Okay, so now you're all set to invest in the startups that’s right for you. But how can you increase your chances of success? We recommend carrying out thorough:
A. Due Diligence
Most experienced Angels would state that their least successful investments occurred where they failed to undertake rigorous due diligence (DD). Carrying out a thorough DD mitigates your investment risk by a large extent. But due diligence takes time, expertise and knowledge, so can outsource it to professionals like us.
B. Valuation
You have to be sure that you're not paying too much for the equity stakes that you're getting. Therefore, it’s a good practice to carry out a proper valuation assessment of the startup using some established methods. Some of the methods include:
Discounted Cash flow method: Where you find out the present value of the startup's expected future cash flows
Comparable company analysis: Where you study the amount of funds raised, the percentage of stakes diluted, the scale of operations of the startup's peers, and EV/R or EV/EBITDA multiples to arrive at a comparable value.
Venture Capital method: Where you find out the present value of the startup's expected exit valuation a few years down the line, after adjusting for the expected stake dilution during the same period.
Finally, the underdog- the Scorecard method: In our experience, this method reveals a lot about the qualitative aspects of a startup, that goes beyond the numbers. Parameters like strength of the founding team, size of the market, competition and technology are often missed while valuing a startup, but this method makes you appreciate these aspects of the business too, and accordingly value it. In fact, you can use it right at the outset of getting an opportunity, not to find the value, but to get a better sense of the strengths of the startup.
You can also rely on consultants like us, to do this assessment for you. However, to make things a bit easier from the get-go, we ran some calculations. We collated the amount of funds raised and the percentage of equity diluted by the Indian Unicorns during their pre-seed and seed rounds to come up with some reliable benchmarks. Here's what we found:
The Unicorns raised an average of ₹1.2 Crore in their pre-seed/seed round from Angel Investors.
In the process, they diluted 10-15% of their equity.
So, if you're investing ₹20 Lakhs in a startup, you can target an equity stake of 1.67%-2.5%.
One last piece of advice: In the end, the valuation that you arrive at is nothing but a bargain between you and the startup. Now, even though your target will be to obtain maximum stake in return for your investment, you have to keep in mind that the startup will have to raise money multiple times more in order to make it large and in the process, it will also have to dilute a lot more. Which means, the more equity you take, the lesser of it will be available with the founders to dilute further and therefore, it will become increasingly difficult for them to raise funds. So, before you bargain for more, think long term.
Find answers to other questions relating to Angel investing in India:
This article is a part of the Jun'24 edition of our Startup Newsletter. Here's the complete publication:
