Notes from the 2016 ACA Summit

By Craig Mullett - President of Branison Group, a corporate finance firm based in Connecticut, USA. Craig is an active angel investor as a director of the Angel Investor Forum. He is also a founder of AngelHub, Africa's first angel group and helped in establishing Trident Angels, the first Caribbean angel group. 

(Editor’s Note:  We liked Craig’s notes from the ACA Summit so much that we thought other ACA members and investors would also get value from them.)

Smart money
Kay Koplovitz (USA Network/ Springboard Enterprises)

  • Be open to serendipitous moments where entrepreneurial solutions may be uncovered
  • Angels need to network where there are innovation pipelines to stay close to cutting edge startups 
  • Plan how your capital will be able to move startups "up the escalator" to the next capital raise and ultimately to exit

Outcome Based Investing session

  • Predicting winners needs to be combined with proactively making winners through post-deal interaction - board advisors with industry expertise
  • Startup team needs combination of selling dynamism & technical product expertise
  • Engaging strategic exit partners early is a predictor of success (avoid exclusivity to keep multiple bidders alive)

New technologies and platforms changing angel investing
Trish Costello (Portfolia) & Scott Dubin (OurCrowd)

Trends shifting investing:

  1. Expanded geography
  2. Opportunity to specialize
  3. Broader diversification 
  4. Stronger diligence
  5. Bring greater value
  • OurCrowd uses a VC GP model with direct investing (due diligence, board rep) then opening round to the crowd who pay 2/20

Intellectual Property Breakfast

  • Costs to defend litigation usually $500k-$3.5m, depending on complexity and aggressiveness of defendant (Medtronic currently has 250 pending lawsuits filed just on medical pumps)
  • As tech companies grow, risk of patent litigation grows - 80% of tech investment $ have had some litigation, with 45% being subject to an enforcement action
  • "On sale" rule - once a product is being sold to customers, there is up to one year to file related patent applications, else all patent protection paths are lost

New Times, New Tools
Bob Rice (Three Moves Ahead) & David Rose (Gust)

  • Policy makers have not been able to account for the tectonic shifts in the global economy - online platforms, shared services and assets, winner-take-all-markets are not reflected in GDP numbers
  • Yale's endowment currently has a higher allocation to VC than US equities
  • expected real returns on 60/40 equity/bond mix is 2.2% - need to move to a "panoramic portfolio" with early stage, real estate & other alternatives
  • Balance return (growth & income) with risk (capital)

Exiting the Un-Exitables
Michael Kindred-Pratt (Ohio Tech Angels) & John Harbison (Tech Coast Angels)

  • Zombie companies that have morphed into lifestyle support for the CEO
  • Determine "stack to 1x" - what value would you need to get full capital back? If stack is too high, rather take the write-down (sell back to company for $1)
  • Use reverse calculation of buyer needed IRR to determine minimum acceptable bid (MAB) and run an auction amongst existing shareholders
  • For fairness to investors, all successful bidders pay highest price that allows all units to clear 
  • "Lost Causes Fund" - investors sell securities for $1 to angel group fund who agree to donate any resurrections to charity at a later date, while investor gets immediate tax write-off

Lessons for Running Angel Groups

  • Women entrepreneurs and angels have higher returns
  • Watch out for sunk due diligence costs - walk away if you have any queasiness
  • Proactively address member churn by creating a collegial investor group and get frequent feedback on the group 
  • Ensure you have "no jerks" who destroy group cohesion
  • Raising member fees should be done cautiously and based on value add to investors (deals, peer network, learning)
  • State funding is always tenuous and better applied towards specific projects than used for ongoing operations

Convertible Notes Debate

  • Need a reasonable cap
  • Only do notes with insiders (family/friends) to ensure alignment for priced round
  • Compile an “outcomes waterfall” that assesses likely scenarios for conv note vs priced preferred equity 

Angel Investor Adventures
Fabrice Grinda

Team needs to fit with investor outlook
Business features: 

  • scalable with angel money
  • $1bn market
  • market leader potential
  • execution know how of team

Equity platforms likely to be loss making for small investors due to asymmetric info
Successful B2B marketplaces need high margins, high order value and high recurrence