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ANGEL
INVESTING IN
INDIA
Ravi Trivedi
@trivediravi
30-Jan-2021
An Investors Perspective
MY
BACKGROUND
Principal – US
Venture Fund.
4 investments, 2
exits.
Investments
Angel Investments
Entrepreneur
Coupons for India, Malaysia,
Singapore
Still operate with small team
Web Push Notifications
Platform
150+ Countries - [Exited to Awesome
Motive]
Still Running
In Personal Capacity
Founder
Founder
Inactive
Exited/ Partial Exit
Acting GM
Equity Analyst
Software Developer
Pre-Sales
Online Lead Gen Business
[US]
Education
AGENDA
Types of Startup & Funding Needs
Basics on Venture Capital
Why & What of Angel Investment
Typical Process of Fund raise
How to Select a Business & Team for Investment
Typical valuation in various stage
Term Sheet Basics & typical term sheet in seed
round
TYPES OF STARTUPS
Fast Growth, Funding
Likely Required
Organic Growth, Cash
Flow Positive
Example
Software as a Service,
Consumer Internet
Services Company, Ad
Agency, Taxi Service,
Restaurant
Revenue Spend First, Earn Later Revenue from Operations
immediately
Funding Required May be needed at later
stage for growth
Risk Higher.
[ Over 95% fail]
Moderate
Time Longer time to build a
sustainable business.
Need to commit 10
years ( 5 years min.)
Building a sustainable
business requires shorter
duration
STARTUP FINANCING CYCLE
Source: Wikipedia
ANGEL INVESTING VS
VENTURE INVESTING
Differences &
Similarities
VENTURE CAPITAL 101
 Venture Capital Funds are professionally
run
 Fund life is often 10 years. Means
Investment to Exit is between 5 to 8
years.
 Offer Advice, HR management, Office
Space etc.
 Typically, Series A onwards or >$1M
investments
 They fund 1 in 100 plans
 Often company > $1M in revenue at
time of Venture funding
 Often the next stage after Angel
VENTURE CAPITAL/ANGEL 101
Where do VC get money from?
Why?
• A Pension fund
needs to grow its
funds to match the
needs
• Investment
Diversification
Source of Funds for Venture Capital
VENTURE CAPITAL 101
How do VC make money ?
 Sell or IPO the Invested Companies
 Target 33/33/33 Rule
 33 % Success – Most 2x to 10x,
but Superhits can be 50x to 200x
 33% Breakeven – 1x to 2x
 33% Failure - 0x
1) 0.33x0 + 0.33x1 + 0.33x 10 = 3.66x
3.66 x in 8 years is 18% IRR
2) 0.33x0 + 0.33x1 + 0.33 x 20 = 7x
7x in 8 years is 28% IRR
WHY ANGEL INVESTMENT
Investment Diversification
 If you have Rs 100 lakh to invest, how much will you allocate to
Angel/Venture Investment
5 to 20% of total assets
Example Asset Allocation US Pension Fund
 Private Equity/Venture Capital/ Angel , also known as Alternative
Investments
 High Risk, High Return Asset Class
TYPICAL ANGEL INVESTMENT
IN INDIA
Invest investor invests between 2 lakhs to 50 lakhs in one
startup.
Expect returns in 5 to 10 years.
High Risk High Return Asset Class. Upto 40% of startups may
return 0.
Expect 3x to 50x return. Unicorn return 100x+
In India an accredited investor should have a net worth of Rs 5
Crores.
Average Return for India Stock Market = 13 to 15%.
Expected Return from Venture/Angel hence is +5 to 10% over
Indian stock market = 18% to 25%
The broader the risk is spread, the better is risk diversification.
Typical Angel Round deal sizes = 50 lakhs to 5 Crore
As Angel investor you are investing in the person/team largely
(more on it later)
GOAL OF
AN
ANGEL
INVESTO
R
1. Help startup with Funds
2. Guidance & Mentorship – aka
Smart Money
 Help startup with guidance, mentoring &
connections when asked for.
3. Help the company reach next
stage –
 Where they can raise Venture Capital
Funds, and pass the baton
POSSIBLE WAYS TO EXIT
1. Exit during Series B or later, when Venture funds
buyout the stake.
2. Company Sale – Strategic or Financial Buyer
3. IPO.
4. Company shutdown return partial money or AcquiHire.
WHY STARTUPS
FAIL
 No Market Need
 Founder Conflicts & Team
 Run out of cash
 Product without Business Model
 Ignore Customers
 Outfunded/outcompeted
TYPICAL ANGEL
INVESTMENT PROCESS
1. Startup Pitch or Introduction
2. Subsequent Discussion to Screen the Idea
3. Lead Investor & Investor group formation.
4. Term Sheet to Founder
5. Due Diligence Process
6. Shareholder agreement Negotiation
7. Deal Close, Fund transfer
8. Monitoring the Deal/Company & Helping
9. Exit the company
DEAL FLOW
• Creating a flow of good companies in an angel group or
as an individual is key differentiator for performance.
Art of creating Inbound Deals
•As an angel, we add value at higher risk/reward, but our
ability to influence with capital is limited (vs. a VC fund).
• The best value one can offer is in operating level help,
or network connections.
• Pick your niche carefully, and then help entrepreneurs &
deals will come.
IDENTIFYING
INVESTIBLE
COMPANIES
What to look for?
BUILDING A BUSINESS?
BUILDING A INVESTIBLE
BUSINESS
KEY ELEMENTS OF A BUSINESS
Customer Pain Point/Problem you are
solving
What is the Pain Point you are solving?
Is it 10x better than other solution.
Team
Differentiator or Competitive
Advantage
What is your differentiator? IP or Moat
Barriers to Entry
Scalability
WHAT DO INVESTORS LOOK
FOR ?
The Team [ 40%]
Integrity of Founders, Track Record
Complementary skills
Skin in the game of Founder
Investible Business
Market Size, High Growth
Product & Technology
Marketing & Sales Execution
Differentiation & Moat
Scalable
Clean Structure
TYPE OF SEED INVESTORS
Individuals
 Friends/Family
 Entrepreneurs/ Industry leaders
Groups
 Networks
Incubators/Accelerators
 Infrastructure only
 Accelerator
Seed Funds
 Institutional Funds -
 Individual LP funds –
Other Funds
 PE funds, Special Situation Funds
 Hedge Funds
 How do you get a list of Investors
•Your Network
•Angel.co/Linkedin/Conference/News
 Portfolio Company introductions are valued
WHEN ?
 Idea in a slide
 Prototype Ready
 Customer Traction
 Paying Customers
 Product-Market Fit
 Multiple customer segment
Business Model Fit
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 ]
How do you know you are ready for
Venture Round
Institutional Angel Round
MILESTONES, VALUATION AND
RAISE (OLD)
Milestones Stage Age Revenue Pre-Money Raise Amount From Whom
1 Company Started - Incubation 0 to 0.5 yrs 0 1Cr 5 - 20 L Self, Friends, Family,
2 Beta Product Launched 0.5 to 1 yr
Small amount 1.5Cr to 3 Cr 5L - 50 Cr
Self, Friends, Family, Individual
Angels, Accelerator
B2C : Product used by real customers, Few
paying customers
B2B: Good customer Pipline, 1-2 customers in
trial
3 Stable version 1 - 1.5 yr10 - 15L /yr 3 to 5 Cr 10L - 1 Cr
Self, Accelerators, Seed Funds,
Individual Angels
Regular Customer growth
4 Product-Market Fit Found 1 - 2 yrs 40 - 1Cr/yr 5 to 10 Cr 50L - 2Cr
Individual Angels, Seed Funds,
Few Venture firms
Strong and Consistent Customer growth
Clear product and revenue for next 2-3 yrs
5 Business Model Fit found 1.5 - 3 yrs
2Cr - 5Cr/yr 20Cr - 50 Cr 10Cr - 20Cr Venture Funds
Clear growth Path for next 3 - 5 yrs
Consistent growth in paying customers
Potentially breakeven
WHO TO RAISE MONEY FROM
 Depends on the stage
 Some thought processes
Smart Money > any money
Any money > No money [ If can’t bootstrap]
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
UNDERSTANDING
VALUATION
Pre-Money Valuation + 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)
B) 20% (1Cr/5Cr)
Typical Valuation Models apply for revenue companies
Revenue Multiple
DCF
DILUTION OVER LIFECYCLE
TERM SHEET BASICS –
ECONOMIC RIGHTS
Liquidation Preference – Defines how cash is
distributed on liquidation to preferred stock-
holders vs. common stockholders.
Participating vs. Non-participating.
Cap vs. No Cap
Participating
Preference 2.0x
Non-Participating
Preference 2.0x
Investment Amount $5M $5M
% Stake 30% 30%
Equity Value in Sale $20M $20M
Investor’s share 2 x5M +30% x10M =
$13M
Max of {2x5M = $10M
, 30%x 20 = $6M } =
$10M
Management share $7M $10M
TERM SHEET BASICS –
ECONOMIC 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 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.
TERM SHEET BASICS -
CONTROL INTERESTS
Tag-Along Rights
Management agrees not to sell without giving investors a right for pro-rata
participation in sale.
 If Promoters are selling some part of their shares in next round, the minority
investors also have the same rights.
Right of First Refusal
Existing investors have first right to buy any shares transferred (new
fund raise or buyback)
At-least 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)
OTHERS
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
around with other investors while the dialogue is
on.
Time period can range from a few weeks to a
few months.
Due Diligence
CONVERTIBLE NOTE VS.
STRAIGHT EQUITY
Solves for Mismatch in expectation in Valuation &
Investor Expectation
SHA negotiation can take longer
Solution:
Deferred Valuation to next stage of funding
20% discount to Series A
Convertible Preference Shares (India Company law), compulsory
converts to Equity
Reference - https://www.100x.vc/isafe
TYPICAL TERMS IN
SERIES AA TERM SHEET
Liquidation – 1.0 participating or 1.5– 2.0x
non participating
Anti-Dilution – Weighted Average / Full
Ratched (common in India)
Tag Along/Drag Along
Board Seat + Board Observer
Valuation
Founder Vesting – 3 to 4 year
NON-OBVIOUS
REASONS FOR
REJECTION
Structure/Others
Cap-table – Dead equity, Too much dilution
People Related
Founder and Team Chemistry
Reference Checks/ Litigation Threat
Coachability
Single Founder
Location
Market
Portfolio Company Competition
Bias regarding a space
SUMMARY
 Angel investing is a great way of investment
diversification, and for you to benefit from the India’s
startup growth.
It is a great way to help the startups
Remember it is high risk/high return category and
upto 40% may fail. You need to be patient for 5 to 8
years to get a return.
Typical asset allocation for Angel/Venture is 5 to 15%
Angel investment is mainly an investment in the
team + large market size.
Being able to help startups, through connects, or advisory, can be
big differentiator for you as an angel.
QUESTIONS?
Resources
Book : Angel Investing: by David Rose
Naval Ravikant – Founder AngelList -
https://nav.al/angel-1
Series AA Term sheet – Techstars, YC
Angel.co - List of Angels
Entrepreneur Pitchbook – How to create
one by Canaan.
http://www.slideshare.net/canaanpartner
s/canaan-entrepreneur-pitchbook-
presentation

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Angel investing bootcamp

  • 2. MY BACKGROUND Principal – US Venture Fund. 4 investments, 2 exits. Investments Angel Investments Entrepreneur Coupons for India, Malaysia, Singapore Still operate with small team Web Push Notifications Platform 150+ Countries - [Exited to Awesome Motive] Still Running In Personal Capacity Founder Founder Inactive Exited/ Partial Exit Acting GM Equity Analyst Software Developer Pre-Sales Online Lead Gen Business [US] Education
  • 3. AGENDA Types of Startup & Funding Needs Basics on Venture Capital Why & What of Angel Investment Typical Process of Fund raise How to Select a Business & Team for Investment Typical valuation in various stage Term Sheet Basics & typical term sheet in seed round
  • 4. TYPES OF STARTUPS Fast Growth, Funding Likely Required Organic Growth, Cash Flow Positive Example Software as a Service, Consumer Internet Services Company, Ad Agency, Taxi Service, Restaurant Revenue Spend First, Earn Later Revenue from Operations immediately Funding Required May be needed at later stage for growth Risk Higher. [ Over 95% fail] Moderate Time Longer time to build a sustainable business. Need to commit 10 years ( 5 years min.) Building a sustainable business requires shorter duration
  • 6. ANGEL INVESTING VS VENTURE INVESTING Differences & Similarities
  • 7. VENTURE CAPITAL 101  Venture Capital Funds are professionally run  Fund life is often 10 years. Means Investment to Exit is between 5 to 8 years.  Offer Advice, HR management, Office Space etc.  Typically, Series A onwards or >$1M investments  They fund 1 in 100 plans  Often company > $1M in revenue at time of Venture funding  Often the next stage after Angel
  • 8. VENTURE CAPITAL/ANGEL 101 Where do VC get money from? Why? • A Pension fund needs to grow its funds to match the needs • Investment Diversification Source of Funds for Venture Capital
  • 9. VENTURE CAPITAL 101 How do VC make money ?  Sell or IPO the Invested Companies  Target 33/33/33 Rule  33 % Success – Most 2x to 10x, but Superhits can be 50x to 200x  33% Breakeven – 1x to 2x  33% Failure - 0x 1) 0.33x0 + 0.33x1 + 0.33x 10 = 3.66x 3.66 x in 8 years is 18% IRR 2) 0.33x0 + 0.33x1 + 0.33 x 20 = 7x 7x in 8 years is 28% IRR
  • 10. WHY ANGEL INVESTMENT Investment Diversification  If you have Rs 100 lakh to invest, how much will you allocate to Angel/Venture Investment 5 to 20% of total assets Example Asset Allocation US Pension Fund  Private Equity/Venture Capital/ Angel , also known as Alternative Investments  High Risk, High Return Asset Class
  • 11. TYPICAL ANGEL INVESTMENT IN INDIA Invest investor invests between 2 lakhs to 50 lakhs in one startup. Expect returns in 5 to 10 years. High Risk High Return Asset Class. Upto 40% of startups may return 0. Expect 3x to 50x return. Unicorn return 100x+ In India an accredited investor should have a net worth of Rs 5 Crores. Average Return for India Stock Market = 13 to 15%. Expected Return from Venture/Angel hence is +5 to 10% over Indian stock market = 18% to 25% The broader the risk is spread, the better is risk diversification. Typical Angel Round deal sizes = 50 lakhs to 5 Crore As Angel investor you are investing in the person/team largely (more on it later)
  • 12. GOAL OF AN ANGEL INVESTO R 1. Help startup with Funds 2. Guidance & Mentorship – aka Smart Money  Help startup with guidance, mentoring & connections when asked for. 3. Help the company reach next stage –  Where they can raise Venture Capital Funds, and pass the baton
  • 13. POSSIBLE WAYS TO EXIT 1. Exit during Series B or later, when Venture funds buyout the stake. 2. Company Sale – Strategic or Financial Buyer 3. IPO. 4. Company shutdown return partial money or AcquiHire.
  • 14. WHY STARTUPS FAIL  No Market Need  Founder Conflicts & Team  Run out of cash  Product without Business Model  Ignore Customers  Outfunded/outcompeted
  • 15. TYPICAL ANGEL INVESTMENT PROCESS 1. Startup Pitch or Introduction 2. Subsequent Discussion to Screen the Idea 3. Lead Investor & Investor group formation. 4. Term Sheet to Founder 5. Due Diligence Process 6. Shareholder agreement Negotiation 7. Deal Close, Fund transfer 8. Monitoring the Deal/Company & Helping 9. Exit the company
  • 16. DEAL FLOW • Creating a flow of good companies in an angel group or as an individual is key differentiator for performance. Art of creating Inbound Deals •As an angel, we add value at higher risk/reward, but our ability to influence with capital is limited (vs. a VC fund). • The best value one can offer is in operating level help, or network connections. • Pick your niche carefully, and then help entrepreneurs & deals will come.
  • 20. KEY ELEMENTS OF A BUSINESS Customer Pain Point/Problem you are solving What is the Pain Point you are solving? Is it 10x better than other solution. Team Differentiator or Competitive Advantage What is your differentiator? IP or Moat Barriers to Entry Scalability
  • 21. WHAT DO INVESTORS LOOK FOR ? The Team [ 40%] Integrity of Founders, Track Record Complementary skills Skin in the game of Founder Investible Business Market Size, High Growth Product & Technology Marketing & Sales Execution Differentiation & Moat Scalable Clean Structure
  • 22. TYPE OF SEED INVESTORS Individuals  Friends/Family  Entrepreneurs/ Industry leaders Groups  Networks Incubators/Accelerators  Infrastructure only  Accelerator Seed Funds  Institutional Funds -  Individual LP funds – Other Funds  PE funds, Special Situation Funds  Hedge Funds  How do you get a list of Investors •Your Network •Angel.co/Linkedin/Conference/News  Portfolio Company introductions are valued
  • 23. WHEN ?  Idea in a slide  Prototype Ready  Customer Traction  Paying Customers  Product-Market Fit  Multiple customer segment Business Model Fit
  • 24. 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 ] How do you know you are ready for Venture Round Institutional Angel Round
  • 25. MILESTONES, VALUATION AND RAISE (OLD) Milestones Stage Age Revenue Pre-Money Raise Amount From Whom 1 Company Started - Incubation 0 to 0.5 yrs 0 1Cr 5 - 20 L Self, Friends, Family, 2 Beta Product Launched 0.5 to 1 yr Small amount 1.5Cr to 3 Cr 5L - 50 Cr Self, Friends, Family, Individual Angels, Accelerator B2C : Product used by real customers, Few paying customers B2B: Good customer Pipline, 1-2 customers in trial 3 Stable version 1 - 1.5 yr10 - 15L /yr 3 to 5 Cr 10L - 1 Cr Self, Accelerators, Seed Funds, Individual Angels Regular Customer growth 4 Product-Market Fit Found 1 - 2 yrs 40 - 1Cr/yr 5 to 10 Cr 50L - 2Cr Individual Angels, Seed Funds, Few Venture firms Strong and Consistent Customer growth Clear product and revenue for next 2-3 yrs 5 Business Model Fit found 1.5 - 3 yrs 2Cr - 5Cr/yr 20Cr - 50 Cr 10Cr - 20Cr Venture Funds Clear growth Path for next 3 - 5 yrs Consistent growth in paying customers Potentially breakeven
  • 26. WHO TO RAISE MONEY FROM  Depends on the stage  Some thought processes Smart Money > any money Any money > No money [ If can’t bootstrap] 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
  • 27. UNDERSTANDING VALUATION Pre-Money Valuation + 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) B) 20% (1Cr/5Cr) Typical Valuation Models apply for revenue companies Revenue Multiple DCF
  • 29. TERM SHEET BASICS – ECONOMIC RIGHTS Liquidation Preference – Defines how cash is distributed on liquidation to preferred stock- holders vs. common stockholders. Participating vs. Non-participating. Cap vs. No Cap Participating Preference 2.0x Non-Participating Preference 2.0x Investment Amount $5M $5M % Stake 30% 30% Equity Value in Sale $20M $20M Investor’s share 2 x5M +30% x10M = $13M Max of {2x5M = $10M , 30%x 20 = $6M } = $10M Management share $7M $10M
  • 30. TERM SHEET BASICS – ECONOMIC 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 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.
  • 31. TERM SHEET BASICS - CONTROL INTERESTS Tag-Along Rights Management agrees not to sell without giving investors a right for pro-rata participation in sale.  If Promoters are selling some part of their shares in next round, the minority investors also have the same rights. Right of First Refusal Existing investors have first right to buy any shares transferred (new fund raise or buyback) At-least 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)
  • 32. OTHERS 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 around with other investors while the dialogue is on. Time period can range from a few weeks to a few months. Due Diligence
  • 33. CONVERTIBLE NOTE VS. STRAIGHT EQUITY Solves for Mismatch in expectation in Valuation & Investor Expectation SHA negotiation can take longer Solution: Deferred Valuation to next stage of funding 20% discount to Series A Convertible Preference Shares (India Company law), compulsory converts to Equity Reference - https://www.100x.vc/isafe
  • 34. TYPICAL TERMS IN SERIES AA TERM SHEET Liquidation – 1.0 participating or 1.5– 2.0x non participating Anti-Dilution – Weighted Average / Full Ratched (common in India) Tag Along/Drag Along Board Seat + Board Observer Valuation Founder Vesting – 3 to 4 year
  • 35. NON-OBVIOUS REASONS FOR REJECTION Structure/Others Cap-table – Dead equity, Too much dilution People Related Founder and Team Chemistry Reference Checks/ Litigation Threat Coachability Single Founder Location Market Portfolio Company Competition Bias regarding a space
  • 36. SUMMARY  Angel investing is a great way of investment diversification, and for you to benefit from the India’s startup growth. It is a great way to help the startups Remember it is high risk/high return category and upto 40% may fail. You need to be patient for 5 to 8 years to get a return. Typical asset allocation for Angel/Venture is 5 to 15% Angel investment is mainly an investment in the team + large market size. Being able to help startups, through connects, or advisory, can be big differentiator for you as an angel.
  • 37. QUESTIONS? Resources Book : Angel Investing: by David Rose Naval Ravikant – Founder AngelList - https://nav.al/angel-1 Series AA Term sheet – Techstars, YC Angel.co - List of Angels Entrepreneur Pitchbook – How to create one by Canaan. http://www.slideshare.net/canaanpartner s/canaan-entrepreneur-pitchbook- presentation