A Guide to Angel Investment

For Angels and Entrepreneurs

Tom Tierney Update: 8/26/2013

Tom Tierney lives in Encinitas, CA and is a member of Tech Coast Angels (www.techcoastangels.com). Also see http://en.wikipedia.org/wiki/Tech_coast_angels for more background information on the TCA.

2 “A Guide to Angel Investment”

Introduction

This “Guide to Angel Investing” outlines some of the presentations and writings I have available on

slideshare (www.slideshare.net/tomando) that hopefully give entrepreneurs and new angel investors,

an overview of some important concepts and process involved in early stage company (start-up)

investing, or angel investing.

The guide is by no means a definitive resource, but ideally complements other information you

encounter along the way to help make your entrepreneurial pursuit of capital, or your investment in an

entrepreneur(s), a more successful and enjoyable process.

I’ve divided the guide into chapters:

-1- “Background Information for Angels and Entrepreneurs”

-2- “Inside the Angel’s Mind”

-3- “Investor Presentations”

-4- “Due Diligence”

-5- “When You Fail”

-6- “Venture Capitalists”

Each section has a quick overview but really uses my existing presentations or short notes to cover each

section in more detail.

All references to documents and presentations have hyperlinks attached to the numbered footnote

along with a URL link included in the footnote (you can click on the links “live” if you are reading online

or type/follow the link (if you’ve printed out the document) in the “Reference Material Links” section at

the end of each chapter).

You can reach me via email at ttomtierney@gmail.com for any comments or suggestions as to improving

this guide.

3 “A Guide to Angel Investment”

-1-

Background Information for Angels and Entrepreneurs

You may start out in the early stage company investing process and simply wonder, what are angel

investors and venture capitalists (VCs)? Who are they and what do they do? Here is a short note with a

long title (“Angel Investors and Venture Capitalists: Who, What, Where, When, Why?” [1] ) describing

both of these characters along with online pointers for more information on the “Angel Capital

Association” and “National Venture Capital Association”. Both websites (ACA and NVCA) include

resources and information about angel investors and venture capitalists, respectively.

Learning the Language

Probably the most difficult problem for entrepreneurs when first presenting their idea for a company

and product is learning the language and habits of investors. This language problem is also an issue for

new angel investors as they may hear for the first time phrases like “pre-money”, “post-money”, “term

sheet” and the always lovely “cram down”.

I’ve put together a presentation called the “ABC’s of Angel Investing” [2], which defines some of the

common terms used in the early stage investing process. This presentation describes some phrases, lists

other key phrases but the expectation is that this can be used as a starting point and other definitions

can easily be found searching online, or the many books on angel investing.

Chasing Your “White Whale”

In Herman Melville’s book “Moby Dick”, Captain Ahab spent his life chasing the white whale that earlier

took Ahab’s leg, ultimately leading to Ahab’s death by the same white whale.

Entrepreneurs and angel investors both sometimes become as focused as Ahab on their “white whales”

and it can potentially lead to a similar fate as Ahab (well, at least in a “business sense”). So,

entrepreneurs who claim they have “disruptive technology” or “no competition”, angel investors who

4 “A Guide to Angel Investment”

chase “100X Returns” and big “IPOs”, this presentation is for you: “Moby-Dick; or, The White Whales of

Angel Investing” [3].

The Real Statistics Behind M&A (Merger and/or Acquisition) Exits

If you take a look at “Tech Merger&Acquisition Data: The Odds Favor Smaller Acquisitions” [4], you will

see that the largest grouping of tech acquisitions over the last four years occurred under $50M, with the

average acquisition price of around $28M. Roughly 60% of the deals occur under $100M.

No doubt there are large M&A and IPO events, but the predominately larger number of M&A deals

occur in the lower end of the valuation spectrum.

It should be noted that most start-ups, fail. So even with those that are successful and get to an exit,

attrition is very high.

For angel investors, early stage investing is a very high risk occupation where you hope the few winners

in an investment portfolio make up for the vast number of failures.

Maybe 1 out of 10, or 2 out of 20, companies are big successes in an angel portfolio.

Reference Material Links

[1] http://www.slideshare.net/tomando/angel-investors-and-venture-capitalists

[2] http://www.slideshare.net/tomando/abcs-ofangelinvesting

[3] http://www.slideshare.net/tomando/white-whalesofangelinvesting

[4] http://www.slideshare.net/tomando/tech-mergeracquistion-data-2008-2011

5 “A Guide to Angel Investment”

-2-

Inside the Angel’s Mind

While I can’t speak for all angel investors, my mind over years of involvement in angel investing has

become a dark and sinister place: you never know around the next corner whether a competitor will put

a company out of business or if a venture capitalist will dilute you completely out of your earlier

investment in a start-up company.

Some (most?) angel investors begin start-up investing with an attitude that most presentations they see,

and start-ups they come in contact with, seem like great ideas. Over time, experience and life’s ultimate

post-graduate learning institution (the “School of Hard Knocks”), teaches angels to view each

opportunity with a more “jaundiced eye”: most start-ups fail.

The Magic 8-Ball of Angel Investing

The high expectation for success on part of the entrepreneur or start-up, versus the expectation that

most start-ups fail on part of the angel investor , sets the table for a “tug-of-war” of expectations during

the investing process.

One thing I think that is important for a start-up is to try and look at this process from the perspective of

the angel investor, get inside their head, and possibly try to bridge this “gap of expectations” to enhance

the chances for successful investment.

The presentation “The Magic 8-Ball of Angel Investing” [5] and corresponding note “Magic 8-Ball of

Angel Investing” [6] give entrepreneurs an “inside the 8-Ball” or “inside the mind” view of what angel

investors may be thinking during investor presentations and the investing process.

Angel Investor’s “10 Commandments”

What are the goals, or what might be the goals, of angel investors in early stage investing? If there were

a “higher investing power” to inform and lead the angel investor, what might they issue as

commandments to follow to be successful in the process?

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The presentation “Ten Commandments of Angel Investing” [7] describes what might be basic rules for

angel investors to follow. These rules are also helpful to entrepreneurs to understand what

characteristics angels might be looking for in start-ups in general.

Icebergs

Angel investors may sometimes feel as if they are navigating a field of icebergs, to finally arrive at the

start-up they are interested in investing in.

Icebergs offer some examples of the difficulty of finding great investments and even after investing, the

difficulty of great “exits” or “returns on investment”. Again, entrepreneurs should think about the

iceberg metaphor to help understand and manage expectations both for the start-up, and investors,

during the process of investment.

The presentation “Icebergs and Angel Investing” [8] describes some of the similarities between angel

investments and icebergs, leaving a lasting visual image of the likelihood of success with an investment,

VC dilution and the size of the underlying “due diligence” process.

Reference Material Links

[5] http://www.slideshare.net/tomando/magic-8-ball-of-angel-investing

[6] http://www.slideshare.net/tomando/magic-8ballofangelinvesting

[7] http://www.slideshare.net/tomando/ten-commandmentsofangelinvesting

[8] http://www.slideshare.net/tomando/icebergs-and-angel-investing

7 “A Guide to Angel Investment”

-3-

Investor Presentations

Certainly for angel investing groups, and sometimes even for individual angel investors, each may be

viewing multiple start-up presentations during the course of a morning, afternoon or evening

presentation session. Even if the group or individual angel is just reviewing your start-up company

presentation, you can be guaranteed if you don’t capture their attention or otherwise “wander” during

your presentation, the investor will start to “tune you out”.

If you are presenting and most investors aren’t making eye contact, are flicking through messages on

their cell phone or staring off into space, you’ve lost them.

This section is to pass along some tips to help entrepreneurs better structure their start-up’s

presentation and help to keep investor’s engaged, pass along information they are interested in and

help get the entrepreneur follow on meetings that help lead to a successful investment.

Investor Presentation on A Napkin

I’ve created a presentation “Investor Presentation Guidelines (The 7P’s you can do it on a napkin!)” [9]

which outlines a simple structure for creating an investor presentation that maintains some simplicity

but also delivers the information an investor requires to make a decision as to whether to continue the

investing process with a start-up.

This presentation (literally) guides an entrepreneur to think of what information they could sketch out

on the folded sections of a typical napkin, as if they were sitting in a coffee shop or restaurant explaining

their start-up idea to an investor.

Obviously, it is difficult to cram as much information as you would like in the 8 panels of a napkin, but it

is at least a style guide and you can always have extra slides in your “presentation deck” as questions

come up after the presentation.

The 7P’s of Presentations

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The presentation “Investor Presentation Guidelines” [10] is the “non-napkin” format of the presentation

described above.

This presentation describes 7 P’s you should cover in your investor presentation: Pitch (elevator pitch),

People (founders/management bios), Pain (problem/market addressed by start-up), Product

(product/service description), Players (competition), Projections (financials/business projections) and

the Proposition (what’s the deal terms for investors?).

Again, this is a suggestion for the format of the presentation, each presentation will differ as to the

format that makes sense for your start-up idea and the audience you are presenting to. Ideally, keep

the presentation short and informative and have backup slides that describe potential investor

questions in more detail, during the Q&A (Question and Answer) session after the presentation.

Reference Material Links

[9] http://www.slideshare.net/tomando/investor-presentation-on-a-napkin

[10] http://www.slideshare.net/tomando/techcoastangels-7-ps-of-presentations

9 “A Guide to Angel Investment”

-4-

Due Diligence

One of my favorite quotes that is applicable to angel investing is from former U.S. Secretary of Defense

Donald Rumsfeld:

Early stage start-up investing is full of “unknown, unknowns”! How do we, as angels discover what lies

behind these “unknown, unknowns”? We use the “diligence” or the “due diligence” process to

investigate and research the start-up team, idea, target market, financials, competition and many other

pieces of a start-up company team, product and market.

Due Diligence Case Study

A “Due Diligence Case Study” [11] offers a “tongue in cheek” look at a “well known but mythical

company” to describe part of the due diligence process and terms angels may use during the process.

Entrepreneurs, and the start-ups they create, should work to have a “due diligence book” (in some

rudimentary format) available for angels as they start the due diligence process. As a politician might

create or hire someone to create “opposition research” on themselves, the start-up should strive to

have as much information available for angels to make this process smoother .

A “due diligence book” might include resumes and references of the management team (LinkedIn?),

product spec sheets or mockups, business plan, financial/business model (price, cost, underlying gross

margin), funding needs/spend plan, product mockup or prototype (or pointers to them), any third party

affirmation of idea, patents or descriptions of “secret sauce”… whatever you can provide that helps

smooth the due diligence process will be appreciated by investors.

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Angel Investments and Nigerian Email Scams

Could your start-up presentation look like a “Nigerian Email Scam” to an angel investor? Although using

some humor to drive home a few points, the presentation “Can Angel Investment Opportunities be like

Nigerian Email Scams?”[12] and note “Angel Investing Presentations and Nigerian Email Scams”[13] ,

show some possible similarities between the two and offers “due diligence” as the way to ultimately

differentiate one, from the other.

Reference Material Links

[11] http://www.slideshare.net/tomando/a-due-diligence-study

[12] http://www.slideshare.net/tomando/angel-investmentsandnigerianemailscams

[13] http://www.slideshare.net/tomando/angel-investinglikenigerianemailscams

11 “A Guide to Angel Investment”

-5-

When You Fail

Yes, the title of this section uses the word “when”, not “if”.

Most start-ups fail. Some will succeed in one way or another: return some of an investor’s money,

return all of the investor’s money or in the limited success case, the investor’s money plus some profit.

Some start-ups will fail on their initial idea for a product or service but pivot to a new product or a new

market. Some team members will fail (or bail) on the start-up.

There are few guarantees in life but some level of failure is mostly guaranteed during the start-up

process.

Graveyard of “Dead Deals”

“The Graveyard of Dead Deals” [14] presentation and presentation notes “The Graveyard of Dead Deals”

[15] describe how start-ups may fail during the investment process. Some failures are related to the

team, the product, the market or even company valuation (can’t come to an agreement between

company and investors).

This graveyard is meant to give examples of how investment deals have fallen apart, they aren’t

necessarily definitive or all inclusive as to all failure modes and is simply presented as a tool to learn

from those who have “gone before us”!

The Start-up Stakes

On a lighter note, we may consider this all to be a horse race with the angel investor trying to place a bet

on best jockey (management team), horse (company) or race (market), or some combination of all.

Each race has a winner, but most lose (fail).

12 “A Guide to Angel Investment”

The presentation “The Startup Stakes: An Early Stage Company Thoroughbred Race” [16] describes

investor’s different perspectives on how to avoid failure when picking (investing) in a start-up company.

Reference Material Links

[14] http://www.slideshare.net/tomando/the-graveyard-of-dead-deals

[15]http://www.slideshare.net/tomando/notes-for-the-graveyard-of-dead-deals

[16] http://www.slideshare.net/tomando/startup-stakes-an-early-stage-company-race

13 “A Guide to Angel Investment”

-6-

Venture Capitalists

Venture capitalists (VCs) and angel investors have one unique difference: angel investors generally

invest their own money, VCs generally invest “other people’s money”, their investors or “limited

partners”.

A VC has a fiduciary responsibility, a legal responsibility, to these limited partners and ultimately harsh

decisions can be made that affect start-ups because the VC has this responsibility. This doesn’t mean

angel investors are always “angels”: angels have to sometimes make these same harsh decisions.

In some ways, VCs have it easier than angels in that they can simply point to their fiduciary responsibility

as the reason they have be harsh. Angels can’t finger point. Though in both cases, one hopes decisions

are made that the entrepreneur recognizes and accepts as in alignment with his/her own as to ultimate

success of the company.

How to Field Dress a Venture Capitalist

The presentation “How To Field Dress a Venture Capitalist”[17] is meant to describe the underlying

“friction” that may develop between entrepreneur and VC, and how to prepare and hopefully avoid it.

This same friction is true for angel investors, friends or family that might invest in your start-up idea.

As with most things in life: be honest, communicate when problems arise and plan for the “unknowns”

to occur.

“Murphy’s Law” tells us: “Whatever can happen, will happen.” Plan contingencies and keep open lines

of communication to your investors.

Reference Material Links

[17] http://www.slideshare.net/tomando/how-tofielddressaventurecapitalist

14 “A Guide to Angel Investment”

A Final Word: “Persistence” “Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan 'Press On' has solved and always will solve the problems of the human race.” -- Calvin Coolidge (1872 - 1933) 30th President of the United States