Incentive Targeting Sold To Google, 82 Angels Cash Out

You may see lots of Scowling Scrooges and Sourpuss Santas this season, but you’ll see Smiling Angels all around Boston, 82 of them, who invested in Incentive Targeting, acquired by Google yesterday.

“It has been a hard-working, but a wonderful ride” says one of our private sources. “This evening, after the official closing, our “family” had a celebration and many of the 82 investors joined the party. Yes, you got that right – 82! I just came back. The investors are happy as can be -- what a better way to end a year than having a story to share at upcoming cocktail parties about how their investment was not only above the average, but also was bought by Google!”

Incentive Targeting, as a large 100% angel deal, may well prove to be a milestone event both locally and nationally. “This is great for the angel ecosystem in town: it is a shot in the arm to have Google validate one of our smaller companies and it is liquidity for 82 angels who will plow that money right back into local companies to fund innovation and create jobs. Exits like this are exactly what aspiring ecosystems crave - Boston is established, but needs these exits to stay strong,” says Christopher Mirabile, Managing Director of Launchpad Venture Group. 

The amount of angel money invested in this company was $6.2 million, with Launchpad at $1.3 million and Hub Angels at $600k.  Angels also contributed effort and advice. “Launchpad member Bob Gervis was on the board and was absolutely instrumental in helping the company get the deal done and in helping them to raise the two bridge rounds necessary to fund them through the deal,” says Mirabile. Paul Silva of River Valley coordinated the second tranche of the A round.  Launchpad led the A2 round.

“This company raised a sizable amount of capital over more than three years, all from angel investors.  To me, this shows the power angel investors can have by syndication and cooperation,” says Gervis. “In addition, I believe that the fact that Incentive Targeting raised all of its capital from angel investors facilitated the company's ability to achieve a successful exit.  The reason is that by relying exclusively upon angel financing, the company was able to manage its valuation during each financing round in such a way as to broaden the range of acceptable exits.  While the terms of this transaction have not been disclosed, I believe that all parties are pleased with this outcome.”

Syndication proves successful

For angels, this was an absolutely massive syndication measured both by number of investors participating and by the amount of money raised.  Its origins lie back a decade or so; back before there was either a national Angel Capital Association or a regional angel syndication group (we call these our quarterly New England ACA Regional Summits). James Geshwiler of the Common Angels had invited a number of us to meet together to discuss common problems.  Present were Ham Lord (Launchpad) and myself (eCoast Angels).  There were others present, but I’ll have to refresh my memory. The ACA was formed in January, 2004 and we all became charter members.

Our first syndication meeting was in 1975. But, as we all know,   it can be a long slow journey from investment to exit. “Incentive Targeting is an early example of New England angel groups pioneering the formation of large angel syndicates.  We were the first region in the country to really do this well and it is a credit to our strong ecosystem and the tight, cooperative and friendly relations between all the groups in the northeast,” says Christopher Mirabile.

Kudos exchanged

"Launchpad is incredibly proud to have been part of such a large and successful investor syndicate and for the opportunity to assist Josh, Win and Ben on the board as they built this terrific outcome. It is a credit to the angel community in the northeast as well as its fantastic entrepreneurs that we have this to celebrate. Congratulations to all," says Mirabile.

“We didn’t reach this milestone alone. From day one, we have relied on the support and commitment of our retailers, brands, investors, partners, and advisors, as well as the hard work and dedication of our team. We could not have done this without them, and as we look ahead, we are thrilled to be part of Google!”  - Ben Sprecher, Josh Herzig-Marx, Win Burke, and the entire Incentive Targeting team.

 

Tuesday Night: the deal is signed and now comes the toast.  From Left to Right are Nick Pappas of MassVentures, Win Burke, CEO, Robert Gervis, Launchpad board rep, David Verrill, Hub Board rep, and Ben Sprecher, one of two key founders (Josh Herzig-Marx, the other founder, is not pictured). Photo by Christopher Mirabile.

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Angel and VC Returns: Show Me the Money!

The number of Angel Investors continues to grow while the number of Venture Capital firms shrinks, this drama being played against a backdrop of a decade of economic malaise. Yet the day is not far off when it will become obvious that Angels contribute more to society than VCs: more money, more new companies, more mentorship, more regional dispersion, more opportunity for everyone.  But why is this happening? Angels invest for many reasons: to help the new guy, to be part of the action, to handle our own money, to make our own investment decisions; but what about the money?

Dueling having been discredited, it is hard to devise an efficient method for resolving disputes about competing approaches to early stage investing. Confronted with an opinion like the following, many of us might be rendered almost speechless. “I would also add that it probably makes more sense for would-be angels to invest their capital into seed VC funds like Jeff's (if they can get in) and let the pros invest the capital.”(Note 1)

Having written recently on angel returns, and earlier on the incredible shrinking VC industry, this post deals with a results based approach: comparing returns, most commonly referred to as IRR, Internal Rate of Return, which is the closest thing to a single figure for comparing fund performance. For some investments, like bank accounts, the internal rate of return is easy to figure because the bank tells you what it is. For example, a 5% simple interest bank account has an internal rate of return of 5%. For a more comprehensive definition, start with the Wikipedia and click on forward from there.

What makes this comparison difficult? Most VCs conceal their IRRs as closely as their hole cards in a Texas hold ‘em tournament. But thanks to Dan Primak (Note 2), I can share some IRR results with you for some of the funds our NE Angels deal with.

Let’s start with a group we know and like,  MassVentures (formerly MTDC).  Vice President Nick Pappas attends our Regional Summits. Most recently they co-invested with our eCoast Angels and many other well-known local angels in Libboo, a Techstars company, where they were the second largest investor (behind eCoast).  I consider MassVentures a real asset to our start-up community.  Nonetheless, their IRR is 1.91% (Check Note 3, Nick says more).

One of the large fund managers most visible to local angels and entrepreneurs is Polaris Venture Partners, due in part to their sponsorship of startup space Dogpatch Labs and to the high twitter and industry profile of some of their partners, particularly Venture Partner Bob Metcalf. Here are results for three of their funds.

Polaris Venture Partners III, LP (2000)                (3.03)%

Polaris Venture Partners IV, LP (2002)               2.45%

Polaris Venture Partners V, LP (2006)                 8.78%

Other funds active here in New England include the following.

Charles River Partnership XI                               7.85%

Commonwealth Capital Ventures                        0.66%

Commonwealth Capital Ventures II                    13.50%

Flagship Ventures Fund 2004, LP                        (2.22)%

Highland Capital Partners Fund VII, LP              (0.67)%

Spark Capital                                                      10.12%

Venture Capital Fund of NE II, LP                      1.42%

For comparison, there are published industry averages for IRR, based on the year the fund was established.  For example, for the three Polaris managed funds, here is how they stack up against industry averages.

Year            Median IRR          Polaris IRR

2000           12.38%                 (3.03)%

2002           16.61%                 2.45%

2006           8.29%                   8.78%

In addition to the above, Primak privately obtained performance data for several noted funds, although presented in a different format. Below, the percentage is the 12/31/2011 portfolio value (including cumulative distributions) divided by the called capital. In parenthesis is the cumulative distribution divided by called capital. “In both cases, 100% is break-even (well, until you include fees),” says Primak.

Benchmark Capital IV (1999): 133% (109%)
General Catalyst II (2001): 149% (53%)
HIG Venture Partners (2000): 44% (22%)
Kodiak Venture Partners II (2000): 35% (4%)
Nokia Venture Partners II (2000): 56% (35%)
Onset Ventures IV (2000): 31% (4%)
Sigma Partners VI (2001): 125% (75%)
Softbank Capital Partners (1999): 21% (21%)

Top Angel Jean Hammond points out that the tables above don’t include key active players like Founder Collective, Next Stage, Point Judith, and 406.  Alas, I have no data for them, but if they wish to send me some, I’ll type them right in. The same goes for Angel Funds such as Common Angels and Golden Seeds. 

Conclusions?  Are you better off as an Angel or as a limited partner in a VC fund? The data we have is inconclusive; you’ll have to decide for yourself. Wiltbank, in a 2007 study, showed Angel IRR as 27%.  Locally, George Schwenk  of the Breakfast Club  is above  29% for an extended period. As you consider this, remember that the top performing funds, typically located near San Francisco, are not likely to let you invest unless you are incredibly wealthy and well connected.

Will venture funds continue shrinking?  Unless they also manage other, better performing funds, some of the partnerships mentioned above will be unable to raise funds in the future.  I believe two of them have already ceased operations. 

 

Wouldn’t it be nice to have more data?  I’ll do my best to keep you posted on Angel group exits and performance, but I need your help sharing your data with other Angels.

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Note 1.  This comment and related discussion comes from a post, “Wow, Angel Investing Isn’t Crazy,” at the Golden Seeds Group on LinkedIn.

Note 2. Dan Primack writes “The Term Sheet,” Fortune.com's daily email about deals and deal-makers.  He provided the data on VC returns.   You can find IRR figures from Mass. Pension Reserves here.  Click here for exclusive returns for brand name VC funds.

Note 3. Nick Pappas writes: "Thanks for the call out in your article, however, the IRR you list for us taken from the PRIM report is extremely misleading. It represents the net return on $2m we managed for them back in 1986  – clearly not relevant data for your blog today. It is a very small slice of the money we have put to work over the years: $2m of a total of $85M invested and 10 of 133 companies.

 On a gross basis, our historical IRR calculated as of 6/30/12 is 14.4% over the life of the group. As you know, we are an evergreen fund so it is difficult to track vintage year funds as you would in traditional private venture firm. While IRR is an important benchmark, as an economic development agency we also pay close attention to employment figures and how much private capital follows our investment.

 It would be great if you could adjust your posting. I don’t take issue with the point you are making but it is misleading to quote our IRR as 1.9% As an evergreen fund, if that was our historical return, we would be out of business pretty quick.”