primer on angel investing 1000 angels

Primer on Angel Investing

© Copyright 1000Angels.net All rights reserved

Agenda State of the Technology Startups In The Philippines

Angel Investments 101

What is Angel Investment? Why should you do it?

How do you make a return?

How do you evaluate a startup?

Deal Dynamics

Valuation

Process

Primer on Term Sheets / SHA

How do you get started?

Syndicates on LV

Pitches with analysis


Team Here Today


Angel Scenario in the USA

Source:

http://online.wsj.com/news/articles/SB10001424052702304402

104579149390398554348


State of seed/Angel

Investments

2012 Deals and Roughly between 120-150 deals

Networks etc contributing to guess estimate of 30-35% of the deals

Median investment value for Seed/Angel investment:

Roughly 50 deals between Dec-Mar 13

Start of incubators


State of seed/Angel

Investments

2013

• Slight slow down

• New players (including incubators) starting to deploy funds

• RISE of the incubation model (today approx 5+ incubators)

• Accelerators working on batches 2 & 3

• HOT sectors (not including consolidation): Healthcare,

Education


Funding ~200 startups / year

Source: ventureintelligence

Unconfirmed reports say ~500-700 angel investors in India


Do you want to change it?


Why Angel Invest?

Support Entrepreneurship

Leverage your knowledge and connections

Develop an alternate asset class

Make Money


Who is an Angel Investor

Strong Passion for entrepreneurship

It is nearly a pseudo entrepreneurship

Bring value to the startups

Anyone with Surplus capital which can be invested


What returns can you expect?

2/3 of startups fail world wide

75% of the angel investments do not make

returns

Very high risk / High Return Game

India, still a young eco-system. Not many

data points…

Some reports show a return of 3x – 22x


How do you exit?

Since you own equity in the venture, only when you sell

equity to someone else, you make money

You do not make money on dividends / profit share


How do you exit?

Subsequent Rounds of Funding

M&A

Promoter Buyback

IPO


Typical Curve

0 2 4 6 8 10

Valuation

Year

Seed

Round

Angel

Round

Series A

Series B

Series C

Bridge

Round*


Typical Curve

0 2 4 6 8 10

Valuation

Year

Seed

Round

Angel

Round

Series A

Series B

Series C

Return*Bridge

Round*

*20-25% Discount from the round

valuation


Valuations Jump

0

1

2

3

4

5

6

7

8

9

10

0 5 10 15 20 25 30 35

Money Raised (CR)

Va

lua

tio

n M

ultip

le

Bridge Round

Series A


Valuations Jump

0

1

2

3

4

5

6

7

8

9

10

0 5 10 15 20 25 30 35

Money Raised (CR)

Va

lua

tio

n M

ultip

le

Bridge Round

Series A

Valuations can jump by

2-3x in a Bridge Round5x-8x in a Series A


Understanding Investments


When ?

Idea in a slide

Prototype Ready

Customer Traction

Paying Customers

Product-Market Fit

Multiple customer

segment

Business Model Fit


Milestones & Raise

Milestones/Stage Age RevenueRaise

AmountFrom Whom

1 Venture Launched 0 – 0.5 0 5 – 25 L Self, Friends, Family

2 Beta Product LaunchedB2C : Product used by real customers, Few paying customersB2B : Good Customer Pipeline, 1-2 customers in trial

0.5 – 1 yr Small amount 25L-75L Self, Friends, Family, Individual Angels, Accelerators

3 Stable versionRegular Customer growth

1 – 1.5 yrs 10 – 15 L peryear

50 L – 1.5 Cr Self, Accelerators, Seed Funds, Individual Angels

4 Product- Market fit foundStrong & Consistent Customer GrowthClear 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 foundClear growth Path for next 3-5 yrsConsistent growth in paying customersPotentially 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


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*


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


Evaluating Startups


As an Angel Investor – what

do you really care for?


Exit!


What is needed for an exit?


Scale!


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*


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*

Do not spend too much

time on revenue models

instead spend more time

on how the team is

figuring their way to PM

fit.

Evaluate whether the

core team is coming

together


team knows how to scale

and remain in PM fit

even after a business

model launch

Ability to build & run a

larger team.

Role definition among

the founding team is

clear

Is the team capable or

open to bring in senior

talent to really grow the

business.


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*

Do not spend too much

time on revenue models

instead spend more time

on how the team is

figuring their way to PM

fit.


core team is coming

together


team knows how to scale

and remain in PM fit

even after a business

model launch

How is competitive

scenario?

Financial Models

Evaluate ability to

achieve scale

Look for validations on

growth strategies


Team

Chemistry & Coachability

Skills / Domain Expertise

Structure & Role Definition

Founder’s skin in the game

Ownership distribution

Previous track record

Access to Advisory Board / Mentors


Other Factors

Is it a “Me too” business?

Do they have an edge in the market place which is defendable (Entry Barrier)

Is the market size big enough for them to keep scaling?

Are they focused on profitability or growth?


Key is to develop one or two

specific points why will this

startup succeed

(Investment Thesis)


When not to Invest

Exit Discomfort

Founder Discomfort

Business Discomfort

Structure Discomfort


Deal Dynamics


Understanding Valuation

“Worth” of the company typically

ascertained while raising capital

More of an art rather than science

Determines the % dilution the entrepreneur

will go through while raising money


Terminology

Investor wants to invest 1CR for 20% of

the company

Post Money Valuation = 1CR / 20% = 5 CR

Pre Money Valuation = 5CR – 1CR = 4CR

Investor wants to invest 1CR for a 3CR

pre-money valuation

Post Money Valuation = 1CR + 3CR = 4CR

% of the company = 1CR / 4CR = 25%



Models for Valuation

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

Cost-To-Recreate Model

• An estimate of what it would cost to duplicate the

venture

• Make vs Buy decision thinking




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




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


Valuations – Recent Examples

Money R

ais

ed (

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



Pre

-Money

(CR

)

Annual Revenue (CR)

0

2

4

6

8

10

12

14

0 1 2 3 4 5 6

Series1


% D

ilution

Annual Revenue (CR)


0

5

10

15

20

25

30

35

40

0 1 2 3 4 5 6

Series1


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%


Dilution over Lifecycle

Year 0 1 3 5

StartInitial 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


Convertible Debt

Early stage companies are difficult to value

Deferred valuation tied to next event of

funding

Typically a discount on valuation is given

Not very popular in India


Convertible Debt

Base Valuation – Minimum Discount

Monthly Discount

Cap on the maximum discount


The Funding Process

Listen to Pitches

Verbal Commitment to

Invest

Term Sheet SHA Closure

Legal DD

Fix Issues

Financial DD

DropIssues too serious?

YN

All Ok?

Y

N


Understanding Term Sheets

Management typically holds common

stocks

Professional investors, both angels and

venture capitalists, take preferred stock

More control over decisions

Better economic terms

Interests of common stocks and preferred

stocks needs to be negotiated in the term

sheet agreement

Economic & Control Interests


Economic Interests

Liquidation Preference

In the event of sale / liquidation, preferred

stock holders are entitled for a pre-determined

return before common stock holders

Participating clause further allows the

preferred stock holders to get further returns

on pro-rata basis

If there is not enough cash, the preferred

clause can take the founders with no returns


Liquidation preference

Typical clauses

1.x or Investment Amount (higher of the two)

1.5x with a cap on time or money


Example

Amount Invested = 5M @ 20M pre-money

Number of shares before series A = 1M

Stake 20% [5M / 25 M]

Number of Shares

Issued250K

Price / Share 200K [5M / 250K]


Example

Liquidation Preference

Basic Share (CR) Participating Share (CR) Total (CR)

Simple

Prorating10M [20% of 50M] NA 10M

1x 5M 9M [20% of 45M] 14M

1.5x 7.5M 8.5M [20% of 42.5M] 16M

Amount Invested = 5M @ 20M pre-money

Investors hold 20% stake

Company exited at 50M


Economic Interests

Future Participation in Financing / Sale

Exit Provisions

Waterfall model

Strategic Sale -> IPO -> Drag Along

Drag Along before the time out above a certain

value


Control Interests

Restriction on Founders Shares

Vesting Curve

Lock-in

Right of First Refusal

Tag Along

Board Seat

Reserved Matters


Others

Legal & Accounting Fees

Mostly all investors put the burden of the legal

fees on the entrepreneur

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


How do you start?


Getting Started

Set aside a “forgettable” corpus

Make a portfolio of ~10 investments over 2-3

years and possibly ~20+ over 4-5 years

Lean on experienced angels to get started

with

Invest in your area of expertise

Help the startup without being over bearing

Meet the founders, spend time with them


Gradually work towards having

your own Investment Thesis


Investment Thesis

Your theory of investment

Examples

Product Companies with differentiation and potential to go

global

Both niche & mass products / services startups with potential for

emerging and developed markets

Invest in ventures which work towards bringing a change in the

social sector


Lead Investor

Typically an investor leads the team in a syndicate. A lead

investor has the following major tasks

Setting up the terms of the deal

Help Build a syndicate

Possibly take a board seat and help run the company

Facilitate next round of funding


Post Deal Management

Good to build a rhythm of a monthly review / quarterly

report

Provide them help without being over bearing

Exercise patience when startup founders are not taking your

suggestions

Open Doors

DISCOVER

Efficient Startup ListingComprehensive Investment Ready ProfilesInvestor Listing with Interests & Portfolio

SYNDICATE

1 Syndicate closed in 7 days

5 Syndicates opening

COMMITMENT-TO-CLOSURE

5 Complete

DISCOVER


SYNDICATE

1 Syndicate closed in 7 days

5 Syndicates closed in total


5 Complete

DISCOVER


SYNDICATE

First Syndicate closed in 7 days

5 Syndicates opening


5 Complete


Quick Tips

Get started by participating in syndicates

Network with experienced investors

Invest in the area of your expertise

Develop relationships with the entrepreneurs

Allocate corpus

When in doubt, do not invest!

In the end, go with your gut!

primer on angel investing 1000 angels

Business

rights reserved funding

rights reserved team

rights reserved angel

x copyright

india copyright

incubators copyright

wikipedia copyright

analysis copyright