EFactor Event – Angel Investing Summary (Held on December 15, 2011)

By Cunwang Chen

Part 1: Introductory description: terminologies and definitions

1st keynote speech (given by Gregory D. Grove)

The Angel Funding Landscape

Angel investors are individuals or small groups of rich people who invest their own money for startup companies. Unlike venture capitalists, which focus on funding more mature businesses, angel investors tend to concentrate on early stage funding. It is worth to point out that evidence shows that angel-funded startup companies are less likely to fail than companies that rely on other forms of initial financing.

When making their investments, there are some terms that the investors may ask for.

Typical structures for the investment terms are:

Type A. Bridge Bonuses: Warrants, Stocks, Discounts, etc.

Convertible Debt: In this case, the investment is in the form of a promissory note that converts into equity on the terms of a “qualified financing” (where qualified financing typically is defined by having a minimum amount – say $1m of total investment.) The note will either convert at a discount to the price of the qualified financing (usually in the 20% – 40% range), will have warrant coverage (usually in the 20% to 40% range), or both.

Part 2: Classifications of angel investors:

Topic discussed during the panel discussion

Entrepreneur angels (institutional angels): the most active in terms of number of investments and amount invested, the most experienced angels and also the wealthiest. Their preference is to invest at start-up and enjoyment is a major motivation. Their key investment criterion is the personality of the entrepreneur. Entrepreneur angels are also the most open to investing outside of their own field of experience. They are unlikely to play a role in the day-to-day management of their investee companies.

Income seeking angels: significantly less wealthy investors, less active and less motivated by fun and enjoyment considerations, tend to invest in industries in which they are familiar and looking for a formal management role in the ventures in which they finance.

Wealth maximizing angels (Ad-hoc angels): predominantly self-made investors but includes some with inherited wealth, interested primarily in the financial return, more likely to invest in industries in which they have personal experience and more likely to take a full-time position in their investee businesses.

Part 3: Angel investors and external financing options for early stage companies

2nd Keynote speech, given by Michael C. Gruber

Banks are notoriously stringent when it comes to small business loans.

The majority of early stage companies fund their initial capital needs personally, but the capability to do so is limited, and without external funding, a business will be starved of the nutrient required to allow it to grow to its full potential. The amount of funding needs typically increase with each stage of the business, and the sources of capital will change according to the stage.

A. Typical mode:

(Source of picture: www.cornerstoneangels.com)

 

Besides, grants and government sponsored funding are also important sources of fund providers. However, usually these grants are non-dilutive.

B. Key checkpoints to impress the angel investors (topic also covered during the panel discussion)

Angels are typically high net-worth individuals who invest their own funds. To optimize the chances of impressing the angels, follow the following checkpoints:

1. Build a prototype product that you can demonstrate: A frustrating conundrum for many entrepreneurs is that they need money from investors to design and build a prototype product, yet most angel investors expect to see at least a prototype before they invest.

2. Find the initial customer who is willing to pay real money for your product or service: All the conviction and market research in the world are no substitute for real customers paying real money. This is called “validating the business model.”

3. Network to the maximum with investors and investor connections:

No explanation to this final point.