Angel Investing Process

In the last article, we covered the topic, ‘What about crowdfunding platforms?’

In this article, we’ll cover the topic of the 'Angel investing Process’. The angel investing process is crucial for making informed and successful investments in startups. Each step—finding, screening, pitching, due diligence, negotiating, closing, and syndicating—ensures that investors thoroughly assess potential ventures, mitigate risks, and maximize returns. By meticulously following this process, investors can identify promising startups, evaluate their commercial viability and legal standing, secure favorable terms, and build diversified portfolios. This structured approach not only protects the investor's capital but also provides startups with the support they need to thrive.

As always, we’ll try to explain this using a story. Let’s begin!

Meet Raj, a successful angel investor mentoring new investors on the intricate process of angel investing. One day one of his mentees Akshay asked him a question. Akshay had a knack for learning newer strategies to invest but the one thing he couldn’t get his hands on was the process of Angel investing which according to many experts was very complex & time-consuming. Akshay was firm on learning the art of Angel investing and as a precursor to that he had to invest his time in learning the process of Angel investing. Raj decided to help him by narrating a story:

“Dhruv was an aspiring angel investor living in the city of Mumbai. Since college days he had been fascinated by stories of Angel Investors making big returns. His aspirations got wings when the reality show Shark Tank India went live where he saw Sharks investing in high-potential startups. Although he always wondered what happens once Shark offers a deal. Is the deal complete or are there more processes involved?

Dhruv got in contact with Rajesh, an experienced investor through Linkedin, and sought his guidance on the issue so that he too could enter the world of Angel investing knowing fully well what to expect. Dhruv excitedly agreed to subscribe to the Planify Angel Investing Masterclass being taught by Rajesh. During his interaction with Rajesh, Dhruv inquired about each step from finding promising startups to closing the deal, providing a comprehensive guide for aspiring angels. Rajesh guided him through the process which was as follows:

Finding and Screening:

The first step Rajesh guided him was to identify the correct startup that met his investment criteria. Dhruv began his journey by identifying potential startups through networking, industry events, and online platforms. These were startups that ticked all the checkboxes of his investment criteria.

Once he prepared a list, Rajesh directed Dhruv to begin screening these startups, evaluating their business models, market potential, and founding teams to create a shortlist of viable candidates. The process included thorough research on the market size, product differentiator or USP and ultimately conducting a SWOT analysis.

Pitch and Commercial Due Diligence:

Next, Rajesh asked Dhruv to attend pitch sessions where startups present their ideas. Rajesh also advised that during these pitches, he should focus on commercial due diligence, assessing the startup’s team composition, business model, market size, competition, and most importantly revenue model. Try to have a 1-on-1 session with the founding team, understand their mission and vision, the philosophy they follow, their background, etc. Simultaneously, he needs to evaluate the startup's valuation, ensuring it aligns with market expectations.

Term Sheet Negotiation:

Once Dhruv is interested in a startup after completing the vetting process, Rajesh directs him to convey his decision to invest in the company and post that the Company will prepare a term sheet which has to be negotiated.

Now what does the Term sheet include? Quite a few things honestly.

For starters the Term sheet outlines the investment terms, valuation, and equity stake. This document sets the stage for more detailed due diligence and legal processes in future.

Legal and Financial Due Diligence:

Post-signing of the term sheet, Rajesh advises Dhruv to delve into legal and financial due diligence. This includes examining the startup's financial statements, legal standing, and intellectual property.

Rajesh explains why Legal & Financial Due Diligence is important.

Legal and financial due diligence is vital in angel investing as it ensures a thorough evaluation of a startup's legal and financial health before committing funds. This process uncovers any hidden liabilities, verifies the accuracy of financial statements, and ensures that the company's legal standing is solid, protecting the investor from potential risks and legal issues. It also confirms that the startup's intellectual property is secure and that all regulatory requirements are met, ensuring a sound and informed investment decision.

1. Definitive Agreements and Completion of Conditions Precedent (CPs):

Next step, post-financial & legal due diligence completed, Dhruv moves on to drafting definitive agreements, which legally bind the investment terms. Both parties work to fulfill conditions precedent (CPs), such as regulatory approvals or specific milestones, before finalizing the investment.

2. Closing the Deal and Documentation:

Once Conditions Precedent (CPs) are met, Dhruv closes the deal by signing the definitive agreements. Rajesh at this point advised Dhruv to undertake Detailed documentation which would be crucial at this stage to ensure all terms are clearly outlined and legally enforceable.

At this point, Dhruv raised a doubt. During his course of interaction with budding investors at Seminars, he was repeatedly offered to become a part of Syndicates which might make it more flexible for him to make large investments and earn handsome returns. He decided to inquire about this from Rajesh. Rajesh explained to him what a syndicate means in the world of Angel Investors.

3. Syndicating the Investment:

Rajesh explained “Syndicating investments in angel investing involves multiple investors pooling their resources to fund a single startup. This approach allows investors to participate in larger deals and diversify their risk while providing startups with more substantial financial support and a broader network of expertise. Syndicates typically have a lead investor who conducts due diligence, negotiates terms, and manages the investment on behalf of the group. This collective effort enhances the investment’s potential for success by combining the knowledge, experience, and financial strength of multiple investors.”

4. Negotiating and Putting Money in the Bank:

Finally, Rajesh advised Dhruv to negotiate any last-minute details and transfer the investment funds to the startup’s account. The money in the bank signifies the official start of the partnership, where Dhruv begins providing mentorship and strategic guidance.

Dhruv’s story illustrates the detailed and structured approach required in angel investing. From finding and screening startups to closing deals and syndicating investments, each step is crucial for making informed decisions and fostering successful ventures. For aspiring angel investors, following Dhruv's methodical process ensures a balanced and effective investment strategy in the dynamic startup ecosystem.

Akshay thanked Raj for explaining the concepts of the Angel Investing process to him. With this, he had learned some key valuable lessons in the art of mastering Angel Investments.