Raising Seed/Angel FundingRaising Seed/Angel Funding

Ravi Trivedi

ravi.trivedi@gmail.com@trivediravi

23/Feb/2012

My BackgroundMy Background

Ravi Trivedi�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.

�Equity Analyst covering technology stocks

�Software Development and Product Experience. B2B Marketing.

�Author –Web Services Security

�MS - IISc, Bangalore, MBA - Duke University, Fuqua, IIMB PGSM coursework

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

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)

Building a business?Building a business?

Building a Building a InvestibleInvestible BusinessBusiness

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

What do Investors look for ?What do Investors look for ?

�The Team

�Investible Business

�Big Market

�High Growth

�Differentiated

�Scalable

�Clean Structure

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

When ?When ?

� Idea in a slide

� Prototype Ready

� Customer Traction

� Paying Customers� Paying Customers

� Product-Market Fit

� Multiple customer segment

�Business Model Fit

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

Milestones, Valuation and RaiseMilestones, Valuation and Raise

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

Understanding ValuationUnderstanding 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)� A) 25% (1Cr/4Cr)

� B) 20% (1Cr/5Cr)

�Typical Valuation Models apply for revenue companies

�Revenue Multiple

�DCF

Dilution over lifecycleDilution over lifecycle

Term Sheet Basics Term 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-ParticipatingPreference 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

Term Sheet Basics Term 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 Average�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.

�Drag-Along Rights�Investors can force the sale of the company

Term Sheet Basics Term 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 participation�Atleast 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)

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 around �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 Debt vs. Straight EquityConvertible Debt vs. Straight Equity

�Deferred Valuation to next stage of funding

�Discount on valuation from next round

� Few individuals/firms do that in India

�Legal aspects

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 Along� Tag Along/Drag Along

� Board Seat + Board Observer

� Valuation

� Founder Vesting – 3 to 4 year

NonNon--Obvious reasons for Obvious reasons for rejectionrejection

� Structure/Others

�Cap-table – Dead equity, Too much dilution

� People Related

�Founder and Team Chemistry

�Reference Checks/ Litigation Threat�Reference Checks/ Litigation Threat

�Coachability

� Single Founder

�Location

� Market

�Portfolio Company Competition

�Bias regarding a space

Questions?Questions?

Resources

� Angel.co - List of Angels

� Series AA Term sheet –Techstars, Mobistac� Series 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

Weighted Average Anti Dilution ExampleWeighted Average Anti Dilution Example