From Invention to Start-Up:Money – Angel, Venture and

Strategic Partners

February 20, 2007

Mary Baker AndersonCalipa Partners

andAlliance of Angels

Financing Life Cycle

DiscoveryProof-ofConcept

ProductDesign

ProductDevelopment

Manufacturing/Delivery

Friends and Family

Angels

Seed Funds

Venture FundsFounder

Institutional Equity

Loans / BondsAngel Groups

Government Grants/Loans

Strategic InvestmentStrategic Investment

Professional Investors

Angels, venture capital, strategic investors (corporations) typically receive: Preferred stock Convertible debt with warrants or additional stock

Provide more than money: Can be proactive in developing business through (“win together”): Company building experience Company functionality experience Industry experience Contacts for partners, customers and follow-on financing

What Professional Investors Are Looking for: Investable Companies Clear path to profitability Solid management Realistic business concept and plan Scalable business Competitive edge/Technical superiority Market acceptance Realistic financial projections Realistic valuation Clear, well-articulated exit strategyBottom line: Opportunity for financial return

What Professional Investors Are Looking for: Investable Companies

How does an investor make this determination? Passion of entrepreneur (presentation) Team track record – individually and together

Entrepreneur’s ability to succinctly articulate vision and mission

Entrepreneur seeks advice of trusted, experienced, honest advisors

Coachable entrepreneur

What Professional Investors Are Looking for: Investable Companies

How does an investor make this determination? Competitors researched and understood Clear market differentiator Value proposition for customer clearly evident Market access strategy clear and realistic Comprehensive summary of risks (and plans to

cope/address) Profit potential – good margins Marketability of company – M&A exit

Type, timing and realistic purchasers

Who Are Angels?

Angels are accredited investors who: Expect a financial return Believe in giving back to their communities Invest locally and regionally Participate in the investment process Show interest in personal relationships with

companies and employees Offer wisdom and guidance to entrepreneurs

Financial Attributes of Angels

Provide early-stage investment dollars Invest smaller dollar amounts per investment Partially fill funding gap left by venture

capitalists (VCs) Invest individual wealth Can tolerate loss of entire investment Have diversified portfolios Invest with “patient money”

Forms of Investment

Debt (note) Equity (stock)

Options Warrants

Debt: collateralized, non-collateralized, interest in cash or stock (deferred?), convertible (at election or automatic?), length of time, etc.

Equity: common vs. preferred, dividends, many other terms discussed below

US Angel Investments

2005 – invested $23.1 billion (49,500 deals) Increase of 2.7% in $’s over 2004 Increase of 3.1% in deals over 2004

2004 – invested $22.5 billion (48,000 deals) 2003 – invested $18.1 billion 227,000 active angels

20% Healthcare/medical devices and equipment 18% Software

55% in seed/start-up 43% in post-seed/start-up (10% increase over 2004)

Source: Center for Venture Research

0 5 10 15 20 25 30 35

Telecommunications

Software

Semiconductors

Retail/ Distribution

Other

Networking & Equipment

Medical Devices & Equipment

Media & Entertainment

IT Services

Industrial/ Energy

Healthcare Services

Financial Services

Electronics/ Instrumentation

Consumer Products/ Services

Computers & Peripherals

Business Products/ Services

Biotechnology

Angel Investment Preference

Finding Angel Investors Angel Organizations:

Several in Puget Sound area including: AoA, PSVC, Seraph Capital Forum, Zino Society, Keiretsu Forum, Tacoma Angel Network, Bellingham Angel Network

Professional Service Providers Investment Forums

Early Stage Investment Forum, Zino Zillionaire Business Plan Competitions Professionally-funded Start-ups Venture Capitalists Corporate Boards

Venture Capital Statistics: Investments in US

2006 – invested $25.5 billion (3,416 deals) 2005 – invested $21.7 billion (2,939 deals) 2004 – invested $20.9 billion (2,876 deals) 2003 – invested $18.9 billion (2,893 deals) Increase due largely to late stage

investments Less than 2% in early/seed stage

Source: NVCA and Moneytree

Venture Investment by Deal Stage

($ millions)

0

2000

4000

6000

8000

10000

12000

Expansion Late Stage Early Stage Start-Up

2003200420052006

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Dollars (in $B) No. of Deals

Venture Capital Investment

Source: MoneyTree

Average Venture Deal Size ($Mil)

6.2

6.4

6.6

6.8

7

7.2

7.4

7.6

2002 2003 2004 2005 2006

20022003200420052006

$6.6

$7.0

$7.25$7.4

$7.5

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

*2006 Estimated Value

Startup/Seed

Valuations Of Venture Capital Seed/Startup Rounds ($ Millions)

Valuation: Expected ROIs ROI Five Year ROI

Seed 60%+/year 10X+

Start-up 50% 8X

Early stage 40% 5X

2nd stage 30% 4X

Near exit 25%/year 3X

Angels and VCs – Similarities

Selective in investments Requirements for an investable company Expectation of return on investment -

scalable Similar investment terms (though angels can

and often are – or must be – simpler) Bring the attributes of a professional investor

Angels and VCs –Differences Venture capitalists:

Invest on “home-run” theory ROI is ultimate goal Investing 3rd party money Often more demanding and actively involved than angels:

Control often issue Can requirement board and advisor approval and corporate

actions Angels:

Invest for returns – may be more modest expectations Social /community aspect to investments Individuals investing their own wealth Patient money

Strategic Investor Characteristics

Typically invest in complimentary technologies Usually have an internal champion

Often will invest in competitive technologies Unlike VC’s or angels who will place only one

bet in a market segment Typically follow, don’t lead a round

Pros and Cons of Strategic Investment

PROS Less price sensitive

than other investors

Can create instant credibility

CONS Erratic follow on

investment behavior Won’t always

champion your product internally

Can box you out of competitor products

Summation Angels usually invest initially in seed/start-up rounds Angels represent (more) patient money Angels are almost always sophisticated investors Angels make excellent advisors and mentors Strategic investment can be your best investment opportunity

or your worst nightmare There is a place for angels, venture, and strategic investment,

depending on the stage and investment needs of the company Many companies will need only angel investors Not all companies make great angel investments Be open, coachable and realistic Show your commitment, passion and drive