Primer on angel investing 1000 angels

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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

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)
ValuationMultiple
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)
ValuationMultiple
Bridge Round
Series A
Valuations can jump by
2-3x in a Bridge Round
5x-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 Revenue
Raise
Amount
From Whom
1 VentureLaunched 0 – 0.5 0 5 – 25L Self,Friends,Family
2 BetaProductLaunched
B2C:Productusedbyrealcustomers,Few
payingcustomers
B2B: Good CustomerPipeline,1-2customersin
trial
0.5–1yr Smallamount 25L-75L Self,Friends,Family,Individual
Angels,Accelerators
3 Stableversion
RegularCustomergrowth
1 – 1.5yrs 10– 15Lper
year
50L – 1.5Cr Self,Accelerators,SeedFunds,
IndividualAngels
4 Product-Marketfitfound
Strong& ConsistentCustomerGrowth
ClearProduct& Revenuefornext2-3yrs
1 – 2yrs 20– 50Lper
year
1CR– 4Cr IndividualAngels,SeedFunds,Few
Venturefirms
5 BusinessModelFit found
CleargrowthPathfornext3-5yrs
Consistentgrowthinpayingcustomers
Potentiallybreakeven
1.5– 3yrs 2Cr– 5Crper
year
3Cr– 20Cr VentureFunds
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
MoneyRaised(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

%Dilution
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
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%
SeedInvestors 0.0% 0.0% 24.0% 21.0% 15.8% 15.2% 11.4%
InitialVCInvestors 0.0% 0.0% 0.0% 0.0% 25.0% 24.1% 18.1%
LaterVCInvestors 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 25.0%
EarlyEmployees+ 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
Drop
Issuestoo
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
Issued
250K
Price / Share 200K [5M / 250K]

Example
Liquidation
Preference
Basic Share (CR) Participating Share (CR) Total (CR)
Simple
Prorating 10M [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 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
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

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