Categories
Angel Investing India Startups Venture Capital

Doing due diligence on startups

Due diligence is the process of researching and analyzing a potential investment before making a decision. The process can include reviewing financial documents, assessing market trends, evaluating management teams and a lot more. Essentially, due diligence is all about doing your homework to make an informed investment decision. When it comes to investing in startups at very early stages, due diligence can be more art than science.

Investing without proper due diligence can lead to disastrous financial losses, missed opportunities, and frayed relationships.

On the other hand, conducting thorough due diligence, though often time consuming, can help an investor make better informed investment decisions that align with their financial goals, risk tolerance and investment horizon. By conducting proper due diligence, an investor can gain a deeper understanding of the investment, evaluate its potential returns and risks and make a decision that is right for them.

However, it is equally important to balance thoroughness with speed. Many times, there are very few or no financials and legal documents for an investor to review and make decisions on. This is especially true at the pre-seed and seed stages of many tech startups. At Saka, we look at diligence a little differently. We believe the usual diligence is required but we also believe it doesn’t have to be a very long or complicated process for the founders. 

At Saka Ventures, we try to balance speed of decision making with as much data to back up a decision. After a meeting or two, we can confidently tell if a company, and the founders, are onto something that requires more time or the startup just isn’t a fit for us. If we eventually move to a conditional, yes, we start our diligence process.

Here are some key steps we employ in conducting due diligence when evaluating a potential investment:We start by reviewing the company’s financial statements, including income statements, balance sheets, cash flow statements, KPIs and other metrics. This gives us a sense of the company’s financial health, growth potential and profitability. We try to look for consistency and accuracy in financial data and projections, as well as, a clear and viable revenue model. A startup’s financials should reflect a good understanding of the market and the expense projections are a good indication of that understanding. 

In India, we have seen that, often, founders start working on an idea well before incorporating a company and sometimes, the incorporation can take a significant amount of time. Hence, very often, there aren’t any financial or legal documents to review. In such instances, we ask for three to six months of bank statements to review. If these don’t exist, we ask the founders to share financial projections for the next one to two years. We believe that most financial projections for early-stage startups are a waste of time but the expense projections are an incredible indicator of how the founders are thinking about their business. 

We look for an efficient use of capital and realistic assumptions about the market and growth. We also look for potential risks, such as legal liabilities or debt obligations, such as repaying a relative for their help before the company was setup. When investing in a market like India where, frequently, there are complex structures used, it’s critical to understand how the finances flow from investor to operations, customer to operations and, eventually, where is value being created. We want to make sure that we are investing in the entity where the value creation is occurring.

In assessing the market where a startup operates, we research the market speaking with other investors, founders and our advisors and mentors, many of whom have been entrepreneurs and operators in cross-border startups straddling the US and India. We also examine industry trends and direct and indirect competitors in the space. Many times, we pass on investment opportunities because it’s a market we don’t have enough information or just haven’t formed an opinion on.

In our opinion, the most important part of investing in pre-seed and seed stage companies is to assess the founding team. We look into the company’s founders, including their experience, track record building companies and products as well as selling them. In India, over the past decade, we’ve seen a massive surge in the number of high quality operators across the spectrum needed to scale a young startup. We try to assess a founder’s past contributions and what they’ve been able to accomplish. Unfortunately, this is sometimes quite opaque and requires much more than reference checks. We don’t rush this process. We take our time getting to know the founders and understand how they think and act. Building a relationship can take a lot of time and effort. Some times, we will pass on an investment opportunity because we haven’t yet been able to establish a working relationship that we can build on over the next ten to fifteen years it takes to build a successful startup. 

Some key documents we request early on in addition to financial, legal and operational due diligence, are a cap table showing the ownership structure of the startup and details the percentage of ownership for each investor, the articles of incorporation which outline the legal structure of the startup and its key provisions, such as the number of shares authorized, the board of directors and the initial shareholders, shareholder agreements which detail the rights and obligations of the company’s shareholders and outline procedures for important decisions, such as the sale of the company or issuance of new shares and, finally, the employment agreements which detail the terms and conditions of employment for key executives and employees.

We like to ensure that the startup has a strong legal foundation, with a clear ownership structure and contracts that protect the company’s assets.

Investing in startups is not a one-size-fits-all approach and taking the time to conduct data driven and human due diligence can help mitigate the chance of investing in the wrong company or people but since startups are high-growth and have high failure rates, it still may not prevent financial losses.

If you’d like to hear more, I did a short video on this topic a few years ago.

Please accept YouTube cookies to play this video. By accepting you will be accessing content from YouTube, a service provided by an external third party.

YouTube privacy policy

If you accept this notice, your choice will be saved and the page will refresh.

This post was originally published on the Saka Ventures blog.

Categories
Advice Angel Investing Bangalore Business Delhi Entrepreneurship India InvestStream Video New Delhi Startups Venture Capital Video

Early-Stage Startup Deal Terms in India 2020

There was a recent thread on Twitter about how even in 2020 angels and VCs in India continue to put ridiculously onerous terms into early-stage deals.

I recently invested in an Indian startup that closed a pre-series A round and the documents were more than 100 pages. When I was at 500 Startups, with the help of BMR Legal, we modified the 500 Startups KISS Agreement for India and open sourced the documents in the hopes that it would simplify early-stage documentation and reduce the amount of time to close a deal and the cost of doing early-stage deals in India, much like Series Seed docs and the SAFE have done in the US.

Here’s a presentation I gave in January 2020 at CIE-IIIT Hyderabad on some of the deal terms in India to watch out for. Unfortunately, there’s no video of the actual presentation I gave so I recorded a voice over for you.

Please accept YouTube cookies to play this video. By accepting you will be accessing content from YouTube, a service provided by an external third party.

YouTube privacy policy

If you accept this notice, your choice will be saved and the page will refresh.

If there are additional terms you have questions about or terms you’ve come across that are onerous, please leave a comment on the YouTube video and I will respond. Hopefully, other founders will benefit from it as well.

Categories
Advice Angel Investing Business Entrepreneurship Finance Investing InvestStream Video Startups Venture Capital Video

Angel Investing at Scale with Fabrice Grinda

Please accept YouTube cookies to play this video. By accepting you will be accessing content from YouTube, a service provided by an external third party.

YouTube privacy policy

If you accept this notice, your choice will be saved and the page will refresh.

Fabrice Grinda is the founder of Zingy, Aucland OLX and FJ Labs, a VC firm and venture studio based in NYC, focusing on marketplace businesses. FJ Labs has invested in hundreds of companies such as Alibaba, Bla Bla Car, Zolostays, Brightroll, ZoomCar and many many more. In 2018, Forbes named Fabrice the #1 Angel investor in the world. On this episode of Invest Stream, Fabrice shares his journey as an entrepreneur and how that led him to invest in startups in France and Europe, his thoughts on the cryptocurrency vertical, what approach he took to working with the entrepreneurs that he invested in and much much more.

Categories
Angel Investing BarCamp Entrepreneurship India Investing Investing InvestStream Video Life startup saturday Startups Venture Capital Video

Off the Beaten Path: Wall Street to Startup Investor – A Fireside Chat with Me!

Who is “Pankaj Jain” besides being the founder of Invest Stream and Founder Craft What came before? 

If you’ve followed my erratic writing over the years, you might have some idea. I’ve been a risk manager at the largest hedge fund in the world, Long-Term Capital Management (LTCM), operator, product manager, entrepreneur, community builder at BarCamp Delhi, co-founder of HeadStart Network Foundation and Startup Weekend India

I’ve been a venture capitalist at TLabs and 500 Startups, advisor to startups, funds and platforms like AngelList India and most recently, a dabbler in startup and venture capital related video content

My friend and former colleague, Ritesh Bansal, suggested interviewing me on the show to bring out more about who I am and what my journey has been. Naturally, I couldn’t refuse an invitation to be on my own show. Get ready for a frank and open discussion between an old friend and I. This is going to be Ritesh’s first time being visible on any social media channel, so please be gentle with him. It’s an #AMA so feel free to ask me anything.

I’m looking forward to seeing you for the AMA-style chat on July 28th, 2020 at 9:30am PDT / 12:30pm EDT and 10:00pm IST. If you’d like to RSVP and have a calendar invite, click the button. Otherwise, head over to YouTube with your questions.

Please accept YouTube cookies to play this video. By accepting you will be accessing content from YouTube, a service provided by an external third party.

YouTube privacy policy

If you accept this notice, your choice will be saved and the page will refresh.

Categories
Angel Investing Entrepreneurship India Investing InvestStream Video Startups Venture Capital Video

The Rise of Indian Venture Capital

Over the last twenty years, India has seen a tremendous amount of economic activity in the tech arena. The startup and venture capital ecosystems were a bit slow to pick-up, partly due to low Internet penetration until just a few years ago. That, however, didn’t prevent the creation of unicorns like Flipkart, Snapdeal and others. Since 2017, India has seen numerous new venture capital firms being launched with domestic and foreign capital. Japanese and Chinese investors have poured billions of dollars into Indian tech startups and venture capital firms over the last 5 years.

In the next Invest Stream Live, we’re going to chat with Ankita Vashistha, founder of the Saha Fund and Rahul Chandra, founder of Arkam Ventures. Both Ankita and Rahul have been active investors in India and both of them have very unique fund strategies. We will discuss broad trends they are seeing in India right now, what drove them to formulate such unique theses for their respective funds and what they see in store for Indian startups and other VC firms over the next year.