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Angel Investing 101 - Part 1 - Pre-screening

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One of the most fundamental parts of the startup funding process is the pre-screening round. Here a group of investors or their representatives will do a short (~1 hour) interview with you to understand if your investment is a viable opportunity. Also gives the founder/CEO the opportunity to meet with the investor(s) and see if there would be a good fit.

Angel Investing 101 - Part 1 - Pre-screening

  1. 1. Angel Investing 101 PRE-SCREENING
  2. 2. Agenda  Purpose of this presentation:  Steps to qualify or disqualify an investment opportunity  Deal Sources  Next Steps  Benefits  Low time commitment approach for initial investigation  Mitigate some of the risks inherent to angel investing  Useful for giving advice to fledgling entrepreneurs
  3. 3. Deal Flow: Sourcing to Exit Pre-Funding •Exploratory contact •Application •Pre-screen •Due diligence •Revisions/Pivots Funding •Term sheet and valuation •Presentation(s) •Deal structure/documents/legal •Closing Post- Funding •Monitoring •Mentoring •Resources/Network •Harvesting/Exit < 2 hours
  4. 4. The Key Questions  Question 1: Is this a good deal for our Angel group?  Question 2: Is this the right team to execute this business?  Question 3: Does this business have superior proprietary products?  Question 4: Do the products address a clear need in a large market?  Question 5: Is the requested investment sufficient for the company to achieve key milestones?  Question 6: Has this company made a compelling case for the overall attractiveness of the business opportunity?  Question 7: Is this an attractive investment opportunity?
  5. 5. Question 1: Is this a good deal for our Angel group?  Industry Sector:  High-growth industry  Expertise within Angel Group  Proceed with caution:  partnerships, proprietorships, franchisees, investment funds, retail stores, publishing, professional or consulting services, real estate, entertainment, natural resources  However there are always exceptions
  6. 6. Question 1: Is this a good deal for our Angel group?  Which one of these would you invest in?  Publishing company  Electronic Health Records  Chain of dry cleaning services  Social Gaming (e.g. Words with friends)
  7. 7. Question 2: Is this the right team to execute this business?  Management team can make or break any deal  track record of key team members  balance of operational expertise (including financial), domain knowledge, and business acumen:  Though at early stage, not ALL of the items above need to be present. Most should be  Angel Investors will help round out management gaps or find individuals who can.  Proceed with caution:  “one-person-show”  Family-based business
  8. 8. Question 3: Does this business have superior proprietary products?  Mostly product or technology  Although services possible  Scalability  Competitive Analysis:  Clear differentiation  better/faster/smaller/cheaper?  New markets/paradigm shift: AVOID.  Sustainable Competitive Advantage  Freedom to Operate  Product Line
  9. 9. Question 3: Does this business have superior proprietary products?  Which of the following would you invest in?  Augmedix  A service for medical doctors that's powered by Google Glass.  Twilio  Build apps that communicate  Fits.me Virtual Fitting Room  Fits.me’s solutions help boost the profitability of online clothing retailers.  Swifto  Uber for Dog Walking- GPS tracked dog walking service
  10. 10. Question 4: Do the products address a clear need in a large market?  Clear economic value proposition:  Need-to-have VS Nice-to-have  Market Size:  For Angels: >$100M. For VCs: >$1B  Market Segment:  niche market(s)?  reasonable chance of market acceptance  Identification of key decision makers  Sales:  Paying or Beta Customers? Proof needed (LOI e.g.)
  11. 11. Question 4: Do the products address a clear need in a large market?  Neverware  automatically boosts performance of old computers for a low monthly fee. Targeted to the education sector.  AirBnB  rent unoccupied living space and other short-term lodging  OrderWithMe  Group Buying from Factories in China
  12. 12. Question 5: Is the requested investment sufficient for the company to achieve key milestones?  Attractive for follow-on venture investment  Cash flow break-even  Not a fit for Angel investing:  Capital intensive industries (e.g. alternative energy) require constant capital injections
  13. 13. Question 6: Has this company made a compelling case for the overall attractiveness of the business opportunity?  Clear identification of strengths and weaknesses vs competitors  Does the company have or can gain access to required resources?
  14. 14. Question 7: Is this an attractive investment opportunity?  Valuation Expectations:  Pre-revenue valuation >$3M.  Strongly advice against pre-revenue unless strong compelling argument (e.g. IP).  Any company >$10M is not a good fit for Angels  Equity too low to justify due diligence effort  Potential for Lucrative Exit:  For angels, exit of 10X within 3 – 7 years is the norm. Exit strategy must be articulated.  Prior deals:  Previous unreasonably high valuations  Untenable deal structure terms from individual investors/angels
  15. 15. Key Takeaways  This is the first step in the process, should you spend time even evaluating the deal.  Short . < 2hours  Main points to look for  High growth industry, synergies with angel network  GREAT and complementary management team  Clearly differentiated product/technology. Scalable and sustainable  Addresses pain points in large markets. Not too large >$100M but <$1B. Have Sales!!!  Clear need for capital, but do not require constant infusion  Companies valued between $3M and $10M. Exit at 3 – 7 years.
  16. 16. Questions?

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