Record-breaking Investments in 2007: The AoA Play-by-Play

Here at the AoA we think transparency is a good thing. Plus we're data junkies. Below please see a few facts and figures from our record-breaking deals in 2007. If there's anything you'd like to know and don't see, we can pretty much slice and dice our stats any way that may be of interest, so don't hesitate to email us . Also feel free to post a comment (if you didn't get enough from the thread following John Cook's blog); this month the topic of angel investing has ranged from spectator sport to bench-clearing brawl.

As with any sport, we have our own ground rules for reporting:

• We only report investments made in companies that were screened, coached and selected to present to the Alliance of Angels membership. Red flag: some groups report all investments reported by their members, regardless of whether or not the angel organization was involved.
  
• We clearly distinguish "direct investment" (our own members' investment in the companies described above) from "indirect investment" (additional investment our members facilitated through their network). Yellow flag: some groups will consolidate both categories into a single group of "facilitated" investment.
  

Just the stats, ma'am:

• 174: companies interviewed, coached, screened (90 minute meetings)
• 32: new investment opportunities that were selected from the above, and presented to our membership
• 15: investments in new companies (just about 50% of the new opportunities reviewed by our membership).
• 9: 3 minute updates made by companies who had previously presented and were funded by AoA returned to give brief presentations when seeking another round of funding.
• 8: of these 9 received follow-on funding
• 21: additional AoA portfolio companies from prior years received follow-on investment from our members.
• 44: grand total of AoA investments tracked in 2007.

Show me the money:

• $3.9 million tracked in direct funding from our membership, in AoA companies
  
• $3.3 million in additional sources facilitated by AoA ("indirect" funding)

• 87% of the new companies who received investment were high-tech
• These deals received 85% of the total direct dollars (the other 13% of deals, 15% of dollars were consumer product and retail).
• 93% of companies receiving follow-on investment were high-tech, and received 92% of this category of funding (correspondingly, 7% of the deals were consumer/retail and received 8% of the dollars)

For more fun with stats, and some color commentary, check out our press release.

Debt vs. Equity-Battle Royale

At our first members-only fireside chat of 2008 we enjoyed a lively discussion about valuation trends and the merits of debt vs equity with top notch participants David Clarke (partner Perkins Coie), Peter Parsons (partner Davis, Wright, Tremaine), Geoff Entress (Madrona), Robert Headly (Ignition), and Dan Rosen (Chair of Alliance of Angels). With the panelists addressing the issues from the point of view of both investors and entrepreneurs it was a night to remember. Some insights gleaned from the discussion

Valuation

• "More of an art than a science"-Geoff, who went on to remark that you could always try to use a DCF but more than likely it will end up getting thrown away.
• Peter-Angels need to be careful not to be too generous in an A round because they will get crammed down by VC's in the next round.

Term Sheets

• Robert-VC's may get nervous if a company a large number of individual investors (e.g. >30).
• Geoff-In an angel deal find terms consistent with what VC's will look for later on to minimize attorney fees.
• If you are going to pursue more than just friends and family money, convert an LLC to a C-corp early on to save yourself a headache.
• Option pool-be analytical!! Think about necessary hires and what they will expect (eg. CEO 7-10%) and craft size of option pool to conform to needs for that round.

Convertible Debt vs Equity

• Have a clear end point (next round of funding) in mind with convertible debt-6 months is normal outer limit for the next funding to occur. David suggested setting a cap on valuation if there are questions about the timing of the next round.
• Between the attorney's and VC's on the panel the market discount rate for convertible debt appears to be 25-30% with some cases of the rate escalating month to to month after a certain point.
• In a debt deal, make sure to note what will happen if a sale occurs before the next round of financing-set a valuation or an agreed upon return for debt investors.

Expense Budget for an A round

• David gave an estimate of company counsel costing $50K and investor counsel between $25-35K for a normal series A venture round, with an angel round costing perhaps 2/3 of that. Although Peter, in a friendly dig at the competing firm, noted that perhaps Perkins is on the high side and his experience showed it to be a bit lower.
  

Update 5-22

• Since we are still seeing quite a number of debt deals coming through our process I thought it would be interesting to link to a new article contending that convertible debt is a bad deal for angel investors. The arguments put forth in the article are the same we have been making here at the Alliance for some time, regarding the instances where convertible debt is an appropriate instrument. It does make the interesting addition that debt can be a good deal if there is a cap (agreeable to the investors) on the pre-money because in the event of a negative exit, debt holders will at least have first right to any assets...