Seed and Early StageAngel Investing: A Case Study

Troy Knauss, Fund ExecutivePiedmont Angel Network

Adjunct Professor, Wake Forest Universitytknauss@panfunds.com

Presentation

Investing Structures

> Individual Angels

> Angel Networks

> Angel Funds

> Venture Capital FundsANGELS MUST BE ACCREDITED INVESTORS UNDER ALL STRUCTURES

Idea Start up

Intro Rollout Growth Expansion Maturity

ANGEL GROUPS$100,000 – $1MM+

INDIVIDUAL ANGELS$10k – $100k

GRANTS UP TO $1MM

SYNDICATIONUP TO $2.5MM

Seed Capital / Grants

Individual Angels / Groups / Boutique VCs

Venture Banks / Venture Capital Funds

Traditional Banks

Acquisition Stage / IPO /

Mergers

Rev

enu

e / E

BIT

DA

Funding Size

Source: University of New Hampshire Center for Venture Research, Price Waterhouse Coopers

Source of FundingE

arly

Sta

ge

to L

ate

Sta

ge

2007 Angel Investments 2007 VC Investments

$25+ Billion51,000 Deals

Average Deal Size:

$500,000

$25+ Billion3,416 Deals

Average Deal Size:

$7,500,000

TheEntrepreneur’sFundsm

All individuals areAccreditedInvestors

$1 Million Net Worthor $200,000 in salary

for past two years

PAN has over 150investors in 2 funds.Limit to 99 investors

per fund (SEC)

Each investorcommits a minimum

$50,000

The funds have$10 million under

management

Important: Thefunds are

member-managed

Business Plan

Business Plan

Business Plan

FundExecutive

ScreeningCommittee

DD TeamRecommend

InvestmentVote

DDVote

MembershipPresentation

Due DiligenceTeam

Deal TermsMonitoring

Team

PresentRecommendation

to Membership

No

No

No

YesYes

Yes

Yes(Invest)

Yes(Invest)

No

No

Su

bm

it E

xecu

tive

Su

mm

ary

Structured Process

Funding Statistics

Percent Approved by Screening Committee Percent Approved by Members to go to DD

Percent DD Recommended for Investment PAN Two Statistics

81 Plans Reviewed at Screening Meetings

52 Plans Reviewed at Member Meetings

38 Plans Approved by Members for DD

5 Plans Approved for an Investment

70%

Percent Approved by Screening Committee Percent Approved by Members to go to DD

Percent DD Recommended for Investment PAN Two Statistics

81 Plans Reviewed at Screening Meetings

52 Plans Reviewed at Member Meetings

38 Plans Approved by Members for DD

5 Plans Approved for an Investment

13%

jjjjj

Percent Approved by Screening Committee Percent Approved by Members to go to DD

Percent DD Recommended for Investment PAN Two Statistics

81 Plans Reviewed at Screening Meetings

52 Plans Reviewed at Member Meetings

38 Plans Approved by Members for DD

5 Plans Approved for an Investment

64%jjjjj

>Funds invest in 6% of all companies screened and less than 1% of all deals seen

>Individuals invest in 30% of companies seen

Sources of Deal Flow

> Other Angel Groups

> Venture Capital Firms

> Individual Angels

> Professional Services Lawyers, Accountants, Incubators

South Coast Angel Fund, LLC

More than 20 Angel Groups in the Southeast U.S.

Geographic LimitationsInvestments are restricted to an approximate three-hour drive of the Piedmont Triad region to provide better access to portfolio companies for improved monitoring and assistance.

PAN will review investments throughout North Carolina, as far north as Charlottesville, Virginia, and as far south as Columbia, South Carolina.

Investment Region

Percent of GroupsSource: 2008 ACA Angel Group Confidence Survey

0 5 10 15 20 25 30

No restrictions

Region

State/ province

4-hour drive

2-hour drive

Where do groups invest?

Portfolio CompaniesVirginia

Winston-Salem

Greensboro

Triangle

Charlotte

16TotalInvestments

7 Life Science Investments + 2 to be announced soon

Industry Portfolio %

Life Science 43.8%

Technology / Software

37.5%

Services 12.5%

Education 6.2%

What Angels are Investing in?>University of New Hampshire Research for

Q1/Q2 2008:

>This is the first time in many, many years that Life Science investments are not in the top 3

> Expect exit in 5 – 7 years

> 10X to 30X multiples

> Will not look at valuations above $5MM

> Initial investments expected to yield min.10% equity

> Dry powder (very important to ultimate returns)

> Board Governance / Monitoring critical to returns

Expectations / Conditions

35% - 0X

Overall Multiple: 2.6X

Avg Holding Period: 3.5 years

Average IRR: 27%

3 yr

3.3 yr

4.6 yr

4.9 yr6 yr

0

10

20

30

40

50

60

< 1X 1X to 5X 5X to 10X 10X to 30X > 30X

Exit Multiples

Perc

en

t o

f T

ota

l E

xit

sDistribution of Returns by Venture Investment

Average Returns

-

10

20

30

40

50

60

< 1X 1X to 5X 5X to 10X 10X to 30X > 30X

Exit Multiples

Per

cent

of E

xits

Low Participation High Participation

High = 1 or 2 times per monthLow = 1 or 2 times per year

High 3.7X (4.0 years)

Low 1.3X (3.6 years)

Impact of ParticipationMentoring, Board, Financial Monitoring

Returns with Monitoring

FINANCIAL RETURNS /VALUATION

Sample Portfolio ReturnsPortfolio Co.

Multiple 5-Year IRR

Portfolio Co.

Multiple 5-Year IRR

1 0.0 0% 6

2 0.0 0% 7

3 0.0 0% 8

4 9

5 10

Source: Becoming an Investor-Ready Entrepreneur (sbtdc.org)

Sample Portfolio ReturnsPortfolio Co.

Multiple 5-Year IRR

Portfolio Co.

Multiple 5-Year IRR

1 0.0 0% 6

2 0.0 0% 7

3 0.0 0% 8

4 1.3 5% 9

5 1.3 5% 10

Sample Portfolio ReturnsPortfolio Co.

Multiple 5-Year IRR

Portfolio Co.

Multiple 5-Year IRR

1 0.0 0% 6 1.6 10%

2 0.0 0% 7 1.6 10%

3 0.0 0% 8

4 1.3 5% 9

5 1.3 5% 10

Sample Portfolio ReturnsPortfolio Co.

Multiple 5-Year IRR

Portfolio Co.

Multiple 5-Year IRR

1 0.0 0% 6 1.6 10%

2 0.0 0% 7 1.6 10%

3 0.0 0% 8 7.6 50%

4 1.3 5% 9

5 1.3 5% 10

Sample Portfolio ReturnsPortfolio Co.

Multiple 5-Year IRR

Portfolio Co.

Multiple 5-Year IRR

1 0.0 0% 6 1.6 10%

2 0.0 0% 7 1.6 10%

3 0.0 0% 8 7.6 50%

4 1.3 5% 9 20.0 82%

5 1.3 5% 10

Sample Portfolio ReturnsPortfolio Co.

Multiple 5-Year IRR

Portfolio Co.

Multiple 5-Year IRR

1 0.0 0% 6 1.6 10%

2 0.0 0% 7 1.6 10%

3 0.0 0% 8 7.6 50%

4 1.3 5% 9 20.0 82%

5 1.3 5% 10 Unknown Unknown

Return on Portfolio Investments (1-9) is 3.7X (26% IRR over 5 Years)

Start-uptechnology usingrecycled plastic

for compositewood decks

Start-up plastictoy company inPennsylvania

In 1990, I had the option to put $100,000 in one of the following deals:Why invest as a fund?

In 1990, I had the option to put $100,000 in one of the following deals:Why invest as a fund?

$10,000,000$17,000

In 1990, I had the option to put $100,000 in one of the following deals:Why invest as a fund?

LOST $83,000 DIDN’T MAKE $9,900,000

RETURN RETURN

In 1990, I had the option to put $100,000 in one of the following deals:Why invest as a fund?

IF YOU INVESTED AS A FUND

AND PUT $50,000 IN EACH DEAL,

YOU WOULD HAVE MADE

$4,908,500

Deals Missed

“If you are in this business long enough, you'll see some great deals walk through your door. If you are in this business long enough, you’ll show some great deals the door.” – OVP Venture Part.

“A guy walks into your office in the late 1980’s and says he wants to open a chain of retail shops selling a commodity product you can get anywhere for 25 cents, but he will charge 2 dollars. Of course, you listen politely, and then fall off your chair laughing when he leaves. Howard Shultz didn’t see this as humorous. And we didn’t make 500 times our money. To get even (wasn’t our not making money enough?) years later, Howard opened his own venture capital firm right down the street.”

“The Internet boom was just beginning. Amazon had sales of $4M a year. We had a handshake on a term sheet with the CEO to put $2M into Amazon for 20% of the company (a $10M post money value). At the eleventh hour, some guy named John Doerr flew up and offered $8M going in for 20% of the company (a $40M post money value). Handshake? What handshake? To get even, we buy all our books at Barnes & Noble. We don’t think Amazon has noticed.”

Quote

Contact Information:Troy KnaussPiedmont Angel Networktknauss@panfunds.com(336) 235-0941