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Seed Capital From Angel Investors: Basil Peters, CEO and Fund Manager, Fundamental Technologies II (Part 5)

Posted on Wednesday, Jul 7th 2010

By guest authors Irina Patterson and Candice Arnold

Irina: When you invest, what is your average dollar amount?

Basil: That varies. It varies a lot. I can invest anything from $10,000 to $500,000 in one deal.

Irina: How many companies do you have in your portfolio right now?

Basil: Seven.

Irina: What is the typical valuation of a company you invest in?

Basil: I’m a typical angel, so I usually invest today in valuations in the $1 million to $3 million range. That’s a very typical angel range.

Irina: What percentage of a company’s equity do you usually seek?

Basil: It goes back to that $10,000 to $500,000, so I’m in some companies for under 1% and in other companies for over 25%. It depends.

Irina: What’s the typical return you seek, and over what period of time?

Basil: It’s a little bit like asking how far is up in that what everybody wants is they want the most return. But if you ask me how angels make money . . . the statistics on angel portfolios are virtually identical to those on venture capital portfolios. It’s only been in the past two, three years that we’ve actually had the very beginnings of useful data on angel investments. Very much like what we’ve seen over the past several decades with venture capital portfolios.

The investments, statistically, 60% of them are ones that lose money, and 20% are the ones that effectively go sideways. They don’t fail but they also don’t return anything significant.

All of the returns in the portfolio are from 20% of the investments. And those are rough statistics, but those are broadly universal. If you look at angel investment as an asset category, then to appropriately return to the investors, considering the risk that’s in that type of investment, the angels need to get 20% to 25% per year on that type of investment to make it viable, across the portfolio, which is the same as a venture fund.

So, if you do the math, pretty quickly what you can see is that angels need to make three to five times their money in three to five years. That’s just math and statistics. It’s almost a law of physics. The easy way to remember it and the way I always say it entrepreneurs is 3x to 5x in 3 to 5 years.

Irina: At what stage of a business’s development do you prefer to invest?

Basil: I have invested pre-incorporation and I have also invested when the company had several million dollars of revenue. That doesn’t matter as much to me.

Irina: What about the total available market? Does that matter?

Basil: No, it doesn’t, because there are some investments that are excellent investments and the total market size might only be $50 million a year. But if it’s a company that could capture half of that, and if I could invest at a $1 million or $2 million pre-money valuation, and exit in three years, that could be an exceptionally good investment.

There are other types of investments where you need a $1 billion market to make it make sense. But the thing that’s fun about angel investing is that angels can invest in a much wider range of business models than traditional venture capital investors could because the venture capital funds [are] so large. With angels who can scale down to as low as $10,000 and have it make sense, really there’s no lower limit on the market size.

This segment is part 5 in the series : Seed Capital From Angel Investors: Basil Peters, CEO and Fund Manager, Fundamental Technologies II
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This is a was a great series. From an entrepreneur's perspective it is nice to hear a fund manager discuss their funding philosophy from start to finish and to learn how the angel first got into the business. It's certainly an exciting time in the world of angel investing. Thanks for publishing such an informative interview.

jobZook Thursday, July 8, 2010 at 4:34 PM PT