angel & venture capital finance: where is the money moving?
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Angel & Venture Capital Finance: Where is the Money Moving?
James Geshwiler
Managing Director, CommonAngels
Web Innovators Group
9 December 2008
James Geshwiler, 781-274-9124, james@commonangels.com
Where’s the Money?!
• Public Market Crash Hits Everybody “Venture Capital Hits a Cash-Call
Crunch,” WSJ, 12/8 “High-tech Wrestles with credit crisis,”
Boston Globe 10/8 “A lot of [VCs] could be on the sidelines
for four or five years." –Boston-based general partner
Most angels net worth down 30-50%
James Geshwiler, 781-274-9124, james@commonangels.com
Risk Isn’t Up that Much; Just Changed
• Financial risk—very high Can’t count on follow-on investment
Syndication gone from tough to nearly impossible
• Competitive Risk—way down! Little threat from existing companies
Fewer VC-backed chasers
• Market Risk—mixed, depends on sector, company
• People Risk—down; great teams, attrition down
• Product Risk—unchanged
James Geshwiler, 781-274-9124, james@commonangels.com
Working with Investors Today
• Target Investors who Succeed on Lower M&A
High M&A, IPO closed for big exits
Very hard to move the needle on a big fund
• Shouldn’t be Focused on Today’s Market
Companies backed today targeting 5-7 years for exit
• Cash is King of Kings
Cash-flow break even on 1 round if at all possible
James Geshwiler, 781-274-9124, james@commonangels.com
Working with Angels, VCs, Both?
• Individual “Angel” or “Private” Investor Invests own money, gets full return Typically industry veterans
• Venture Capitalists Compensated on fees, profit share Dedicated, institutional investor
• Angel Groups Large networks of industry experts Usually 2-3 with greatest skills lead + “bench” Organized, institutional structure
James Geshwiler, 781-274-9124, james@commonangels.com
Who are the Top Investors?
Entrepreneurial Experience
Low High
Industry Experience
HighOperational expertise
angelGuardian Angels
Low Financial Return AngelProfessional Entrepreneur
Angel
Source: MIT Entrepreneurship Center & HBS Study on Angel Investing, Feb 2000
Founder, ChairmanFormer CEO
Successful company in your or complementary
sector
James Geshwiler, 781-274-9124, james@commonangels.com
Angel Groups Addressing Void Left by VC
Stage Pre-Seed Seed/Start-Up
Funding Gap between
$500,000 and $5,000,000, targeting average M&A and up
Early Later
Source Founders, Friends
and Family
Individual
Angels
Venture Funds
Investment
$25,000 to $100,000
$100,000 to $500,000
$5,000,000 and up(initial capital may be smaller,
but exit targets higher)
James Geshwiler, 781-274-9124, james@commonangels.com
Median Fund Remains ~$200M!
Source: DowJones/VentureOne
$206
$153
$96
$75
$105$100
$107$98
$80$80
$201
$0
$50
$100
$150
$200
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Median VC Fund Size (for funds greater than $20M)
James Geshwiler, 781-274-9124, james@commonangels.com
Funds < $100M Disappearing
Allocation of Fund Size by Number of Funds Raised per Vintage Year
Source: DowJones/VentureOne
2% 4%
29%21%
25%
25%
29%
65% 71%
34%
12%8%0%
20%
40%
60%
80%
100%
1996 1998 2000 2002 2004 2006
Under $100M
$100M-$249M
$250M-$499M
$500M-$999M
$1B+
James Geshwiler, 781-274-9124, james@commonangels.com
Angels Institutionalizing
• ACA Formed 2004 46 Groups
Charter Members
• As of 2008: 142 Groups 18 Affiliate Organizations >6,500 Investors 43 States & Provinces
Member Locations
Full Member
Provisional Member
James Geshwiler, 781-274-9124, james@commonangels.com
CommonAngels Target Investments
Series A Financing of $500K - $5M
Total Capital Less than $20M
• New Areas of Information Technology
• Current Expertise within the Membership
• Passionate with CEO Capabilities
• Within the Geographic Area – 1 Hour Travel
• Possibility of Liquidity Event in 5 years
James Geshwiler, 781-274-9124, james@commonangels.com
Submissions(~30 PlansPer Month)
Managing Director pre-
screens emailed
submissions.
Screening TeamReview
(5 – 10 PlansPer Month)
Screening team votes on
which companies to
invite to general
meeting.
General MeetingPresentations(1 – 3 PlansPer Month)
Managing Director polls members for
level of investment
interest in deals, recruits diligence
team, and facilitates
selection of deal lead to begin term
sheet negotiations.
Manage Investment
Board member represents
member interests and
seeks an attractive exit.
Deal lead closes
transaction and the sidecar
fund invests in companies that attract at least
$250K in investment
from at least 5 members.
Diligence & TermSheet Negotiations
(Coordinated byManaging Director
& Deal Lead)
Typical Deal Process
James Geshwiler, 781-274-9124, james@commonangels.com
Who Matters More than What
“The most important item on a term sheet is the name of the investor at the top”—Mark Gorenberg, Hummer Winblad Venture Partners
• View Investors like any other Strategic Relationship Cash is a commodity, firms and people aren’t Long-term partners Influence of style, expertise
• Big Investor vs. Small Investor Incentives
• “Instant Company” vs. Organic Approach
• 1st round dilution matters much less than later rounds
James Geshwiler, 781-274-9124, james@commonangels.com
Big Investor Incentives
• >$250M in Fund >$40M/Partner >$10M/Investment >$50M Liquidity/Deal, Exits >$500M
• Institutional LPs Meticulously measure IRR Next fund depends on top quartile performance
• From Company’s Perspective Pro/con: 800lb Gorilla as your friend Technical risk OK ($ can fix that);
Can’t Bring Market Risk (exit too small) Return needs to justify $30-40M+ from syndication, multiple rounds “We Fund BIG Ideas….”
James Geshwiler, 781-274-9124, james@commonangels.com
Small Investor Incentives
• <$100M in Fund/Network $10M/Partner or less $500K-$3M Investment $5M-20M Liquidity/Deal, Exits $50M-100M
• Institutional LPs, SBIC, Individuals Maybe more flexibility in performance (non-ERISA $) Maybe less, eg., SBIC program….
• From Company’s Perspective Pro/con: good returns on average M&A transaction Market risk OK; technical risk bad (can be bottomless pit) Shallower pockets may be disincentive to pile on risk “Who is going to buy you?...”
James Geshwiler, 781-274-9124, james@commonangels.com
Big vs Small Investor Incentives
$ Exit
Probability
Big Investor (>$500M):Has capital, incentive to push for big outcome, but can drive failure seeking bigger exit
Small Investor (<$200M):Has capital to avoid failure, incentive to sell earlier for similar IRR
Courtesy Dharmesh Shah, founder Hubspot
James Geshwiler, 781-274-9124, james@commonangels.com
Textbook Case Studies of Incentives
Fund Size
Large Small
Company Capital
Requirements
High
BIOTECH
(drug discovery)
CLASSIC TELECOM
(routers, CLECs)
Likely Clash:Run out of money,
cramdown, premature sale
Low
Likely Clash:Small return for opportunity
cost, incentives to dream big, assume more risk
SOFTWARE(Web 2.0)
Medical Devices(Orthopedics, Non-invasive)
James Geshwiler, 781-274-9124, james@commonangels.com
“Instant Company” vs. Organic Approach
• Timelines, Competition Also Key Variables
• Some Opportunities Require Big Money Up Front Taking on public company Making a market Need critical mass for audience Large capital requirement to finish R&D, prove concept, build infrastructure Analogy: launching a rocket…you get there fast! But aim correctly!
• Others Are Better Done in Stages Greenfield opportunity with barriers to entry Multiple market opportunities that need exploration Multiple exit opportunities, friendly acquirers Analogy: flying an airplane….slower than a rocket, easier to change course
James Geshwiler, 781-274-9124, james@commonangels.com
Example Investment: Carbonite
• Long-time friends of CEO
• All-star team, 5th
company
• Operational breakthrough
on consumer backup
• Rapid initial adoption
• $2.6M 1st Round, Oct ‘05
• $3.5M 2nd Round, Aug ’06
• $15M 3rd Round, Apr ‘07
James Geshwiler, 781-274-9124, james@commonangels.com
Case Study:
• Sloan MBA & Co-Founder
• First-time CEO
• Closely ties to market
• Rapid initial adoption
• $1.1M 1st Round,
All Angels, June ‘06
• $6.0M 2nd Round,
2 VCs + Angels, June ’07
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