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  • 1. ©  Copyright  LetsVenture.In    All  rights  reserved   @letsventurein Manish Singhal Founder & CEO
  • 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, ApartmentADDA v  B Tech Electrical Engineering IIT Kanpur (1992) v  Sports Enthusiast, Wildlife Photographer @manish_saarthi
  • 3. ©  Copyright  LetsVenture.In    All  rights  reserved   Agenda v  State of the Angel Investment in India v  Readiness for raising Angel Investment v  Mapping the start-up lifecycle with Investment needs v  Different modes of funding available v  What do Investors look for (After Tea Break) v  Connecting with the Investors v  Primer on Valuations v  The Funding Process (After Lunch Break) v  Primer on Term Sheets v  Detailed Q&A (After Tea Break)
  • 4. ©  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
  • 5. ©  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
  • 6. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Investments
  • 7. ©  Copyright  LetsVenture.In    All  rights  reserved   Understanding Investments Source: Wikipedia
  • 8. ©  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
  • 9. ©  Copyright  LetsVenture.In    All  rights  reserved   Milestones, Valuation and 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
  • 10. ©  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*
  • 11. ©  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
  • 12. ©  Copyright  LetsVenture.In    All  rights  reserved   Type of Seed Investors v Individuals Ø  Friends/Family Ø  Entrepreneurs/ Industry leaders Ø  Organized Angel Funds v Incubators/Accelerators Ø  Infrastructure only Ø  Accelerator v Seed Funds Ø  Institutional Funds Ø  Individual LP funds v Crowd Funding Ø  Incentives & Investments v How do you get a list of Investors Ø  Your Network Ø Ø  Portfolio Company introductions are valued
  • 13. ©  Copyright  LetsVenture.In    All  rights  reserved   Choosing the right investor When given a choice of investors, choose based on Ø Chemistry with investor Ø Willingness to help you Ø Relevant connections/domain knowledge
  • 14. ©  Copyright  LetsVenture.In    All  rights  reserved   But Remember! Institutional Money > Individual money Smart Money > Any money Any money > No money
  • 15. ©  Copyright  LetsVenture.In    All  rights  reserved   What do Investors Look for?
  • 16. ©  Copyright  LetsVenture.In    All  rights  reserved   Key things Investors look for v Business (Not an idea!) v The Team v Risk Management Plan v Clean Structure & Governance v Exit Plan
  • 17. ©  Copyright  LetsVenture.In    All  rights  reserved   What makes a business?
  • 18. ©  Copyright  LetsVenture.In    All  rights  reserved   What makes it– bigger, better & may be investible…
  • 19. ©  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
  • 20. ©  Copyright  LetsVenture.In    All  rights  reserved   Risk Analysis v Market Risk v Customer Traction Risk v Execution Risk v Team Risk v Exit Risk Key is to talk about the potential risks for your business and more importantly your action plan towards mitigating them!
  • 21. ©  Copyright  LetsVenture.In    All  rights  reserved   Clean Structure & Governance v For equity investments, private limited is the only feasible company structure Ø Proprietary, Partnerships, LLPs are not suitable v Clean equity structure Ø Avoid too many minority stake holders v Intellectual Property Ø Clear unambiguous records of IP developed in- house Ø Business Ethics & above board governance
  • 22. ©  Copyright  LetsVenture.In    All  rights  reserved   Exit Plan v Subsequent Rounds of Investments v M&A v IPO! Key is to talk about the intention of providing Investors an exit!
  • 23. ©  Copyright  LetsVenture.In    All  rights  reserved   Connecting with the Investors v Find your anchor angel v Ask for Introductions v Build a rapport v Interact - Engage
  • 24. ©  Copyright  LetsVenture.In    All  rights  reserved   Connecting with the Investors v Find your “angel” v Ask for Introductions v Build a rapport v Interact - Engage Many investments can happen mainly because of Investor’s confidence & chemistry with the entrepreneurs!
  • 25. ©  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
  • 26. ©  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%
  • 27. ©  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
  • 28. ©  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
  • 29. ©  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
  • 30. ©  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
  • 31. ©  Copyright  LetsVenture.In    All  rights  reserved   Convertible Debt v Base Valuation – Minimum Discount v Monthly Discount v Cap on the maximum discount
  • 32. ©  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  
  • 33. ©  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  
  • 34. ©  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  
  • 35. ©  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%
  • 36. ©  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
  • 37. ©  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
  • 38. ©  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 Ecomonic & Control Interests
  • 39. ©  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
  • 40. ©  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
  • 41. ©  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 2x 10CR 8CR [20% of 40CR] 18CR v Amount Invested = 5CR @ 20CR pre-money v Investors hold 20% stake v Company exited at 50CR
  • 42. ©  Copyright  LetsVenture.In    All  rights  reserved   Economic Interests v Anti – Dilution Ø Clause comes into play when there is a down- round and the first round investor has to protect his interests Ø Full Ratchet & Weighted Average Ø Pay-to-play clause can help the founders get further investments from the original investors
  • 43. ©  Copyright  LetsVenture.In    All  rights  reserved   Example - Full Rachet v Series A – 5CR@20CR, 250K shares @200INR v Series B – 2.5CR @ 10CR for 20% stake v Series A New Stake = 5CR /[2.5CR+10]= 40% v 750K new shares @ 50 INR are issued Stage Founders Series A Series B Before A 100% - - Series A 80% 20% - Series B 40% 40% 20%
  • 44. ©  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. Can limit the founders to get investors who can add more value v Drag-Along Rights Ø Investors can force the sale of the company v Tag-Along Rights Ø Management agrees not to sell without giving investors a right for pro-rata participation in sale
  • 45. ©  Copyright  LetsVenture.In    All  rights  reserved   Control Interests v Board Composition Ø Voting (Director) Ø Non-Voting positions (Observer, Advisory) Ø Investor Seat vs Majority by founders v Veto Rights Ø Majority of the items … Joint bank account v Investor Rights Ø Reports, Appointment of Auditors (internal & external)
  • 46. ©  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. Can negotiate some overall caps 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
  • 47. 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
  • 48. 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
  • 49. 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
  • 50. ©  Copyright  LetsVenture.In    All  rights  reserved   Summary v Investment is not a zero sum game Ø Approach it with a win-win attitude v Negotiate for protecting your long term interests v Lean towards smart money, only money is not so good, good advice, good contacts also worth their weight in gold v Building a solid business is the best way of attracting investments
  • 51. ©  Copyright  LetsVenture.In    All  rights  reserved   Find Your Train Ticket Albert Einstein was on a train. He could not locate his ticket. The conductor approached him and said, “ Everyone knows you around here. I am sure your office can buy you another ticket” Einstein replied, “I am not worried about the money, I need to find out where I am going!” From “Art of the Start”
  • 52. Thank You! ©  Copyright  Saarthi  Integrated  ConsulBng  LLP.  All  rights letsventurein @letsventurein
  • 53. ©  Copyright  LetsVenture.In    All  rights  reserved   Resources v Quora v Venture Hacks v Fred Wilson v Mark Suster v 500 start-ups v Canaan pitch template presentation v slide share
  • 54. ©  Copyright  LetsVenture.In    All  rights  reserved   Exit Options Selling your company to a buyer v Strategy ü How to be on radar of potential acquirers? ü Partnership ü Corp Dev relationship ü Create value v Process Ø Data Room Ø Shopping with buyers, with a timeline Ø Exclusive due diligence signup