This document provides an overview of angel investing in India from the perspective of an experienced US venture fund principal. It discusses the types of startups that require funding, basics of venture capital and angel investing, typical investment processes, factors for selecting businesses and teams, common valuations at different stages, term sheet basics, and reasons for rejection. The summary aims to educate potential angel investors on opportunities and considerations for diversifying their investments through early-stage startup funding in India.
2. MY
BACKGROUND
Principal – US
Venture Fund.
4 investments, 2
exits.
Investments
Angel Investments
Entrepreneur
Coupons for India, Malaysia,
Singapore
Still operate with small team
Web Push Notifications
Platform
150+ Countries - [Exited to Awesome
Motive]
Still Running
In Personal Capacity
Founder
Founder
Inactive
Exited/ Partial Exit
Acting GM
Equity Analyst
Software Developer
Pre-Sales
Online Lead Gen Business
[US]
Education
3. AGENDA
Types of Startup & Funding Needs
Basics on Venture Capital
Why & What of Angel Investment
Typical Process of Fund raise
How to Select a Business & Team for Investment
Typical valuation in various stage
Term Sheet Basics & typical term sheet in seed
round
4. TYPES OF STARTUPS
Fast Growth, Funding
Likely Required
Organic Growth, Cash
Flow Positive
Example
Software as a Service,
Consumer Internet
Services Company, Ad
Agency, Taxi Service,
Restaurant
Revenue Spend First, Earn Later Revenue from Operations
immediately
Funding Required May be needed at later
stage for growth
Risk Higher.
[ Over 95% fail]
Moderate
Time Longer time to build a
sustainable business.
Need to commit 10
years ( 5 years min.)
Building a sustainable
business requires shorter
duration
7. VENTURE CAPITAL 101
Venture Capital Funds are professionally
run
Fund life is often 10 years. Means
Investment to Exit is between 5 to 8
years.
Offer Advice, HR management, Office
Space etc.
Typically, Series A onwards or >$1M
investments
They fund 1 in 100 plans
Often company > $1M in revenue at
time of Venture funding
Often the next stage after Angel
8. VENTURE CAPITAL/ANGEL 101
Where do VC get money from?
Why?
• A Pension fund
needs to grow its
funds to match the
needs
• Investment
Diversification
Source of Funds for Venture Capital
9. VENTURE CAPITAL 101
How do VC make money ?
Sell or IPO the Invested Companies
Target 33/33/33 Rule
33 % Success – Most 2x to 10x,
but Superhits can be 50x to 200x
33% Breakeven – 1x to 2x
33% Failure - 0x
1) 0.33x0 + 0.33x1 + 0.33x 10 = 3.66x
3.66 x in 8 years is 18% IRR
2) 0.33x0 + 0.33x1 + 0.33 x 20 = 7x
7x in 8 years is 28% IRR
10. WHY ANGEL INVESTMENT
Investment Diversification
If you have Rs 100 lakh to invest, how much will you allocate to
Angel/Venture Investment
5 to 20% of total assets
Example Asset Allocation US Pension Fund
Private Equity/Venture Capital/ Angel , also known as Alternative
Investments
High Risk, High Return Asset Class
11. TYPICAL ANGEL INVESTMENT
IN INDIA
Invest investor invests between 2 lakhs to 50 lakhs in one
startup.
Expect returns in 5 to 10 years.
High Risk High Return Asset Class. Upto 40% of startups may
return 0.
Expect 3x to 50x return. Unicorn return 100x+
In India an accredited investor should have a net worth of Rs 5
Crores.
Average Return for India Stock Market = 13 to 15%.
Expected Return from Venture/Angel hence is +5 to 10% over
Indian stock market = 18% to 25%
The broader the risk is spread, the better is risk diversification.
Typical Angel Round deal sizes = 50 lakhs to 5 Crore
As Angel investor you are investing in the person/team largely
(more on it later)
12. GOAL OF
AN
ANGEL
INVESTO
R
1. Help startup with Funds
2. Guidance & Mentorship – aka
Smart Money
Help startup with guidance, mentoring &
connections when asked for.
3. Help the company reach next
stage –
Where they can raise Venture Capital
Funds, and pass the baton
13. POSSIBLE WAYS TO EXIT
1. Exit during Series B or later, when Venture funds
buyout the stake.
2. Company Sale – Strategic or Financial Buyer
3. IPO.
4. Company shutdown return partial money or AcquiHire.
14. WHY STARTUPS
FAIL
No Market Need
Founder Conflicts & Team
Run out of cash
Product without Business Model
Ignore Customers
Outfunded/outcompeted
15. TYPICAL ANGEL
INVESTMENT PROCESS
1. Startup Pitch or Introduction
2. Subsequent Discussion to Screen the Idea
3. Lead Investor & Investor group formation.
4. Term Sheet to Founder
5. Due Diligence Process
6. Shareholder agreement Negotiation
7. Deal Close, Fund transfer
8. Monitoring the Deal/Company & Helping
9. Exit the company
16. DEAL FLOW
• Creating a flow of good companies in an angel group or
as an individual is key differentiator for performance.
Art of creating Inbound Deals
•As an angel, we add value at higher risk/reward, but our
ability to influence with capital is limited (vs. a VC fund).
• The best value one can offer is in operating level help,
or network connections.
• Pick your niche carefully, and then help entrepreneurs &
deals will come.
20. KEY ELEMENTS OF A BUSINESS
Customer Pain Point/Problem you are
solving
What is the Pain Point you are solving?
Is it 10x better than other solution.
Team
Differentiator or Competitive
Advantage
What is your differentiator? IP or Moat
Barriers to Entry
Scalability
21. WHAT DO INVESTORS LOOK
FOR ?
The Team [ 40%]
Integrity of Founders, Track Record
Complementary skills
Skin in the game of Founder
Investible Business
Market Size, High Growth
Product & Technology
Marketing & Sales Execution
Differentiation & Moat
Scalable
Clean Structure
22. TYPE OF SEED INVESTORS
Individuals
Friends/Family
Entrepreneurs/ Industry leaders
Groups
Networks
Incubators/Accelerators
Infrastructure only
Accelerator
Seed Funds
Institutional Funds -
Individual LP funds –
Other Funds
PE funds, Special Situation Funds
Hedge Funds
How do you get a list of Investors
•Your Network
•Angel.co/Linkedin/Conference/News
Portfolio Company introductions are valued
23. WHEN ?
Idea in a slide
Prototype Ready
Customer Traction
Paying Customers
Product-Market Fit
Multiple customer segment
Business Model Fit
24. HOW MUCH ?
Raise Enough to reach the next milestone
What is the next Milestone ?
Venture Round [ $1M and more]
Institutional Angel Round [ $500k and less ]
How do you know you are ready for
Venture Round
Institutional Angel Round
25. MILESTONES, VALUATION AND
RAISE (OLD)
Milestones Stage Age Revenue Pre-Money Raise Amount From Whom
1 Company Started - Incubation 0 to 0.5 yrs 0 1Cr 5 - 20 L Self, Friends, Family,
2 Beta Product Launched 0.5 to 1 yr
Small amount 1.5Cr to 3 Cr 5L - 50 Cr
Self, Friends, Family, Individual
Angels, Accelerator
B2C : Product used by real customers, Few
paying customers
B2B: Good customer Pipline, 1-2 customers in
trial
3 Stable version 1 - 1.5 yr10 - 15L /yr 3 to 5 Cr 10L - 1 Cr
Self, Accelerators, Seed Funds,
Individual Angels
Regular Customer growth
4 Product-Market Fit Found 1 - 2 yrs 40 - 1Cr/yr 5 to 10 Cr 50L - 2Cr
Individual Angels, Seed Funds,
Few Venture firms
Strong and Consistent Customer growth
Clear product and revenue for next 2-3 yrs
5 Business Model Fit found 1.5 - 3 yrs
2Cr - 5Cr/yr 20Cr - 50 Cr 10Cr - 20Cr Venture Funds
Clear growth Path for next 3 - 5 yrs
Consistent growth in paying customers
Potentially breakeven
26. WHO TO RAISE MONEY FROM
Depends on the stage
Some thought processes
Smart Money > any money
Any money > No money [ If can’t bootstrap]
Institutional Money > Individual money
When given a choice of investors, choose based on
(1) Chemistry with investor,
(2) Willingness to help you,
(3) relevant connections/domain knowledge
27. UNDERSTANDING
VALUATION
Pre-Money Valuation + Invested amount
= Post Money Valuation
Investor invests 1 crore at 4 crore
valuation
Post Money = 4 Cr + 1 Cr = 5 Cr
• Investor Stake = What is the right answer?
A) 25% (1Cr/4Cr)
B) 20% (1Cr/5Cr)
Typical Valuation Models apply for revenue companies
Revenue Multiple
DCF
29. TERM SHEET BASICS –
ECONOMIC RIGHTS
Liquidation Preference – Defines how cash is
distributed on liquidation to preferred stock-
holders vs. common stockholders.
Participating vs. Non-participating.
Cap vs. No Cap
Participating
Preference 2.0x
Non-Participating
Preference 2.0x
Investment Amount $5M $5M
% Stake 30% 30%
Equity Value in Sale $20M $20M
Investor’s share 2 x5M +30% x10M =
$13M
Max of {2x5M = $10M
, 30%x 20 = $6M } =
$10M
Management share $7M $10M
30. TERM SHEET BASICS –
ECONOMIC RIGHTS
Anti-Dilution
Clause comes into play when there is a down-round
and the earlier round investor can to protect his stake
Down –Round = Lower valuation in future rounds.
Series A = $1/share, Series B = $0.5/share
Two Types - Full Ratchet & Weighted Average
Full Ratchet – Series A is also brought at = $0.5/share, conversion rate
2:1, i.e 1x new shares issued. Less common
Weighted average - More common.
31. TERM SHEET BASICS -
CONTROL INTERESTS
Tag-Along Rights
Management agrees not to sell without giving investors a right for pro-rata
participation in sale.
If Promoters are selling some part of their shares in next round, the minority
investors also have the same rights.
Right of First Refusal
Existing investors have first right to buy any shares transferred (new
fund raise or buyback)
At-least pro-rata participation
Board Composition
Voting (Director)
Non-Voting positions (Observer, Advisory)
Investor Seat vs. Majority by founders
Investor Rights
Reports, Appointment of Auditors (internal & external)
32. OTHERS
Legal & Accounting Fees
Mostly all investors put the burden of the legal
fees on the startup Can negotiate some overall
caps
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
33. CONVERTIBLE NOTE VS.
STRAIGHT EQUITY
Solves for Mismatch in expectation in Valuation &
Investor Expectation
SHA negotiation can take longer
Solution:
Deferred Valuation to next stage of funding
20% discount to Series A
Convertible Preference Shares (India Company law), compulsory
converts to Equity
Reference - https://www.100x.vc/isafe
34. TYPICAL TERMS IN
SERIES AA TERM SHEET
Liquidation – 1.0 participating or 1.5– 2.0x
non participating
Anti-Dilution – Weighted Average / Full
Ratched (common in India)
Tag Along/Drag Along
Board Seat + Board Observer
Valuation
Founder Vesting – 3 to 4 year
35. NON-OBVIOUS
REASONS FOR
REJECTION
Structure/Others
Cap-table – Dead equity, Too much dilution
People Related
Founder and Team Chemistry
Reference Checks/ Litigation Threat
Coachability
Single Founder
Location
Market
Portfolio Company Competition
Bias regarding a space
36. SUMMARY
Angel investing is a great way of investment
diversification, and for you to benefit from the India’s
startup growth.
It is a great way to help the startups
Remember it is high risk/high return category and
upto 40% may fail. You need to be patient for 5 to 8
years to get a return.
Typical asset allocation for Angel/Venture is 5 to 15%
Angel investment is mainly an investment in the
team + large market size.
Being able to help startups, through connects, or advisory, can be
big differentiator for you as an angel.
37. QUESTIONS?
Resources
Book : Angel Investing: by David Rose
Naval Ravikant – Founder AngelList -
https://nav.al/angel-1
Series AA Term sheet – Techstars, YC
Angel.co - List of Angels
Entrepreneur Pitchbook – How to create
one by Canaan.
http://www.slideshare.net/canaanpartner
s/canaan-entrepreneur-pitchbook-
presentation