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RISK, RETURN AND ACCESS TO ANGEL
INVESTINGCAIA ASSOCIATION EDUCATIONAL EVENT
Hosted by:
Refreshments
courtesy of:
THE GLOBAL BENCHMARK IN ALTERNATIVE
INVESTMENT EDUCATION
The CAIA Charter
Geir Watland
CAIA ASSOCIATION
Founded in 2002, the Chartered Alternative Investment Analyst (CAIA) Association is the global authority in alternative investment education.
Vision & Mission
Establish the CAIA designation as the benchmark for alternative investment education worldwide.
Promote professional development through continuing education, innovative research, and thought leadership.
Advocate the highest standards of professional ethics.
Provide a network for industry professionals to connect globally as well as a member career center
GLOBAL PRESENCE
MEMBER ASSET CLASS FOCUS AND REGIONAL
DISTRIBUTION
Data: Member Survey, December, 2015
Hedge Funds 65%
Fixed Income Alternatives 50%
Private Equity 45%
Real Estate 41%
Commodities 39%
Managed Futures 32%
Real Assets Infrastructure, Farmland,
Timberland 30%
Structured Products 29%
Venture Capital 18%
0 18 35 53 70
55%
13%
32%Americas
Asia-Pacific
Europe, Middle-East, Africa
CAIA Members work across a variety of asset classes globally.
MEMBERSHIP GROWTH
561
3,265
5,700
8,400
0
2,000
4,000
6,000
8,000
10,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
*2016 Data through May 31, 2016
SEATTLE
Membership
88 Active Members
Candidate Growth
9+ Level 1 Candidates for fall 2016
11+ Level 2 Candidates for fall 2016
Easy, quick and fun! Only two exams!! Sign up NOW!!!
Goals
Continue to organize educational events
Promote the CAIA designation and support candidates
Establish a full Seattle Chapter by H1 2017
Please check out website: www.caia.org
Seattle Angel Fund
Susan Preston
Risk, Return and Access
to Angel Investing
Make equity investments – generally not loans
Invest in early-stage companies
Often successful entrepreneurs or retired business persons
Active investors = invest both time and money in companies
Accredited investors - SEC definition
Invest their own money
Generally invest in local companies
Give back and support of economic growth
Part time investors
WHO ARE ANGEL INVESTORS?
COMPANIES BACKED BY AMERICAN ANGELS
FINANCING LIFE CYCLE
Discovery
Proof-of
Concept
Product
Design
Product
Development
Manufacturing/
Delivery
Fin
an
cin
g Idea Pre-seed
Funding
Seed Funding Expansion/Mezzanine
Operating Cap.
Friends and Family
Angels
Seed Funds
Venture FundsFounder
Institutional Equity
Loans / Bonds
Pro
du
ct
De
v
Angel Groups
Start-up
Funding
Government Grants
Crowdfunding
Business Growth Fund
Government Loans
TOTAL CAPITAL: ANGELS AND VCS (US)
2013: 72,000 deals
$24.8B
2014: 73,400 deals
$24.1B
2015: 71,110 deals
$24.6B
Angel Investments
2013: 9,291 deals
$45B
2014: 10,501deals
$69B
2015: 10,293 deals
$79B
VC Investments
Sources: Venture for Venture Research, UNH &
Pitchbook/NVCA
2016 TRENDS
2016 TRENDS
2015 ANNUAL REPORTPresents the
2015 Annual Report
$500k $500k $510k
$850k
$833k $829k $835k
$1,164k
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
2012 2013 2014 2015
Median Round Size Mean Round Size Mean Ownership Percentage
Median and Mean Round Sizes – Angels Only2015 Shows Round Sizes Increasing, Mean Ownership of Angel round is Relatively Stable 20-25%
Median and Mean Round Sizes – Angel Co-InvestmentsRound Sizes Trending Up When Angel Groups Co-Invest With Non-Angels
$1.21M
$1.45M $1.50M$1.60M
$1.70M$1.83M
$1.91M$2.00M
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
2012 2013 2014 2015
Mill
ion
s U
SD
Median Round Size Mean Round Size
ANGEL INVESTOR PROFILE
Data Source: Angel Capital Association
Individual Angels invest
$10,000 to $250,000
Angel Groups invest between
$100,000 to $1,000,000
Investments surprisingly broad
Angels are sheep, we follow the most
recent trends
Syndication allowing average deal
size to increase
Angel Investment Size
MOST ACTIVE ANGEL GROUPS 2015 – TOTAL DEALS
TRACKING ANGEL RETURNS 2016
2016
2007
2009
% o
f To
tal
Exit multiple
IRRMultiple <1X10% of
exits to $
22%
2016
70% 85%
27%
2007
52% 90%
22%2009
56% 80%
2.5X
2.6
2.2
Hold
4.5yrs
3.5
3.6
TRACKING ANGEL RETURNS 2016
Tracking Angel Returns
Risk & Return of Angel Investing:
Practical Strategies for Diversifying
Matthew Le Merle
TOPICS WE’LL EXPLORE TODAY
1. Angel Returns, Best Practices & Case for Diversification
2. Observed Angel Behaviors/Practical Constraints Faced
3. Practical Strategies for Diversification – Pros and Cons
4. Conclusion
IRRMultiple <1X10% of exits
to $
22%
2016
70% 85%
27%
2007
52% 90%
22%
2009
56% 80%
2.5X
2.6
2.2
Hold
4.5yrs
3.5
3.6
Early stage VC ’05-’1129%2.1
Gross TVPI & includes carried value
1A. ANGEL RETURNS ATTRACTIVE
* Source: Kauffman Foundation, Professor Wiltbank of University of Willamette, Keiretsu Capital
Driver Comment
Proprietary deal flow Sourced through relationships – less bad actors/behaviors
Up to 70% for established angel groups
Strong angel led due
diligence culture
Angels that spend more than 40 hours achieve a 5.9x return
compared to low diligence investors who achieve a 1.1x
return*
Active participation in
portfolio companies
Angels who interact 2 times a month or more with portfolio
companies achieve a 3.7x return compared to passive
investors who achieve a 1.3x return*
Deep expertise in
investment areas
Angels investing in areas of direct industry experience achieve
multiples twice as high as those invested outside their
expertise*
Tight relationships
with follow on
investors
Leading angel groups partner with venture capital and
strategic investors to enable follow on rounds and exits
1B. BEST PRACTICES DRIVING RETURNS
Given skew of returns and reliance on 10x exits…
…approximately 40% of investors will return no capital
As angels we focus on return – but can manage risk too
Diversification does not increase return, but does raise probability of achieving the expected population return
Larger portfolio of investments improves risk profile:
12 Investments = 75%
24 investments = 90%
48 investments = 95%
* Source: Professor Wiltbank of University of Willamette
1C. CASE FOR DIVERSIFICATION
Sources: Fifth Era survey of 250 Keiretsu Forum members
1
81
42
17
57
2
Diversified: Expectation Actual Portfolio Size
>30
15 to 30
<15
0
45
55
Expected Returns
>20%
10 to 20%
<10%
IRR in %
Number of
Companies99
%
19%
SURVEY OF 250 KEIRETSU FORUM MEMBERS, 2016
2A. OBSERVED BEHAVIORS
Reasons given for insufficient diversification
Allocation (say 10%) given net worth limits investment #
Minimum investment sizes limit portfolio size
Requires too much time to be active across large portfolio
Don’t have enough time to attend enough meetings
Uncomfortable investing outside own area of expertise
Don’t see enough in home geography
SURVEY OF 250 KEIRETSU FORUM MEMBERS, 2016
Sources: Fifth Era survey of 250 Keiretsu Forum members
2B. PRACTICAL CONSTRAINTS
If the intent is to “play the same game” and not invest in some other game (e.g. Spray and pray)
Guiding Principles:
Investments must be “Angel Investments” or some other asset return is being captured. E.g.:
Not other asset classes (Public markets, Real estate, Series B/later VC/PE etc.)
Made by angels investing in groups
US, North America, International geographical sector focus needs consideration
Best practices of Angels investing in groups must be ensured
No or low cost is best (to capture largest return)
3A. PRACTICAL STRATEGIES FOR
ANGEL PORTFOLIO DIVERSIFICATION
3B. STRATEGY DISCUSSION
Guiding Principles
Less in more
(Syndicate)
Angel Co-
Investment
Funds as LP
Equity
Crowd-
funding
(Direct
/syndicates
/funds)
Incubator/A
ccelerator
Funds as LP
VC Micro
Funds as LP
Investments are Angel
Investments
Yes Yes Can be ? Can be
Proprietary Deal flow Yes Can be ? Yes ?
Strong angel led DD
culture
Yes Can be ? Can be ?
Active participation in
portfolio companies
Yes Can be ? Yes Can be
Deep expertise in
investment areas
Yes Can be ? Can be Can be
Tight relationships with
follow on investors
Yes Can be Can be Can be Can be
No/Low costs Yes ? ? ? ?16
4. CONCLUSION
Angel returns attractive – in mid 20’s IRR’s
Angels demonstrating best practices benefit most
Given skewed returns, diversification needed
24 (to 48) or more investments likely required
Angels rarely meet this diversification threshold
Practical constraints intervene – most have < 15
Five key strategies exist but all but one raise issues
Recommend more smaller investments, syndication and exploring strategies/vehicles that maintain best practices
TODAY’S SPEAKER
Matthew Le Merle
Managing Partner, Keiretsu Capital & Fifth Era
http://www.angelresourceinstitute.org/
www.keiretsucapital.com/angel-returns/
RISK, RETURN AND ACCESS TO ANGEL
INVESTINGOCTOBER 12, 2016
Moderator
• Frank Paganelli, Chair of the Startups & Emerging
Companies Practice Group, Lane Powell
Panelists
• Susan Preston, Managing Member, Seattle Angel Fund
• Matthew Le Merle, Managing Partner, Fifth Era and
Keiretsu Capital