Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Markets Copyright © 2014 International Bank for Reconstruction and Development / The World Bank Mailing Address: MSN I9-900 1818 H St. NW, Washington D.C., 20433 USA Telephone: (+1) 202- 458-4070 Website: www.infoDev.org Email: [email protected] Twitter: @infoDev Facebook: /infoDevWBG Some rights reserved. This work is a product of the staff of infoDev / World Bank. Note that the World Bank does not necessarily own each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the donors of infoDev, The World Bank, its Board of Executive Directors, or the governments they represent. 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Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Markets About infoDev infoDev is a global program within the World Bank Group that supports growth- oriented entrepreneurs through creative and path-breaking venture enablers. Such enablers can be ground-breaking innovation hubs, incubation centers and other business accelerators. It assists entrepreneurs to secure appropriate early-stage financing; convening entrepreneurs, investors, policymakers, mentors and other stakeholders for dialogue and action. We also produce cutting-edge knowledge products, closely linked to our work on the ground. For more information, please visit www.infodev.org Acknowledgments This guidebook is an adaptation of the Ewing Marion Kauffman Foundation’s 2004 publication A Guidebook to Developing the Right Angel Organization for Your Community. infoDev would like to thank the Kauffman Foundation for partnering on this effort and allowing infoDev to update and modify the original version for a global audience. Laura Baker, a consultant for infoDev, adapted the guidebook, which was originally authored by Susan Preston. Maja Andjelkovic, Ellen Olafsen and Oltac Unsal provided research guidance. infoDev would also like to thank Susana Garcia-Robles and Marta Patricia Aparicio y Montesinos of the Multilateral Investment Fund at the Inter-American Development Bank for their generous support for the research and review of this publication. Many thanks to those who were interviewed for this guidebook and shared their knowledge and experiences: Irene Banda Mutalima, Bibhusan Bista, Barry Bogage, Antonio Botelho, Aleksandar Cabrilo, Omar Cisse, Colin Daniel, Harry Tomi Davies, Lianne du Toit, Eric Edelstein, Hernan Fernandez, Luis Galveias, Scott Gillespie, Nelson Gray, Ravishankar Gundalapalli, Hasan Haider, Sam Kamunyu, John Kieti, Derrick Koetze, Bohdan Kupych, Kalsoom Lakhani, Chris Major, Craig Mullet, Torooti Mwirigi, Michael Oluwagbemi, Mobola Onibonoje, Judith Owigar, Gordon Peters, Wissam Rabadi, Sophie Riviere, Ben White, Bagrat Yengibaryan. Peer reviewers were: Marta Patricia Aparicio y Montesinos (Consultant, IADB), Susana Garcia-Robles (Principal Investment Officer, IADB), Esperanza Lasagabaster (Service Line Manager, World Bank), Samuel Maimbo (Lead Financial Sector Specialist, World Bank), Craig Mullet (Branison Group), Justin Piers William Hill (Senior Private Sector Development Specialist, World Bank). Thanks also to Machimanda Appaiah Deviah for copyediting and Corporate Visions, Inc. for the design. The report was made possible by the support of the government of Finland through the Creating Sustainable Businesses in the Knowledge Economy (CSBKE) program. Table of Contents Introduction ................................................4 Background.................................................5 Getting started: community assessment ..................14 Reviewing your assessment............................... 25 Building the framework....................................28 Membership and culture.................................. 29 Organizational structure.................................. 34 Legal structure.......................................... 38 Investment structure..................................... 41 Funding your angel organization........................... 43 Group operations...........................................48 Part 1: Launching group operations........................ 48 Recruitment ......................................... 48 Communications with members ......................... 49 Backgrounds/educational needs . . . . . . . . . . . . . . . . . . . . . . . . . 50 Time commitments.................................... 51 Meeting structure..................................... 51 Sponsorship ......................................... 52 Collaboration with other angels.......................... 53 Promotions/public relations............................. 53 Part 2: Identifying deals and investing...................... 54 Deal sourcing ........................................ 54 Deal screening ....................................... 56 Coaching ............................................ 59 Presentations ........................................ 59 Due diligence......................................... 60 Investment terms and negotiations....................... 61 Liability and risk exposure.............................. 62 1 Part 3: Follow-on relationships and activities ............... 63 Board seats.......................................... 63 Access to information.................................. 63 Tracking investments .................................. 64 Mentorship .......................................... 64 Follow-on financing ................................... 67 Exits................................................ 67 Legal concerns ....................................... 68 Measuring success.................................... 68 Summary ...................................................71 Appendices .................................................73 1. Revenues and Expenses Worksheet ..................... 74 2. Membership Information .............................. 75 3. Membership Agreement ............................... 77 4. Membership Survey................................... 79 5. Group Member Responsibilities......................... 81 6. Funding Application................................... 83 7. Screening Committee Worksheet ....................... 85 8. Issues to Consider in Due Diligence ..................... 87 9. Due Diligence Checklist ............................... 91 10. Sample Term Sheet ................................... 98 11. Guidance Note on Sample Term Sheet ................... 101 12. Mentorship for Equity Contract Template ................ 105 2 Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Markets ¦ Introduction ¦ Background ¦ Getting Started ¦ Building the Framework Introduction In little more than a decade, formal angel investing organizations have shifted from being mostly a U.S. and European phenomenon to being active and visible around the world. From Colombia to Cambodia, Serbia to South Africa, angel investors build networks from scratch and put their own local spin on how these networks are founded, structured, and operated. Most impressively, these angel groups enjoy successes in very challenging environments; many do so with little or no guidance or best practices to follow. However, for every successful angel group founder there are many more potential founders looking for a place to start. This guidebook aims to support such individuals and newly formed angel groups by presenting global best practices and tools and templates for facilitating group operations. Launching an angel network is challenging in any environment. Doing so in a country with limited deal flow, weak institutions, and limited investor protection can seem nearly impossible. To confuse matters even more, there is no one-size-fits-all solution to set up and operate an angel organization. A diversity of models and structures has been successful worldwide. Given this context, this guidebook cannot prescribe a simple formula to set up and run your angel network. Instead, it will help you navigate the decision-making process at various stages, and give you real-world examples of how other networks have worked through difficult problems. Additionally, for those of you in countries where angel organizations do not yet exist, this guide will offer words of wisdom and encouragement from those who have blazed a trail in their own countries. This manual is built from the Kauffman Foundation’s 2004 publication, A Guidebook to Developing the Right Angel Organization for Your Community, which was crafted for a U.S. audience. Many of the decision steps to create an angel network are the same, no matter if you are in the U.S., South East Asia, or Sub-Saharan Africa. Much of the guidance holds true in 2014 as it did in 2004. However, this international edition recognizes the additional challenges that angels face outside the U.S., particularly in emerging economies, and teases out those problems and offers potential solutions. Also, globalization and the fast pace of technology have resulted in important new trends in angel investing since 2004. This edition will explore how the internet and networking platforms have helped international angels connect in new ways and overcome a host of obstacles. It will also touch upon topics such as crowdfunding and diaspora investing. After you have gone through the community assessment, questions, and options outlined in this guidebook and have decided how your organization will look and operate, you may arrive at a completely new model that is not presented in this manual. What is most important is that your membership is comfortable with the result, and that the group is willing to adjust the model, goals, and orientation as it grows and gains experience. Given its broad geographic scope, this guidebook cannot provide specific guidance for every region and country. Be sure to consult your local legal experts, accountants, and other relevant actors to identify regulations that may influence your group’s structure and day-to-day operations. 4 Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Markets Background B a c k What is angel investing? g r o u n There is no universal definition of angel investing, but it is d generally understood as the practice of high-net worth individuals investing their own time and money in new businesses with the goal of profiting from their long-term growth. Such investments are characterized by very high levels of risk as most companies are in the earliest stages and will likely fail. Angel investors are different from venture capitalists (VCs) in that VCs invest other people’s money. Motivations are another important distinction between the two; angels are typically interested in more than just receiving a financial return. Personal interest, the desire to give back, and the thrill of being involved with an innovative company are just a few of the reasons why people decide to become angel investors. The practice of wealthy individuals and groups investing in entrepreneurs has existed for centuries and across many cultures. In some traditions, wealthy family members, friends, and/or community members provide financial support for business ventures, some with expectations of a return on investment or sharing of profits. This is different from most western definitions of angel investing, today, which describe angels as having no meaningful relationship to the entrepreneur prior to investment. Friends and family generally provide the first round of funding to help an entrepreneur get started, and angels step in when the business needs another injection of capital to develop and grow. That is why angels are often associated with high-growth companies. Who are angel investors? Typically, angels are high-net worth individuals with considerable business experience. Of course, “high-net worth” is a relative term that varies from country to country. In the United States, Canada, and the UK most angels have “accredited investor” status as defined by law (see text box on page 8 for details), although this is usually self-certified. Most countries, however, do not have such criteria for angel investors. The majority of high-net worth individuals in developing countries tend to invest locally, most commonly in real estate, agriculture, minerals or other natural resource extraction, and they tend to find opportunities Background 5 and make investment decisions based on personal connections. Some of these investors, however, test the waters of financing high-growth start-up companies that are not in the traditional sectors described above, contributing to the communities of new entrepreneurs and their support structures that make up new start-up communities. Globally, most angels fall into two main categories: m Successful entrepreneurs: These individuals have a close knowledge of the needs of start-ups and are crucial in driving the creation of angel networks. Many want to stay LATIN AMERICA engaged in the start-up scene after cashing out of their angel investers in own businesses, and help cultivate local entrepreneurial ecosystems in their own countries. In some countries, such as Cambodia and Burkina Faso, angel investors include experienced entrepreneurs from the U.S., Australia and other western countries who live abroad and want to 6% family offices invest in innovative new companies. These angels may be 12% other members of the diaspora who want to give back to their professionals home countries or communities. m Business executives and other traditional investors: In many countries, wealthy business professionals from large 25% executives multinational companies or government become interested in investing in start-ups. In places such as Indonesia, these 24%retired company business heavyweights act like angels and draw on a owners tremendous amount of capital and business connections. They bring significant financial support to the table, but 33% active it can take some time for them to adjust to the scale of company owners start-ups and to find time to connect with entrepreneurs to mentor. In some countries it has taken time for traditional investors to warm up to high-growth, IT-based start-ups, which are relatively new and unfamiliar to most investors. This does not mean, however, that these investors cannot become very effective angels. This manual will demonstrate ~ Data is from a 2012 survey of 665 angel investors in networks across how traditional investors have transitioned to angel Latin America. Angel Investor Networks in Latin America and the Caribbean. Private Investors Network and IESE Business School and the investing and are highly involved with start-ups through MIF, 2012, p. 17. angel groups. Research limitations The demand for angel investment—especially syndicated deals where angels invest collectively—increased with the explosion of information technology in the 1990s. The angel industry began to formalize in the U.S. and Europe around this time, which has been well documented by researchers. Unfortunately, research has been limited in other regions of the world. Even though the practice of angel investing is found across Africa, Asia, the Middle East, and Latin America, much of it is informal or has low visibility, and angels are very private about their investments. To overcome blind spots in the research, this guidebook pulls insights from 6 Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Markets