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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.

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This post was originally published on the Saka Ventures blog.

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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.

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Angel Investing Business Entrepreneurship InvestStream Video Startups Venture Capital Video

How are Pre-Seed and Seed Changing in 2020?

A lot is changing in the startup world. Even before getting hit with COVID-19, the definitions of pre-seed, seed, post-seed/pre-series A were changing at a fast clip. Many early-stage VCs were moving downstream, writing larger checks and investing in later rounds. At the same time, larger, late-stage VCs were either ramping up their scout programs and investing earlier than every before, other VCs were directly investing earlier and earlier. From Silicon Valley to New York City, this has created new opportunities for some, while creating additional competition for other investors.

Join us on the next InvestStream Live on June 9th, 2020 to hear two well known early-stage VCs discuss how they see the landscape changing over the next six to twelve months. What will this mean for the number of deals getting down, the size of the deals, the check sizes and more.

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Shruti Gandhi is the Founder of Array.VC, a Silicon Valley based venture firm investing in category-leading startups that take advantage of data, analytics, workflows, and new platforms to change the way an industry works.

Paul Sethi is the Co-Founder of 2048.VC, a New York City based venture firm investing in founders who are creating companies that have differentiation and defensibility through technology. They are geographically agnostic but invest in enterprise SaaS, AI/ML, FinTech, HealthTech, Cybersecurity, Dev tools, Hardware, Genomics, Marketplaces, and B2C/D2C in cities like NYC, Boston, Atlanta, Austin, Toronto/Waterloo, Nashville, Pittsburgh and more.

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Business Finance InvestStream Video Startups Venture Capital Video

What is “Carry” or “Carried Interest”?

Venture Capital can be complex and in this episode of InvestStream, I explain “carried interest” or “carry” as it’s more commonly known and why it’s important for VCs.

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Carry is discussed often amongst Venture Capitalists and other Private Equity investors but rarely amongst founders of startups. Politicians have talked about how carried interest should be taxed. Why do Venture Capitalists and other fund managers care about carry and what does it really mean? There are always variations but this video is meant as a simple illustration so that people thinking of VC as a career have some understanding of how important carry is to their overall compensation and also for entrepreneurs to understand that a VC’s success, really does ride on the coattails of each startup they invest in.

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Business Entrepreneurship India Proto Startups

Proto.in July 2008 Reflections

Proto.in is an event very similar to DEMO held in the US. The basic premise is to help startups gain visibility by being able to showcase their prototypes or products in front of other startups and potential investors.

Proto.in has been held in Chennai since its inception in January 2007, however, this summer, they decided to hold the two day event at IIT’s campus in New Delhi.

It was my first time attending Proto.in and the first thing I have to say is that the event was well organized. The first few speakers on Friday were pretty good. Unfortunately, though, as time went on, it was evident that many of the people giving talks weren’t able to engage the audience. It seemed that many attendees were finding more value mingling in the hallways as compared to what they were getting in the auditorium, myself included.

Day 2 was the day for fifteen startups to showcase what they’re doing in six minutes, like DEMO. Six minutes isn’t a lot of time to talk about your company, demo your product, and pitch the value proposition. However, this time limit is really meant to instill discipline in entrepreneurs’ pitch to customers and investors.

Overall, I wasn’t very impressed with the various ideas/businesses or business models that were being pitched. I’m going to touch upon the four companies that left some sort of impression on me. The other eleven companies left more questions about their viability and business models than anything else. Unfortunately, it wasn’t possible to get in front of the founders of all these companies and get any sort of clarification.

Soliton was an interesting company. Good presentation, good delivery and interesting to see a company building hardware focused on the manufacturing industry. The idea behind the product isn’t new but Soliton is trying to deliver a simpler and more effective camera to monitor manufacturing defects in a smaller package at a palatable price point.

The HiringTool is a web based B2B platform for recruiting. It allows companies to use multiple recruiters, consultants and agents. Their UI looks very easy to use and provides some interesting methods of working with recruiters ahnd determining what candidates are acceptable or not. The HiringTool hasn’t officially launched but they are taking registrations. Too bad they didn’t build this using Open Source technologies 🙁

Blink Magic showcased a nice little LCD display connected to a physical shopping cart. The idea is to enhance the shopping experience at a grocery store, Walmart, K-Mart, or anywhere shopping carts are found. Cool little product with a nice simple interface. I’m not sure how viable this is in India, though. I see HUGE potential for this type of product at places like Walmart, Sears, K-Mart, Target, etc. Reliance Fresh, Sub ka Bazaar, or other Indian retail outlets, not so much, yet. The problem in the Indian context, once again comes down to basic infrastructure – mainly electricity and connectivity in the retail stores. Go West, young man, Go West!

Eko, for the purposes of full disclosure, is owned by a friend of mine so I’ve been exposed to their business model for a while. I won’t say much other than they have the potential to do for micro-banking what Grameen Bank did for micro-lending.

I am hoping that the next Proto attracts really innovative thinkers and entrepreneurs rather than business models that are, for lack of a better description, mind-numbing.