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Raising Seed/Angel FundingRaising Seed/Angel Funding
Ravi Trivedi
[email protected]@trivediravi
23/Feb/2012
My BackgroundMy Background
Ravi Trivedi�Principal at Southeast Interactive technology funds, early stage
venture fund in North Carolina, US
�Moved to Bangalore in July 2011
�Angel Investor in India startupsAngel Investor in India startups
�Experience running e-commerce company. Digital Marketing, and Customer Acquisition.
�Equity Analyst covering technology stocks
�Software Development and Product Experience. B2B Marketing.
�Author –Web Services Security
�MS - IISc, Bangalore, MBA - Duke University, Fuqua, IIMB PGSM coursework
AgendaAgenda
� Few First Thoughts
� Building a Investible Business
� What do investors look for?
� Type of Seed investorsType of Seed investors
� When/ How much to raise? Who to raise
� Typical valuation in various stage
� Term Sheet Basics
� Typical term sheet in seed round
First Things FirstFirst Things First
� Lean Startup.
� Focus on MVP
� Bootstrap
� Focus on Building a Business
◦ Investors will find you, once you have traction
� Raising funds based on a slide-deck (idea only) , is a rarity. (Exceptions exist)
Building a business?Building a business?
Building a Building a InvestibleInvestible BusinessBusiness
Key Elements of a BusinessKey Elements of a Business
�Customer Pain Point/Problem you are solving�What is the Pain Point you are solving?
�Differentiator or Competitive Advantage
�What is your differentiator?
�Barriers to Entry
�Scalability
�Team
What do Investors look for ?What do Investors look for ?
�The Team
�Investible Business
�Big Market
�High Growth
�Differentiated
�Scalable
�Clean Structure
Type of Seed InvestorsType of Seed Investors
� Individuals◦ Friends/Family
◦ Entrepreneurs/ Industry leaders
�Groups◦ Networks
� Seed Funds◦ Institutional Funds -
◦ Individual LP funds –
�Other Funds◦ PE funds, Special Situation
Funds◦ Networks
� Incubators/Accelerators◦ Infrastructure only
◦ Accelerator
Funds
◦ Hedge Funds
� How do you get a list of Investors•Your Network•Angel.co/Linkedin/Conference/News
� Portfolio Company introductions are valued
When ?When ?
� Idea in a slide
� Prototype Ready
� Customer Traction
� Paying Customers� Paying Customers
� Product-Market Fit
� Multiple customer segment
�Business Model Fit
How Much ?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 ]�Institutional Angel Round [ $500k and less ]
�How do you know you are ready for
�Venture Round
�Institutional Angel Round
Milestones, Valuation and RaiseMilestones, Valuation and Raise
Who to Raise FromWho to Raise From
� Depends on the stage
� Some thought process
�Smart Money > any money
�Any money > No money
�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
Understanding ValuationUnderstanding 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)� A) 25% (1Cr/4Cr)
� B) 20% (1Cr/5Cr)
�Typical Valuation Models apply for revenue companies
�Revenue Multiple
�DCF
Dilution over lifecycleDilution over lifecycle
Term Sheet Basics Term Sheet Basics –– Economic RightsEconomic Rights
� Liquidation Preference – Defines how cash is distributed on liquidation to preferred stock holders vs. common stock holders.
� Participating vs. Non-participating.
� Cap vs. No Cap
Participating Preference 2.0x
Non-ParticipatingPreference 2.0x
Investment Amount $5M $5M
% Stake 30% 30%
EquityValue in Sale $20M $20M
Investors share 2 x5M +30% x10M =$13M
Max of {2x5M = $10M , 30%x 20 = $6M } = $10M
Management share $7M $10M
Term Sheet Basics Term Sheet Basics –– Economic RightsEconomic 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�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.
�Drag-Along Rights�Investors can force the sale of the company
Term Sheet Basics Term Sheet Basics -- Control InterestsControl Interests
�Tag-Along Rights�Management agrees not to sell without giving investors a right for pro-rata participation in sale
�Right of First Refusal �Existing investors have first right to buy any shares
transferred (new fund raise or buyback)
Atleast pro-rata participation�Atleast 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)
OthersOthers
�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 �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
Convertible Debt vs. Straight EquityConvertible Debt vs. Straight Equity
�Deferred Valuation to next stage of funding
�Discount on valuation from next round
� Few individuals/firms do that in India
�Legal aspects
Typical Terms in Series AA term sheetTypical Terms in Series AA term sheet
� Liquidation – 1.0 – 2.0x participating or 1.5– 2.0x non participating
� Anti-Dilution –Weighted Average / Full Ratched(common in India)
� Tag Along/Drag Along� Tag Along/Drag Along
� Board Seat + Board Observer
� Valuation
� Founder Vesting – 3 to 4 year
NonNon--Obvious reasons for Obvious reasons for rejectionrejection
� Structure/Others
�Cap-table – Dead equity, Too much dilution
� People Related
�Founder and Team Chemistry
�Reference Checks/ Litigation Threat�Reference Checks/ Litigation Threat
�Coachability
� Single Founder
�Location
� Market
�Portfolio Company Competition
�Bias regarding a space
Questions?Questions?
Resources
� Angel.co - List of Angels
� Series AA Term sheet –Techstars, Mobistac� Series AA Term sheet –Techstars, Mobistac
� Entrepreneur Pitchbook – How to create one by Canaan. http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation
� Example Pitch Deck – Mint.com Deck -
http://www.slideshare.net/hnshah/mintcom-prelaunch-pitch-deck
Weighted Average Anti Dilution ExampleWeighted Average Anti Dilution Example