How does the San Diego Angel Conference work?

Maybe you already are! Have you ever given family or friends money to help them get their business off the ground and they promise to give you a piece of the pie? You are an angel investor.  An angel investor is someone who invests money (capital) in a new business (start-up) in exchange for either debt (a loan that converts to shares of ownership in the future) or a piece of the company (shares of ownership/equity). When you invest with people you know or are related to that’s called a Friends and Family round. You will learn about rounds, and so much more, during the San Diego Angel Conference. 

However, to be an “official” (accredited) angel investor the SEC requires that you have a certain financial sophistication, whereby you understand the risks of investing in a start-up that may or may not succeed. (For more detail, see ‘Who can become an angel investor?’). An accredited investor is:

• An individual who has a net worth, either individually or upon a joint basis with a spouse, of at least $1,000,000, or has had an individual income in excess of $200,000 for each of the two most recent years, or a joint income with spouse, or spousal equivalent, in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. -OR-
• An individual, who holds, in good standing, one of the following certifications or designations administered by the Financial Industry Regulatory Authority, Inc. (“FINRA”):
•  the Licensed General Securities Representative (Series 7), 
• Licensed Investment Adviser Representative (Series 65), or 
• Licensed Private Securities Offerings Representative (Series 82) -OR-
• An individual, who is a “knowledgeable employee” within the meaning prescribed under Rule 3c-5(a)(4) of the Investment Company Act of 1940, as amended (the “Investment Company Act”) of a private fund exempt from registration pursuant to Rule 3(c)(1) or Rule 3(c)(7) of the Investment Company Act.

 More details can be found at: https://www.ecfr.gov/current/title-17/chapter-II/part-230/subject-group-ECFR6e651a4c86c0174/section-230.501

Besides providing capital , angel investors can assist a start-up in one of several other ways. An investor may have expertise/knowledge in a particular area that is meaningful to a company’s success. An investor might tap into their existing network of contacts to help a company by introducing them to people with expertise they need. An investor may be called upon by a contact in their network to help another company that they want to succeed. Over time you will become part of a community that helps one another. 

You must qualify as an Accredited Investor to invest in companies beyond just friends’ and family companies. Accredited Investors must meet one of the criteria:

1. To qualify as an accredited investor based on your net worth, you must have a net worth of $1 million or more (excluding your primary residence); or
2. To qualify as an accredited investor based on your annual income, you must have had an annual income of $200,000 or greater (or $300,000 or greater combined income with your spouse) for the prior two years and have a reasonable expectation of the same or greater income in the current year; or
   
3. To qualify as an accredited investor based on your work experience, you can be considered a “knowledgeable employee” who has a good understanding of the risks involved in angel investing.

The SEC states that the definition of accredited investor is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary”.

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An angel network is an investment group made up of angel investors who pool their expertise to help select a group of early stage companies that are most likely to result in a successful return on investment.  This expertise may include providing feedback to companies that are presenting, participating in due diligence (researching the company team, market, financials, etc), and voting on the companies with the greatest likelihood of success. Investors invest independently from one another.

The San Diego Angel Conference is a member managed, event fund. Investors become members of the Fund, which invests in at least one company that applies through the SDAC process on a the specific date of the finale. SDAC establishes a “contest” through which new companies (start-ups) apply to “win” pooled investment dollars (the SDAC Fund). These companies learn how to effectively pitch their ideas to potential investors, and investors learn how to evaluate these startups and select one or more they believe will provide the greatest return on their investment over time. The process provides real-world education in investing in start-up companies.

By creating this contest, the San Diego Angel Conference provides four things to accredited angel investors:

1. A way to build a network of angel investors to work with in the future
2. Access to a pipeline of companies and ways to generate deal flow
3. An opportunity to develop one’s own unique method for evaluating and choosing deals
4. An investment in at least one company

This combination of education and real-world experience in the startup community is what makes SDAC unique.

The cost to participate in the SDAC is low compared to other angel investment opportunities. It is also finite; investors work together to select an investment between February and the end of April. At the conclusion, the SDAC Fund makes an investment in at least one company, and investors have the opportunity to learn in a socratic way, while they build their network.

Many great companies do not take small investments from individual investors. By pooling funds, SDAC can attract better opportunities, providing participating investors with good deal flow for future consideration. The more members that participate, the more capital can be raised.

An angel fund is an investment group made up of angel investors who invest as a group and pool their funds in advance of making investments. A fund may or may not provide expertise or other support to companies. A fund may be member managed (all investors participate in the cultivation and evaluation of deals and make decisions as a group), or manager managed (an individual or small group makes the investment decisions.

There is evidence that if you combine the expertise of investors to select which companies to invest in, the odds of success are better (2019 ACA Angel Funders Report). Of course, there are no guarantees. Angel investing is considered high risk investing.

Some funds have a specific focus for their investments, ie limit investments to one industry only, such as clean tech, or health and wellness.  To meet SDAC’s goal of engaging new investors from all walks of life, the SDAC Fund of pooled capital does not have a specific focus.

Note that, while the “San Diego Angel Conference” is a series of annual events, culminating in a finale where the investment decisions are made, a new “Fund,” in the form of a California LLC, is formed to collect funds from investors and distribute those funds to our winning start-ups each year.  So while every investor in a particular year does invest in all “funded companies” for that year, the Fund for each SDAC is a separate legal entity and is not intertwined with any other years’ investment.

In order to operate the Fund must have a minimum of 19 units purchased (see ‘What is a unit?’). There is also a maximum limit of 364 units available for purchase and up to 249 individual investors can participate.  An individual investor can have more than one unit. As an example, the Fund could have 26 investors with 7 units each or 91 investors with 2 units each, etc.

There are two basic fees. 

There is a tax deductible, SDAC Membership of $1500 paid directly to the University of San Diego. This fee is not legally part of the Fund. The Membership portion of your first unit is tax deductible and grants membership into USD’s President’s Club. All President’s Club members are invited to exclusive events that happen throughout the year. All investor related expenses are covered by Sponsors. The SDAC Membership is charged once per investor regardless of the number of units in which they invest.

Initially, the Fund Manager is responsible for negotiating the terms of the investments, signing the necessary documents, and ongoing operational decisions of the Fund.  However, there is work every year that is managed on the back end (ie. tax documents for each company that needs to be distribute to all investors, etc) by Signal Rock Capital on behalf of the CA Limited Liability Corporation (LLC). 

The average angel investment holding period is >4 years (2019 ACA Founders Report). The SDAC builds its long term maintenance plan to cover the cost of the Fund if it lasts for 10 years. If investment lasts longer than expected, then additional costs, above the initial $500/unit, are possible, but this is uncommon. 

A unit is an investment of $5,000, plus an Service Fee of $500 ($5,500/unit total cost).  Investors can only invest by purchasing whole units (ie. One unit $5,500, two units $11,000, etc). The investment portion of the unit is what makes up the fund (see ‘What is a fund?’). 

There are two types of units:

• ACTIVE UNITS come with the privilege of voting (maximum of 4 allowed per investor) 
• PASSIVE UNITS do not come with voting privileges (unlimited).  

Any investor can purchase passive units, but only active investors can purchase active units (see ‘Who is an Active Investor?’). If an active investor purchases 4 active units, they may vote 4 times, providing them with a greater impact on which companies are ultimately funded. 

Additional units can be purchased at any time until the final call for investments (usually 1 day after the Conference). 

Active Investors are required to participate in conference activities related to evaluating the startup companies that are seeking investment.  This participation earns active investors the privilege to vote on the companies they would like to support for a fund investment.  Voting is done at various points throughout the process, such as during screening presentations, due diligence, and when selecting the final company(ies) that win fund investment. Voting is a privilege and SDAC reserves the right to convert active units to passive units if an investor does not properly participate in SDAC activities 

Passive Investors are not required to participate in all conference activities related to company evaluation and in turn relinquishes the privilege of voting.

Both active and passive investors vote on any substantial changes/decisions that deviate from what is described in the Private Placement Memorandum (PPM). The PPM is the legal document that establishes the Fund.

Below is the basic timeline for the Conference:

• September – Companies have the option to participate in the Entrepreneurs (“E”) Track, which consists of weekly sessions that help them become more investor-ready. Anyone who is interested can join one or all the sessions.
• January – SDAC offers “Angel Academy” where angel investors learn or brush up on the important aspects of being an angel investor.
• January – By January 19, companies must submit applications to compete in the San Diego Angel Conference, a process that requires a substantial amount of information (pitch decks, financials, executive summary, team details, and a 60-second video).
• February – New and returning investors participate in the Investor (“I”) Track. Investors purchase one or more units in the SDAC Fund, then they work together as a group to review, and evaluate the deals (each opportunity for investment is called a deal). There are a few guest speakers along the way that offer their expertise in the investment process. Every few weeks, active investors vote and pick the companies that will move on to the next round.
• Finalists – Deals are narrowed down to the best 6 opportunities (the finalists), investors break into small teams and perform an in-depth investigative process called due diligence. Teams report to each other weekly until the finale.
• April – At the finale, the community, applicants, partners, and investors come together to see the top 6 companies pitch (present their opportunity for investment) for the last time. After each finalist has pitched, the investors are sequestered until they choose a winner (and often runners-up).
• Investment documents are executed and the SDAC Fund is distributed to the successful company(s), typically 2-3 weeks after the conference.