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KNOWLEGDE 2017-10-25T09:50:57+00:00

Investor education:

Angel investing basics

Assessing a deal

Making an investment

Post investment

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Frequently asked questions

Who are “Angel Investors” and what do they do? 2017-10-25T09:38:24+00:00

Angel investors or business angels are individual investors who invest directly, or through their personal holdings, their expertise, time and money predominantly into seed or start-up companies that they have no family relationship with. They are filling the funding gap in between friends and families on one hand and banks, VCs, and private equity firms on the other. The above-mentioned investment process is called angels investing.

Why be an angel’s investor? 2017-10-25T09:24:05+00:00
  • Helping entrepreneurs: rewarding
  • Stay engaged – using skills and experiences to help build a business
  • An active form of investing
  • Return on investment
Why not be an angel investor? 2017-10-25T09:27:46+00:00
  • High risk
  • Invest only what you can loose
  • Stressful
What is angel investing? 2017-10-25T09:37:59+00:00

The angel investing is the matching between business angel and entrepreneur.

The angel investment is the process where the investor would normally take shares (an equity stake) in the business in return for providing equity finance (funds). In doing so, they provide the business not only with money to grow, but also bring their experience and knowledge to help your company achieve success.

Angel investing is the most significant source of investment in startup and early-stage businesses seeking equity to grow their business.1

How is the investment process in general going? 2017-10-25T09:28:36+00:00

We can briefly describe the process of preparing and realizing the investment in the following milestones: 6

  • Business plan – a basic document that comprehensively represents the company, its product, the vision and strategy – Long-term goals and the way how to achieve them.
  • Initial assessment of the investment plan – basic assessment of the future potential of the project presented in the business plan.
  • Due diligence – in-depth analysis of the company including financial analysis, management analysis, position on market and future prospects, comparison with competing companies, and so on.
  • Defining the terms and conditions of the investor’s entry – determining the conditions for realization of the investment – amount of investment, investment timetable, investor share in the company, decision-making powers investor and investor exit strategy from the company.
  • Investment contract – written acceptance of investor’s entry conditions, definition of rights and the obligations of both parties.
  • Capital entry into the company – transfer of funds to the equity of the company, in some cases, creation of a new company for the purpose of realization of the business plan.
  • Company evaluation – as a consequence of good economic results, the market value of the company will increase.
  • Exit of Investor – a pre-agreed exit of investor from the company that can be realized by selling to a financial or strategic investor, respectively the original owner of the company.
How does the basic concept of angel investing work? 2017-10-25T09:29:09+00:00

The investor:

  • develops investment strategy (Why do I want to invest? What are my goals? How would I measure if I am successful or not? How much money overall do I have? For what period of time do I want to invest?)
  • starts sourcing deals
  • decides to go for investment
  • takes shares (an equity stake) in the business in return for providing equity finance (funds)
  • brings his/her experience and knowledge to help the company to achieve success
  • invests alone, or as part of a syndicate (a group of angels)
  • seeks to have a return on their investment over a period of 3-8 years
Why is angel investing so important? 2017-10-25T09:29:32+00:00

Because of three main reasons:

  • Filling the funding gap between what friends and families can offer and what banks, VCs, and private equity firms are willing to contribute.
  • Providing business knowledge, networks and mentorship
  • Jobs creation2
How investors assess failure and success? 2017-10-25T09:29:59+00:00

Investors measure failure and success very individually. Mostly by the mix of:

  • return on investment,
  • satisfaction from having helped other entrepreneurs (‘giving back’ – perhaps reminding them of themselves when younger),
  • interest in a business model or sector.
What does it mean in practice to be a successful business angel? 2017-10-25T09:30:22+00:00

Being a professional business angel is not an easy business and definitely not for everyone. Abroad there are a number of professional publications dealing with this issue. Slovak business angel network has accumulated some advices/assumptions that should be met by the person who is interested in becoming a successful business angel: 6

  • Being a business angel is primarily to take a considerable amount of risk –only those who could afford to lose some money should invest.
  • Increased risk is associated with the high profit potential – investment in young prospective companies is an important part of each investment portfolio.
  • Underestimate the due diligence of the company does not pay off – underestimation of this process is the most common reason for faulty investment decisions.
  • Experiencing business angels advice not to “fall in love” with their investment and not to prolong lifetime of unsuccessful business by investing more money.
  • There is not one good recipe for a successful investment. Successful investments can show a lot heterogeneous characteristics.
  • Money attracts success – successful investments always require additional funding, it is advisable to have sufficient financial possibilities.
  • Do not avoid syndicated investment – more investors mean not just more finance for investment, but also the possibility of greater know-how and a combination of forces in the successful outcome.
  • Be patient and do not panic if an idea does not work.
  • Think of your exit strategy when deciding on investing – to develop your relationship with potential buyers.
What are the common problems facing angel investors? 2017-10-25T09:31:10+00:00

Angel investing is a high-risk endeavor no matter where you are in the world. However, certain risks are more prevalent in some countries than in others. According to recent research on angel investing in four Asian emerging markets, angels “face relatively more challenges compared to business angels investing within developing economies.” Angels interviewed for this manual agreed, and highlighted the following specific environmental factors: 2

  • Lack of awareness among angels and entrepreneurs of angel investing and that it is a hands-on process
  • Weak entrepreneurial ecosystems that fail to produce and support innovative start-ups
  • Lack of successful and visible angel investing models to follow in most countries
  • Lack of trust among angels and/or between angels and entrepreneurs
  • Lack of industry expertise/mentors to help start-ups improve business models, connect with markets and grow
  • Weak regulatory frameworks that may discourage, or at least fail to encourage, angel Investment and/or the creation of start-ups
  • Lack of educational resources for new angels to learn best practices and technical aspects of investing in high-growth companies
  • Fear of loss of capital and “face” in this risky asset class
How big capital the candidate must have in order to be able to become a Business Angel? 2017-10-25T09:31:49+00:00

In general, the business angel should invest only as much money as she/he can afford to lose. There are no minimum or maximum limits for investment, and the myth that business angels are exclusively rich people does not apply to it. Investments of individual investors range from € 25,000 up to € 250,000 per business project, with all investor investments cumulatively not going to exceed more than 25% of the total assets of the investor.6

Does the business angel have to meet any other special requirements? 2017-10-25T09:32:19+00:00

A typical business angels actively engage in a company in which they have invested funds. For this reason, they should have sufficient managerial skills and experience. However there are also differences among the individuals in terms of engagement and degree of cooperation with the investee.

Lachenmaier distinguishes the following types of investor:

  • “Angel – Entrepreneur” is the ideal type of investor to provide capital, know-how, and contacts.
  • “Angel – Investor” acts as a provider of funds looking for an attractive option the depositing of his capital, contacts or know-how, mostly does not provide his engagement, within the investment company is passive.
  • “Angel Consultant” brings professional know-how, but it does not provide capital, provides it only to a limited extent. The young entrepreneur offers the opportunity to gain valuable experience in the field.

Concerning the experience in the field, some surveys have shown that only about a third of business angels invest exclusively in the sector where they have professional work experience. The remaining two-thirds have realized at least one investment in a sector with no previous professional experience.

Business angels can, therefore, divide their activities into two main groups, actively engaged investors and passive investors who are less involved in the company. Profile of active investor more closely corresponds to typical capital requirements, which in practice are referred to as “smart money”. From different scientific research shows that business angels who are actively engaged in society and they have experience needed in this area of business are more successful in investing than those who remain in a passive position.6

What do angels look for in a business? 2017-10-25T09:32:45+00:00

Study shows that business angels used top three investment criteria when assessing the attractiveness of the proposition to invest:

  • The Management team criteria
  • Revenue potential
  • Exit opportunities
How to match angel investors with a business? 2017-10-25T09:33:05+00:00

For a start-up/business: There are several places where investors can be met. Business Incubators, managers of entrepreneurship programs at universities and wealthy entrepreneurs may be able to point them into their direction. Even more convenient are the online ventures, who are in touch with various angel investors all over the world and are interested in bringing together the entrepreneur and the investor.3

For Angels: Active Angels have many potential sources for connecting with entrepreneurs seeking Angel funding such as co-working places, hubs, accelerators, incubators, startup events and competitions etc. However, they need to be proactive in establishing those sources and, where they can, they prefer that some level of pre-screening occurs. This ensures that they are referred to only those investments which are likely to fit their criteria. This requires the Angel to establish an ‘Investment Profile’ which can be discussed with possible sources.3

What is Deal screening? 2017-10-25T09:33:31+00:00
  • The process of investors to quickly reduce the (usually very large) number of received investment opportunities (deal flow) down to the few most promising ones which warrant further effort. Guided by the criteria of a suitable personal investment strategy prepared in advance.4
  • It is the first step in the journey toward finding appropriate investment opportunities.
Does the due diligence have a positive impact on the success of the investment? 2017-10-25T09:33:53+00:00

Due diligence is conducted in order to reveal the real situation of the enterprise and the actual price, for which the investor offers an equity interest in the enterprise. Thanks for this in-depth review, it is ensured that it is adequate investor protection against risk.

The quality of the due diligence depends on the size of the business, the size of the business activities, time options, vendor cooperation, or up-to-date data. Conclusions of due diligence are critical for the investor’s final decision on the transaction and its offer to the buyer. The more careful the due diligence investor performs, the more it will filter out inferior intentions, which logically increases the success rate of realized investments.6

What are the main factors for assessing which companies to invest in? 2017-10-25T09:34:17+00:00
  • The company is scalable.  This means the company can grow quickly in revenues, while expenses are kept down, building a good margin.
  • The company is attractive to potential acquirers.  Many corporations that acquire innovative ventures are looking for high growth, scalable companies with great margins and products that align with their strategies.
  • The potential exit provides the return you need.  Every potential exit comes with a return calculus based on a combination of how much you invest, the pre-money valuation, how much of the stock the investor owns, and the acquisition purchase price.
  • An excellent management team.  Investable companies are led by solid management teams with experience, knowledge and complementary skills, along with the ability to build a great culture as the company grows.
  • The product is validated by customers and meets other criteria.  One of the biggest things to determine when considering an investment is “who is going to buy this product?” Make sure a realistic product road map exists and that true costs of production and delivery are well thought through.
  • A large market and strong go-to-market strategy.  Make sure the addressable market is big – $500 million, not $5 million – for a better chance at revenue growth.  And confirm a clear market strategy.
  • The opportunity fits your personal preferences. Choosing a company is a personal decision and over time angels develop their own weighted list of attributes to look for.5
What are the most common reasons for accepting investors’ investment opportunity? 2017-10-25T09:34:38+00:00
  • Interesting and innovative technology that fills the market gap or better meets customer needs in the market.
  • Positive “chemistry” between the investor and the entrepreneur, a certain level of trust between the two sides.
  • Perspective options for the exit in later stages of business.
  • An attractive profit opportunity.6
What are the most common reasons for investor investment rejection? 2017-10-25T09:34:57+00:00
  • Low level of investment preparedness of the entrepreneur, inability to perform due diligence.
  • The absence of trust between entrepreneur and investor.
  • Lack of willingness of investors to undergo higher risk.6
What are the most common ways of exiting investments? 2017-10-25T09:35:23+00:00

Exit (exit from business) is the final stage of the entire investment process, but it must also be seen as a critical part of the initial investment decision. The concept of withdrawing from the investment should be pretty clear already in the beginning of entrepreneur and angel investor cooperation, of course can be during the investment process modified. The options to withdraw from the investment are as follows: 6

  • Sales to a strategic investor (trade sales) means selling an investor´s stake to another company which, in the case of a purchase, can pursue the objective of strengthening its own market position.
  • Redemption of the investor’s interest by management. Redemption is mostly funded by loan. The benefits include the fact that management knows the company that share plans to buy and no due diligence is required. In foreign literature, management redemptions realized on their own management are referred to as “management buy-out”.
  • The refinancing of an enterprise consists in replacing the investor’s funds with the funds of another investor.
  • Initial Public Offering (IPO) represents the sale of the company through issuance of shares in publicly traded markets.
  • The exit from an unsuccessful investment is the worst option of an investment exit when a business angel is leaving the company with a loss. The most important task is to minimize losses by selling property of the company or liquidation of the company.
What are the advantages of creating or joining an angel group? 2017-10-25T09:35:44+00:00

While individual angels are incredibly important, there is only so much one person can do alone. Angel groups, which pool the resources and knowledge of their members, can overcome many limitations associated with solo investing and investing in risky environments, such as emerging markets. Because of this, angel groups are helpful in the following ways: Through groups, individual angels can access a higher number of better deals, especially when groups are recognized as having a particular investment focus.

  • Groups can aggregate resources to secure staff, interns, and facilities to enhance the deal process.
  • Angel groups have more efficient deal screening processes that allow for multiple “checks and balances” by having a diversity of knowledge about the market, management, and financial assumptions.
  • Angel groups can make larger investments and fill larger funding gaps by combining resources of individual investors.
  • Angel groups allow people to syndicate on a deal and share the risk.
  • New angels can learn from experienced angel investors on all aspects and steps of investing.
  • The pooling of investment capital gives angels greater economic power and influence which enhances investment terms negotiation. It also reduces risk by allowing angels to diversify their investments across several deals.
  • Angel groups provide the intangible values of fellowship and sharing of common goals.
  • Angel groups can have an influential voice collectively when raising regulatory and policy issues with government and can contribute to the creation of new and better policies.2
Are there any world-known examples of successful business angel investments? 2017-10-25T09:36:33+00:00

Very successful business angel investments are, for example: 6

  • com
  • Apple
  • Body Shop.
  • social network for sharing professional contacts XING
  • Facebook, Twitter
  • Skype communication platform
  • Simple Design and Print Platform Vistaprint
  • Starbucks International Café Network and many more.
Sources 2017-10-25T09:37:10+00:00
  1. UK BUSINESS ANGELS ASSOCIATION, 2017. Introduction to angel investment. [online]. [cit. 2017-06-26]. Available on the Internet: https://www.ukbusinessangelsassociation.org.uk/services-for-entrepreneurs/support-and-advice/angel-investment-right-business/

 

  1. KAUFFMAN, International Bank for Reconstruction and Development/The World Bank. 2014. Creating Your Own Angel Investor Group: A Guide for Emerging and Frontier Market. [online]. [cit. 2017-06-19]. Available on the Internet: https://www.infodev.org/infodev-files/angelgroups_guidbook _final_0.pdf

 

  1. MCKASKILL, T. 2009. An Introduction to Angel Investing. [online]. [cit. 2017-06-19]. Available on the Internet: https://www.angelcapitalassociation.org/data/Documents/Resources/McKaskill-_Intro_to_Angel_Investing.pdf?rev=CF33

 

  1. BUSINESS ANGEL INSTITUTE, 2017. [online]. [cit. 2017-07-11] Available on the internet: http://businessangelinstitute.org/resources/glossary/

 

  1. HUDSON, M. 2014. 7 Factors For Deciding To Invest In A Startup — Or Not. [online]. [cit. 2017-07-11]. Available on the Internet: https://www.forbes.com/sites/mariannehudson/2014/09/18/7-factors-for-deciding-to-invest-in-a-startup-or-not/#7ac9b6b3344b

 

  1. SLOVAK BUSINESS ANGELS NETWORK. 2017. Podnikanie pod krídlami anjela. E-book [online]. [cit. 2017-08-21]. Available on the Internet: http://businessangels.sk/others/podnikanie-pod-kridlami-anjela.pdf

Angel investment terms Glossary

A

Accelerator: Privately or publicly funded initiatives supporting startups for a predetermined period of time. Accelerators attempt to “fuel” the development process of companies. Their assistance is typically restricted to a few months and generally provided in the form of expertise transmission, coaching or in the form of boot camp events. As remuneration, accelerators often receive a future revenue participation or (even) equity. The boot camps initiated by accelerators often end with “demo days”, during which the business concept is presented to potential investors. 12

Accrual Accounting: An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company’s current financial condition.17

Acquisition: One company buys controlling stakes of another company. The acquisition of stakes can be either “friendly” (mutually agreed upon) or “hostile” (no previous agreement between the parties).

Angel Groups:  Organizations, funds and networks formed for the specific purpose of facilitating angel investment in start-up companies. 11

Angel Investors/Business Angels: Sophisticated, accredited private investors who choose to make early stage investments (time, experience and money) into start-up companies. 11

(Women) Business Angel ((W)BA): A (woman) business angel is an individual investor who invests directly (or through her/his personal holding) her/his own money, experiences and knowledge. (Woman) Business Angels predominantly invest in seed or start-up companies with no family relationship. In exchange, (W)BAs become owners of the company’s shares, they bring financial and non-financial support, and they increase the chances of the company’s success and profitable return on investment.

Angel Investment: (High-risk) investments made by business angels providing seed financing for startups. Angels invest by supporting companies financially and in terms of expertise, experience and personal networks in exchange for ownership equity.

Assets: This term refers to all corporate owned financial resources. “Current assets” comprise any form of currency, including traded inventory, investments and checks. “Fixed assets”, or “capital assets”, consist in material goods and company equipment, such as a company’s premises, company buildings and all machinery. The term “intangible assets” generally refers to intellectual property, copyrights, patents, etc. 4

Asset Management:  The term defines all systematic and coordinated activities to optimally and sustainably reach company objectives through a cost-effective life cycle management of assets. 10

Asset Management Plan: Long-term plans, from 10 to 20 years or more (for infrastructure assets), that outline asset activities and programs for any service area or resource. Asset Management Plans are applied to provide a defined level of service for each asset in the most cost-effective way.10

Asset Management Policy: A document that broadly outlines the principles and mandated requirements to undertake systematic and coordinated AM across an organization. The asset management policy needs to be consistent with the organization’s strategic plan and provides the framework for the AM strategy and AM Plan. 10

Asset Register: A record of the asset information, typically held in a spreadsheet, database or software system. The asset register also includes asset-attributed data, such as quantity, type, construction cost, etc.

B

B2B: Is an acronym that reads “business-to-business”. It is a term that describes business relations between at least two companies trying to sell their products or services to each other. The term B2B is not to be confused with the term B2C.

B2B technology: It is also sometimes referred to as “enterprise technology”.

B2C: The term stands for “business-to-consumer” and means selling products or services directly to individual customers. “B2C transactions” occur when a business engages in direct commercial interactions with consumers. In this scenario, the consumer is the end-user of the provided product or services. 6

Balance Sheet:  A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date. 3

Benchmarking: The term describes the process of comparing a company’s performance, costs, products and/or strategies to those of leading firms, peers or standards within the industry. Benchmarking is used to for the evaluation of early-stage companies by comparing them to known examples. 12

Bridge Loan: “Bridge loans” are a company’s solution of choice when short-term financing (up to one year) is needed. This type of loan also helps start-ups to have sufficient funds for any eventual future event e.g., long-term financing.2 A short-term loan used in anticipation of a permanent loan or financing in order to meet current obligations.17

Business plan: A business plan is a legal document that business owner’s use to describe their business idea(s) in the specific. It also contains a company’s overall financial objectives. Many investors heavily rely on entrepreneurial business plans when deciding to invest in a company, which is why many prospective business owners work diligently to refine their business plan in order to raise the capital they need to develop. 4

Business Model Canvas: This term defines a business-plan template that is commonly used by startup companies. A BMC is a short and visually more appealing alternative to the traditional business plan that can be specifically geared towards startups. The so-called “Lean Canvas”, and the “Startup Canvas” are special variants of the classical Business Model Canvas.

Business angel investors: Business angels (BAs) are individual investors who invest directly, or through their personal holdings, their expertise, time and money predominantly into seed or start-up companies that they have no family relationship with.

Burn Rate: The amount that a startup is spending, typically expressed as a monthly figure. 2

Buyout: The purchase of company shares that gives the purchaser controlling interest in the company. A common exit strategy.

C

Capital: Monetary assets currently available for use. Entrepreneurs raise capital from different sources to start a company and continue raising capital to sustain and grow the company.

Capital under Management: The amount of capital that an angel or VC (Venture Capital) Fund’s management team have at their disposal to invest in new startups. 6

Capitalization Table: A table depicting the quantity of shares or unit ownership which is held by each investor in a corporation or LLC (Limited Liability Companies), typically including founders’ equity, investor equity, and advisor/ employee Stock Option Pools. 6

Capitalize:  To record an outlay (amount of money spent) as an asset (as opposed to an expense), which is subject to depreciation or amortization. 3

Closing: A transaction that occurs after entrepreneurs and investors legally exchange all required legal documentation and capital that is needed in their business deal. When an investor “closes in on a deal”, they have already negotiated with the entrepreneur the details encompassing corporate ownership and monetary obligation. 4

Closing conditions: Specific conditions precedents that have to be met before one or both parties to an agreement have to honour their obligations in full. The parties concerned have no obligation to proceed with the agreement while closing conditions remain unsatisfied or incomplete. 12

Closing date: The date when a transaction is brought to completion. 12

Co-investment: Investments into a company alongside other investors in the same round (does not necessarily refer to a group of investors stable over time or involved in several investments). 12

Collateral: A sort of insurance that the lender asks the borrower to provide. Often times, when entrepreneurs seek capital from a financial institution, they use their assets (personal belongings and material goods) as a “collateral” or security for their loan. Should the borrower default on payments (i.e. the borrower is unable to repay interests on the lent capital), the lending institution has the legal authority to confiscate those assets. 4

Competition risk: The risk of losing market shares due to changes in market conditions or as a result of actions undertaken by competitors. 12

Condition Assessment: The inspection, assessment, measurement and interpretation of data, to indicate the condition of a specific component in order to determine the need for some preventive or remedial action. 10

Conversion features: Rights to convert an existing type of investment into another. For example, a convertible bond gives the bondholder the right to convert the bond into shares (equity).

Core Asset Management (or ‘Basic AM’): Management of physical assets (buildings, infrastructures and machineries) which relies primarily on the use of an asset register, maintenance management systems, top-down condition assessment, simple risk assessment and defined levels of service, in order to establish a long-term cash flow projection. 10

Corporate Venturing: A term that is used when a company invests internally on development and innovation of a new product, makes an external investment in another company, or creates an alliance with another company for innovation purposes. 12

Corporation: Synonym for “company”, “enterprise”, or “business establishment”. 4

Cost-Effective Management: The proactive, as opposed to reactive, management of the maintenance, repair and rehabilitation activities required to deliver the desired/required level of service while minimizing the life cycle costs of providing the infrastructure.

Co-Working Space: A shared working environment.

Crowdfunding: Collection of small financial contributions from a large group of people. This is an alternative to traditional loans or investment from friends and family, angel investors, and venture capital, to finance production or services.

Current Replacement Cost: The cost the entity would incur to acquire the asset on the reporting date. The cost is measured by reference to the lowest cost at which the gross future economic benefits could be obtained in the normal course of business. In other words, the minimum cost to replace the existing asset with its modern equivalent, allowing the entity to obtain the same quantity and quality of output with the same operating costs. 10

D

Deal flow: The stream of investment opportunities that reach an investor (in whichever form – business plans, pitches at events etc.).12

Deal Screening: The process of investors to quickly reduce the (usually very large) number of received investment opportunities (deal flow) down to the few most promising ones which warrant further effort. Guided by the criteria of a suitable personal investment strategy prepared in advance. 12

Debt: Money owed by one person/company to another. The borrower has to repay the money at a later date, together with an amount of interests. 14

Demand Management: Actions taken to influence demand for service and assets, often undertaken as part of sustainability initiatives and/or to avoid or defer required asset investment. Demand management may be “SUPPLY-SIDE” (for example: minimizing waste through pipe leak detection) or  “DEMAND-SIDE”, to reduce demand for over-utilized assets or vice versa (for example: through pricing, regulation, education and incentives). 10

Dilution: Issuing more shares of a company dilutes the value of those shares, which are held by existing shareholders. 2

Discount rate: The percentage reduction that investors participating in the convertible round would receive on the share price of a future round that triggers conversion. The discount can be seen as a reward for bearing earlier risk. It should be read in conjunction with the longstop date (deadline for the convertible trigger event to occur), as a later longstop date will typically mean a higher discount. 14

Diversification: An investment strategy that involves mixing the amount, values and kinds of investments within a portfolio to spread risk and minimize losses. 14

Dividends: The distribution of a portion of a company’s profits to shareholders. 14

Drag-along right: A contractual obligation that allows majority shareholders to force minority shareholders to join in the sale of a company on the same terms, valuation and conditions of the majority shareholders. 14

Due Diligence: The process through which a potential buyer or investor carries out an in-depth analysis of a target company. Started only after a clear and serious interest has been demonstrated (due to the amount of work involved in such analysis), this process has to be finished before the transaction takes place. 12

E

Elevator pitches: An extremely concise presentation of an entrepreneur’s idea, business model, company solution, marketing strategy, and competition delivered to potential investors. Should not last more than a few minutes, or the duration of an elevator ride. 3

Escape velocity: The moment a company reaches the growth momentum needed to put it ahead of the competition. For startups, escape velocity has to do with becoming dominant in their market and growing indefinitely. 13 & 16

Equity: Shares or other securities that represent an ownership interest in a company. 14

Equity capital: Shares of a company are bought in exchange for a cash injection; such cash constitutes the Equity capital. The entity buying shares becomes a co-owner of the company, sharing risks and rewards with the other shareholders. It is not a loan, it is an investment. Investment in exchange for company ownership (Equity financing). 13

Exits: Exiting an investment by selling or transferring one’s ownership stake in a company. 13

Exit channels: The different routes available to company owners to sell (usually all of) their shares. Commonly sought exit channels are the sale to a strategic buyer, the sale to a financial buyer, or an initial public offering; other possibilities include a repurchase or simple liquidation. 12

Exit Strategy: A planned action taken by a company that results in the liquidation of the company’s stock, often in the form of an acquisition by a publicly traded company or a public offering. 11

Expansion Stage Company:  This term generally refers to a company that has been in existence for at least three years. During this period of development, a company may have been already successfully commercializing many of their products and services but may not be generating the desired amount of profits.  An enterprise that is in its expansion stage may resort to seeking additional sources of capital, to minimize the chances of failure. Many venture capitalists invest in companies that are in such stage of their development. 4

F
Follow-on investing (follow-up investing):  These terms refer to the event whereby investors reinvest in a company sometime during its development. Often times, follow-on investments occur when a company is not performing as successfully as originally planned. Angel capitalists tend to avoid making follow-on investments to the same company because of the high risk of additional monetary loss. 4

Funding: This term is used as a synonym of “financing”. It refers to the amount of money that is needed for a business endeavour to take off. For example, a new business owner may seek a certain amount of funding for their startup company. This “raised” capital can be used to launch their endeavour as well as to sustain their company until monetary profit can be generated. 4

Fund of funds: An investment fund that invests in other funds. 12

I

Incubator: An organization established to support the development of startup companies within their first years of existence. Incubators can provide facilities, offices and lab space shared by supported startups, as well as resources and development programs, potentially including mentoring programs. Incubators differ from accelerators in that the latter typically specialise themselves on assisting startups to growth in a short time frame, whereas the former is focused on the development of the company and its product over a longer period. 6

Initial Public Offering (IPO): it´s the first time the stock of a private company is offered for public purchase. Smaller, younger companies seeking capital to expand often issue iPOs, but they can also be done by large privately owned companies looking to become publicly traded. 17

Intellectual property rights: Legal rights of ownership of intangible assets, for example trademarks, copyrights, patents, designs and trade secrets. 12

Internal rate of return (IRR): A typical measure of how Venture Capital Funds compare performances between investments. It represents the rate at which the present value of a series of investments is equal to the present value of the returns on those investments. For example, a corporation will evaluate an investment in a new plant versus an extension of an existing plant based on the IRR of each project. The project with the highest IRR would be the wiser investment, all other factors (including risk) being equal. 3 & 17

Investment agreement: A contract that states the rights and obligations of each party within an investment. The agreement can be made between investors, investors and an investment manager, etc. 12

Investment Bank: A regulated financial institution that provides various financial and consulting services such as capital-raising, mergers and acquisitions (M&A), stock trading, etc. 12

Investor roles: Different investors can provide different kinds of support to their portfolio companies, especially among business angels. They can act as advisors, board members etc. Economic scientist Roland Engel classifies early-stage investors into five types: Cowboy (provides all resources except materials), Big Boy (financial investor), Landlord (assists startups through infrastructure or tangible materials), Co-founder (actively participates also on the operational level), and Godfather (has a strong network, participates in management). Furthermore, if several investors invest at the same time in the same company, they can cover multiple roles or even exchange roles among themselves during the investment process. 12

L

Later-stage Company: A company that is considered to be in its mature stages of development. Unlike early and expansion-stage companies, later-stage companies already have successful commercialized products and services that are publicly available and they are able to generate a significant cash flow. Many venture capitalists tend to invest in mature companies since they are already established, less risky, and have proven to be a financial success. 4

Lead Investor:  The term indicates the primary investor of a syndicated round of financing (see Syndication/Syndicate). This investor is typically the largest investor of the syndicated round and usually structures and leads the negotiation of terms related to the investment’s documentation. 6

Levels of Service: They indicate a series of statements, which describe the outputs or objectives an organization or activity intends to deliver to its customers. 10

Leveraged buyout (LBO):  This is a type of aggressive business practice, whereby investors or larger corporations utilize borrowed funds (junk bonds, traditional bank loans, etc.) or debts to finance their acquisition. The high debt-to-equity ratio enables the investors to “buyout” a smaller company with very little cash. Leveraged buy-outs can be either friendly or hostile, depending on the negotiations made. 4

Liquidation: This event represents the complete or partial closing of a company. During such event, a company’s assets and material goods (securities) are converted into cash and/or distributed for sale to pay off existing corporate debt.4

Liquidity event: This occasion represents a common exit strategy for entrepreneurs and investors. When a corporation is purchased (through merger or acquisition) or when an IPO (Initial Public Offering) is made, equity is converted to cash. 4

Life Cycle Costs: The total cost of an asset throughout its “life”. The life of an asset includes its planning, design, construction, acquisition, operation, maintenance, rehabilitation and finally its disposal costs. 10

Long-Term Financial Plan: A plan for generating, spending and saving future income, raising and repaying borrowings as appropriate. It will cover a period of at least three years and will highlight the financial implications of an entity’s proposed activities and anticipated events.15

M

Market: Based on supply and demand, this term refers to the societal arrangement whereby consumers purchase goods and services from businesses and individual sellers in exchange for currency. For economic relevance, the “market” can be divided into different industries, such as biotechnology, food, etc. The exchanges between consumers and sellers contribute to a society’s market economy. 4

Market Capitalization:  The total dollar value of all outstanding shares of a company. Computed multiplying the number of shares by their current price per shares. Prior to an IPO (Initial Public Offering), market capitalization is derived from estimating a company’s future growth and from comparing a company with similar public or private corporations (see also: Pre-Money Valuation). 3

Market risk: Probability of loss common to all businesses and investment opportunities, and inherent in all dealings in a market. Also called Systemic risk, economic changes or other events that affect large portions of the market. 18

Mezzanine Financing: A blend of debt and equity financing, requiring little to no collateral, which does not necessarily involve giving up interest in the company. This capital is typically used to fund growth or to enable management to buy out company owners for succession purposes. The interest rate is high, ranging from 20-30%. Lenders can convert their stake to equity or ownership in the event of default. 2

N

Non-Disclosure Agreement (NDA): A legal agreement between parties that formally binds all signing parties not to disclose any confidential information that they have shared with each other. 2

P

Pipeline: The flow of upcoming underwriting deals. 12

Pivot: A concept popularized by the lean startup movement. It indicates a company deliberately and substantially changing its direction based on what it has learnt in the past. In other words, pivoting implies making use of prior experiences, applying the new insight to different areas.

Pitch: A presentation in which a startup founder attempts to persuade an investor of the viability of their company.  The presentation spectrum varies based on the specific purpose of the pitch. Elevator pitches, for example, are brief presentations in which an entrepreneur provides a 30 – 60 second overview of their idea, business model and marketing strategy, with the purpose of attaining a follow-up audience with an investor.  Formal, detailed presentations utilizing power point slides, with the specific objective of seeking investment from angel groups or Venture Capitals (VCs), are known as investment presentation pitches. 6

Portfolio: The collection of all of the companies invested in by an angel or Venture Capital (VC). 7

Post-Money Valuation: Company value immediately after funding. If the pre-money valuation equals $2M and the company subsequently raises $500K, the post-money valuation will total $2.5M. 2

Pre-Money Valuation: Company value immediately before funding. If post-money valuation equals $2.5M and the company raised $500K, then the pre-money valuation will be equal to $2M. 2

R

Raising capital: Refers to obtaining capital from investors or venture capital sources. 12

Redemption rights: The right an investor has to request the company to buy back (redeem) the investor’s shares. 10

Return on investment (ROI): This term is also referred to as rate on return (ROR) or rate of profit. It is a percentage given by the amount of money gained from a past or existing investment divided by the amount of money invested. For example, angels investing in startups and early stage companies will expect a high ROI to compensate for the high risk of such an investment.

Renewal: Replacement of existing assets or facilities with newer ones of equivalent capacity or performance capability. 10

Risk: This word refers to the probability of a loss on an investment. 4

Risk Management: Coordinated activities to identify, direct and control risks in which an organization may incur. 10

S

Scalability: The ability of a business to grow very large very fast. 13

Seed money/seed capital: This is the initial capital for a newly formed or startup company. Angel investors are usually the primary source of seed capital for new businesses. 4

Seed stage/start-up stage: This is the initial phase of a company’s development, whereby a prospective business is developing new products and services, which have not been fully tested and introduced to the public. This company phase usually lasts an average of 18 -24 months, before entering into its early stage of development. 4

Shareholder agreement: An agreement between a company’s shareholders, detailing their rights and obligations.

Startup: A company in the early stages of development, which seeks to create a new product or service under significant uncertainty. Startups, which demonstrate a large growth opportunity in the first few years, represent the most interesting investing opportunities. 12

Strategic Plan: A plan containing the long-term goals and strategies of an organization. Strategic plans have a strong external focus. They cover major portions of the organization and identify major targets, actions and resource allocations relating to the long-term survival, growth and value of an organization.

Syndication/syndicate: The process whereby a group of venture capitalists/business angels provide a portion of the amount of money needed to finance a small business. 4

T

Tag-along rights: A contractual obligation, which gives minority shareholders the right, but not the obligation, to join a transaction of shares, on the same terms, valuation and conditions enjoyed by majority shareholders. 4

Terms Sheet: A non-binding document that outlines the general terms of a deal. Once the parties agree, the terms sheet will provide the guideline along which the appropriate legal documentation will be drafted. 2

Ticket size/Entry ticket: The amount of money that goes into an investment transaction. 12

Tranches: Portions of a deal or structured financing that are paid out only under certain condition (typically the achievement of pre-agreed milestones).

V

Validation: The idea behind a validation is to prove that a business concept is practical and worth investing in. Depending on the desired level of validation, it may provide information over the product/market fit (proof that there are some willing buyers) or traction (proof that there are many/enough willing buyers).12

Valuation: The estimation of the economic worth of companies, assets or liabilities. There is a range of different methods for determining such value, the development stage of a company or the industry in which it operates usually dictate which method to use.12

Venture: Often use for referring to a risky start-up or enterprise company. 4

Venture Capital (VC): is also called risk capital. The term indicates an institutional source of financing for startup companies, made by entities and individuals seeking higher returns for taking greater risks.12

Venture Capital Funds: Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.4

Vesting: A process in which you “earn” your stock over time. The purpose of vesting is to grant stock to people over a fixed period, so they have an incentive not to sell their shares. A typical vesting period for an employee or founder might be 3 – 4 years, which would mean they would earn 25% of their stock each year over a 4-year period. If they leave before the vesting period is over, the unvested portion returns back to the company.2

W

Warrants: are issued by the company and give an investor a contractual right to buy a certain amount of stock at some point in the future (set time or linked to company milestones) at a predetermined price (set price or discount on future value).19

References

 

  1. Source: Crowdfunding Professional Association, website (http://www.crowdfundingprofessionalassociation.org/)
  2. Source: 37 Angels, website (http://www.37angels.com/glossary/)
  3. Source: Angel Capital Association, website (http://www.angelcapitalassociation.org/data/Documents/Resources/StartingaGroup/1b%20-%20Resources%20-%20Starting%20a%20Group/10%20Angel_Guidebook_-_Glossary_of_Terms.pdf)
  4. Source: Go4Funding, website (http://www.go4funding.com/Articles/Angel-Investors/Commonly-Used-Terms-For-Angel-Investors.aspx)
  5. Source: FundingPost, website (http://www.fundingpost.com/glossary/venture-glossary.asp)
  6. Source:  FundingSage, LLC, website (http://fundingsage.com/entrepreneur-dictionary-for-startups/)
  7. Source:  Angel Investing,  by David S. Rose
  8. Source: Institutional Limited Partners Association
  9. Source: Venture Choice, website (http://www.venturechoice.com/glossary/)
  10. Source: INGENIUM and IPWEA (2011) International Infrastructure Management Manual (IIMM), Association of Local Government Engineering New Zealand Inc. and National Asset management Steering Group, Thames, New Zealand.
  11. Source: Ewing Marion Kauffman Foundation (2000), website (http://www.pnl.gov/edo/media/angel_glossary.pdf) (EMKF)
  12. Source: Business Angel Institute, website (http://businessangelinstitute.org/resources/glossary/)
  13. ANGEL ACADEMY (AA), Angel Investing Training Course, website (http://www.angelacademy.co/glossary/)
  14. Source: SEEDRS, website (https://www.seedrs.com/learn/glossary)
  15. Source: IPWEA (2010) Australian Infrastructure Financial Management Guidelines (AIFGG), Institute of Public Works Engineering Australia, Sydney, Australia.
  16. Source: David Cummings on Startups, website (https://davidcummings.org/2012/03/31/escape-velocity-for-startups/)
  17. Source: Investopedia, website (http://www.investopedia.com/)
  18. Source: Business Dictionary, website (http://www.businessdictionary.com/)
  19. Source: Go Beyond early stage investing, web site(https://go-beyond.biz/), video(https://go-beyond.biz/Rising-Tide-Intro-Managing-Follow-on-Rounds-2016-08-02)

 

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