Three Days of Angel Investing Insights
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to compensate future management. Voss remarked that focusing on the important due diligence questions is necessary to manage time. And, change of control provisions embedded in contracts are important to make sure relationships continue in the event of an acquisition to optimize the long term value of the contract. Clearly, entrepreneurs need to keep these thoughts in mind when entering into long term agreements so as to not jeopardize value. Tidwell emphasized the selection of board members who can help guide the entrepreneur and build value for investors.
When considering valuation, the entrepreneur needs to understand that angel investors need to return 30X their money if one deal out of 10 succeeds to get a 25 internal rate of return or about three times capital over five years. The implication is that ventures need to be able to scale which should be important to entrepreneurs too. Patience is required because “big returns take time to develop.” Conversely, “lemons rot faster than plums ripen” according to Luis Villalobos, a well-respected entrepreneur and angel. The typical pattern is as follows: belly up happens in three years; 10 times return takes 6 years; and 30 times takes 8 years. Performing solid due diligence, industry experience, engagement with the venture, and investing at the right valuation can help improve the odds of success.
The Angel Capital Association Northwest Regional Meeting over Thursday and Friday provided similar insights but with a wider range of angel groups. Furthermore, there were additional insights into important national policy developments the association has had a hand in helping shape for the benefit of angel investors and job creation. The ultimate sale of a venture (“exit”) is critical for the entrepreneur and investor to be clear about at the beginning and prepare for well in advance. Fortunately, the ACA’s efforts helped to extend the zero capital gains tax for investments made through the end of 2012. Tom Alberg, partner at Madrona Venture Group, is on President Obama’s National Council on Innovation and Entrepreneurship, and provided an update on efforts to improve policy for driving investment in innovation and job creation. One shift is in the Small Business Administration’s growing understanding of the difference between businesses that scale and those that are simply “main street” types. Investors, entrepreneurs, and policy need to come together to provide the perfect “petri dish” for growing a dynamic innovation economy in the United States which is globally competitive. Spending three days with entrepreneurs and investors demonstrated we certainly have the will.