Feedback from ACA Annual Conference

14th June 2010

Nelson Gray, LINC's Director of Special Projects and Market Development, recently attended the Angel Capital Association Annual Conference.

One of the main topics being discussed was how best to achieve exits. Nelson's notes on this topic are featured below:

As angel investment becomes increasingly organised and recognised globally for the key role it has in driving innovation and economic development, the ACA Conference represents a fantastic networking opportunity to learn from investors across the world. Approximately 420 people from more than 28 countries attended.

The three key themes of the conference can be summarised as: Exits, Cross Border Investing and "Where are the VCs?"

Exits

The very first session of the conference was "Finding and Executing Exits". Contrary to the impression held by many, the vast majority of exits in the US are at a value of under US$30 million. The Facebooks, Googles and Twitters of the world are anomalies and the statistical probability of getting one of these is way under 1% of investments made - even in the hothouse of Silicon Valley. In reality IPOs, even looking back a few years, are virtually unknown, and most exits are by trade sale.

The US clearly has some advantages in this, given the high number of acquiring companies domestically headquartered. Oracle made 70 acquisitions last year alone. But even with this apparent level of M&A activity, our American colleagues are just as concerned about what they perceive as too few exits. This mirrors the same concerns expressed at a European level at the recent EBAN conference, and our own discussions with LINC members. The key messages to angel investors were:

• Make sure that there is an exit market for the opportunities you invest in, before investing
• Don't expect exits just to happen - you need to build them into the plan
• Ensure that the investor's and entrepreneur's interests are truly aligned to find an exit
• Concentrate on building strategic value that will be attractive to an acquiring corporation that can exploit its full potential - before you have to be EBITDA positive.

Taking an exit focused investment strategy to the extreme was Ron Conway, Silicon Valley based and founder of the Angel Investors LP fund. Among his 500 angel investments he includes Google, Ask Jeeves and PayPal in his portfolio. His approach? "When listening to a pitch, if within 10 seconds I can't think of 5 companies who are potential acquirers of the proposed start up, I won't take the discussions any further." No more the patient investor?

Cross Border Investment

There is some early interest from angel groups to start considering investment opportunities across borders. This is contrary to the received wisdom that "angels invest close to home" which is probably still true for most investors. However, it was clear from the conference that some angels have a number of "homes", and are quite happy investing in countries they have spent time working in, or expanded their own businesses into.

For Scottish companies to truly grow and deliver the returns we want, they need to operate on a world scale. They have to establish themselves in offshore markets and the angel networks in these countries are beginning to look like a great beachhead. Scottish angels need to become connected to these networks to find the right angel partners to co-invest in and get involved with their companies in these new markets. But be aware that other countries are out there actively promoting themselves and their technologies, so Scotland needs to invest in this activity just to avoid being left behind.

Venture Capital

There was a big debate about whether angels in the US want to do deals that are likely to involve follow-on funding from VCs. In an instant survey of the audience, 26% present said they always/most of the time looked for deals that would need VCs in the future. 48% said sometimes, while 26% said never! It's the last group that seems to be growing compared with previous years, with increasing concern that VCs are actually delaying or blocking what would be potentially good exits for the early angel investors, as they would not deliver the high IRRs needed to help the VC secure their next fund. And that assumes you can find a VC in the first place. California based Tech Coast Angels have gone from having 20 VC affiliate members to just 6.