Angel Investments Made Easy

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Manish Singhal Founder & CEO

[email protected]


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


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)


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


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


Understanding Investments


Understanding Investments

Source: Wikipedia


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


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


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


Bridge Round*

3CR – 20CR

5-25L

25-75L

50L-1.5CR

1CR – 4CR

50L-1.5CR


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


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


But Remember!

Institutional Money > Individual money

Smart Money > Any money

Any money > No money


What do Investors Look for?


Key things Investors look for

v Business (Not an idea!)

v The Team

v Risk Management Plan

v Clean Structure & Governance

v Exit Plan


What makes a business?


What makes it– bigger, better & may be investible…


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


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!


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


Exit Plan

v Subsequent Rounds of Investments

v M&A

v IPO!

Key is to talk about the intention of providing Investors an exit!


Connecting with the Investors

v Find your anchor angel

v Ask for Introductions

v Build a rapport

v Interact - Engage


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!


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


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%



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



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



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


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


Convertible Debt

v Base Valuation – Minimum Discount

v Monthly Discount

v Cap on the maximum discount


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


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


% 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


Typical Dilutions

0 1 2 3 4 5 6 7 8 9

Seed Round

Angel Round

Series A

Series B

Series C


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

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


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


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


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


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


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


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


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%


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


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)


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


SYNDICATE 1 Syndicate closed in 7 days 5 Syndicates closed in total


DISCOVER


SYNDICATE First Syndicate closed in 7 days 5 Syndicates opening



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


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!

© Copyright Saarthi Integrated ConsulBng LLP. All rights reserved

www.LetsVenture.com

letsventurein

[email protected]

@letsventurein


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


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

Angel Investments Made Easy

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