US Angel Capital Association (ACA) Conference

New Zealand Delegate Trip Reports April 2016

Contents

1. ACA Trip Report – Blake Richardson

2. ACA Trip Report – Christopher Boyle

3. ACA Trip Report – George Gong

4. ACA Trip Report – Susan Iorns

5. ACA Trip Report – Tina Jennan

10TakeawaysfromtheAngelCapitalAssociationSummit2016ThisyeartheACA2016Summitwasheldon9-11MayinPhiladelphia.Philadelphiaisanincrediblecity;oncebeingthelargestintheUSandbrieflythecapital.Philadelphiastillholdsasenseofgrandeurwithsomeamazingbuildings,statues,churchesandobviouslythestepsthatSylvesterStalloneclimbsinRocky.Thecityisoneofamazingcontrastsasalongsidetheimpressiveaffluenceithasanequallyoverwhelmingnumberofhomelesspeople.

TheACASummittookplaceinthePhiladelphiaConferenceCentrewhichinkeepingwiththerestofthecitytookup3largecityblocks.The600attendeesattheACASummitquitecomfortablyfitintoonesmallwing.TheConferenceranover3daysandhadoptionalseminarsonanythingyoucouldimaginerelatingtoAngelInvesting.Whiletherewasjustanimmenseamountofknowledgeimpartedoverthe3daysthesearesomeofmystandoutkeytakeaways.BelowisalsoamoreextendedreportonBasilPeter’sExitsWorkshopwhichIfoundparticularlyuseful.

1) Avoidaccidentalsub-optimalexits:Ensureexitistreatedasjustanotherbusinessprocesswithmeasureablemilestones.Simplybyperiodicallycheckingthateveryoneisalignedontheexitandthatmilestonesarebeingmetwilldrasticallyincreasethelikelihoodofasuccessfulexit.ExitExecution,BasilPeters.

2) ExploretheM&Amarketforyourbusiness:Anysaleablebusinesswillhaveaminimumof50potentialacquirers.Manyofwhomthefoundersandinvestorswillnothaveconsidered.ExitExecution,BasilPeters.

3) RecognisewhethertheCEOcangothedistance:ACEOneedstobeagreatstorytelleranduniteeveryonetowardsavision.AngelsneedtoestablishearlyifaCEOhaswhatittakestopushthecompanyforward.IfitbecomesapparentaCEOdoesn’thavewhatittakesAngelsneedtobepreparedto“pullthetrigger”(moveontheCEO).AdysfunctionalCEOisasurewaytoendupintheAngelDustbin,aplacewhereacompanysurvivesdaytodaybutis“noclosertoreturningcapitalthanthemanonthemoon”.OutcomeBasedInvesting,MikeArthur,RobArnold,CharlesEmleyandMichaelRaymer.

4) Qualityreportingonnon-financialmetricsiscriticalforImpactInvesting:Itisn’tgoodenoughtoassumeyouarecreatingpositiveexternalities.Thecompanyneedstosettargetsintheseareas(e.g.reducinghomelessness)andreportonthemjustasitwouldonfinancialforecasts.Thisiscriticaltoattractingnon-conventionalfinancingandalsotoensuringthepositiveexternalitiesareintegraltothebusinessandsosurviverestructuringorpivots.ImpactInvesting,RacheleHaber-Thomson,JohnMoore,andKenMerritt.

5) DitchtheZombies:USAngelgroupsoftenhaveLCF’s(LostCausesFunds)andallowmemberstosell‘Zombies’or‘Unexitables’totheFundat$1.Thisallowsmemberstocleanuptheirbalancesheetsandacceleratestherecognitionoflossesfortaxpurposed.AnyprofitsshouldaZombiecomebacktolifearedonatedtocharityorusedtowardsfundingtheadministrationofthegroup.ExitingtheUnexitable,ParkerMacDonell,JohnHarbisonandMichaelKindrat-Pratt.

6) FounderObsession:AcrossallofBradFeld’sverysuccessfulexitsarefounderswhoareabsolutelyobsessedwithmakingthebusinesswork.BradFeld,AwardsandKeynotes.

7) 2016Valuationsanddealnumberstrendingdown:ThemedianpremoneyvaluationoftheUSseeddealsin2015was$4.6milwhichwasa53%increasefrom2014.Q1hasseenadropinthenumberofseeddealsaswellasadropinpremoneyvaluations.Ithasalsobrought

significantnumbersofdownroundsandanincreaseinconvertiblenoteswhicharelikelyanattempttoavoiddownrounds.AngelReturns,RobWiltbank.

8) LegalCanabaissettocreateaboom.Legalcannabiswasa$7billionmarketintheUSin2015andisforecasttoreach$23billionby2020.52%ofpeopleintheUSliveinastatewhereCannabisislegalinsomeformandthiswillbeashighas92%ifallthecurrentballotinitiativesarepassed.InsightsonanEmergingandHighGrowthSectorforAngels,FrancisPriznarandErickBrimen.

9) Publicgoingprivate:Bigmutualfundsarecontinuingtopushintothepre-publicspaceinpartbecauseofthetrendofcompaniestostayprivatelonger.Mutualfundsarelikelyinalargepartthereasonforthecurrentloftypre-IPOvaluations.KeynotePresentation,FabriceGrinda.

10) Takeasplit:SuperAngelFabriceGrindasells70%oncetheyhavetheopportunitytoselldownandthenridestherestsotheyhavesomeexposureintheeventitturnsintoaunicorn.Hisaverageholdis3-4years.KeynotePresentation,FabriceGrinda.

BasilPeters–ExitExecutionAmajordrawcardoftheAngelAssociationAnnualSummitwasBasilPeter’sExitExecutionWorkshop.Basilisanaccomplishedfounder,investor,fundmanager,authorandacademic.IoftenheardBasilreferredtoasthe“ExitGuy”andrightlyso.Basil’smissioninlifeistoincreasetheproportionofwhatheconsideredsaleablecompaniesachievingsuccessfulexits.Ifyou’rekeentofindoutmoreaboutBasilhehassomegreatresourcesherewww.early-exits.com/.

ThroughBasil’sworkwithearlystagecompanieshefoundthatonlyabout25%ofsaleablecompanieshadsuccessfulexits,afurther25%hadpoorexitsand50%notachievinganexit.Basilwasatpainstopointoutthatthedatasettrackingcompaniesthroughtheearlystagesoftheirlifecycleislargelyanecdotalandhesuggestedthatmoreresearchinthisareaiscritical.OneofthemajorroadblocksisthatthemajorityofexitsareunderNDAsothismakesitverydifficulttocompilequalitydata.

AvoidAccidentalExits

Anaccidentalexitisasituationwherethecompanyhasn’tplannedorstructuredanexit,i.e.theexitoccursbychanceratherthandesign.Basilsuggeststhereisahighcorrelationbetweensub-optimalexitsandaccidentalexits.Awellexecutedexitstrategycanhugelyincreasethepriceandthelikelihoodofanexit.Withoutdoingtoworkestablishwhatthemarketispreparedtopayforthebusinessandalsotocreateamarketbycontactinglargenumbersofbuyersinordertocreatecompetitivetension.Byleavinganexittochanceacompanyisleftinavulnerablepositionandisunlikelytoachieveanoptimalresult.

Basilhadafewexamplesfromhisownexperience;oneofthemostfascinatingexampleswasVineyardNetworks.Vineyardwasadeeppacketinspectioncompany.Foundedin2008thecompanyhadaninitialvisionofsellingin3-5yearsfor$25mil.Despitehavingaclearexitobjectiveattheoutsettheexitwasneverdiscussedafterthecompanywasfounded.In2012thecompanywasapproachedwithanofferof$18mil.TheboardwereeventuallypersuadedbyBasiltogobackwithacounterof$30milandthedealwascompletewithin4monthsat$28miltotheamazementoftheboard.

The$10milofadditionalvaluewasonlycapturedbecauseofBasil’sinsistencetogobackformorethiswasbasedmoreonhisexperienceratherthanknowledgeaboutwhatthemarketforthecompanywas.Theinitialofferrepresentedasignificantupliftforeveryoneinvolvedandnotfarfromtheinitialobjective.Sowithoutanotherbidderorgoodinformationaboutthemarketforthecompanythetemptationwastotakeit.ThisasaluckyescapeforVineyardandasituationwhichcouldhavethroughawell-executedexitstrategy.

ExitasaBusinessProcess

Exit’sshouldbeviewedassimplyanotherbusinessprocessandjustlikeotherprocessesitneedstobeconstantlyrefined.Itiscrucialtoperiodicallycheckeveryone’salignmentatleastannuallywithallthekeypeopletosignoffontheexactstrategywithmilestones.HenotedthatJohnHustonrequiresthatexitalignmentbecheckedeveryboardmeeting.Basilthoughtthatthisamountedtobestpracticeandthispracticealonewoulddrasticallyincreasethelikelihoodofasuccessfulexit.

OnewayforinvestorstoensureexitalignmentwithfoundersisthroughleverssuchasrequiringaPUTclauseinthetermsheet.Theimpactismorepsychologicalthananythingelseandtheseclausesunlikelytobeused,butithelpstoensureeveryone’salignment.

Havinganexitstrategyisakeypartoftheprocessandhelpskeepeveryoneontrack.Thestrategyshouldconsiderthetypeofcompany,thestateoftheeconomyandtheM&Amarketbutasastartingpointitmightbeassimpleas:

“Ourexitstrategyisto[sellthecompany]inabout______yearsforaround$______million.Weplantoexecutetheexitbyengaging[midmarketM&Aadvisor]by(date)”

ExitTimeline

Interestingly,oftenthemostcriticalquestionfortheteamandboardis“howsooncanwecompleteadeal?”andnot“howmuchcanweget?”.Basil’sanswerinshortisgenerally6-18monthsfromengaginganM&Aadvisortohavingthecashinthebank.Basilwarnsthatyouneedtobeverywaryoffirmswhopromiseditcouldbedonefaster.

Basilbreaksdowntheexitprocessinto4partsfora$10mil+USDexit:

1) PreEngagementPreparation(1-5months):ThisincludespreparingDD,creatingIMandothersalescollateral,gettingalignmentfromteamandcleaningupthecorporatestructure.

2) BuildingSalesFunnel(2-6months):Researchbestprospectsglobally,developtacticsonbuildingstrategicvalue,makeinitialcontactwith50to250companies,respondto10-50interested,signingNDA’sandstartingduediligencewith5-8,gettoashortlistof3.

3) Part3:BiddingProcess(2-4months):ActivelyinDDwith3interestedparties,negotiatingsimultaneously,CEOfullyengaged.

4) NegotiatingandClosing(1-3months):Negotiatingevenafteradealissignedanddepositpaid;obtainingagreementoftheadvisors,boardandshareholders;andgettingapprovalsandresolutionssigned.

Timeistheenemyoftheseller;itiscriticalthatthesellertakeschargeofthesituationtoensureitisasseamlessaspossibleforthebuyer.Buyerswillhaveotheroptions.Additionally;itisimportantthattheprocessisstructuredconsistentlywiththebuyer’sexpectations.

Thenumberofpotentialbuyersisalwaysasurprisetocompanies.Itwilldependonthesizeandnatureofthecompanybut50isapracticalminimumofpotentialbuyersforanycompany.Basil

suggestsitisimportanttocontactlargenumbersofpotentialbuyersbutthatinitialcontactmaybelimitedtojustanemailwithandIMandExecSummary.

TheExitTeam

Itiscriticaltoproperlyresourcethesalesprocessagaindependingonthesizeofthecompanyitistypically3-4people’sfulltimeworkthroughthesalesperiod.Itisimportantthatthesearetherightpeople;itisoftenafalseeconomytohavecheapM&Aadvisorswhowillachieveasub-optimalresult.Choosingtheteamisthesinglelargestcontrollablefactorinengineeringasuccessfulsale.

ItiscriticalthattheCEOisnotoverseeingthesale.TheCEOmustbekeptinreserveaslongaspossibletoensuretheyarekeepingthecompanyaliveandthattheyeffectiveinthelaterstages.CEOdealfatigueisarealthingandBasilhasliterallyseenaCEOwheeledoutofalawyer’sofficetoanambulance.

Insmallercompanies(<$10milUSDexit)AngelsanddirectorsmayhaveamuchmoreactiveroleasitmaynotbeeconomictohavefulltimeM&Aadvisors.Asmallerexitmaynotmeanlessworkasapre-revenuecompanymayrequiresignificantlymoreworktoestablishthestrategicvaluetoaseller.

Theteamwillusualbeasfollows:

• CEO:reservedforthelaterrounds.• M&Aadvisorsorbusinessbroker(<$10milUSD):thesalesguyandbadguywhen

needed.• Asmallcommitteeoftheboard.• LegalandAccountingProfessionals.

MaximisingValue

Basilnotedafewwaystotrytoincreasethevalueofabusinessleadingintoasale.Thesefallintoafewcategories:

1) IncreaseGrowthRate:Buildingsalesintoasalecanreallychangethemultipleapplied.2) StructuralChanges:Assetvsharesale,financingchangesandtaxinnovations.3) CapitalisingonInefficientMarkets:Thevalueofacompanyissubjectiveandthereisno

listedreferencepoint.Thisisabigadvantageofasellershouldmultiplebiddersbeinvolvedastheymaycomebackwithwildlydifferentoffers.

4) IlluminatingStrategicValue:Doingthiseffectivelyoftencreatesthebiggestincreaseinsellingprice.

DepartedChchSunday1pmthroughHouston,arrivingPhy11pmSundaynight.

Contacts:

AlisonFurness- BlueberryCountry(metinUnitedLoungeinHouston)MicWilliams - BostonHarborAngels(Investor)DrorFutter- McCarter&English(attorneyinIPandBiotechspace)DougFarber- OrangeMaker(Entrepreneur)RamyFarid- Proseeder(dealmakerapp)CatherineV.Mott- BlueTreeAngelGroup(investor)BobGoff- SierraAngels(investor)WadeT.Brooks- WillametteUniversity(academicEntrepreneur)MichaelJ.Harrington- GenoverdeBiosciences(startup- gmointrees)GeraldEldering- InnovaTechVentures(Investors)FraserLusty- Equitygap(earlystageinvestors)MaryJoGorman- PLLProsper- YoungWomen(TheYieldLabIncubatorStLouis)BasilPeters- ARIJoe- PipelinePhillyGeorgeGong- GreenPureLife(investor- kiwi)LisandraRickards- BransonCentreofEntrepreneurship- CarribeanMarcia- PennAngel(linktoMitsubishiElectricTransformers)DaveBusch(1000X)Brian(NYAngela)- YachtinginNZBrianandAnnPayneBridgetUnsworthNZVIFRobbiePaul- ICEAngelsSuzeReynolds- NZAngelsTinaJennen- EnterpriseAngelsDylanLawrence- NZTEBlakeRichardson- RaglanBradFeld- Harmonixinvestor

ExitsWorkshop- BasilPeters:Mon7.45am

www.exits.com/blog/early-exits-strategies-workshop (previousworkshopavailableonline)Only25%ofsaleablecompaniessuccessfullyexit- afurther25%haveapoorexit- 50%noexit- andallleavetoomuchmoneyonthetableChangingworld- in90'sIPOwasbestoptionAllcommentsrelyonanecdotalobservationsintermsofwhatisworkingtodayasthereisnocurrentreliabledata

BuyerwasProceraNASDAQ$60m/yrrevenuea.4monthsaleprocessb.Initialofferwas$18mc.Firmcounterwas$30md.Arrivedatsettlementof$28m(6xEBITDA)e.$0.36to$3.14sharepricef.

VineyardNetworks$1mequity,$350kloans1.

Markettestingproducta.Customerpurchasedcompanyb.Pre-launchofproduct/hadpatentsfiledc.

ABC- Reallyearlyexit2.

Prebetarevenuesoftwarepackagea.Low7xEBITDAb.Strategicinvestorsdon'tworkc.Theyendedupacquiringbusinessd.Abouthalfofexitsareaccidentale.

BCpre-revenuesoftwareexit3.

Examplesofsales:

Lesson:Priceiselastic- StretchIt!!Canonlysellonce- understandyourvalue.

Youcan'tsellabusinesswithastrategicinvestorasashareholder- leadstoimpairmentofcompanyvalue.

Transactionsarefavourabletosellers-Beproactive/notreactive-Ifyouhaveonlyonebuyeryouarelikely tobeonly25%successful-

TheM&Amarketishot:

Optimumexitsrequirestrategiesandplanning.COMPANIESARESOLD- NOTBOUGHT!

'Ourexitstrategyisto[sellthecompany]inabout_yearsforaround$_million.1.'Weplantoexecutetheexitbyengaginga[midmarketM&AAdvisor]by_[date].2.

StrategyfortheBoard:

Checkthealignmentofthebusinessateveryboardmeeting.

Eg.Sellin3/5yearsfor3-5X- meanswhat??

DanRossen(Angeltermsheet- Seattle)- builtaputoptionintoshareholderstermsheetwithFoundertoforceanexit.SiliconPastureNetworkandNewYorkalsodoingit.Itisamethodofexitiftheentrepreneurisnotfocussedonselling- don'tgettrappedasanangelinvestor.(seevideosonExitStrategiesonwebsite)

Ensurestructureisnot(shareholders/voting)flawedandwillinhibitdecisionmakingprocess,1.

Executivesummarya.ConfidentialIMagreement(TheBook- businessplan)b.Phonecall tofollowupc.

Salescollateral, theprocess;2.

Processoffindingthebuyer:3.

EXITTimeline:

Disclosureisdoneinlayers,startsalesprocesswithcommitment4.Thebiddingprocess- threebuyers(2-3months)5.

Needtoalignboard/shareholders/regulatorsa.Negotiatingandclosing- thedeal,cantakemanymonths6.

Saletotal6-18monthprocess.7.

Veryefficientinternalgrapevine1.Tellsoonerthanlater2.

Whentotelltheteam?

WatchforCEOdealfatigue- exitisverystressful!

Onetotwoman-yearsforafullymarketedsaleprocess1.Excludeslegal/accountingtime2.Assume3-6man-yearsformanagementteam3.Needprofessionalsupport4.

VolumeofWork:

TAKETHETIMETORESEARCHBUYERS?BUILDSALESINFO

Probabilityofsale=probabilitycompanyissaleable(therearebuyers)xexitteamcanexecute/completetransaction[Exitteamstructure/membersiscritical]

CEO1.M&AAdvisor(unregulated)- maximisepriceandterms/minimisetimeline/protectCEO2.SmallcommitteeofBoard(1)3.Legal&Accountingprofessionals4.

Teamis:

Noeexperience-Needgoodrelationshipwithbuyerssocantbebadguy-Conflicted(willalsobenegotiatingemploymentcontractatsametime)-

CEOshouldnotleadEXITteam

transactioncompletionrate1.Trackrecordofmaximisingprice2.Proximity,knowledge,andcompatibility(minimisetravelcostsandtimetorespondifclose)3.

SelectingM&AAdvisor- lookfor:

Note:Everydealneedsabadguy- atsomestage(musthavetensiontogetthebestprice)

Engagementfee$50k1.

8- 10%for<$5ma.5- 7.5%for$10m- 30mb.2- 3%>$100mc.Allequalsabout$2m!d.Excludeslegal/accountingcostse.Seewww.exits.com/blog/ma-advisor-fee'-selling-business/f.Accountingfeesarepaidbeforesaleg.Legalfeespaidoutofsalesproceedsh.M&AAdvisorsstateonlyabouta5-30%successrateofsalei.

Successfee(includingengagementfee)2.

M&Acosts:(basedon$10-50msale)

SelectinganM&Aadvisor- theycanonlyhandle3dealsperteam,all teamsaboutthesamesize,irrespective thesizeofthefirm.

Gotagoodpatent,sellthecompany.....itwillcosttoomuchtodefendit!.

IntrotoNewMembersMon1pm:

Introductionsaroundtheroom.MeetMaryJoGorman- Prosper(WomanEntrepreneurs)YieldLabStLouis

SABDirectorTuesdayLunch:

Thesmartmoneyishuman,social,capital.USGovtputs$7.5bofmoneyintonewbusinessannually.

Universityengagement:Wed9am

DeaneSmith- lawyer.Biotechpatentattorney,universityengagementPurdueVentures- researchparkProofofconceptfundsPeterSherman- UC,commercialisation- officeofB.DevJamieRhodes- TexasUni- investorinresidence

WorkingwithUni's;Reasonableexpectations,earlystagetechnology,bureaucracyandpoliticsEstablishrelationshipwithPrimaryInvestigatorofIPSeedcapital- needproofofconceptfundingfirst,thenseedinvestmentPlacebudgetcontrolsaroundfundingConvertiblenote- 8%,3yearterm- firststagefunding,convertsnextround.Explainriskandreturn- BostonconsultingmatrixMotivationofUniistomakehistory.BusinessmodelisIPpropertymanagement- realestate.Manageexpectations- howbigaproblemarewesolving,andwhataretherisks.Partnership- partnersdon'tpaytoworktogether,theyworktogethertogetpaid.Getthecommercialisationprocesssortedandthemoneywilltakecareofitself.MITgoodatthis- licensingoffice- 2inventionsaday.InventormentoringAcademicsneedtounderstandvalueoftheirIPtopublic.Reallycritical tounderstandwhoyourcustomeris!Understandthelengthofthecommercialisationtimeframe.

Angelsperspective:EIR- entrepreneurinresidence isessentialstartingpoint7yearinvestmenttimeframe fromseedmoneytoexit(lifescience)PutthebusinessaroundthescientistsPeterCowley- ukbasedAngel- CambridgeAngelsAccessforEIRintoalllabsandseeallIPwithrighttocommercialise.Studentswanttoknowhowtocommercialise IP- letstudentsworkinthecompany.Creata'collisionspace'wheretherearenotitlesetc- freetotalkanddiscuss.Horje- TexasUniversityHelpthemtalkaboutthevalueintheiridea!!GoogleCambridgeenterprises2015documentConvertiblenotetofundresearchfromearlystagetofirstroundfunding.SelfsupportingfundstocommercialiseIP- translationalactivities!

FabriceGrindaWednesday12noon:- confessionstheofanaccidentalAngel(cofounderFJLabs)fabricegrinds@com

Theteam1.

Scalable,current,untapped,uniquea.Thebusiness2.

BRICSrepresenthugeopportunityandhighrisk3.Theproduct4.Theterms5.

Assessmentcriteria:

Investinwhatyouknowandunderstand,beapassiveinvestorForm'thefoundersclub'andgetothersmoney.Identifybusinesseswithhighordervalues(AOV)andhighfrequencyoforders.Sellsharesonwayup(upto70%)torecoverinvestmentandleaverestinuntiltheend.Holdingonaveragefor3.4years.

ACA PhiladelphiaMay2016Report- ChristopherBoyle(MIG)12/05/16 1:02AM

USA Angel Capital Association Conference

April 2016 - Trip Report [George Gong]

Report by George Gong, IceAngels Club member

Overview: This was my first visit to an ACA Summit. For me it was a valuable insight into the systematic thinking about Angel investing in a global framework.

I attended a Pre-ACA workshop selection and some panel sessions, and

networked with many investors from US, Span, Australia, UK, Finland and India. I also visited a startup incubator in Boston, and attending the “Leading

Lights” dinner. Before ACA Summit

My background o I’m an entrepreneur with 20+ years experiences in IoT industry,

then turned to angel investor. Fairly to say, people like me knows more business than investment. This is why I feel hunger for resources and research of angel investing.

Boston o I visited a startup incubator in Boston.

( http://www.InTeaHouse.com ) They have strong link to MIT.

Pre-ACA workshop o Angel Investing: An Overview

Key impressions

American Angel Investor’s average annual return 27%

American were talking about ‘Return’ always, we in NZ are talking about ‘Give back’.

There were so many resources you can reach in ACA Summit.

There were so many people you can learn from in ACA Summit.

Links between NZ Angels getting better after 3 days meeting. Key learnings

American Angel Investor’s average annual return 27% o This number are really impressed me. o American were talking about ‘Returns’ always, this is real

business for them. Good returns encourage more investments. o We in NZ are talking about ‘Give back’ more than ‘Returns’, is

this excuse for our lack of confidence?

5 Critical factors to angel investor o Do I understand the risks of angel investing? o Do I know how diversification impacts my returns? o What is y risk tolerance? What is y spouse’s tolerance? o How much should I allocate to this investment class? o What are my main investment objectives?

5 critical factors to founder o Is raising money just as important as the idea? o Is my company of interest to local investors? o Am I willing to personally fund the deal? o How do I return money to investors? o Am I looking for personal income or wealth?

High-Growth vs. Lifestyle o Lifestyle companies

Great income source for entrepreneurs Organic growth Flexible exits Not fundable by investors(no anticipated exit)

o Fundable companies High-growth potential Need investor’s capital to grow Exit strategy defined at outset Entrepreneur builds wealth, not high income

Interactions more with startups in your portfolio = better return o 1-2 interactions per year = 1.3X o 1-2 interactions per month = 3.7x

Conference session insights and highlights [Angel Investing: An Overview]

This is a half-day workshop presented by Angel Resource Institute.

The topics covered Angel Investing Overview and Portfolio Strategy, Deal Flow & Process Overview, Due diligence Overview, Structure the Deal & Term Sheets, Develop Valuation Methodologies, Post-Investment Process & Exits.

Teacher is Troy Knauss who is a very experienced angel investor, entrepreneur and teacher. Twitter: @troyknauss

Conference organization – key “do’s and don’ts” you picked up

Select a Pre-ACA workshop to join if you really want to ‘learn’ something.

Don’t do the ‘New Attendances session’ as it was over crowd. PLUS scanned copies of business cards… PLEASE!

USA Angel Capital Association Conference

May 2016 - Trip ReportSusan Iorns

Key impressions● The rich ecosystem of young company assistance in NZ is similar in scope to other

countries. Scale varies widely.● Angel investors are so mindful of the risks that many think their realized returns are below

the average described by Rob Wiltbank et al.● With so many asset classes overvalued, there is optimism that early stage might offset

other disappointments.● Tech trends such as self-drive vehicles, internet of things, AI, VR, and aerial drones are

heralding massive change. Also robotics, 3D printing, microbots, solar power, and personalized medicine.

Key learnings● No one ever thought they changed the management too soon. Building talent involves a

lot of churn.● Some angel groups have rules against members working for pay in investee businesses● Boards should regularly discuss exit● Hybrid vigor – the key to having diverse companies is to have diverse networks.● Companies need a good storyteller. Only invest in companies with someone who can sell.

Conference session insights and highlightsMonday, May 9International Exchange MMWR Reception – Updates from Angel Networks from around the globe: Pan-European (EBAN), Estonia, Spain, Nordic, UK, BAE, Scotland, Caribbean, Cameroon, Kenya, Columbia, and the Pacific AllianceOpening Keynote: Kay KoplovitzAngel Returns – The 2016 Study Results - Presentation - Rob Wiltbank published: avg over 4.5years, 2.5X, 22% IRR.Outcome-Based Investing – Tobin Arthur, Rob Arnold, Charles Emley, Jr., Michael RaymerTobin reported that every one of his failed investments didn't have anyone who could sell. His successes all did well at sales. Charlie handled a “lifestyle” business by putting in a chair with a mandate to sell the company. The founder helped with the sale and didn't have to be removed.Building Talent in Portfolio Companies -- Theresa Sedlack, Steve Flaim, Jim Hunt, Ken KouskyMost of the discussion was about changing management! Steve of Tech Coast Angels, said they have Rules of Management which prevent members from taking an income from companies the group invests in. Jim, of Blu Venture Investors, said it's inevitably conflicted.

Tuesday, May 10 Keynote: David S. Rose, New York Angels and Gust introduced Alternative Investing Expert Bob Rice, Tangent Capital “There is a bubble in everything”. Every asset class is overvalued, Bob said. Look for growth: PE, Venture, Activist, Distressed, Real Estate, Stocks. Look for income: Bonds, MLP's, Royalties, Peer to Peer, EM Debt, Farmland (incl timber). Risk management – include: Bonds, Long/Short Credit L/S Equity, Global, Macro.

Building Exit Value for Strategic Buyers Craig Mullett, Meredith Haviland see slidesAcqui-hires: People should want to stay, but make sure there is an escape clause.Don't let buyers have negative surprises. E.g. Be honest about product returns.

Investing in Inclusive Teams: Victoria Pettibone, Nnamdi Okike, Barbara Clarke, Rhonda Wallen,Teresa Nelson PhD -- leadership teams that have diversity in gender, race and perspective out-perform non-inclusive teamsIt was pointed out that the session should have been called Increasing Your Returns and it might not have been so poorly attended (particularly by pale males). Rhonda, of Andarix Pharma., brought the “scientific concept of hybrid vigor”. Victoria, of Astia Angels, offered the key to growing diverse teams: we have to ensure that our networks are diverse.

Wednesday, May 11Secrets of Successful Angel Deals That Start with University TechnologyPeter Schuerman, Ph.D., University of California, Merced – said he closed the Tech Transfer Officeand opened the Business Development Department. This seemed a remarkably realistic approach to me.John Hanak, International Business Innovation Association/ Purdue Incubator – Noted that universities are not welcoming for business. Early ideas aren't investible. Universities don't chase dollars, they try to release tech into the market and hope that money will somehow appear.Peter said it's necessary to be clear with universities about who gets what. They aren't directly financially motivated, they run on prestige. Risk needs discussion. It works best to look at it like partners: help each other get paid and align expectations.David Verall of MIT was in the audience. He said to look at structures beyond the licensing office. He specified 1) the Deswari Centre which gives $50k grants. The business school inserts inventions into classes. 2) Venture Mentoring Services.Jamie Rhodes, Alliance of Texas Angel Networks – said that the Uni of Texas has fiefdoms that compete with each other and by comparison the MIT parts embrace cooperation.John said that their conflict of interest policies are well defined and published. [online?]Peter said that conflicts of interest will be generated in the ordinary course of affairs and managing them has to be someone's job.

A Conversation Between Angels and University Tech ExpertsAngels who are Entrepreneurs-in-Residence at universities are on the front lines of working through the culture clash of academia and early-stage investors.Steve Flaim, Tech Coast AngelsPeter Cowley, UK Business Angel of the Year 2014/ Cambridge AngelsJerry Creighton, New Jersey Institute of Technology – recruits & installs entrepreneurs in residencein universities.Jorge Varela, Tech Fort Worth and Cowtown Angels – requires access to every department to find hidden projects. At first he is greeted with suspicion, then after a time, researchers will approach him.

Both sessions on universities complained about them trying to grab IP, which doesn't work for anyfounders.

Keynote Presentation – Fabrice Grinda

People met:NY Angels: Brian Cohen (@NXTE dinner), Simon Hopkins, Stephen SnyderDavid Beatty (International Exchange) looking for reps to share experiences with Vietnamese. I volunteered!Rob Wiltbank introduced Lars Johansson as a candidate to for the NZ speaker trail.Manhong Mannie Liu who is John May's co-author. Has Chinese VC connectionsMarkus Schreyer runs an incubator in Chile and is trying to develop the ecosystem there. I suggested he visit NZ.Fraser Lusty from Edinburgh

1

USA Angel Capital Association Conference

April 2016 - Trip Report Tina Jennen

Key impressions & Key learnings

• New Zealand is very connected in the international angel space and does a great job of upskilling its angels members

• New Zealand lacks scale but has more grant funding opportunities per capita than the US

• Angel investors are generally interesting, dynamic, talented and fun! • Potential for NZ companies to grow through cross-border investment • Untapped opportunity to grow women and their ventures - She-conomy • Impact investment is mainstreaming and should be leveraged. • Get the right people leading a business during right time for market. • Best M&A market in15 years; success still tied to team capability • Get connected into Life Sciences calls in North America • Bring Springboard to NZ • Founders and Angels need a tolerance of ambiguity • Angels are good Psychologists; watch out for cognitive dissonance • most successful deals are with founders who are obsessed with

bringing a solution at the intersection of different industry verticals • Angel investing in the best place it’s ever been • Survey 350 investments found companies with women do 63% better • Biggest Mistake – trying to sell product instead of the investment • The entire startup market in the US is $50B of a $50T securities

market. Conference session insights and highlights

• Capital W Boston Women’s Capital Summit, Boston District Hall % of VC partners that are women is currently 6%, although 15 years ago it was 10%; % of VC funded businesses with less than 1% on Exec Team = 15%, 5% @15 years ago. Women control 95% of food budget and 85% of all consumer purchases from autos to healthcare.

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• Exit Execution – Basil Peters Team capability affects price/terms, length of M&A, probability of close and only 25% of saleable businesses exit, could easily increase to 50%; Avg 8% of M&As get completed • Kay Koplovitz – Leading the Way for Women in Business

Springboard Investee Company Performance - 84% raise capital and 81% are still in business today. They have 11 IPOs, 175 liquidity events. Women really do perform.

Opportunity to co-invest, been a topic for years now, but now thinking about the vertical. Kay calls it “going up the escalator” to connect the value chain right through to the exit • Rob Wiltbank – Angel Returns 10% of the exits produce 85% of the cash returns; entrepreneurs tend to own about 1/3rd at the end of a liquidity event; VCs are involved in 2/3rd of the events and 70% of the ones with a gain in capital; biggest changes – the 1x-5x categories shrunk with more moving into <1x and also time to exit was another year. • Outcome-based Investing

Three priorities: Capital needs, Network, Exit strategy Winning combination – someone who can solve a technical problem and someone who can really sell Approach the stakeholders you may want to exit to as a distribution partner instead of setting up entire sales force Bolt-on technologies are powerful to bring to other companies Got to have the hard conversations and exit the wrong people

• Impact Investing Impact is in the eyes of the beholder; ensure the impact is embedded in the company in a way it cannot be removed as the company iterates or exits; PRI = Program Related Investment; MRI = Mission Related Investment

• John Huston Angels are really good Pyschologists; watch out for cognitive dissonance in the team • Brad Feld On upcoming Crowdfunding launch: “I think it’s going to be a complete Shit Show.”

Angel investing in the best place it’s ever been with more investors, more information, more access to capital and more efficiency – more progress can be made with less money

• Chris Mirable – Crowd Funding SCC – focus on quality of disclosure; not quality of the deal. Warning: secondary market may not exist to sell shares in crowdfunded deal, investors may have to hold

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• Universities and Successful Angel Deals – 2 sessions

Key is to bring the business side to the scientists. Drivers are about prestige rather than money – make history. • Howard Lee Morgan Pick great partners, let them use their superpowers Listen, interact, advise Too Early, way too early, just right – understand timing Diversity investments Heed Warren Buffet and Charlie Munger Invest on rational, not emotional basis

Conference organization – key “do’s and don’ts” you picked up

• Better food, more water stations, herbal tea and better coffee • Coordinate NZ dinner better so we don’t miss other key dinners • More follow-up to encourage on-going global connectivity

PLUS scanned copies of business cards Attached as Pdf Unedited Notes from Sessions Attached Below

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Unedited Notes from Sessions

Capital W Boston Women’s Venture Capital Summit

District Hall, 6 May 2016 John Landry, Lead Dog Ventures LLC

• 51% of the deals in the US are being supressed because women can’t get financing, he’s unsure as to why

• % of VC partners that are women is currently 6%, although 15 years ago it was 10%

• % of VC funded businesses with less than 1% on Exec Team = 15%, 5% @15 years ago

• % of VC funded businesses with a woman CEO = 2.7% • Boston-based VC firm investing partners that are women = 3% • Current mapping by the NVCA of the investment ecosystem but it has

been delayed • Dr Candida Brush, lead author quotes potential of women • TAM – TOTAL ADDRESSABLE MARKET • Women account for 85% of all consumer purchases from autos to

healthcare • Boomer women are educated, have high income and make 95% of

purchase decisions for households • Women control 95% of food budget • 50% women net worth $19 Trillion • Next decade will be beneficiaries of greatest asset transfer – double

from inheritance of parents and husbands • Market larger than China with all that $ and talent • Babson – Women on Exec team • Babson – Women CEO • Graph source: startupcompass.co • She-conomy • Seek out VC firms with female partners, ideally with female founding

partners Christopher Mirabile, Launchpad

• Panel member • Chair of Angel Capital Association • Launchpad recent award winner – lookup

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Scott Kirsner, Innovation Leader, Boston Globe

• Panel member Madhuri Reddy, Co-Founder Care Academy

• Business acknowledging lack of standardisation of skills training in homecare

• Preventing falls in older adults • Focuses on HOME care • CareLinx is a customer; 20 agencies as customers • Barrier to entry is the content creation • B-Corp Certified –Profit/People/Planet • P4P – pitch4pilots

Larry Bohn, General Partner of General Catalyst Jeff Bussgang, General Partner of Flybridge Capital Erin Janklow, Entrada, Employer Sponsored Learning - ESL

• Wearable language learning device to use while working Privo

• Working with compliance issues related to child privacy laws in the digital space

• Certifies companies • Parent has a single account to give consent to the minor child

Tiger Eye, Security Sensor Founder CJ Scarlet

• http://www.tigereyesensor.com/ • Primary target = real estate agents, then female college

students

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ACA Summit Exit Execution, Basil Peters

• www.exits.com • Watch early exits video workshop found in blog • Deals should start with the end in mind – proactive not reactive • Only 25% of saleable businesses successfully exit and about 50% get

less than they should - don’t leave millions on the table • Understand the life cycle • Only about 10% of angel deals get an exit and many are distressed

sales, wind-downs or sub-optimal • We rely on anecdotal observations, so it’s important to share info • 50% of exits are accidental • Have best M&A market in 15 years; success still tied to team capability • Team capability affects price/terms, length of M&A, probability of close • Only 25% of saleable businesses exit, could easily increase to 50% • M&A Advisor Success rate - probability of completing a sale is 8% • Important to highlight strategic value

ACA KEYNOTE 2-2:45 pm Natalia Oberti Noguera, Pipeline Investors (http://pipelineangels.com) Kay Koplovitz, USA Network and Springboard Fund (http://koplovitz.com) Look up Kay’s YouTube talk on Stanford Channel How did Springboard begin?

• There was a disconnection between women and investment • First Demo Day in January 2000 – first event received 350 applications

Fashion Tech Lab http://www.nyftlab.com/

• Started three years ago • The diversity of people who are innovators is significant; this creates

opportunities at the intersections of things like fashion, technology, location, retail, etc.

Opportunity to co-invest, been a topic for years now, but now thinking about the vertical. Kay calls it “going up the escalator” to connect the value chain right through to the exit

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Natalia says that bootstrapping has been glamourised by the media, when this is simply called “living” and that some entrepreneurs do not have the friends and family to support their early stage investment needs. Kay: Human Capital is far more important than Financial Capital. This is a key role of angels and the importance of building a network. Kay: The 619 companies in Springboard score very high on “Tolerance of Ambiguity” which is unlike that of corporate executives. 84% raise capital and 81% are still in business today. They have 11 IPOs, 175 liquidity events. Women really do perform. Natalia: if you really want to be a helpful angel investor, you need to also grow your tolerance for ambiguity Rob Wiltbank, Angel Resource Institute

• Halo Report Set combined with Angel Fund Set • All completed investments in angel groups, including sidecar fund • Now using a repeatable methodology that will be used in 2017, 18, 19… • Biggest bias – higher VC data representation. • Other bias – over • Fewer strategic variables such as how many hours were spent om due

diligence – biggest loss on the change of method, granularity is lost • Halo set had 109 investments, over 90% are post 2010, • Angel Fund set 250 firms, self-selection risk and bias risk

Summary:

• The entrepreneurs tend to own about 1/3rd at the end of a liquidity event. • VCs are involved in 2/3rd of the events and 70% of the ones with a gain

in capital. • Biggest changes – the 1x-5x categories shrunk with more moving into

<1x and also time to exit was another year. • 10% of the exits produce 85% of the cash returns • Slides may be found on:

http://www.angelresourceinstitute.org/resource-center.aspx OUTCOME BASED INVESTING

• Weeding things out that aren’t going to work • I believe in making winners rather than predicting winners. • Start with the end game • When I invest I get to work • If you want to foretell the future, invent – Drucker

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Three priorities: 1. Capital needs? 2. Network? – value chain fit and/or people talent fit 3. Exit strategy? – start with the end in mind

Basil Peters– early exit book What is the unmet need – what are they doing and why? Don’t typically take a full-time role with a startup company. What are the hurdles that you realised with the team?

• Identify that the CEO was actually a better COO and needed to be a good storyteller

• Identifying the strengths in the team and then fill the gaps through the network

• Sees too many lifestyle companies – gotten too comfortable • Angel Dust Bin – like the living dead? Change has to me made but

someone needs to make that change happen • Gotta be willing to exit out the founder or CEO if they are stalling out,

even if the CEO is not cooperating Other insights:

• Winning combination – someone that knows how to solve a technical problem and someone who can really sell

• Approach the stakeholders you may want to exit to as a distribution partner instead of setting up an entire sales force, etc.

• Bolt-on technologies are very powerful to bring to companies • Value of network of industry verticals to go deeper and scale the

expertise

IMPACT INVESTING

Investor Circle – http://www.investorscircle.net/

• 200 members from across the US • $200M investment in 1-3M tranches • Meet monthly in 6 locations

Why Impact Investing?

• Philanthropy with the tools of capitalism • How do you define impact? - Impact is in the eyes of the beholder. • Initiative solutions for environmental or social issues • Ensuring the impact is embedded in the company in some way so it

cannot be removed as the company iterates or exits

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• Example of a laundry company that only serves the inner city on bikes – it doesn’t appear so on the service but the model is scalable, it also has workforce development – growing vulnerable people that have had hardship or criminal records; also this company was able get debt funding that is not typically available to early stage startups

• PRI = Program Related Investment • MRI = Mission Related Investment • Return is not being traded for social benefit, however often trade off

occurs with risk vs. return. Often the risks are lower in addition to returns being lower

• http://casefoundation.org/ • Impact PHL

Building Talent in Portfolio Companies “Talking to Humans” book When the technology is done, only half of the work is complete. Encourages a scientist to partner with an MBA Five Temptations:

1. Being more concerned about popularity than results 2. Listen to your team, 3. Being more concerned about personal positioning over the company 4. ??? 5. ???

Separating the Advisory Boards from Governance Board. The most difficult fire is the “Good Guy”, so how do you get rid of the nice guy? You need to base it on metrics. Transparency is an issue - need to mitigate the CEO founder that talks about all the good stuff then at the last minute says they can’t meet payroll SBA – OII mark.walsh@sba.gov Some markets left: politics, education, real estate, medical Predictions: Veracity – a truth machine - measures voice, facial expressions, sweat Anonymity – the right to be forgotten Predictability Ubiquity

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Movie HER - new app VIV Book – the Circle (Privacy is theft) John Huston – Angels are really good Psychologists Brad Feld most successful deals are with founders who are obsessed with bringing a solution at the intersection – i.e. Guitar Hero works at the intersection of music/entertainment/video games. Coachability – important that the founder understands investors are giving them data and how they process and understand that data to make their own decisions that they can play back to the investors. Important to understand the difference between giving advice and mentoring. Not telling what to do but providing data from experience to engage founder and let them process. Brad wants the founder to want him as an investor as much as he wants to invest in that founder. Ran an experiment with Angel List to do a syndicate. Did about 65 deals over a year and a half. Surprised as they expected the other syndicate members would engage with each other and Foundry Group team. Didn’t get the intangible value they wanted. Brad Feld on upcoming Crowdfunding launch: “I think it’s going to be a complete Shit Show.” Might be ok if you only need one round of funding but if you are going to need institutional funding, there’s a lot of mechanisms that need to be figured out. Angel investing in the best place it’s ever been with more investors, more information, more access to capital and more efficiency – more progress can be made with less money Cross-border Investing – Rising Tide - http://rt Most important theme:

1. Trust 2. Common vision on investing

Cross border and Cross experience Creating a common language, common benchmarking - the same information can often be interpreted differently. Mechanism to overcome the compliance and connectivity issues.

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https://go-beyond.biz/ What is the value of being together? Knowledge sharing. Important to have similar skin in the game, shared pain, equalising Getting the right timing of the funds and members Will there be enough demand on the angel side Crowdfunding Chris Mirabale SCC – focus on quality of disclosure. It is not a focus on the quality of the deal. Crowd funding on Service deals? How can we enforce the investment limits- limits protect the investors from overinvesting when they can’t afford it Warning regarding secondary market may not exist to sell shares once crowdfunded deal is done and that investors may have to hold. One option to gain liquidity is using a debt instrument. Successful angel deals that start with University Technology Proof of Concept Fund U of California - Closed the tech transfer office in favour of a business development office In a bureaucracy, everyone has to behave well enough not to get fired. How do we make it Win-win?

• Reasonable expectations, takes a long time • Bureaucracy and politics run high • Establish a relationship with the Primary Investigators • Finding the friendly welcoming open door • Make it easier for the angels and stay involved to manage the

relationship • Help the inventor dumb down the messaging so anyone can

understand the technology

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What’s in it for the University? • Frame it around risk and return • Drivers are about prestige rather than money – make history. • Business model = intellectual property real estate • Manage expectations – how big is the problem we are solving? • Create a partnership vs. transactional work • Partners don’t pay each other – they help each other get paid. • Don’t worry about the money, the money will follow – keep focused on

getting the product to market David at MIT – they have a big licensing office, over 100 patents last year. Focus on getting products out to market, grants to faculty, venture mentoring, Systematic exploration of opportunity – this process helps scientist and researcher learn the business side, collaboration instead of the fiefdoms competing against each other. Don’t assume that the motivations are the same. How do you prepare faculty for thinking around commercialisation. Helping the faculty to become more aware of the link to business-side. Lots of handholding required. Important to understand who owns what and who is the customer of the programme. Level of trust required to get more disclosure from the inventors What is the perception of angels? Misperception about how long it really takes. Long slow partnership, Session 2 University Tech Key is to bring the business side to the scientists. EIR- Entrepreneurs in Residence – don’t always want to run a company Collision space – fosters natural collaboration Programme called “Breakthrough” to learn how to talk about their idea in simple terms Need to be a good Connector MBAs work on creating a plan for the IP as part of their curriculum. External Services – provide commercial support. i.e. - In-part Alumni can facilitate some of this work and connectivity.

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http://www.enterprise.cam.ac.uk/ http://techfortworth.org/ How do we attract EIR? Difficult to source How do we get $ for funding?

1. Selling time as a consultant on 2/3 to staff to 1/3 to university 2. Convertible Notes 3. SBIR - https://www.sbir.gov/ 4. Endowment $

Fabrice Grinda

1. Do I like the business? The Holy Grail – characteristics for more resiliency

1. Venn – High margins of 20% 2. High average order value 3. High recurrence

Virtual Reality is still immature – triple risk

1. Category Risk 2. Products 3. App Risk

http://www.fjlabs.com/team/ Blockchain and Bitcoin – decentralisation of markets The entire startup market in the US is $50B of a $50T securities market. Howard Lee Morgan http://firstround.com/ Lessons –

• Always have more money for the follow-on https://www.rentec.com/Home.action?index=true Renaissance Technologies – half quantitative investing, half venture capital https://www.ted.com/talks/bill_gross_the_single_biggest_reason_why_startups_succeed?language=en

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Incubator – Idea creation, protoyting, filtration, realising individual potential, Attract the brightest minds, reward creative thinking, look for passion about ideas, regular brainstorming, The key thing to look for in a founder – passion and storytelling – critical skill often overlooked “rebuttable presumption” Entrepreneurs support one another. Super Angels shake up Venture Capital

1. Pick great partners, let them use their superpowers 2. Listen, interact, advise 3. Too Early, way too early, just right – understand timing 4. Diversity investments 5. Heed Warren Buffet and Charlie Munger 6. Invest on rational, not emotional basis

“Having just the vision's no solution, everything depends on execution” ― Stephen Sondheim, Sunday in the Park With George A survey of 350 investments found that companies with women do 63% better. Issue is that network is more male-oriented, so need to cast a wider net to get women. https://www.parsable.com/ Biggest mistakes companies make when trying to get investment?

• Trying to sell product instead of the investment - (products, shares, images)

• Knowing your competitor

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Morgan/Lodish 3 by 5 approach Products Shares Image Customers Sell benefits &

value Stability of company

Users Ease of use/benefit

Investors Growth and earnings potential

Enhance value

Personnel Work in hot product area

Value of options Why work there?

Strategic Partners

Add to their offering

Gain investment Increase credibility