startup istanbul 2017 - asra nadeem - angel investing basics
TRANSCRIPT
Angel Investing BasicsStartup Istanbul
Hi, I’m Asra
Partner @ Draper University Ventures
Program Director @ Draper University
Presentation Roadmap
➔ Angel Investing: What, Why, How (Legally, Worldview)
➔ Starting Your Journey: Angel Syndicates
➔ Generating Deal Flow: Brand, Network
➔ Deal Flow Meetings
➔ Assessing Opportunities
➔ Post-Investment Insights
What is investing?
What is angel investing?
Landscape
STARTUP FUNDING ROUNDS FUNDING ACTORS
Sweat Equity, Bootstrapping, Self-Funding, Friends & Family Self, Friends & Family
Crowdfunding Public
Incubator/Accelerator Programs
Angel Angels
Seed Early-Stage Funds, Angels
Bridge Early-Stage Funds, Angels
Series A Early-Stage Funds
Series B+ Growth Funds, Corporates, Private Equity
ANGEL EARLY-STAGE FUND
FINANCIAL INCENTIVE STRUCTURE Invests own money, sees 100% returns Manages and invests other people’s money, sees ~20% returns
$$$ DEPLOYED/DEAL Invests tens of thousands per deal Invests hundreds of thousands - millions per deal
NO. DEALS/YEAR 5-15 deals/year, rarely joins board Individual VC invests 1-2 deals/year, likely retains option to join board
DECISION MAKING & WORKLOAD Alone Debates investment decisions over multiple meetings with
partners (has a team to consult and delegate work to)
PROCESS Less formal/structured More standardized/codified process for investment process
(ex: deal flow, deal memos, due diligence)
Why angel invest?
● Return life changing money
● Change your home > change the world
● Be a part of your local startup ecosystem > the global startup ecosystem
● Stay current with ideas, technologies, the market
● Engage in entrepreneurship without the responsibility
● Deep relationship building with founders as a mentor/coach/therapist figure
● Give back, ex: founder turned angel
Official Requisites (US)
In the US, these are the minimum for angel investing:
Be an accredited investor
● Net worth of $1,000,000, excluding value of one’s primary residence, or
● Net income of at least $200,000/year for last two years, or
● If married, combined income of $300,000, and expectation to make same amount this year
Have capital to deploy when it’s time to write founders a check
● Rule of Thumb: Invest <10% of your net worth
Unofficial Requisites
Are you cut out for this?
❏ Long tail view for success (aka returns)
❏ Ok with 99% failure, 1% success
❏ Work with wide range of (strong) personalities
Starting Your Journey
You’re legally able to invest
You have the financial means to invest
You are mentally prepared to invest
How do you find the “right” companies to give your money to?
Deal Flow
Non-Proprietary Deal Flow
Definition: Deals in the public domain
● Startup conferences
● Accelerator demo days
● Online (AngeLlist, Crunchbase, SeedInvest)
● Angel groups and/or syndicates
Proprietary Deal Flow
Definition: Deals that never see the light of day - insider’s information shared with you by elite founders
and investors based on your network and reputation
How do you become an insider?
Step 1: Join an Angel Syndicate
Overview
What
Lead, experienced angel pools together $$ from other angels > takes a carry of ~20% of return
Appear on cap table as one entity represented by the syndicate lead
Where
In the US, you can find angel syndicates on sites like AngelList, SeedInvest, and Funders Club
How
Need to be an accredited investor to join a syndicate
Buy in between $1000 to $2500 per deal
Why
Whether you put in $1000 or $100,000 into a startup, you’re still an angel, reaping all that comes with that association >
increase your brand and build deep relationships with founders and other angels in your syndicate
Recommendation
New angels participate in 10 small angel syndicates before direct investing
● Build your reputation● Have a chance to build relationship with founders > prove worth● Jump-start network
Picking a syndicate
What characteristics should you look for when looking for syndicates to join?
Look for a syndicate with a lead that has been investing for at least five years and has at least one notable, unicorn
investment
Look for a syndicate investing in a startup that
○ Has at least two founders (in case one quits)
○ Has a product or service that is already in the market
○ Has either (a) six months of continuous user growth or (b) six months of revenue
○ Has notable investors
○ Post-funding, will have eighteen months of cash remaining (aka runway)
How to behave in a syndicate
● Pick the brain of your syndicate lead and fellow syndicate members
● Meet with the founders at least once
● Write deal memos
Step 2: Launch Your Brand and
Network
Building social currency with other angels
Take stock of the angels that are now in your network thanks to your participation in angel syndicates
Connect with them across platforms like LinkedIn, AngelList, Twitter, and Facebook
Engage with them across these platforms
Discover which investors you find most interesting
Reach out to the investors you find most interesting via email
Meeting with other angels/investors
During Meeting
Figure out what they invest in and why
Figure out what value they bring to startups
Communicate what value you bring to startups
Ask have you seen anything interesting lately?
Offer I just invested in these two startups, which are exceptional. Would you like to get introduced to the founders?
Logistics determine if they prefer double opt-in introductions or blind introductions
Post Meeting
Promptly email
● Thank them for their time
● Include a list of the ten startups you’ve invested in (include links)
● Ask them if they are interested in meeting any of your founders
Setting the stage for proprietary deal flow
Specific Angel
Tim, it was great getting coffee with you last week. I noticed you’re an angel investor in Tesla and I think they have
a really interesting vision of a carbon-free future. Was wondering, would you mind introducing me to Elon Musk?
I believe strongly in Elon’s vision and I’ve got two specific ideas that I’m positive will help improve Tesla’s
marketing and social media.
Network of Angels
Have you seen anything compelling recently?
Step 3: Meeting Founders
Pre-Meeting Research
● Look into founder background (LinkedIn)
● Review their product
● Understand the market they operate in
● Know who their competitors are (AngelList, Crunchbase)
● Know who else has already invested in the company (AngelList, Crunchbase)
The Meeting: Four Founder Questions
1. What are you working on?
2. Why are you doing this
3. Why now?
4. What’s your unfair advantage
The Meeting: Five Tactical Questions
1. Tell me about the competition
2. How do you make money?
3. How much do you charge customers?
4. How much does your average customer spend?
5. Tell me the top three reasons why this business might fail
The Meeting: Other Topics
● What stage is the product/service
● Market/size of opportunity
● Management team experience/holes
● Use of funds
● Other investors
First Meeting: Common Red Flags
● “We are the X of Y” (ex: FB, Uber, AirBnb)
● “We have no competition”
● “We need to know right away”
● “Tim Draper committed to us already”
● Argumentative founder
● Lack of market statistics
Deciding Who To Invest In
Four Investor Questions
1. Why has this founder chosen this business?
2. How committed is this founder?
3. What are this founder’s chances of succeeding in this business - and in life?
4. What does winning look like in terms of revenue and my return?
Ideal Founder Characteristics
Tangibles
Domain expertise
Startup experience
Management experience
Operating knowledge
Intangibles
Passion
Integrity
(Even) temperament
Leadership
Commitment
Pragmatism
Flexibility
Pre- vs. Post-Traction Startups
Pre-Traction No users or revenue
Post-Traction People using and sometimes paying for a product
Considerations
● Post-traction there are market metrics you can evaluate and use to forecast
● Pre-traction there is less information > chances of losing $ are higher > *but valuations are lower to
reward you for taking this risk
Pre-Traction Phases of Progress
Back of the napkin
Basic research
Business plan
Mock-ups
Functional prototype
Minimum viable product
Beta testing
Stealth mode
Getting in too early
Some observations about the market
● 99% of people who write an idea on the back of a napkin never do it
● 95% of people who write a BP never execute on it
● 90% of people who build a prototype never build an MVP
● 80% of people who do a beta test never incorporate
● 95% of people who run a successful beta never raise money
Add this to an 80-90% mortality rate of startups that do raise money
You want the people who are doing it, not the people talking about maybe doing it after you
fund them
Process: Deciding who to invest in
Company Name Rating Comment 2nd Round Comment 6 Months Out
Okay Why you’re not going to invest Raised $250k
Okay Why you’re not going to invest Shut down
Okay Why you’re not going to invest Shut down
Good Why you’re not going to invest Raised $600k
Good Why you’re not going to invest Shut down
Great Why they’re going to win Why you said no Shut down
Great Why they’re going to win Why you said yes Raised $1.5M
Writing Deal Memos
Angels don’t need to write deal memos, but they should
Deal memos force you to crystalize your thinking in the short term
Deal memos should cover:
● Why are you investing
● What you think the risks are
● What you think has to go right for the startup to return money on your investment
Review deal memos every time a given startup raises a new round of funding so you can test your original thesis and see if it
still applies
*For every startup you don’t invest in, write clear notes on the reasons why you passed, review these periodically as well
Saying Not Yet
When you decline a deal:
● Say “not yet” instead of “no”
● Ask founder to add you to their monthly updates
Benefit?
Give founders the ability to prove your wrong but still include you
Saying Yes
Have a solid startup attorney review documents for investing, giving you a brief summary of the deal and calling
out anything they find unusual. Double check that you have pro rata, and ask for that to be added if it’s not there.
Let the founders know how excited you are + that you look forward to getting their monthly updates
Schedule a quick-check in/coffee meeting with the founders a hundred days from then on your calendar + a one-year
follow-up call
Get your documents in order > try to get a copy of the cap table > file away signed docs in Dropbox
What if the round fills up before I commit?
Post-Investment
Following Progress
Ask for monthly updates
● Keep track of them in a Google Sheet
● Read updates and send a short follow-up
● If you don’t get an update from a company for 2+ months check in kindly
Set up Google Alerts for founder, company, and competitors
Use the product
Share the product
Year Two
Year two is when many of the companies you’ve invested in begin to run out of runway
Bad founders are revealed quickly - they are no longer selling a promise, they’re selling their performance
Founders from strong companies will raise another round (likely from an institutional investor) based on their performance
Bridge Rounds
Talk to the founders about what the bridge will accomplish
Have the founders present goals and a vision for what the startup will look like when this new capital comes in
Goals/vision usually come in (3) flavors of *one magical event will save the startup*:
● Savior hire
● New feature
● Partnership
When presented with these strategies, ask yourself:
● Is it true that this one event will change their trajectory?
● Is it possible to reach that event given these additional resources?
Also look at:
● MRR growth - are they on a path to get to profitability?
● For consumer product, growth of users and engagement
Criteria for Follow-On Investments
● What’s changed since your initial investment?
● Who is pricing this round?
● Has the founder sent updates consistently?
● How many of the existing investors are participating in this round?
● Did the startup hit their stated goals over the past year?
● Will they send you a revenue/users since inception chart by quarter, month, week, and day?
● Ask for their monthly profit and loss since inception and talk to their outside accountant
De-escalating Problems
When a founder comes to you with a problem
● What is going on?
● Is there anything else I should know?
● What are you planning to do?
● How can I help
Do not speak for your portfolio company
If the press contacts you, do two things:
1. Forward mail to portfolio company FYI, let me know if you would like me to respond
2. Do not reply to the journalist! Even “I have no comment” can be twisted into a headline.
Never engage the press unless founders themselves ask you to
Different Flavors of Investment Thesis
Bet on people | Zuck, Holmes
Bet on problems | AirBnb, Uber
Bet on delight | Apple
Bet on markets | Pharma, Finance, Social
Bet on technologies | Blockchain, CRISPR
Selling Shares, Making Money
There are three ways to make money
All involve selling the shares you bought to another party down the road
1. IPO: Become a publicly traded company
2. Secondary Shares: Sell off shares to investors/PE pre-IPO
3. M&A:
○ Acquihire
○ Appropriate acquisitions
○ Premium sales *great companies are bought not sold (WhatsApp, Instagram, YouTube)
