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Raising Seed/Angel round : (Part 1) A Primer

I plan to write a series of blog posts emphasizing on some of the basics of raising angel round – When and how to raise angel funding, how much to raise, who determines my valuation, term sheet basics and what investors look for. 

Author: Shanti Mohan
 
LetsVenture has now completed about 18 months. The journey has witnessed our first Angel / Entrepreneur summit LetsIgnite which was endorsed by coming together of 180 investors and 30 startups which were showcased at the event.
 
As I look back on my journey and the learning I have had working with startup founders trying to raise an angel round – I see myself repeating the same points to entrepreneurs.
 
I plan to write a series of blog posts emphasizing on some of the basics of raising angel round – When and how to raise angel funding, how much to raise, who determines my valuation, term sheet basics and what investors look for.  
 
This Blog post will cover the basics of raising funding – As a startup, when should I raise angel funding?  How do I determine how much to raise?
 
Founding your own startup should be a journey you need to commit for a long haul – entrepreneurship is a marathon, not a sprint.  As an entrepreneur myself who has raised my angel round, the most important question I would urge you as a founder to ask:  Why does my startup need angel funding? Don’t raise angel funding because your friend raised a round for his startup, or because startup pitching in events is now becoming the most happening topic in town. Raising capital cannot be a goal by itself – it is only an enabler to the goal.  There is so much news and PR around funding that it could appear as a goal by itself – but remember, once you have raised angel money, as a founder you are on the treadmill and you can’t get off the treadmill for a very long time.
 
As a startup, when should I raise Angel funding?
At LetsVenture, we meet at an average of 10 startup founders every week – just reviewing the startup details and the fund raise requirements. As a trend, startups who are in beta or closer to product market fit, with enough traction and product validation are able to raise angel funding at reasonable valuations. I have seen very few startups with powerpoint ideas who have generated a lot of angel interest. The chaff does get filtered out and the market place dynamics continues to drive validation around business plans and business models. Before you raise angel funding, ask yourself the following questions:
 
What stage would you categorize your startup? 
  • Idea Stage: You have the next big idea which you think will disrupt the world. An idea of what you want to do for the next 3 years of your life.
  • Beta / POC Stage: You worked on the idea to create a POC. You can use the POC to validate some of the assumptions you made while ideating – on solving a customer problem, on creating a disruption or on just ensuring customers are excited about what you are offering.
  • Revenue Stage (Early Revenue or Steady Revenue): You now have a product that customers are willing to pay for.  For some products which are more web enabled or are B2C, this metric could be easily replace traction or number of users using the product. 
How do I determine how much I should raise?
Typically it is good to raise angel funding that will help you build your startup for the next 2 years without having to raise capital again. At LetsVenture, we use a simple excel sheet to help you calculate this. Divide your spend and revenues into 8 quarters, and find the lowest negative and add a 25% to this, to account for margin errors. This will help you determine how much you should raise in your angel round. There are several other ways you could calculate, but we have seen this simple approach helps you quickly know if the ask is reasonable for your venture. We have included an example below:-
 

 

 
 
Over the next blog posts, I will address the following questions :
  • Who determines my valuation for the startup? How do I choose my investors? 
  • Term sheet basics – what do I need to look out for when I sign a term sheet?
  • What do angel investors look for when they invest in startups?
  • How does an angel investor exit my startup?
If you need to ask any question, do tweet your query to @shantimohan, @letsventurein or post your query in the comment box; the same will be answered in the subsequent blog posts.
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