Business Angel Investing& Role of BANSEA: Business Angel Investing & Role of BANSEA Assoc. Prof. Wong Poh Kam Chairman, Business Angel Network Southeast Asia Ltd (BANSEA) & Director, NUS Entrepreneurship Centre


Financing Mechanisms at different stages of the Start-Up process : Financing Mechanisms at different stages of the Start-Up process High Low Level of Investment Risk Assumed By Investor Seed Start-up Early growth Established Stage of Development of Entrepreneurial Firm Commercial Banks Equity Markets Non-financial Corporations Venture Capitalists Business Angels Founder, Friends, and Family Source: Onasbrugge et. al. (2000)


Role of Business Angel Investors : Role of Business Angel Investors Although much attention has been paid to the role of professionally managed VC funds, the potential contribution of the informal angel investment sector has been under-recognized in most countries. Even in the US, where the formal VC industry is the most advanced, angel investors play critical role in the development of high tech start-ups in the Silicon Valley The role of informal angel investment is more than just money at the critical early stage; it provides the mentoring, coaching to guide the start-up to reach the next stage for funding by the formal VC firms


Rate of Informal Investing in Singapore 2000-05: Rate of Informal Investing in Singapore 2000-05 Source: Wong et. al., GEM Singapore Reports, 2000-05


Slide5: GEM 2005 – Informal Investing Prevalence Rate & Rank among OECD countries Singapore’s 95% confidence interval is 2.9 to 4.1, hence countries ranked from Belgium to Switzerland are within the same band as Singapore Source: Wong et. al., GEM Singapore 2005 Report


Relationship of informal investor to investee, Singapore 2000-05: Relationship of informal investor to investee, Singapore 2000-05


Profile of informal investors in Singapore, 2000-04: Profile of informal investors in Singapore, 2000-04


Importance of Business Angel Networks: Importance of Business Angel Networks Many Angel Investors Participate in Formal or Informal Networks Information exchange/knowledge & practice sharing Exchange of deal flows Joint Investment/Pooling of risks Forum for networking & professional development


Examples from North America: Examples from North America Informal Business Angel Network Silicon Valley Band of Angels, California Angel Forum-Vancouver, Canada Investment Clubs The Angels’ Forum (TAF), Silicon Valley CommonAngels, Boston Formal Private Equity Fund Investment Advisory Services/brokerage & Incubation Services Online Investor-Entrepreneur Matching & Networking Services (e.g. angeldeals.com) Association of angel networks (e.g. Angel Capital Association North America, EBAN)


Business Angel Network (Southeast Asia)(BANSEA): Business Angel Network (Southeast Asia) (BANSEA) Established in 2001 in Singapore as a Public Company limited by guarantee by a group of Singapore-based angel investors, with network connections to angel groups in Thailand and Malaysia Membership is open to bona-fide angel investors, recommendation by an existing member; one-time joining fee


Business Angel Network (Southeast Asia)(BANSEA): Business Angel Network (Southeast Asia) (BANSEA) Website www.bansea.org Receive and circulate business proposals to members; A sub-committee vets submitted plans for presentation at networking lunch Regular networking lunch, usually with a guest speaker and invitation of 3 start-ups to make business plan pitches & network; Members can invite 1-2 guests to attend Mentoring service Participate in various activities (e.g. serving as judges in business plan competition, providing inputs to government policy making etc) Angel investment forums and workshops


EDB SEEDS Scheme: EDB SEEDS Scheme Incentive scheme for angel investing Co-invest with third party investor(s) unrelated to investee company on 1:1 basis up to a maximum of S$300K, on same term as investor(s) On exit, EDB will first recover its orignial investment, then give 1/3 of its gain to the investor Investee company must be Singapore-based, must not have received prior investment, and should be knowledge-based. A similar scheme administered by SPRING is applicable for non-technology based ventures.


Angel Investing Process : Angel Investing Process Establishing investment goals/risk preferences Appetite for risk: what can you afford to lose? Time horizon for return: angel investing as long-term investing vs. short/medium term exit; Early seed vs. later stages Time involvement: Active “smart money” role vs. passive financier Thrill of the chase? Mentoring skills and Importance of “chemistry” Solo vs. Group approach formal vs. informal Deal prospecting, evaluating, negotiating, post-investment monitoring, coaching, exit planning


Deal Prospecting & Evaluation : Deal Prospecting & Evaluation Networking: Getting into “circulation” for deal flows Leveraging old connections Plugging into the venture ecosystems Hunting in pack vs. solo Informal network vs. formal private equity fund Art & science of reading business plan, due diligence Checking out investee’s background, track records, motivation, skin at risk, establish “chemistry” Valuation: second opinions, dilution, exit options What can go wrong with the plan?


Negotiation Strategies and Tactics : Negotiation Strategies and Tactics Lead vs. tag-on role Focus on the essentials of the deal, but get legal advice on technicalities of the final term sheet Valuation Structuring of deals: stocks, stock options, milestone/ performance clauses, board seat, veto rights, anti-dilution, exit options


Key Issues in Investment Term Sheet: Key Issues in Investment Term Sheet No. of share issued, price per share Conversion price (preferred to common) Anti-dilution clauses (weighted average vs. “full ratchet” protection, pre-emptive rights and rights of first refusal) Registration rights (mandatory, piggyback) Right to elect board members, attend board meetings “Protective rights”: Veto rights over next financing, acquisition, mergers, sales and disposition of assets, dividends, borrowing and easing,compensation of executive employees, ownership and sales of proprietary IP, etc. “Lock-up” conditions on key employees and their vesting rights “Information rights” (inspection, financial statements,etc.)


Issues in more complex term sheets: Issues in more complex term sheets Options, convertible loans vs. upfront shares Liquidity preferences for preferred shares: cumulative dividend, participating preferred stocks, Redemption rights Milestone clauses Co-sale rights


Preferred term sheets of angel investors: Preferred term sheets of angel investors Usually try to keep things simple Sliding convertible loan to avoid haggling over valuation at the early seed stage Commitment of founders to key employee share allocation to attract good people Board seat Key protective rights, especially veto rights over compensation of key management team members and use of funds Anti-dilution clauses


Exit Mechanisms for Investors: Exit Mechanisms for Investors IPO (typically after a lock up period) Organic growth Roll-up Mergers & Acquisition by a Corporate Group For Cash Share Swap Trade Sales Hold for Dividend Yield …try to avoid Living Dead