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Angel Investments Made Easy
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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
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Agenda
v State of the Angel Investment in India
v Angel Investments 101
v What is Angel Investment? Why should you do it?
v How do you make a return?
v How do you evaluate a startup?
v Deal Dynamics
v Valuation
v Process
v Primer on Term Sheets / SHA
v How do you get started?
v Syndicates on LV
v Pitches with analysis (Post Lunch)
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Angel Scenario in the USA
Source: http://online.wsj.com/news/articles/
SB10001424052702304402104579149390398554348
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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
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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
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Funding ~200 startups / year
Source:
ventureintelligence
Unconfirmed reports say ~500-700 angel investors in India
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Why Angel Invest?
v Support Entrepreneurship
v Leverage your knowledge and connections
v Develop an alternate asset class
v Make Money
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Who is an Angel Investor
v Strong Passion for entrepreneurship
Ø It is nearly a pseudo entrepreneurship
v Bring value to the startups
v Anyone with Surplus capital which can be
invested
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What returns can you expect?
v 2/3 of startups fail world wide
v 75% of the angel investments do not make
returns
v Very high risk / High Return Game
v India, still a young eco-system. Not many data
points…
Ø Some reports show a return of 3x – 22x
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How do you exit?
v Since you own equity in the venture, only
when you sell equity to someone else, you
make money
Ø You do not make money on dividends / profit
share
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How do you exit?
v Subsequent Rounds of Funding
v M&A
v Promoter Buyback
v IPO
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Typical Curve
0
1
2
3
4
5
6
7
8
9
Valuation
Year
Seed
Round
Angel
Round
Series A
Series B
Series C
Bridge
Round*
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Typical Curve
0
1
2
3
4
5
6
7
8
9
Valuation
Year
Seed
Round
Angel
Round
Series A
Series B
Series C
Return*
Bridge
Round*
*20-25% Discount from the round valuation
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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
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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
ValuaFons
can
jump
by
2-‐3x
in
a
Bridge
Round
5x-‐8x
in
a
Series
A
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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
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Milestones & 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
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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*
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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
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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*
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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
Evaluate whether the
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.
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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
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Other Factors
v Is it a “Me too” business?
v Do they have an edge in the market place
which is defendable (Entry Barrier)
v Is the market size big enough for them to
keep scaling?
v Are they focused on profitability or growth?
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Key is to develop one or two specific
points why will this startup succeed
(Investment Thesis)
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When not to Invest
v Exit Discomfort
v Founder Discomfort
v Business Discomfort
v Structure Discomfort
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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
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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%
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Understanding Valuation
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
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Understanding Valuation
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
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Understanding Valuation
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
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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
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Valuations – Recent Examples
Pre-Money(CR)
Annual Revenue (CR)
0
2
4
6
8
10
12
14
0
1
2
3
4
5
6
Series1
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%Dilution
Annual Revenue (CR)
Valuations – Recent Examples
0
5
10
15
20
25
30
35
40
0
1
2
3
4
5
6
Series1
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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%
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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
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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
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Convertible Debt
v Base Valuation – Minimum Discount
v Monthly Discount
v Cap on the maximum discount
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The Funding Process
Pitch to
Investors
Verbal
Commitment
to Invest
Term Sheet SHA Closure
Legal DD
Fix Issues
Financial DD
Drop
Issues
too
serious?
YN
All Ok?
Y
N
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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 Economic & Control Interests
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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
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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
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Example
v Amount Invested = 5CR @ 20CR pre-money
v Number of shares before series A = 1M
Stake 20% [5CR / 25 CR]
Number of Shares Issued 250K
Price / Share 200 INR [5CR / 250K]
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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
v Amount Invested = 5CR @ 20CR pre-money
v Investors hold 20% stake
v Company exited at 50CR
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Economic Interests
v Future Participation in Financing / Sale
Ø Right of First Offer – Preferred Stock holders get
the first right to participate.
Ø Exit Provisions
v Waterfall model
v Strategic Sale -> IPO -> Drag Along
v Drag Along before the time out above a certain value
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Control Interests
v Restriction on Founders Shares
Ø Vesting Curve
Ø Lock-in
Ø Right of First Refusal
Ø Tag Along
v Board Seat
Ø Reserved Matters
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Others
v Legal & Accounting Fees
Ø Mostly all investors put the burden of the legal
fees on the entrepreneur
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
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Getting Started
v Set aside a “forgettable” corpus
v Make a portfolio of ~10 investments over 2-3
years and possibly ~20+ over 4-5 years
v Lean on experienced angels to get started with
v Invest in your area of expertise
v Help the startup without being over bearing
v Meet the founders, spend time with them
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Investment Thesis
v Your theory of investment
v Examples
Ø Product Companies with differentiation and
potential to go global
Ø Both niche & mass products / services startups
with potential for emerging and developed
markets
Ø Invest in ventures which work towards bringing
a change in the social sector
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Lead Investor
v Typically an investor leads the team in a
syndicate. A lead investor has the following
major tasks
Ø Setting up the terms of the deal
Ø Help Build a syndicate
Ø Possibly take a board seat and help run the
company
Ø Facilitate next round of funding
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Post Deal Management
v Good to build a rhythm of a monthly
review / quarterly report
v Provide them help without being over
bearing
Ø Exercise patience when startup founders are not
taking your suggestions
v Open Doors
- 67. 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
- 68. DISCOVER
Efficient
Startup
Listing
Comprehensive
Investment
Ready
Profiles
Investor
Listing
with
Interests
&
Portfolio
SYNDICATE
1 Syndicate closed in 7 days
5 Syndicates closed in total
COMMITMENT-TO-CLOSURE
5 Complete
- 69. DISCOVER
Efficient
Startup
Listing
Comprehensive
Investment
Ready
Profiles
Investor
Listing
with
Interests
&
Portfolio
SYNDICATE
First Syndicate closed in 7 days
5 Syndicates opening
COMMITMENT-TO-CLOSURE
5 Complete
- 70. Thank You!
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Quick Tips
v Get started by participating in syndicates
v Network with experienced investors
v Invest in the area of your expertise
v Develop relationships with the entrepreneurs
v Allocate corpus
v When in doubt, do not invest!
v In the end, go with your gut!