Preparing For A Visit From angels

Jay Schwartz, Ph.D.

Member- Boston Harbor Angels

My BioAcademic- Performed research on many aspects of cardiovascular molecular medicine,

bioassay development, diagnostics and gene therapy at M.I.T and Harvard Medical Schools. Have served as Research Scientist Faculty at the M.I.T. Center for Biomedical Engineering. Continues relationship with M.I.T. as a member of the MIT Venture Mentoring Service and a Deshpande Center Catalyst.

Entrepreneur (Last company)- Co-founder and Principal Scientist of engeneOS, Inc a venture backed company.

Consultant- Assists client companies with business strategy, competitive intelligence, and business development, due diligence, corporate finance and interim management for more than five years.

angel Investor and member of Boston Harbor Angels http://www.bostonharborangels.com, serve as a member of both the executive board and life science committees.

Technology Company Life Cycle & Funding

Time, Effort and $$$$

Gov’t & Donor Funding

VC, License, CRADA, & JV, or Sales Revenue

angel & Private Equity Funding

Professional Seed, Gov’t & Private Equity

Choices For Early Stage CapitalGov’tGov’t angelsangels DebtDebt

The world’s biggest seed capital fund (NIH, NSF, NIST, DOD, SBIR etc)

Over 170 groups

More investing as groups than ever before

Many types of group and investment structures!

Banks, Credit Unions, Commercial finance companies, SBA guaranteed loans

Around $28 billion annually Over $25B in angel investment in 2006

Short-term lenders offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment

Best terms in town- no sale of equity required, you own IP

Make decisions quickly and

Each member will typically invest $25-100K

Expect about $200-500K per group but can be more

Money from family and friends as a loan instead of equity. When your business attracts professional investors, convert the loan value to preferred stock priced the same as that offered to new investors, or at a slight discount

Proven track record supporting 1000’s of projects

Good independent validation and helps cash flow

Can act as mentors - Have industry experience, business experience and a Rolodex

Borrowing against receivables, inventory, or equipment

When Do Angel Investors Usually Invest?    Seed or Concept • A concept exists if there is no management team, no prototype or business plan.Start-up • A prototype has been or is developed, and the initial business plan and marketing plan

are being refined.First Stage • The company is now a going concern and is selling a product or service. A

management team is in place and there may be some setbacks or “growing pains”.Second Stage• Significant sales, assets and liabilities are developing and cash flow management becomes

critical.Third Stage (also Mezzanine Stage)• The potential for a major success is beginning to become evident. Mezzanine or bridge

financing may be necessary to bring the company to “harvest”.Stage Four• The company is determining its options for “harvest” such as going public, being acquired,

or merging.

How To Find angel Investors

• Referrals from lawyers, doctors, business partners

• Investigate how comparable companies raised capital

• Web searches – e.g. www.bostonharborangels.com

New England Area angel Groups

• 1st Run Angels Group - Conway, NH

• Angel Healthcare Investors LLC - Newton, MA

• Angel Investor Forum - Old Saybrook, CT

• Bay Angels (Boston) - Boston, MA• Beacon Angels- Boston, MA• Boston Harbor Angels - Boston,

MA• Cherrystone Angel Group -

Providence, RI• Common Angels - Lexington, MA

• eCoast Angels - Portsmouth, NH

• Granite State Angels - Hanover, NH

• Hub Angels - Brookline, MA

• Launch pad Venture Group - Wellesley, MA

• Maine Angels - Maine

• North Country Angels - Vermont

• River Valley Investors - Springfield, MA

• Walnut Venture Associates - Wellesley Hills, MA

Boston Harbor angels

Boston Harbor angels is a group comprised of over 30 sophisticated, accredited investors. Members are successful business leaders from the Boston area committed to providing capital and assistance to passionate entrepreneurs aspiring to build "The Next Big Thing“

www.bostonharborangels.com

The Funding Gap Blues: angels To The Rescue

• Difficult to raise > $100,000 –$200,000 from FFF• Angel deals require < $5-10MM ‘all in’• Angel capital fills the gap in start-up financing between the "three F"s and VC’s• VC’s will not usually consider investments < $10 million.• angel investment is a common second round of financing for high-growth start-

ups, and accounts in total for more money invested annually than all venture capital funds combined (The University of New Hampshire's Center for Venture Research).

• Large variety of structures– Umbrella LLCs with each angel as a member– Independent LLCs formed specifically for an investment – Non-profit organizations with individuals making independent

investments– Some form of management company acting as a general

partner– A hybrid of some or all of the above

What angel Investors Want• The potential for a solid return- 10X in 3-7yr

- Value Proposition to Customer- Radical Design Changes Economics- Sound Business Model- Market Growing, Easy to Reach- Regulatory Approval Likely Soon- Competition Exists, Manageable - Product Changes Market Dynamics

• A solid management team- angel investor is investing in people - Team Brings Sector, Startup Skills

• A solid business plan- convincing and complete- Sound and compelling IP- Competition Exists, Manageable- A business structured for investment- Delaware ‘C’ corp.; formal shareholder’s agreement- Financial Projections that make sense for investors- A good reason to invest- know your audience

• A viable exit strategy- ongoing concern, or M&A, IPO not usually an option

You Are More Likely To Get Investment If You Can Show That…

Team• 5 each with 10+ years designing advanced widgets• Engineers and two with extensive sales experience

Product• Radical new widget: costs 90%, revenues 50%

Market• $500M market today in 5 verticals, growing 20%/yr• Adoption drivers and resistance clearly articulated

Regulatory • e.g. FDA 510k already in progress, or approved

Competition• Current: large players with old technology; two small entrants• Future: large players will adapt, but will take 5 years to retool

Financials• Seeking <$2M, will get to cash-flow break even• >$10M in revenue, or exit in 3 years

Preparing for Due Diligence• Prior to your pitch, have competent professional

services and legal counsel assist you prepare for DD on issues of corporate governance, contracts, IP, accounting etc.!

• Follow up with your DD team contact at the group• Be responsive to due diligence• Actively (and in good faith) negotiate deal terms

with angels• Remember that you are selling credibility!

Due diligence review covers:• Corporate/Structure Organization• Funding/Ownership• Proposed Deal • Financial Structure/ Financial model/ projections/ best and worse case

scenarios• Product/Service• Customers• Suppliers• Regulatory/ Reimbursement• Marketing/ Customer validation/ supplier Business strategy/ over all

market/ competition• IP and freedom to operate• Entrepreneur/ team background

Deal Terms are Variable!

Some organized angel groups prefer to lead the investment round, drafting the terms of the deal (valuation, security, rights and provisions) and negotiating the terms with the company and other investors.

Other groups have chosen not to lead investments and instead prefer to co-invest on terms determined by other investors. Some choose to either lead or follow, depending on the amount of capital raised, the urgency of the investment, their relationship with the company, and their level of domain expertise.

Source- ACA

Post Funding Follow-Up

angel groups tend to follow up with a company in three ways: – Oversight and advice for the business; – Observer status or seat on the board of directors; and, – Assistance with additional fund raising.

You should follow up with your investors– Consistent and timely progress reports Q1-Q4– Make use of their resources as BOD without portfolio,

or mentors• Not using them is like leaving gas in the fuel truck, having

runway behind you and altitude above you!

Angel Resources Beyond Capital

• Supply objective strategic and tactical perspectives• Refine your business plan• Determine the needs for a top management team and

help find key management personnel • Obtain key contacts for strategic partnerships • Develop financing strategies and locate sources of

further financing • Configure the company for a public offering, sale of

the company or merger

Remember• Seven out of 10 investments are made within 50 miles of the investor's home or

office.

• Investors expect an average 26% annual return at the time they invest, and they believe that about one-third of their investments are likely to result in a substantial capital loss.

• Investors accept an average of 3 deals for every 10 considered. The most common reasons given for rejecting a deal are insufficient growth potential, overpriced equity, lack of sufficient talent of the management, or lack of information about the entrepreneur or key personnel.

• Most of all, take your time in forming a relationship with an angel. You are going to be spending a number of years together at a critical time in your business' life. Take the time to assure yourself that this is a person who you are comfortable with through both the ups and downs the future will bring.

Q & A

John ‘Jay’ Schwartz, Ph.D.

Member - Boston Harbor Angels

URL- www.bostonharborangels.com

Email - Jay@stage1strategies.com