Angel Investing

A Few Observations, Ideas, and Actions

It’s A Great Time To Be An Angel

• Australian entrepreneurial ecosystem expanding

• Increasing number of Angel groups and education

• Increasing number of startups

• Cheaper to start and prove a business model– But just as expensive to scale

Angel List

Billions of Dollars of Wealth Created

• Globally successful startups can be grown from Australia

Next Cohort Is Forming

Why Angel Investing – High Return Potential

• $1000 in FB in 2005 = $624,500 today (62,450%)

• $1000 in Airbnb in 2009 = $589,667 today (58,967%)

• $1000 in Dropbox in 2008 = $391,500 today (39,150%)

• Peter Thiel invested $500K in FB for 10.2% in 2004. He sold 16.8M shares at IPO for $638M and has another $396M left.

A Few Fun Facts

• $20B angel money invested in the U.S. annually• 60,000 companies – 80% seed• 258,000 active angel investors• Average investment size - $10K - $100K• Not neat and tidy messy• Hard work but fun• Can be financially rewarding

Five Successful Views/Approaches

• Ron Conway

• Reid Hoffman

• Mike Maples

• Paul Graham

• Peter Thiel

Ron Conway:Google, Twitter, Square and Paypal

• “I'm not looking at their idea. I'm looking at: Are they a leader? Are they focused on their product? Can they attract the team? What are the cofounders like? I can tell within three minutes.”

• “I think the ideas that entrepreneurs start with evolve and change dramatically from the beginning and sometimes end up unrecognizable, so we believe in investing in the people.”

• Have a list of resources to help the entrepreneur

• Very diversified portfolio

Reid Hoffman: LinkedIn, Facebook, Zynga, Flickr

• How will you reach a massive audience? He targets products and services that have the potential to reach millions of users and keep them engaged.

• What is your unique value proposition? He doesn’t like to invest in companies that can’t distinguish themselves from their competition.

• Will your business be capital efficient? Meaning, will your idea continue to get funding in later stages of growth?

Mike Maples: Odeo, Twitter

• Maples prefers to invest in startups that have low capital requirements, meaning that a company won’t need tens of millions to succeed and prove its model.

• To Maples, one of the most important qualities for a startup company is a solid team.

• Add value quickly – mostly people needs

Paul Graham: Y Combinator

• Have to be a good judge of potential– Angels have to be able to predict

• Recognize good startup founders – bet on people– Make things happen– Relentlessly resourceful– Missionary zeal

Peter Thiel: Paypal, Facebook, SpaceX, Spotify

• “The good thing is that there are more great companies being started now than were being started a decade ago”

• People• A lot of conviction• A lot of money in the bank – bigger checks• Invest with fewer investors. Many means no one has

done their homework. Consensus deals are low returners

• Concentrated portfolio

To Be Successful

• Get educated• Get in the deal stream• Invest with other angels gets you deeper into deal

stream• Evaluate quickly, say no quickly• Don’t be a free rider, can I add value after investing?• Be a good person don’t demoralize founders. If bad,

referrals dry up• Build your personal brand and reputation = better

deals

Some Questions/Tips

• Do I like/trust the entrepreneur/team?• Am I a customer, do I feel the problem?• Pick a thesis/strategy/area of expertise• Maybe look at 20 deals before investing• Spend just a few hours evaluating, not weeks• Only constant is team (and that changes)• Expect messiness• 1 or 2 deals will make your return

Strategies to Enhance Performance • Increase Due Diligence Time – Investors experienced better returns in the deals where they exercised

more due diligence. Sixty-five percent of the exits with below-average time spent on due diligence reported a return that was less than their original investment. Losses occurred in only 45 percent of the deals where investors did above-average due diligence.

• Invest Where You Have Industry Expertise – Analysis indicated that expertise has a material impact on angel investors’ returns. Returns were nearly double for investments in ventures where the investor had related industry expertise.

• Syndicate or Co-Invest With Experts (pattern recognition)

• Build a Portfolio (Diversified v Concentrated)

• Participation/Value Add – After an angel makes an investment, his or her participation in the venture – through mentoring, coaching, and financial monitoring – is significantly related to that venture’s returns, according to the study.

• Be Careful With Follow-On Investing – Deals where the angel investor made follow-on investments generated significantly lower returns. In ventures where follow-on investments were made, nearly 70 percent of the exits occurred at a loss.

• http://www.kauffman.org/research-and-policy/returns-of-angels-investors-in groups.aspx#sthash.TObynS6L.dpuf

Re-Cap

• Team, expertise, and market are most important

• Deep understanding of the problem (authentic connection) + passion is key

• Deal structure/valuations important but distant second

• Bigger checks less diversification vs smaller checks and more diversification

• Accept honest failure good naturedly

Remember

• Most die

• Some survive (1 – 5x) • A few thrive (20x+)

Places To Learn More• http://www.paulgraham.com/angelinvesting.html (Paul Graham)• https://angel.co (Angel List)• http://www.angelresourceinstitute.org (Angel Association US)• http://www.fabricegrinda.com/entrepreneurship/9-business-selection-crit

eria/• http://www.svb.com/halo-report/ (Halo Report)• http://aaai.net.au (Australian Association of Angel Investors)• http://www.tommckaskill.com/ebooks/angels.html (Tom McKaskill’s book

An Introduction to Angel Investing)• Innovation Bay, Sydney Angels, Melbourne Angels, SA Angels, etc

ADDITIONAL SLIDES

Startup Investor Ecosystem

Angels & Incubators($0-10M)

“Micro-VC” Funds ($10-100M)

“Big” VC Funds ($100-500M)

“Mega” VC Funds (>$500M)

Brandon CapitalSouthern Cross

General Catalyst

Pollenizer

Startmate

Blue Chili

Tank Stream

Carnegie

Blackbird

Sequoia

Accel

GBS

Airtree VC

Muru-D Incubation

Seed

Series A

Series B

Series C+

Bootstrap, KickStarter, Crowdfunding