Angel Investments Made Easy

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Simple concepts to get started on angel investments

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Angel Investments Made Easy

  1. 1. ©  Copyright  LetsVenture.In    All  rights  reserved   Manish Singhal Founder & CEO manish@letsventure.com @letsventurein
  2. 2. ©  Copyright  LetsVenture.In    All  rights  reserved   Manish Singhal Entrepreneur, Coach, Angel Investor v  Several years of experience in start-ups as well as established companies like Sling Media, Ittiam Systems & Motorola v  Active Angel Investor v  Contributed to MPEG-4 standard as a member of MPEG committee. Hold two patents on video technology v  On Advisory board of Freshersworld.com, ApartmentADDA v  B Tech Electrical Engineering IIT Kanpur (1992) v  Sports Enthusiast, Wildlife Photographer @manish_saarthi http://in.linkedin.com/in/smanishsinghal
  3. 3. ©  Copyright  LetsVenture.In    All  rights  reserved   Agenda v  State of the Angel Investment in India v  Angel Investments 101 v  What is Angel Investment? Why should you do it? v  How do you make a return? v  How do you evaluate a startup? v  Deal Dynamics v  Valuation v  Process v  Primer on Term Sheets / SHA v  How do you get started? v  Syndicates on LV v  Pitches with analysis (Post Lunch)
  4. 4. ©  Copyright  LetsVenture.In    All  rights  reserved   Angel Scenario in the USA Source: http://online.wsj.com/news/articles/ SB10001424052702304402104579149390398554348
  5. 5. ©  Copyright  LetsVenture.In    All  rights  reserved   State of seed/Angel Investments v 2012 Deals and Roughly between 120-150 deals Ø Networks (IAN, Mumbai Angels, Hyderabad Angels, Bangalore Angels) etc contributing to guess estimate of 30-35% of the deals Ø Median investment value for Seed/Angel investment: 1.5 CR Ø Roughly 50 deals between Dec-Mar 13 Ø Rise of the institutional first cheque (Blume, Kae, firstcheque, Harvard, 500startups etc) Ø Start of incubators
  6. 6. ©  Copyright  LetsVenture.In    All  rights  reserved   State of seed/Angel Investments v 2013 •  Slight slow down (Impact of Section 56 ?) •  New players (including incubators) starting to deploy funds •  RISE of the incubation model (today approx 50+ incubators) •  Accelerators working on batches 2 & 3 •  HOT sectors (not including consolidation): Healthcare, Education
  7. 7. ©  Copyright  LetsVenture.In    All  rights  reserved   Funding ~200 startups / year                            Source:  ventureintelligence Unconfirmed reports say ~500-700 angel investors in India
  8. 8. ©  Copyright  LetsVenture.In    All  rights  reserved   Do you want to change it?
  9. 9. ©  Copyright  LetsVenture.In    All  rights  reserved   Why Angel Invest? v Support Entrepreneurship v Leverage your knowledge and connections v Develop an alternate asset class v Make Money
  10. 10. ©  Copyright  LetsVenture.In    All  rights  reserved   Who is an Angel Investor v Strong Passion for entrepreneurship Ø It is nearly a pseudo entrepreneurship v Bring value to the startups v Anyone with Surplus capital which can be invested
  11. 11. ©  Copyright  LetsVenture.In    All  rights  reserved   What returns can you expect? v 2/3 of startups fail world wide v 75% of the angel investments do not make returns v Very high risk / High Return Game v India, still a young eco-system. Not many data points… Ø Some reports show a return of 3x – 22x
  12. 12. ©  Copyright  LetsVenture.In    All  rights  reserved   How do you exit? v Since you own equity in the venture, only when you sell equity to someone else, you make money Ø You do not make money on dividends / profit share
  13. 13. ©  Copyright  LetsVenture.In    All  rights  reserved   How do you exit? v Subsequent Rounds of Funding v M&A v Promoter Buyback v IPO
  14. 14. ©  Copyright  LetsVenture.In    All  rights  reserved   Typical Curve 0   1   2   3   4   5   6   7   8   9   Valuation   Year   Seed Round Angel Round Series A Series B Series C Bridge Round*
  15. 15. ©  Copyright  LetsVenture.In    All  rights  reserved   Typical Curve 0   1   2   3   4   5   6   7   8   9   Valuation   Year   Seed Round Angel Round Series A Series B Series C Return* Bridge Round* *20-25% Discount from the round valuation
  16. 16. ©  Copyright  LetsVenture.In    All  rights  reserved   Valuations Jump 0   1   2   3   4   5   6   7   8   9   10   0   5   10   15   20   25   30   35   Money Raised (CR) ValuationMultiple Bridge Round Series A
  17. 17. ©  Copyright  LetsVenture.In    All  rights  reserved   Valuations Jump 0   1   2   3   4   5   6   7   8   9   10   0   5   10   15   20   25   30   35   Money Raised (CR) ValuationMultiple Bridge Round Series A ValuaFons  can  jump  by     2-­‐3x  in  a  Bridge  Round   5x-­‐8x  in  a  Series  A  
  18. 18. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Investments
  19. 19. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Investments Source: Wikipedia
  20. 20. ©  Copyright  LetsVenture.In    All  rights  reserved   When ? v Idea in a slide v Prototype Ready v Customer Traction v Paying Customers v Product-Market Fit v Multiple customer segment v Business Model Fit
  21. 21. ©  Copyright  LetsVenture.In    All  rights  reserved   Milestones & Raise Milestones/Stage Age Revenue Raise Amount From Whom 1 Venture Launched 0 – 0.5 0 5 – 25 L Self, Friends, Family 2 Beta Product Launched B2C : Product used by real customers, Few paying customers B2B : Good Customer Pipeline, 1-2 customers in trial 0.5 – 1 yr Small amount 25L-75L Self, Friends, Family, Individual Angels, Accelerators 3 Stable version Regular Customer growth 1 – 1.5 yrs 10 – 15 L per year 50 L – 1.5 Cr Self, Accelerators, Seed Funds, Individual Angels 4 Product- Market fit found Strong & Consistent Customer Growth Clear Product & Revenue for next 2-3 yrs 1 – 2 yrs 20 – 50 L per year 1CR – 4 Cr Individual Angels, Seed Funds, Few Venture firms 5 Business Model Fit found Clear growth Path for next 3-5 yrs Consistent growth in paying customers Potentially breakeven 1.5 – 3 yrs 2Cr – 5Cr per year 3 Cr – 20 Cr Venture Funds Note: The values in the above table are indicative only
  22. 22. ©  Copyright  LetsVenture.In    All  rights  reserved   Typical Raise 0   1   2   3   4   5   6   7   8   9   Valuation   Seed Round Angel Round Series A Series B Series C Product Market Fit Business Model Fit Bridge Round*
  23. 23. ©  Copyright  LetsVenture.In    All  rights  reserved   Typical Raise 0   1   2   3   4   5   6   7   8   9   Seed Round Angel Round Series A Series B Series C Product Market Fit Business Model Fit Bridge Round* 3CR – 20CR 5-25L 25-75L 50L-1.5CR 1CR – 4CR 50L-1.5CR
  24. 24. ©  Copyright  LetsVenture.In    All  rights  reserved   Evaluating Startups
  25. 25. ©  Copyright  LetsVenture.In    All  rights  reserved  
  26. 26. ©  Copyright  LetsVenture.In    All  rights  reserved   As an Angel Investor – what do you really care for?
  27. 27. ©  Copyright  LetsVenture.In    All  rights  reserved   Exit!
  28. 28. ©  Copyright  LetsVenture.In    All  rights  reserved   What is needed for an exit?
  29. 29. ©  Copyright  LetsVenture.In    All  rights  reserved   Scale!
  30. 30. ©  Copyright  LetsVenture.In    All  rights  reserved   0   1   2   3   4   5   6   7   8   9   Seed Round Angel Round Series A Series B Series C Product Market Fit Business Model Fit Bridge Round*
  31. 31. ©  Copyright  LetsVenture.In    All  rights  reserved   0   1   2   3   4   5   6   7   8   9   Seed Round Angel Round Series A Series B Series C Product Market Fit Business Model Fit Bridge Round* Do not spend too much time on revenue models instead spend more time on how the team is figuring their way to PM fit. Evaluate whether the core team is coming together Evaluate whether the team knows how to scale and remain in PM fit even after a business model launch Ability to build & run a larger team. Role definition among the founding team is clear Is the team capable or open to bring in senior talent to really grow the business.
  32. 32. ©  Copyright  LetsVenture.In    All  rights  reserved  
  33. 33. ©  Copyright  LetsVenture.In    All  rights  reserved   Team v Chemistry & Coachability v Skills / Domain Expertise v Structure & Role Definition v Founder’s skin in the game v Ownership distribution v Previous track record v Access to Advisory Board / Mentors
  34. 34. ©  Copyright  LetsVenture.In    All  rights  reserved   Other Factors v Is it a “Me too” business? v Do they have an edge in the market place which is defendable (Entry Barrier) v Is the market size big enough for them to keep scaling? v Are they focused on profitability or growth?
  35. 35. ©  Copyright  LetsVenture.In    All  rights  reserved   Key is to develop one or two specific points why will this startup succeed (Investment Thesis)
  36. 36. ©  Copyright  LetsVenture.In    All  rights  reserved   When not to Invest v Exit Discomfort v Founder Discomfort v Business Discomfort v Structure Discomfort
  37. 37. ©  Copyright  LetsVenture.In    All  rights  reserved   Deal Dynamics
  38. 38. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Valuation v “Worth” of the company typically ascertained while raising capital v More of an art rather than science v Determines the % dilution the entrepreneur will go through while raising money
  39. 39. ©  Copyright  LetsVenture.In    All  rights  reserved   Terminology v Investor wants to invest 1CR for 20% of the company Ø Post Money Valuation = 1CR / 20% = 5 CR Ø Pre Money Valuation = 5CR – 1CR = 4CR v Investor wants to invest 1CR for a 3CR pre- money valuation Ø Post Money Valuation = 1CR + 3CR = 4CR Ø % of the company = 1CR / 4CR = 25%
  40. 40. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Valuation v Models for Valuation Ø Discounted Cash Flow (DCF) •  Forecast several years of revenue & expenses •  Discount the resulting cash flow back to the present using a expected rate of return Ø Cost-To-Recreate Model •  An estimate of what it would cost to duplicate the venture •  Make vs Buy decision thinking
  41. 41. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Valuation v Models for Valuation Ø Market Multiple Model •  Most commonly used •  Value the company by looking at recent sales or offerings of comparable companies and then using a multiple to adjust •  Typically 3x to 5x of projected revenues
  42. 42. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Valuation v Models for Valuation Ø Exit Based Equity Planning •  Estimate target exit return •  Calculate how much further dilution the company will go through to get to that target •  Plan for that dilution upfront and ask for higher stake •  Popular with institutional investors
  43. 43. ©  Copyright  LetsVenture.In    All  rights  reserved   Valuations – Recent Examples MoneyRaised(CR) Annual Revenue (CR) 0   0.5   1   1.5   2   2.5   3   3.5   4   4.5   0   1   2   3   4   5   6   Series1  
  44. 44. ©  Copyright  LetsVenture.In    All  rights  reserved   Valuations – Recent Examples Pre-Money(CR) Annual Revenue (CR) 0   2   4   6   8   10   12   14   0   1   2   3   4   5   6   Series1  
  45. 45. ©  Copyright  LetsVenture.In    All  rights  reserved   %Dilution Annual Revenue (CR) Valuations – Recent Examples 0   5   10   15   20   25   30   35   40   0   1   2   3   4   5   6   Series1  
  46. 46. ©  Copyright  LetsVenture.In    All  rights  reserved   Typical Dilutions 0   1   2   3   4   5   6   7   8   9   Seed Round Angel Round Series A Series B Series C Product Market Fit Business Model Fit Bridge Round* 3CR – 20CR 5-25L 25-75L 50L-1.5CR 1CR – 4CR 50L-1.5CR 5-15% 10-30% 25-40%
  47. 47. ©  Copyright  LetsVenture.In    All  rights  reserved   Dilution over Lifecycle Year 0 1 3 5 Start Initial Hires Seed Round Create Pool VC Round Pool Refresh 2nd VC Round Founders 100.0% 90.0% 68.4% 59.9% 44.9% 43.2% 32.4% Seed Investors 0.0% 0.0% 24.0% 21.0% 15.8% 15.2% 11.4% Initial VC Investors 0.0% 0.0% 0.0% 0.0% 25.0% 24.1% 18.1% Later VC Investors 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 25.0% Early Employees + Advisors 0.0% 10.0% 7.6% 6.7% 5.0% 4.8% 3.6% Employee Pool 0.0% 0.0% 0.0% 12.5% 9.4% 13.0% 9.8% Total 100% 100% 100% 100% 100% 100% 100% Note: The values in the above table are indicative only
  48. 48. ©  Copyright  LetsVenture.In    All  rights  reserved   Convertible Debt v Early stage companies are difficult to value v Deferred valuation tied to next event of funding v Typically a discount on valuation is given v Not very popular in India
  49. 49. ©  Copyright  LetsVenture.In    All  rights  reserved   Convertible Debt v Base Valuation – Minimum Discount v Monthly Discount v Cap on the maximum discount
  50. 50. ©  Copyright  LetsVenture.In    All  rights  reserved   The Funding Process Pitch to Investors Verbal Commitment to Invest Term Sheet SHA Closure Legal DD Fix Issues Financial DD Drop Issues too serious? YN All Ok? Y N
  51. 51. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Term Sheets v Management typically holds common stocks v Professional investors, both angels and venture capitalists, take preferred stock Ø More control over decisions Ø Better economic terms v Interests of common stocks and preferred stocks needs to be negotiated in the term sheet agreement v Economic & Control Interests
  52. 52. ©  Copyright  LetsVenture.In    All  rights  reserved   Economic Interests v Liquidation Preference Ø In the event of sale / liquidation, preferred stock holders are entitled for a pre-determined return before common stock holders Ø Participating clause further allows the preferred stock holders to get further returns on pro-rata basis Ø If there is not enough cash, the preferred clause can take the founders with no returns
  53. 53. ©  Copyright  LetsVenture.In    All  rights  reserved   Liquidation preference v Typical clauses Ø 1.x or Investment Amount (higher of the two) Ø 1.5x with a cap on time or money
  54. 54. ©  Copyright  LetsVenture.In    All  rights  reserved   Example v Amount Invested = 5CR @ 20CR pre-money v Number of shares before series A = 1M Stake 20% [5CR / 25 CR] Number of Shares Issued 250K Price / Share 200 INR [5CR / 250K]
  55. 55. ©  Copyright  LetsVenture.In    All  rights  reserved   Example Liquidation Preference Basic Share (CR) Participating Share (CR) Total (CR)     Simple Prorating 10CR [20% of 50CR] NA 10CR 1x 5CR 9CR [20% of 45CR] 14CR 1.5x 7.5CR 8.5CR [20% of 42.5CR] 16CR v Amount Invested = 5CR @ 20CR pre-money v Investors hold 20% stake v Company exited at 50CR
  56. 56. ©  Copyright  LetsVenture.In    All  rights  reserved   Economic Interests v Future Participation in Financing / Sale Ø Right of First Offer – Preferred Stock holders get the first right to participate. Ø Exit Provisions v Waterfall model v Strategic Sale -> IPO -> Drag Along v Drag Along before the time out above a certain value
  57. 57. ©  Copyright  LetsVenture.In    All  rights  reserved   Control Interests v Restriction on Founders Shares Ø Vesting Curve Ø Lock-in Ø Right of First Refusal Ø Tag Along v Board Seat Ø Reserved Matters
  58. 58. ©  Copyright  LetsVenture.In    All  rights  reserved   Others v Legal & Accounting Fees Ø Mostly all investors put the burden of the legal fees on the entrepreneur v No Shop Ø This prevents entrepreneurs from shopping around with other investors while the dialogue is on. Time period can range from a few weeks to a few months. v Due Diligence
  59. 59. ©  Copyright  LetsVenture.In    All  rights  reserved   How do you start?
  60. 60. ©  Copyright  LetsVenture.In    All  rights  reserved   Getting Started v Set aside a “forgettable” corpus v Make a portfolio of ~10 investments over 2-3 years and possibly ~20+ over 4-5 years v Lean on experienced angels to get started with v Invest in your area of expertise v Help the startup without being over bearing v Meet the founders, spend time with them
  61. 61. ©  Copyright  LetsVenture.In    All  rights  reserved   Gradually work towards having your own Investment Thesis
  62. 62. ©  Copyright  LetsVenture.In    All  rights  reserved   Investment Thesis v Your theory of investment v Examples Ø Product Companies with differentiation and potential to go global Ø Both niche & mass products / services startups with potential for emerging and developed markets Ø Invest in ventures which work towards bringing a change in the social sector
  63. 63. ©  Copyright  LetsVenture.In    All  rights  reserved   Lead Investor v Typically an investor leads the team in a syndicate. A lead investor has the following major tasks Ø Setting up the terms of the deal Ø Help Build a syndicate Ø Possibly take a board seat and help run the company Ø Facilitate next round of funding
  64. 64. ©  Copyright  LetsVenture.In    All  rights  reserved   Post Deal Management v Good to build a rhythm of a monthly review / quarterly report v Provide them help without being over bearing Ø Exercise patience when startup founders are not taking your suggestions v Open Doors
  65. 65. DISCOVER     Efficient  Startup  Listing   Comprehensive  Investment  Ready  Profiles   Investor  Listing  with  Interests  &  Portfolio   SYNDICATE 1 Syndicate closed in 7 days 5 Syndicates opening COMMITMENT-TO-CLOSURE 5 Complete
  66. 66. DISCOVER     Efficient  Startup  Listing   Comprehensive  Investment  Ready  Profiles   Investor  Listing  with  Interests  &  Portfolio   SYNDICATE 1 Syndicate closed in 7 days 5 Syndicates closed in total COMMITMENT-TO-CLOSURE 5 Complete
  67. 67. DISCOVER     Efficient  Startup  Listing   Comprehensive  Investment  Ready  Profiles   Investor  Listing  with  Interests  &  Portfolio   SYNDICATE First Syndicate closed in 7 days 5 Syndicates opening COMMITMENT-TO-CLOSURE 5 Complete
  68. 68. Thank You! ©  Copyright  Saarthi  Integrated  ConsulFng  LLP.  All  rights   www.LetsVenture.com letsventurein @letsventurein manish@letsventure.com
  69. 69. ©  Copyright  LetsVenture.In    All  rights  reserved   Quick Tips v Get started by participating in syndicates v Network with experienced investors v Invest in the area of your expertise v Develop relationships with the entrepreneurs v Allocate corpus v When in doubt, do not invest! v In the end, go with your gut!

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