Early-stage financing!

Opportunities & traps for angels

co-investing with VC’s!

Nicolas Berg, Redalpine Venture Partners!

7th EBAN Winter University !

Luxembourg – 31. October 2008!

Affärsängeldagen 2010Stockholm 27 okt 2010

Successful early-stage investing: Combine the best practices of business angels and VCs

• About me + Redalpine 01

• Early-stage venture zone 02

• Investment process 03

• Case studies: XING, others 04

• Learnings 05

• Q&A 06

00 Agenda

• Founder of 8 start-ups since 1984 Borsalino 1998; 64 angels + 1 VC; sold 2000

• Angel investor in 16 start-ups 2000-2006 e.g. XING Angel Investor 2004, IPO 2006

• Partner Redalpine venture fund 2007-2015

• XING CM CH; journalist; coach@venturelab

• Swiss with norwegian roots, M.Sc. (BA)

01 About me

Nicolas Berg, Redalpine Venture Partners

• Redalpine invests $200k-2m in 12-15 highly scalable European start-ups 2007-2015

• Track-record Partner: 5 trade-sales + 1 IPO 2006-2008 (multiples 7-35), 340 new jobs/$1m*

01 About Redalpine

*) Initial investment (excl. co-investors & following rounds)

• Restorm.com – right clearing between musicians and creative producers

• Veeseo.com – SEO for TV & video platforms by real-time speech to text indexing („google“ TV)

• Poken.com – digital business card connecting people, objects and places at events

• Biognosys.ch – next generation proteomics platform to enable personlized medicine

• Redbiotec.ch – produces virus like particles to enable better and safer vaccines

• Insphero.com – 3D tissue production for faster and safer drug development

01 Redalpine portfolio examples

• because start-ups difficult to evaluate (you must judge people rather than paper)

• post-investment: high support need per $

• small transactions ($150k-2m) > small fund > small management fee

• but: higher multiple if successful (>10, goal >30)

• and: 340+ new jobs per $1m initial investment (2000-2006)

02 Early-stage financing gap

Valley of death: financing need $500k-2m

• Top in EU25 innovation ranking: 1. Swi, 2. Swe (EIS 2009)

• Among top 50 in world ranking of universities: Zurich ETH (18.), Karolingska, Uppsala

• Quite good PISA results 2006 (2003): Swi (7. math), Swe (7. reading)

• active start-up scene & top bluechips (Nestlé, Volvo, Ericsson, Astra, Roche, Novartis, UBS)

• small home market > export oriented

02 Sweden and Switzerland

Almost equal conditions

02 Early-stage financing gap

02 Angels invest more than VCʻs

VC‘s

Start-up investment iceberg

• 90% from government grants, foundations, and – first of all – angel investors

• 10% from VC funds, corporate funds or banks

• Unexploited potential: only 1 out of 200‘000 Swiss millionaires are serial angels

Start-up = (inter)national, highly scalable, innovative/high-tech company

90% from angel investors

• Virgin angel: low

• Fulltime angel & ex serial entrepreneur: medium

• Amateur angel, corporate manager: low

• Managing angel, hands-on: low

• Angel club without sidecar fund: low

• Angel club with sidecar fund: low to medium

• Angels co-investing with top VC fund: higher

02 Type of investors

Success rates uneven

• Most angel networks show a negative performance: true for Switzerland 1999-2009

• Most angels are not successful: true

• Angels may kill a good deal: true - if VC didn‘t enforce a proper shareholder agreement

• Angels act more emotional: true – so what?

• Avoid angels: wrong - good angels do much more good things for start-ups than most VC‘s

02 Why some VCʻs distrust angels

Top 5 prejudices

• VC is rich & will say no (true - odds are 1 : 99)

• Most VC‘s don‘t invest in early-stage (true)

• A VC‘s will force you to sign his terms (true- if he recognizes that he is the only one)

• Most start-ups will never get funded by a VC (true - but most start-ups would fail anyway)

• A VC will not add value to our start-up (wrong - best 25% improve odds for top exit)

02 Why most people hate VCʻs

Top 5 prejudices

• successful VC funds are

• managed and financed by successful former angels/serial entrepreneurs

• systematically invite super angels for co-investments or co-invest with them

• successful angels

• systematically co-invest with successful VC‘s or invite them to co-invest

02 Successful combinations

VCʻs co-investing with top angels

• Investment Managers: Serial entrepreneurs

• Stage: early

• Business model: highly scalable

• Capital need: $500k-2m, $500k-7m in total

• Region: Zurich/Stockholm, Switzerland/Sweden, Nordics/DACH, Europe, World

• Sectors: ICT, Life Sciences, Greentec

• Exit multiple goal: >20 bis >30 / deal (1:10)

02 Successful investment strategy

Highly scalable & diversified

• Sourcing: get access to deal-flow 500-1000

• Selection: Pre-screened pitches only 1. top team. 2. unique & disruptive idea. 3. clear business model. 4. moderate valuation $1-3m. 5. multiple >30 in best-case exit scenario

• Negotiating: 1. Professional lead, 2. VC terms, 3. Simple structure (board of 3, angels pooled)

• Support: Active role of lead + 1 co-investor

• Harvest: Plan, seek & go for top exit from start

03 Investment process

Top 5 criteria of winning angels

• 500 times no within 5 min = $ 5‘000

• 450 times no within 30 min = $ 15‘000

• 50 times face-to-face (8h) = $ 30‘000

• 2-5 deals after due dilligence technology, market & team = $ 50‘000

• Total $100‘000

03 Sourcing and selection

Deal-flow of 1000: Quantity provides quality

Annahme von CHF 500/Manntag (CHF 10‘000/Monat)

03 Negotiating

Term sheet, due diligence, legal

• 4 days term sheet negotiation $ 4000

• 1-2 days lawier $ 3200+

• 1 day legal/financial due diligence $ 2000

• expenses $ 1800

• Total $ 10-20k

03 Post-investment support

by lead investor till exit

• 0.5 - 1 days / week per portfolio company

• 5 investments = 50-100% job

• 10 investments = 100-200% job

• Total for 10 investments: $ 120-250‘000

03 Total cost per portfolio of 10

annual cost of early stage investing

• Sourcing & selection $100‘000

• Negotiating & legal $ 20‘000

• Post-investment support $ 200‘000

• Total annual cost: $ 320‘000

• since 2001 we were pro-actively searching for a social network (SN) investment opportunity with a good business model

• After looking at 5 other SN, we met XING in 2004 and become lead angel (1st rd €500k)

• we developped model for world-wide roll-out in Switzerland as XING Country Managers

• 2005 XING accepts €5m from VC in a pre-IPO round – 2006 IPO at €200m valuation

04 Pro-active sourcing & support

Case study 1: XING

• Lead investor was an unexperienced angel

• Lawiers bill of >$ 50‘000 (!)

• Big3 company (!) mandated for accounting

• headhunter (!) mandated CMO & CFO search

• later early-stage VC took lead, initiated more cost efficiency & tuned strategy, and syndi-cated 2nd rd (VC, super angel, corporate VC)

04 Challenging examples

Case study 2: Project T

• 1st round by 2 angels (ex big pharma) introduced by VC, they convinced a difficult co-founder to leave and sell his shares

• Then early-stage VC joined first round and added additional terms & shareholder agr‘t

• 2nd round with foreign VC and super angel

• after 3 years big pharma shows interest beyond joint research (exit signals)

04 Challenging examples

Case study 3: Project Q

• Top angels and VC‘s hand in hand

• Outsource sourcing & pre-screening

• Check pre-selection, trust your intuition

• Check terms

• be active in post investment phase

• diversify in 10+, sectors, time-wise

05 Learnings for angel investors

Fulltime, quality, diversification

05 Q&A

Any questions?

• Thanks for your attention

• follow serial entrepreneurs (ICT 25-50y, LS 35-70y)

• 7 years for angel investment learning curve (faster in business angel network or with VC)

• Diversify on >7 start-ups

• keep 50% for next round

• talk with VC‘s (some are human beings)

• Read*, speak, publish *) Amis: Winning Angels; Guy Kawasaki: The Art of Start

06 Winning Angels

Bonus tips

Instrument Return* Risk LiquidityGold ?% quite high high

Cash** 2% low highReal Estate 4% moderate moderateBonds-CHF 3% moderate medium

listed Equity 7% quite high moderateVC-early 20% high lowPE-leverg 20% very high low

02 Risk and return

*) in the long run**) your currency

• Team team team: Can it implement the vision?

• Product/market: No-brainer? Disruptive?

• Business model: Who pays whom how much?

• Can I provide an added value for this deal?

• When can I sell my shares to whom? (multiple high enough? Higher than 20?)

06 Investment criteria

More bonus tips

• 50% eat too much and move to little

• Organic Food that keeps you smart & slim

• 50% of ads wasted – never again!

• Media: We spend 5 out of 10h with new media

• Multimedia- & Meta-Search (Mediaclipping, Swoodoo)

• Vertical Social Networks (Quevita, Triphunter)

• Connecting Devices & Toys (DoYouPoken)

• 3D Virtual Apps (WoW, 2L, Starfruit, vMeet, vLearn, vShop)

08 Trends for pro-active sourcing