you developed a comprehensive business plan that articulates your key business strategies for how you will grow your venture?


What kind of enterprises need venture funding?

 Not all companies are suited to receive venture capital, and some will do better with loans or other forms of financing.  According to Katarina Bonde, Managing Director of KUBI, the following companies can benefit from seed capital: – Companies with business ideas with significant commercial potential; – Companies with enough growth or profit potential to generate a good return on investments; – Companies in dynamic and changing industries; – Companies built on technical innovations; – Founders who can share control of the company.


Common mistakes entrepreneurs make in the search of capital                 

Preparing inadequately Searching capital too dispersive Misjudging the time to close a deal Falling in love with your business plan Spending too much time raising money Failing to understand the investor’s real needs Taking your projections too seriously Confusing product development with the need Failing to recognize the strength of mgt. team Providing business plans too excessive details Wasting the time of investors Lacking of analysis Acting at the wrong timing Afraid of sharing idea without telling the whole story Underestimate strategic benefits from investors Wrongly recognizing valuation is a science than an art Mistakenly beleive ownership equal controls


Factors drive value in ventureinvesting Commitment to strong/prope r governance Clearly defined sales & marketing strategy

Culture of innovation and adaptability

GROWING COMPANY VALUE DRIVERS Transparenc y in accounting and financial systems

Intellectual asset harvesting & management systems Recognizabl e brands & industry/pee r respect

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What are the venture investor really looking for? Marketing & Branding Strategies Defendable Competitive Durable Revenue Advantage (IP) Streams

Strategic Alliances, Channels, & Networks

Management Team’s Ability to Lead/Execute

Strong Base of Loyal and Path to Profitability Diversified Customers is Clear Large and Clearly Defined Target Markets

The business plan should always address the areas shown above to ensure there will be a first meeting Â


Suggestion for Change

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Examples of Angel Network in HK  Chamber of Commerce 

British Chamber of Commerce – Baker Tily Angel Program

 University  

HKUST, The Entrepreneurship Program CUHK, Tolo Harbour Business Angel Support Group

 Association 

Monte Jade Science and Technology Association

 Private Corporate / Individual    

HKACN Dark Horse Rudy Chan more and many …


Tolo Harbour Business Angel Support Group

ď Ź Structure


Tolo Harbour Business Angel Support Group

ď Ź Activities


Perspective of Angel Investment in HK  Characteristics      

No sophisticated nor organized angel groups Invest-alone or in loose clusters Close and trusted network Intuitive investment approach Lack of knowledge in business valuation Speculative investor oriented

 Suggested Solutions  Developing guidelines, case studies and templates  Increase depth and breadth of training for investors  Reference to the Business Angel Legislation Support in the UK, EIS (Enterprise Investment Scheme) qualify for generous tax relief for investment done by business angels http://www.hmrc.gov.uk/eis/

 Establishing university-led angel investment network to finance and mentor innovative student-and alumni-initiated companies


Contact

Mingles Tsoi mingles@cuhk.edu.hk http://facebook.com/mingles.tsoi

Raising Capital Through Angel Investors  

Introduction of the start-up financing and angel investors in Hong Kong.

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