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Startup Istanbul 2017 - Asra Nadeem - Angel Investing Basics

Asra Nadeem from Draper University was at Startup Istanbul 2017. She talked to the investors and corporate executives about Angel Investment Basics.

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Startup Istanbul 2017 - Asra Nadeem - Angel Investing Basics

  1. 1. Angel Investing Basics Startup Istanbul
  2. 2. Hi, I’m Asra Partner @ Draper University Ventures Program Director @ Draper University
  3. 3. 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
  4. 4. What is investing?
  5. 5. What is angel investing?
  6. 6. 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
  7. 7. 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)
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. Starting Your Journey
  12. 12. 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?
  13. 13. Deal Flow
  14. 14. Non-Proprietary Deal Flow Definition: Deals in the public domain ● Startup conferences ● Accelerator demo days ● Online (AngeLlist, Crunchbase, SeedInvest) ● Angel groups and/or syndicates
  15. 15. 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
  16. 16. How do you become an insider?
  17. 17. Step 1: Join an Angel Syndicate
  18. 18. 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
  19. 19. 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
  20. 20. 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)
  21. 21. 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
  22. 22. Step 2: Launch Your Brand and Network
  23. 23. 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
  24. 24. 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
  25. 25. 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?
  26. 26. Step 3: Meeting Founders
  27. 27. 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)
  28. 28. 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
  29. 29. 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
  30. 30. The Meeting: Other Topics ● What stage is the product/service ● Market/size of opportunity ● Management team experience/holes ● Use of funds ● Other investors
  31. 31. 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
  32. 32. Deciding Who To Invest In
  33. 33. 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?
  34. 34. Ideal Founder Characteristics Tangibles Domain expertise Startup experience Management experience Operating knowledge Intangibles Passion Integrity (Even) temperament Leadership Commitment Pragmatism Flexibility
  35. 35. 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
  36. 36. Pre-Traction Phases of Progress Back of the napkin Basic research Business plan Mock-ups Functional prototype Minimum viable product Beta testing Stealth mode
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. 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
  41. 41. 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
  42. 42. What if the round fills up before I commit?
  43. 43. Post-Investment
  44. 44. 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
  45. 45. 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
  46. 46. 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
  47. 47. 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
  48. 48. 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
  49. 49. 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
  50. 50. 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)
  51. 51. @asranadeem asra@draperuniversity.com