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1. Manish Singhal @manish_saarthi 30 Aug August Fest Crash Course on Raising Angel Funding

2. Understanding Investor Expectations

3. How do Equity Investors exit?

4. Modes of Exit v Subsequent Rounds of Investments v M&A v Promoter Buy Back v IPO!

5. Subsequent Rounds 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*

6. Understanding Investments

7. 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

8. 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

9. 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*

10. 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

11. 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  Angel.co/Linkedin/Conference/News Ø  Portfolio Company introductions are valued

12. 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

13. But Remember! Institutional Money > Individual money Smart Money > Any money Any money > No money

14. Connecting with the Investors v Find your anchor angel v Ask for Introductions v Build a rapport v Interact - Engage

15. 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!

16. What do Investors Look for?

17. Key things Investors look for v Business (Not an idea!) v The Team v Risk Management Plan v Clean Structure & Governance v Market Size v Exit Plan

18. Valuations

19. 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

20. 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%

21. 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

22. 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

23. %Dilution Annual Revenue (CR) Valuations – Recent Examples 0 5 10 15 20 25 30 35 40 0 1 2 3 4 5 6 Series1

24. 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% 15-25% 25-40%

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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%

33. 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

34. 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)

35. 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

36. 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

37. 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”

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