San Diego Startup Week (SDSW) STARTUP WEEK. is the region s premier catalyst for innovation, creativity & entrepreneurialism.

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2 San Diego Startup Week (SDSW) STARTUP WEEK is the region s premier catalyst for innovation, creativity & entrepreneurialism.

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4 Big Thank You to Our 2016 Sponsors

5 How To Speak Investor Bridging the gap between entrepreneurs and investors- how to get on the same page and speak the same language. Jack Scatizzi Head Analyst, Tech Coast Angels- San Diego Managing Partner, Canopy San Diego San Diego Startup Week- June 2016

6 About Me Spent the past 3 years as the Head Analyst for Tech Coast Angels- San Diego Prior to that I spent 1.5 years as a Volunteer Analyst Since 2012 I have: Reviewed over 1,400 applications Funding applications, Quick Pitch & Meet The Angels Seen over 600 investor pitches Average over 20 pitches a month Participated in over 75 Due Diligence Meetings Participated in 12 Due Diligence Efforts Since 2012 TCA-SD has raised over $27M for 35 companies

7 Tech Coast Angels Founded in 1997 One of the Largest and Most Active Angel Investors Organization in the US $176M in approximately 300 Startups >300 Members in 5 Networks San Diego is the largest network with members Santa Barbara Los Angeles Orange County Inland Empire San Diego

8 Commonly Misunderstood Concepts & Terms Valuation Entrepreneurs- future value of the company based upon market potential Investors- current value of the company based upon milestones achieved Investor returns are generated off the difference between the current value of the company and the future value of the company based upon the market potential

9 Commonly Misunderstood Concepts & Terms Break Event Point/Cash Flow Positive Entrepreneurs- can tend to mix these up or consider them the same Investors- Break Even Point- when the company is generating enough revenue that they no longer need outside capital to cover expenses Cash Flow Positive- point when income exceeds expenses These can be tricky to determine when considering adding outside capital for growth marketing & additional hires

10 Commonly Misunderstood Concepts & Terms In Revenue/Profitable Business Entrepreneurs- can tend to mix these up or consider them the same Investors- In Revenue- when a company has identified a sustainable revenue model, i.e. not just a single revenue event Profitable Business- when the incoming revenue can cover all operational expenses for sustainable amount of time

11 Commonly Misunderstood Concepts & Terms Lead Investor Entrepreneurs- first check in Investors- Generally needs to satisfy these criteria Conducted independent Due Diligence Represent a significant portion of the round Assuming a leadership role in the company Generally a Board Seat Generally a group of investors as opposed to a single investor Role of the Lead Investor is too coordinate the closing of the entire round by recruiting other investors

12 Commonly Misunderstood Concepts & Terms Syndication Deal Entrepreneurs- most are unfamiliar with the term Investors- Coordinated participation of multiple investor groups to close a single round of funding Requires a strong Lead Investor and DD Report/Summary Allows additional investors to be more comfortable with the investment opportunity Especially when coordinating investors from across the US

13 Commonly Misunderstood Concepts & Terms Syndicating a deal is essential for funding larger rounds Typical Angel Investor invests between $25-50k Thus for a $500k round you need investors Thus for a $1M round you need investors Average Angel Group has 68 members with a median of 50 members, but there are larger groups Tech Coast Angels (SoCal /5 networks) Keiretsu Forum (1500/46 chapters) Golden Seeds (275, women led companies) ArcView (550, cannabis focused) Angel Capital Network (approaching 300) Typical cumulative investment from an Angel Group is $ k

14 TCA Syndication Examples Golden Seeds, NY Houston Angels, TX Pasadena Angels, CA-LA Desert Angels, AZ Life Science Angels, CA-SF Mass Medical Angels, MA Boston Harbor Angels, MA Keiretsu Forum, Global Central Texas Angel Network, TX North Texas Angels Network, TX Landmark Angels, CT Chemical Angels Network, US Blue Tree Angels, PA Cowboy Angels, OK Launchpad Venture Group, MA Raised over $20M from 14 Angel Groups Raised almost $7M from multiple Angel Groups Raised $26M from over 300 Angel investors Raised over $3M in 15 months from 7 Angel Groups Tech Coast Angels, Houston Angel Network, South Coast Angel Network

15 Commonly Misunderstood Concepts & Terms Due Diligence Entrepreneurs- providing investors with company generated documents Investors- Are looking for a third party/independent review of company and their DD materials Generally provided by the Lead Investor in the form of a DD Summary/Report Highlights risk associated with the investment opportunity and what the is being done to mitigate the risk- company & investor/bod Not all investor groups will create a DD Summary/Report or share their Summary

16 Commonly Misunderstood Concepts & Terms Why is Due Diligence important Entrepreneurs- Having a solid DD Summary/Report will lower the amount of time additional investors will spend in DD on your company Thus lowering the amount of time it takes you to close your round Investors, from Power of Angel Investing study by Rob Witbanks Median DD completed by investors on a company is 20 hours with a mean of 60 hours Spending < 20 hours on DD leads to 1.1x return Spending > 40 hours on DD leads to 7.1x return

17 Realities of Raising Capital from Angel Investors Not all startups are created equal Steve Blanks: The 6 types of Startups Wall Street Journal Lifestyle Startups- Entrepreneurs work to live their passion Think consultant, works only when they want Highly specialized solutions thus difficult to scale Small Business Startups- Work to Feed the Family Think typical brick and mortar small business Small/niche ecommerce site thus difficult to scale Could be very successful business for the founders, but a low likelihood of an investor liquidity event makes these types of startups not very attractive investment opportunities

18 Realities of Raising Capital from Angel Investors Not all startups are created equal Steve Blanks: The 6 types of Startups Wall Street Journal Scalable Startups- Born to be Big Developing a product/solution that can easily scale to meet a large market demand Think Facebook, Twitter, Uber, etc. Buyable Startups- Acquisition Targets Developing a product/solution that would be an addition to the product portfolio of a larger company Think drug discovery companies, Parse/FB, Waze/Google, etc. Attractive investment opportunities to investors due to potential for an investor liquidity event- IPO or acquisition/merger

19 Realities of Raising Capital from Angel Investors Not all startups are created equal Steve Blanks: The 6 types of Startups Wall Street Journal Social Startups- Driven to Make a Difference Can be non-profits or for profit entities Large-Company Startups- Innovate or Evaporate Think independent internal development at Facebook, Google, Qualcomm, etc. Can be attractive investment opportunities to investors but requires the right revenue model and exit strategy

20 Realities of Raising Capital from Angel Investors Not all Investors are created equal Friends and Family- investing specifically in the founder and not the business model or solution Unsophisticated Investors- generally new to Angel Investing Generally less than 2-3 years of experience investing in early stage private companies and have invested in less than 5 companies Pros: Fairly easy to convince to write a check Cons: Can offer limited support/value beyond capital May not be able to write multiple checks Can be more trouble than the value of their capital

21 Realities of Raising Capital from Angel Investors Not all Investors are created equal Domain Experts- heavy expertise in the market thus they understand the problem you are trying to address and are investing in the solution and the potential of the solution to disrupt the industry Pros: Easily understand the problem you are addressing and the potential financial gains the solution represents Can add tremendous value to the company beyond capital Generally market specific Cons: Can be difficult to identify Have a very narrow investment thesis

22 Realities of Raising Capital from Angel Investors Not all Investors are created equal General Investors- invest in the best investment opportunities regardless of the market/industry Pros: Generally easy to identify Can add value beyond capital and market expertise Cons: Competing with a number of other investment opportunities across various industries Individual/Groups: Individuals- easier to schedule meetings with and quick to make investment decisions Groups- offers access to more investors but have scheduling limitations and rigid workflows

23 Angel Investing Statistics >300,000 ACTIVE ANGEL INVESTORS in the US FUNDED71,000 VENTURES INVESTED $24.6B IN 2014 * IN CONTRAST VC S INVESTED $48.4B IN * Center for Venture Research 2015 Analysis of Angel Investing ** PricewaterhouseCooper s 2014 NCVA Report 4,400 VENTURES IN 2014 **

24 Angel Investing Statistics Average Angel deal size was $345k with a pre-money valuation of $2.32M * Number of checks Angels Investors wrote last year- median of 2 / mean of 4 ** Total number of checks an Angel writes in their career- median of 10 / mean of 19 ** Size of Angel checks- median of $25k / mean of $35k ** Women comprise approximately 25% of all Angel Investors * Center for Venture Research 2015 Analysis of Angel Investing ** The American Angel Campaign, 2016 Wharton Business School

25 TCA San Diego Deal Funnel San Diego Application Status Stats (TOTAL) HiTech Life Science Total Percentages Total Applications Reviewed Immediate TD % Committee Meeting % General Membership Meeting % DD Kick-Off Meeting % DD Initiated % Funded % San Diego Application Status Stats (AVG) HiTech Life Science Total Total Applications Reviewed Immediate TD Committee Meeting General Membership Meeting DD Kick-Off Meeting DD Initiated Funded 3 4 8

26 Conclusions Raising capital from outside investors is extremely difficult and requires alignment between investors and entrepreneurs It s even more challenging if you give an investor a reason to say no simply because you can t understand each other or your expectations are not aligned A successful fundraising effort requires entrepreneurs to spend some time learning investors motives and their expectations

27 Resources Angel Capital Association Knowledge Center Tech Coast Angels Resources Definitive Guide to Raising Money From Angels by Bill Payne (Free Download) appr/collateral/ Definitive+Guide+Raising+Money+from+Angels.pdf Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups by David Rose