Angel Investments Made Easy
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Transcript of Angel Investments Made Easy
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@letsventurein
Manish Singhal Founder & CEO
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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 Freshersworld.com, ApartmentADDA
v B Tech Electrical Engineering IIT Kanpur (1992)
v Sports Enthusiast, Wildlife Photographer
@manish_saarthi
http://in.linkedin.com/in/smanishsinghal
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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)
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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
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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
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Understanding Investments
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Understanding Investments
Source: Wikipedia
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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
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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
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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*
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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
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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
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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
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But Remember!
Institutional Money > Individual money
Smart Money > Any money
Any money > No money
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What do Investors Look for?
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Key things Investors look for
v Business (Not an idea!)
v The Team
v Risk Management Plan
v Clean Structure & Governance
v Exit Plan
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What makes a business?
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What makes it– bigger, better & may be investible…
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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
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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!
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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
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Exit Plan
v Subsequent Rounds of Investments
v M&A
v IPO!
Key is to talk about the intention of providing Investors an exit!
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Connecting with the Investors
v Find your anchor angel
v Ask for Introductions
v Build a rapport
v Interact - Engage
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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!
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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
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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%
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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
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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
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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
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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
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Convertible Debt
v Base Valuation – Minimum Discount
v Monthly Discount
v Cap on the maximum discount
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Valuations – Recent Examples M
oney
Rai
sed
(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
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Valuations – Recent Examples Pr
e-M
oney
(CR
)
Annual Revenue (CR)
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6
Series1
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% D
ilutio
n
Annual Revenue (CR)
Valuations – Recent Examples
0
5
10
15
20
25
30
35
40
0 1 2 3 4 5 6
Series1
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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%
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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
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The Funding Process
Pitch to Investors
Verbal Commitment
to Invest
Term Sheet SHA Closure
Legal DD
Fix Issues
Financial DD
Drop Issues
too serious?
Y N
All Ok?
Y
N
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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
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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
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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
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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
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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
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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%
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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
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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)
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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
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
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
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
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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
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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”
Thank You!
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www.LetsVenture.com
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@letsventurein
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Resources
v Quora
v Venture Hacks
v Fred Wilson
v Mark Suster
v 500 start-ups
v Canaan pitch template
http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation
v Mint.com slide share
http://www.slideshare.net/hnshah/mintcom-prelaunch-pitch-deck
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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