How To Fund Seed Stage Startups

How you discover & fund a deal is an important part of success.

Investing in startups is glamorous, but the question most early-stage investor has is to how does one get access to credible deal flow. I get this question often about where to find startups and then how to evaluate them for funding. I then talk to them about 100X.VC is changing the way early-stage investing is being done today. 100X.VC SEBI registered fund, a discovery platform for early-stage investors to get validated startup deals.

The individual investor should act consistently as an investor and not as a speculator

What constitutes a good investment idea?

What does that phrase even mean? The answer is that it means something different to every person–that is what provides opportunities in a startup world. That is why some investors funds particular startups and others don’t. If everyone agreed on what makes a good investment then everyone would fund the same startup company.

How much should one invest or make per startup idea? 

Investors do not even agree on this principle. Developing own frameworks for investing will help you follow a set of guidelines that you can refine over the years through experience, and as part of that, you will learn to determine what the expected returns and acceptable investment risk for a particular investment are.

It is not easy to be a maverick, a lone ranger to discover, evaluate and fund deals alone as it takes a lot of time, involvement and effort. It makes sense to leverage platforms like 100X to get access to vetted deals at no transaction cost. Class 03 100X.VC Pitch Day is scheduled for 21st & 22nd Jan 2021. This is an exclusive showcase for startup investors. To register yourself for the all online showcase then visit https://www.100x.vc/pitchday and get access to credible startup deal flow.

Investors live or die by their access to investment opportunity, so what does it mean to have good deal flow?

Deal flow is a term used by angels and venture capitalists

• Deal flow refers to the rate at which investors receive pitches.
• Deal flow tends to be a qualitative measure, rather than a quantitative one.
• Deal flow often follows a cyclical pattern, and trends unfold throughout society and economic environments.

While a deal flow can be generated from several sources, the proposals that are likely to garner the most attention are the ones from companies or entrepreneurs where a previous investment has been successful, or where there is a solid existing relationship. On the other hand, unsolicited proposals from untried startup founders are likely to be given short shrift by most established investors.

The trouble with innovation is that truly innovative ideas often look like bad ideas at the time

Investing in seed-stage startups can be exhilarating and highly lucrative, but it can also be incredibly risky, hard work and time-consuming. Startup investing is a 1% business which means that to invest in 1 deal VCs look at evaluating 100 random deals. The success ratio improves as more credibility gets added into the deal flow.

• Random Deals: 500 Deals, 50 Meeting and 5 Investments
• Validated Deals: 100 Deals, 50 Meetings and 10 Investments
• Referred Deals: 50 Deals, 50 Meetings and 20 Investments

Deals Not To Do

Part-Time Founders: Building a startup is complex work. Building a startup part-time or on free time is like building two houses at the same time. There are exceptions, many successful entrepreneurs started their ventures part-time. The question is, with a part-time availability, how does one make sure the startup is running as if the founder is committed to it full-time?

Founders Compensation is High: Founders looking to create income through investors funds are big no. It is a tricky discussion but needs to make the founders understand the wealth they are creating due to investor valuations. Investor funds are required to grow business not founders income.

Complex Company Equity Structure: Avoid investing in companies with complex legal, equity holding structures. If it is not simple direct equity investment in the company it is not worth investing. All IP trademarks ownership should be with the company.

Loan on books: Investor funds should not be used to pay loans on the books. Converting loan to equity is the best solution. Use investor funds for a business not repayment of loans.

Single Founder: Have a bias towards teams and avoid single founder companies. Building startup is tough, the team makes sense to invest.

Outsourced IP: Most businesses are tech or tech-enabled. If tech is outsourced it is not possible to scale and create valuable IP. Unfair advantage is lost if the IP is outsourced. If tech is outsourced try to get a CTO hired.

First Deal One Sees: As a novice investor, one would want to avoid investing in one of the first deals they see.

Deal Evaluation Sheet Scores

Try to rate the startup by giving scores on the following parameters. If you get a score over 75% total then the idea is worthy of investments.

Management Team 0-30%, Size of Opportunity 0-25%, Product & technology 0-15%, Marketing/Sales channels 0-10%, Competitive Environment 0-10%, Other 0-10%

100X.VC Pitch Day investor interest has become a proxy to various trends and sentiments at seed stage funding.

Investing in a startup is never a sure thing—it’s inherently risky. While KPIs can be useful elements in assessing a startup, they might not be the full picture. 3 key KPI's for early revenue making startups to review will be:

• The customer acquisition cost (CAC) can show the level of efficiency of a startup’s marketing efforts by revealing the average cost of obtaining a new customer through various marketing channels and sales efforts.
• The LTV (customer’s lifetime value) is the average revenue generated from a customer over the course of the customer’s relationship with the company.
• Customer retention is likewise a related measurement that can help you understand a startup’s ability to retain customers. Retention is the percentage of customers that make a repeat purchase, renew a subscription-based service, or otherwise continue their paid business relationship.

First time angel investors

• Start slow, do not jump on the first deal you see
• There is no such thing as a perfect startups or predictable winner
• Invest only the capital you can afford to lose
• Your investment decision will always have unknowns
• Do your research, invest in ideas you can comprehend the business
• Connect and work with the lead investor who is writing the biggest cheque
• Never invest open ended with an uncapped note
• Dragging investment process unnecessarily
• Startup investing is not a wealth product with liquidity and fixed income
• Diversify the portfolio with minimum of 20 investments of 3-5 years

Early-stage investing is an asymmetric bet.

Structure the investing in the startups for moonshot ideas. Search for startups and explicitly pick companies based not on who is highly likely to be successful on a low level, but one who has a shot at being one of the mega winners. This means reducing the “win” rate so they can increase their “home run win” rate. Peter Thiel made around $1.1 billion from his 500K dollar early investment in Facebook, a 2,200x return. Every investment you make needs to have the potential to be a home run.

Investing Simplified for Startup Investors

To simplify investing in Indian startups for early-stage value investors by helping them with a credible, curated deal flow where 100X.VC is a lead, first cheque investor. 100X team does the initial analysis on the startup then work closely with founders offering them targeted inputs on business and introduction assistance. We invest around 100+ hours of mentoring time with founders. To invest in these startups there is no membership fee or transaction fee to be paid to 100X by investors. Today 100X.VC Pitch Day has become a very efficient discovery platform for value investors to find fundable deals. 

Funding Simplified for Founders

100X.VC is changing the way entrepreneurs get their first cheque of institutional funding. We believe in the power of focus, we work with only seed-stage startups with uniform investment terms of INR 25 Lacs for future equity using iSAFE notes. We have no other terms. We trust founders hence we invest through iSAFE notes which are founder-friendly in comparison to traditional SHA (Share Holder Agreements). Valuation conflict between investor and entrepreneurs is the biggest deal-breaker. Like all investors, we don’t have anywhere near-perfect ability to forecast winners. We believe that low or high valuations are only discovered later when the company is an outlier hit till then it’s only guesswork. iSAFE notes help to defer valuations discussion at a later stage when startups have enough traction.

100X helps seed stage investors focus on deals that matter by showcasing the brightest minds with innovative ideas

Selection of Startups

100X.VC receives thousands of startup deals for evaluation. We have to make a lot of decisions with very incomplete information, and that’s why at 100X is extremely cautious, some would say borderline paranoid, in the way we select our startup for investments. Any startup that doesn’t fall into the 100X meticulous selection process is declined. At 100X, we are in no rush to fund deals, we do not have deadlines to deploy funds or exit any of our investments. We constantly improve our investment thesis while we evaluate each deal on its own merit. We look at Founding Team, Market Size Opportunity, Business Model Strength, Unfair Advantage, Moat & Conviction of a minimum 20X returns.

Investing Documentation

100X advises to the startup founders on their funding asks but finally it is the founders decision to on how much funding to raise, at what valuations and the terms of investing. There are two main ways to invest in the startups deals:

• investing in a priced equity round through SHA (Share Holder Agreements): investors purchase shares in a startup at a fixed price
• investing in iSAFE (India Simple Agreement for Future Equity) notes: the investment amount eventually “converts” into equity in future.

To know about iSAFE visit https://www.100x.vc/isafe

To lock a deal email the Code of Promise (CP). CP is simply a trust treaty between startup founders and investors before they sign a formal investment agreement. Startup founders need to honour the CP made to reserve the space for the investor in the equity cap table and equally Investors need to honour their CP to complete the investment.

For more details visit https://www.100x.vc/code-of-promise

100X.VC Pitch Day Web App for Class 03 - All Online Showcase

A sincere gratitude thank you to all the founders and investors with whom we got to work in the past with 100X. James Clear in his bestselling book Atomic Habits. We don’t “have” to. We “get” to work with the best. He continues: "I once heard a story about a man who uses a wheelchair. When asked if it was difficult being confined, he responded, “I’m not confined to my wheelchair—I am liberated by it. If it wasn’t for my wheelchair, I would be bed-bound and never able to leave my house.” This shift in perspective completely transformed how he lived each day."

We had successful Class 02 all online showcase with investors. In the Class 03 showcase we will continue with all online showcase to deliver best possible experience for founders and investors alike. To register yourself for the all online showcase then visit https://www.100x.vc/pitchday and get access to credible startup deal flow. 100X team handpicks startup investors basis on their profile to offer them unrestricted access to Class 03 startup deals. Once approved, the investor are logged into 100X.VC Web App. All the investors will be able to see the streaming of the startups pitches, connect, schedule meetings and finally get to reviews the pitches of all startups showcased.

100X team shows it's deepest gratitude to all founders and investors with whom we got to work with.

Startup Updates & Information Rights

We recommend startup founders for a periodical updates to all investors. The most successful investors are the ones who are in direct touch with founders for information and help them with advise and connections. Because startups are not publicly traded, you will not receive the same type of updates you would for public stock investments. Investing in startups requires a high risk tolerance. There are no guarantees that you will receive periodical information.

100X sole purpose is to simplify funding to make it as easy for entrepreneurs to launch new moonshot ideas with seed capital.

Closing Note - Learn Venture & Angel Investing

This is a professional development program aimed at helping you take the next step in your venture capital career. Develop the confidence and ability to assess potential investment opportunities and maximize the value of your portfolio. The program provides a deep dive into both forms of startup financing — venture capital and angel investing.

Register here or contact TiE Mumbai team for details - https://hub.tie.org/e/venture--angel-investing-krkpb94lf3yj5rq

Jumpstart your career by gaining the skills and knowledge to join one of the fastest-growing fields in venture capital. Designed for investors and entrepreneurs alike, participants will come away with a greater understanding of how venture capital (VC) works.

Visit www.100x.vc for more details.