tpr's Profile
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  • Train Asked on September 7, 2015 in Due Diligence.

    An equity round refers to deals that are priced out, have a valuation, have specific share prices and when you invest, you know how much equity your investment is securing in the company.

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  • Train Asked on September 7, 2015 in Due Diligence.

    A convertible note is basically a legal instrument that helps startups and investors avoid certain requirements that come with a priced (equity) round, such as setting a valuation. The typical components in a convertible note crucial to know are:

    Discount Rate: Discount rate refers to the discount percentage you will get when the company you invested in raises a subsequent round of funding that qualifies your debt to convert into equity in that round.

    Interest Rate: Interest rate refers to the interest you will be accruing [most likely annually] from the time you invest to the time your debt note converts into equity.

    Cap: A cap refers to the highest valuation your note can possibly convert, which gets triggered when a bone fide round of capital occurs.

    Bone Fide Round of Capital: A bone fide round of capital refers to an event, specifically a capital raise above a certain figure that would trigger the debt to convert into equity automatically.

    Maturity Date: A maturity date is a specified future point in time in which the note becomes due to investors.

    Turning theoretical into practical

    Say you invested $10K in startup X on January 1st, 2013, which has convertible note terms giving an 8% interest, 20% discount and a cap of $5 million. In addition, the note specifies that if the company raises more than $1.5million, your debt automatically converts into equity in at that round’s valuation. Lastly, the maturity date of that note is January 1st, 2015.

    One year (to the day) passes and Startup X raises their next round of capital of $3million at a valuation of $9million. What does that mean for you? That means your $10K investment is now worth $10,800 and you are entering the equity round at a valuation of $4million instead of $9million because of the 20% discount, and the $5million valuation cap. Therefore, when your $10,800 converts into equity, you will own .27% equity in Startup X.

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  • Train Asked on September 7, 2015 in Angel Groups.

    Many Angel Groups require their members to commit to a minimum annual investment amount  in companies that are screened by the group every year. This investment is normally structured via investment vehicles that invest in the startup or by having the individuals investing directly in the company.

    Additionally, members of these groups often have the following obligations:

    • Annual membership fees
    • Attend networking events
    • Participate in pre-screening sessions of companies seeking capital that are looking to get in front of the membership
    • Involvement with onsite demo days where pre-screened companies pitch to the entire membership
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  • One important disadvantage of being a member of an Angel Group relies on the lack of diversification. Companies that seek capital from these groups receive in my experience checks with a median size of $20K. Having in mind that startup companies fail 90% of the time, it is very hard to pick winners reason. The only way to guard against this (unfortunate reality) is to hedge your bets by diversifying investments into a basket (multiple) of startups.

    Diversification is critical, as the rule of thumb of successful angel investor portfolios is that 1/3 of companies will run out of money and die, another 1/3 will break even, and the rest will provide returns ultimately covering the losses from the companies that failed.

    Another component that makes it hard for Angel Groups to scale is the due diligence process. Being a very manual process with a median time of 20 hours invested on each deal, this process really limits the amount of deals that can be reviewed per month as the HBAN study from 2007 noted.

    In addition, Angel Groups are very much focused on the location where they are based, which makes it very difficult to come across companies that are based in other regions. Now with online platforms you have the opportunity to source deals from all over the world.

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  • Train Asked on September 7, 2015 in Other.

    To add some context around angel investing, according to the Angel Capital Association, there are over 330 Angel Groups in the United States and Canada that are active within the startup community. Angel Groups in the U.S. alone were responsible for investing over $228M in a total of 170 deals during Q1 in 2014. Transaction details can be found on CB Insights.

    The 10 most active Angel Groups in the U.S. according to the Q1 2014 HALO report are: Alliance of Angels, Angel Investor Forum, Central Texas Angel Network, Desert Angels, Houston Angel Network, Launchpad Venture Group, Robin Hood Ventures, Sand Hill Angels, Tech Coast Angels and Wisconsin Investment Partners.

    Moreover, the Halo Report, published a study stating Angel Groups particularly liked startups operating in the industries of internet (37.3%) and healthcare (19.6%). Outside of those two leading verticals, angels backed mobile & telecom (14.6%), industrials (5.7%), energy & utilities (1.9%), software (1.9%), and other industries (19%).

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  • Train Asked on September 7, 2015 in Presentation.

    This means each individual angel is either making over $200K in each of the two most recent years (or joint income with a spouse that exceeds $300K) or that they have $1M in assets excluding their primary residence. With this in mind, the number of accredited investors is just 1% of the US population.

    In essence, we could arguably state that people qualifying under the SEC’s current definition of accredited investor are very busy individuals with a schedule that can hardly accommodate additional activities such as the ones listed above that are required in order to be a member of an Angel Group.

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  • The oldest platform in the startup investing arena is not even 2 years old. However, with the advent of online platforms, angel investors will not have to take time out of their busy schedules anymore in order to participate in the required activities that are established by joining an Angel Group. Angels will now have the chance to navigate and source deals from the comfort of their home or from anywhere in the world. This includes interacting with other users online for crowdsourcing the due diligence process via “deal rooms” or online groups that could be established on some of these sites.

    Furthermore, with platforms like Onevest there is no such thing as a minimum investment to become a member and membership is completely free.

    The secret sauce of these sites is diversification. As an investor, now you can invest that same $50K median investment into 5 different startups, increasing your chances of finding the winners. This is a completely different approach in comparison to the offline investing norms,  where investors are required to invest minimums that range anywhere from $25K to $150K for any single investment opportunity.

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