This document provides guidance on raising seed/angel funding. It discusses building an investible business by focusing on customer problems, differentiation, and scalability. Investors look for strong teams tackling big markets with differentiated solutions. Seed funding ranges from friends/family to institutional funds. Companies should raise enough to reach their next milestone. Valuation is based on pre-money valuation plus investment. Typical seed terms include liquidation preferences, anti-dilution, and board seats for investors. Common reasons for rejection include issues with structure, founders, or market fit. Resources for finding investors and sample pitch materials are also provided.

1. Raising Seed/Angel FundingRaising Seed/Angel Funding
Ravi Trivedi
ravi.trivedi@gmail.com
@trivediravi
23/Feb/2012

2. My BackgroundMy Background
RaviTrivedi
Principal at Southeast Interactive technology funds, early stage
venture fund in North Carolina, US
Moved to Bangalore in July 2011
Angel Investor in India startupsAngel Investor in India startups
Experience running e-commerce company. Digital Marketing,
and Customer Acquisition.
EquityAnalyst covering technology stocks
Software Development and Product Experience. B2B Marketing.
Author – Web Services Security
MS - IISc, Bangalore, MBA - Duke University, Fuqua, IIMB PGSM
coursework

3. AgendaAgenda
Few First Thoughts
Building a Investible Business
What do investors look for?
Type of Seed investorsType of Seed investors
When/ How much to raise? Who to raise
Typical valuation in various stage
Term Sheet Basics
Typical term sheet in seed round

4. First Things FirstFirst Things First
Lean Startup.
Focus on MVP
Bootstrap
Focus on Building a Business
◦ Investors will find you, once you have traction
Raising funds based on a slide-deck (idea
only) , is a rarity. (Exceptions exist)

5. Building a business?Building a business?

6. Building aBuilding a InvestibleInvestible BusinessBusiness

7. Key Elements of a BusinessKey Elements of a Business
Customer Pain Point/Problem you are
solving
What is the Pain Point you are solving?
Differentiator or Competitive Advantage
What is your differentiator?
Barriers to Entry
Scalability
Team

8. What do Investors look for ?What do Investors look for ?
The Team
Investible Business
Big Market
High Growth
Differentiated
Scalable
Clean Structure

9. Type of Seed InvestorsType of Seed Investors
Individuals
◦ Friends/Family
◦ Entrepreneurs/ Industry
leaders
Groups
◦ Networks
Seed Funds
◦ Institutional Funds -
◦ Individual LP funds –
Other Funds
◦ PE funds, Special Situation
Funds◦ Networks
Incubators/Accelerators
◦ Infrastructure only
◦ Accelerator
Funds
◦ Hedge Funds
How do you get a list of Investors
•Your Network
•Angel.co/Linkedin/Conference/News
Portfolio Company introductions are valued

10. When ?When ?
Idea in a slide
Prototype Ready
CustomerTraction
Paying CustomersPaying Customers
Product-Market Fit
Multiple customer
segment
Business Model Fit

11. How Much ?How Much ?
Raise Enough to reach the next milestone
What is the next Milestone ?
Venture Round [ $1M and more]
Institutional Angel Round [ $500k and less ]Institutional Angel Round [ $500k and less ]
How do you know you are ready for
Venture Round
Institutional Angel Round

12. Milestones,Valuation and RaiseMilestones,Valuation and Raise

13. Who to Raise FromWho to Raise From
Depends on the stage
Some thought process
Smart Money > any money
Any money > No money
Institutional Money > Individual money
When given a choice of investors, choose based
on
(1) Chemistry with investor,
(2)Willingness to help you,
(3) relevant connections/domain knowledge

14. UnderstandingValuationUnderstandingValuation
Pre-MoneyValuation + Invested amount = Post Money
Valuation
Investor invests 1 crore at 4 crore valuation
◦ Post Money = 4 Cr + 1 Cr = 5 Cr
◦ Investor Stake = What is the right answer?
A) 25% (1Cr/4Cr)A) 25% (1Cr/4Cr)
B) 20% (1Cr/5Cr)
TypicalValuation Models apply for revenue companies
Revenue Multiple
DCF

15. Dilution over lifecycleDilution over lifecycle

16. Term Sheet BasicsTerm Sheet Basics –– Economic RightsEconomic Rights
Liquidation Preference – Defines how cash is distributed
on liquidation to preferred stock holders vs. common
stock holders.
Participating vs. Non-participating.
Cap vs. No Cap
Participating
Preference 2.0x
Non-Participating
Preference 2.0x
Investment Amount $5M $5M
% Stake 30% 30%
EquityValue in Sale $20M $20M
Investors share 2 x5M +30% x10M =
$13M
Max of {2x5M =
$10M , 30%x 20 =
$6M } = $10M
Management share $7M $10M

17. Term Sheet BasicsTerm Sheet Basics –– Economic RightsEconomic Rights
Anti-Dilution
Clause comes into play when there is a down-
round and the earlier round investor can to protect
his stake
Down –Round = Lower valuation in future rounds.
Series A = $1/share, Series B = $0.5/share
Two Types - Full Ratchet & Weighted AverageTwo Types - Full Ratchet & Weighted Average
Full Ratchet – Series A is also brought at = $0.5/share,
conversion rate 2:1, i.e 1x new shares issued. Less
common
Weighted average - More common.
Drag-Along Rights
Investors can force the sale of the company

18. Term Sheet BasicsTerm Sheet Basics -- Control InterestsControl Interests
Tag-Along Rights
Management agrees not to sell without giving
investors a right for pro-rata participation in sale
Right of First Refusal
Existing investors have first right to buy any shares
transferred (new fund raise or buyback)
Atleast pro-rata participationAtleast pro-rata participation
Board Composition
Voting (Director)
Non-Voting positions (Observer,Advisory)
Investor Seat vs. Majority by founders
Investor Rights
Reports,Appointment of Auditors (internal & external)

19. OthersOthers
Legal & Accounting Fees
Mostly all investors put the burden of the legal fees on
the startup Can negotiate some overall caps
No Shop
This prevents entrepreneurs from shopping aroundThis 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.
Due Diligence

20. Convertible Debt vs. Straight EquityConvertible Debt vs. Straight Equity
DeferredValuation to next stage of funding
Discount on valuation from next round
Few individuals/firms do that in India
Legal aspects

21. Typical Terms in Series AA term sheetTypical Terms in Series AA term sheet
Liquidation – 1.0 – 2.0x participating or 1.5– 2.0x
non participating
Anti-Dilution –Weighted Average / Full Ratched
(common in India)
Tag Along/Drag AlongTag Along/Drag Along
Board Seat + Board Observer
Valuation
FounderVesting – 3 to 4 year

22. NonNon--Obvious reasons forObvious reasons for rejectionrejection
Structure/Others
Cap-table – Dead equity, Too much dilution
People Related
Founder andTeam Chemistry
Reference Checks/ LitigationThreatReference Checks/ LitigationThreat
Coachability
Single Founder
Location
Market
Portfolio Company Competition
Bias regarding a space

23. Questions?Questions?
Resources
Angel.co - List of Angels
Series AA Term sheet – Techstars, MobistacSeries AA Term sheet – Techstars, Mobistac
Entrepreneur Pitchbook – How to create one by Canaan.
http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-
presentation
Example Pitch Deck – Mint.com Deck -
http://www.slideshare.net/hnshah/mintcom-prelaunch-pitch-deck

24. Weighted Average Anti Dilution ExampleWeighted Average Anti Dilution Example