Angel Funding Made Easy - Shanti Mohan, Founder @LetsVenture

© Copyright LetsVenture.In All rights reserved
Shanti Mohan
Founder & CEO
shanti@letsventure.com
@letsventurein

Agenda
 State of the Angel Investment in India
 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 (IAN, Mumbai Angels, Hyderabad Angels,
Bangalore Angels) etc contributing to guess estimate
of 30-35% of the deals
Median investment value for Seed/Angel investment:
1.5 CR
 Roughly 50 deals between Dec-Mar 13
 Rise of the institutional first cheque (Blume, Kae,
firstcheque, Harvard, 500startups etc)
 Start of incubators

State of seed/Angel
Investments
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

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
10
9
8
7
6
5
4
3
2
1
0
0 5 10 15 20 25 30 35
Money Raised (CR)
Valuation Multiple
Bridge Round
Series A

Valuations Jump
Valuations can jump by
10
9
8
7
6
5
4
3
2
1
0
0 5 10 15 20 25 30 35
Money Raised (CR)
Valuation Multiple
Bridge Round
Series A
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 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
1CR – 4CR
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
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
Money Raised (CR)
Annual Revenue (CR)
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
0 1 2 3 4 5 6
Series1

Pre-Money
(CR)
Annual Revenue (CR)
14
12
10
8
6
4
2
0
0 1 2 3 4 5 6
Series1

% Dilution
Annual Revenue (CR)
40
35
30
25
20
15
10
5
0
0 1 2 3 4 5 6
Series1

Typical Dilutions
1CR – 4CR
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
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

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
Financial DD
Listen to
Pitches
Verbal
Commitment to
Invest
Term Sheet SHA Closure
Legal DD
Fix Issues
Drop
All Ok?
N Y
Issues too
serious?
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 = 5CR @ 20CR pre-money
Number of shares before series A = 1M
Stake 20% [5CR / 25 CR]
Number of Shares
250K
Issued
Price / Share 200 INR [5CR /
250K]

Amount Invested = 5CR @ 20CR pre-money
Investors hold 20% stake
Company exited at 50CR
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

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!

Angel Funding Made Easy - Shanti Mohan, Founder @LetsVenture

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